TURKiVE HALK BANKASI A.$. The Project Financial Statements of "Micro Small and Medium Enterprise and Large Enterprise Supply Chain Finance Project" With Independent Auditors' Report As at 31 December 2018 DRT Sagimsiz Denetim ve D e litte Serbest Muhasebeci Mali MuAirlik A. Mastak nol Plaza Eski Buyikdere Caddest Masak Mahallesi No:1 Maslak Saryer 34485 istanbul, Turkiye Tel : +90 (212) 366 6000 Fax:+90(212) 3666010 www.deloitte.com.tr Mersis No: 0291001097600016 Ticari Sicil No: 304099 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Tiirkiye Halk Bankasi A.$. Qualified Opinion We have audited the accompanying project financial statements of Tiirkiye Halk Bankast A.S. (the "Bank"), which comprise the project balance sheet as at 31 December 2018 and the statement of designated account which includes a summary of funds received from the International Bank for Reconstruction and Development ("IBRD"), the summary of expenditures shown under the main project headings and by main categories of expenditures for the period between 1 January 2018 and 31 December 2018, and notes to the project financial statements, including a summary of significant accounting policies (together "the project financial statements"). In our opinion, except for the effects of the matter described in the basis for qualified opinion section of our report, the accompanying project financial statements of the Bank as at 31 December 2018 and for the period between 1 January 2018 and 31 December 2018 are prepared, in all material respects, in accordance with the financial reporting provisions of Terms of Reference ("TOR") (Note 3) of the agreement dated 28 December 2015 between the IBRD and the Bank. Basis for Qualified Opinion The Bank did not recognize the accrued interest income on the amounts due from loan customers and the accrued interest expenses on the amount due to IBRD and any commission amount on the balances in the project financial statements, although such accruals were included in its statutory financial statements. We were unable to determine its impact on the project financial statements of the Bank as at 31 December 2018 and for the period between 1 January 2018 and 31 December 2018. We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Financial Statement section of our report. We are independent of the Bank in accordance with the Code of Ethics for Independent Auditors ("Code of Ethics") published by the Public Oversight Accounting and Auditing Standards Authority, together with the ethical requirements that are relevant to our audit of the project financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis ofMater - Basis ofAccounting and Restriction on Distribution and Use We draw attention to Note 3 to the project financial statements, which describe the basis of accounting. The project financial statements are prepared to assist the Bank to comply with the financial reporting provisions of the TOR of the agreement referred to above. As a result, the project financial statements may not be suitable for another purpose. Our report is intended solely for the IBRD and the Bank and should not be distributed to or used by parties other than the IBRD and the Bank. Our opinion is not modified in respect of this matter. Del te refEr LoeomreAe I le , huh a'- a tsmied, a UK private ),r7%ntdbguate f11 i etrKo meb rflrm,anlheir related ~ a inii:O n ea 4 rt mebe ilm ae e , -eparate and Ind ependlent e-tite 01 al referred, -)a1e*itte Gl obarj does, n' prov de tere ex I de ts t ee ~ w deire ol abu to learrn more alt it ir gitbai netw,r ofK m,iember firmr 1f-rinravti onla stcDe A eT ,ckwT h- it ,mitd Deloitte, Emphasis of Matter - Financial Covenants We draw attention to Note 5. There are financial covenants that the Bank should comply with. However, the Bank did not comply with the covenants as described below: According to "Section I Implementation Arrangements" in the Loan Agreement, "Ensure that at least fifteen percent (15%) of the Loan financing Sub-loans to MSMEs is made for: (a) Sub-loans financing Investment Subprojects located in the Priority Regions; or (b) Sub-loans financing Working Capital Subprojects where the goods consultant services and non-consulting services so financed are used in the Priority Regions." Due to Decisions of the Council of Minister dated 17 October 2014, Priority Regions were established as Adiyaman, Agri, Aksaray, Amasya, Ardahan, Artvin, Bartin, Batman, Bayburt, Bing6l, Bitlis, Qanakkale (Bozcaada and Glkveada district), Qankin, Corurn, Diyarbakir, Elazig, Erzincan, Erzurum, Giresun, Giimii§hane, Hakkari, Igdir, Kahramanmaray, Karabilk, Karaman, Kars, Kastamonu, Kirikkale, Kirgehir, Kilis, Malatya, Mardin, Mu , Nev ehir, Nigde, Ordu, Osmaniye, Rize, Samsun, Siirt, Sinop, Sivas, $anlhurfa, Sirnak, Tokat, Trabzon, Tunceli, Van, Yozgat and Zonguldak. It was observed that, the ratio of Sub-loans to MSMEs given to Priority Regions as compared to total Sub-loans to MSMEs is 4.99% as of 31 December 2018. Our opinion is not modified in respect of this matter. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is s responsible for the preparation of the project financial statements in accordance with the financial reporting provisions of TOR, and for such internal control as management determines is necessary to enable the preparation of the project financial statements that is free from material misstatement, whether due to fraud or error. In preparing the project financial statements, management is responsible for assessing the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank's financial reporting process. Auditors' Responsibilities for the Audit of the Project Financial Statements Our objectives are to obtain reasonable assurance about whether the project financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the project financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the project financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management, Deloitte. * Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the schedule or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Bank to cease to continue as a going concern. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. DRT BACIMSIZ DENETIM VE SERBEST MUHASEBECI MALI MOAVIRLIK A.$. Member of DELOITTE TOUCHE TOHMATSU LIMITED Istanbul, 17 May 2019 TUlRKJYE HALK BANKASI A.S. Micro Small and Medium Enterprises and Large Enterprises in the Supply Chain Project Project Financial Position as of the Semester ended 31 December 2018 ASSETS USD Designated Account 21,363,122.21 Sub-loans to Beneficiary Enterprises 160,344,848.28 Sub-loans to MSMEs 153,012,781.52 Sub-loans to LES 7,332.066.76 Other Assets (if any, description to be provided) TOTAL ASSETS 181,707,970.49 LIABILITIES Amount due to World Bank 181,707,970.49 Credit Line 181,707,970.49 Front-endfee TOTAL LIABILITIES 181,707,970.49 The accompanying notes are an integral part of these project financial statements. TURKIVE HALK BANKASI A.S. Statement Of Designated Account Micro Small and Medium Enterprises and Large Enterprises in the Supply Chain Project Designated Account (DA) Statement as of the Semester ended 31 December 2018 in USD Note Opening balance as of the Semester beginning January 1, 2018 37,138,789.05 Add: IBRD advances during the Semester 6 26,345,893.93 Less: Refund to IBRD from DA during the semester Less: Sub-loans extended to beneficiary enterprises 42,121,560.77 Closing Balance as of the Semester ended 31 December 2018 21,363,122.21 The accompanying notes are an integral part of these project financial statements. 2 � ОрΡ ОрΡ О�j О О О О О О� о О О м О о�о О а м ОрΡ о�о N о�о а�о � а а . NСΡ О ОрΡ О�рΡ N ОрΡ О N О О О О О M1 О� О v1 О N� N О��� у� Й�р О�. р 1~+ р+П ���П N т Т а.�Cf � Й-- О� О� 00 г^+i Ои0 N�[� �� 1+ 00 �О ^ r'i М N ^^ N N^ Г� Г+ ^ р+ И И l� '� j� Q ^ ^ [+ и �, .+ д и �' � = � n Е в � .. 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(the "Bank" or "Halkbank") received loan of USD 200,000,000 for Access to Finance For Micro Small and Medium Enterprises and Large Enterprises ("MSMEs and LEs") in the Supply Chain Project (the "Project") from the International Bank for Reconstruction and Development ("IBRD"). The main objective of the Project is to increase MSMEs and LEs' access to credit, in turn contributing to their growth. By providing MSMEs and I-Es' with access to credit through a credit line, the Project will help increase their sales and productivity, IBRD agrees to lend to the Borrower, on the ten-ns and conditions set forth or referred to in the Loan Agreement USD 200,000,000, as such amounts may be converted from time to time through a Currency Conversion in accordance with the provisions of Section 2.08 of the Loan Agreement, to assist in the financing the Project. The loan is backed by a Government counter-guarantce. 2. OPERATIONS OF THE PROJECT IMPLEMENTING AGENCY Tilrkiye Halk Bankasi A.$. was established in Turkey in accordance with the Law No: 2284 in 1933 and began its operations in 1938 and still continues its activities as a public commercial bank. As per the decree of the Higher Council of Privatization numbered 2007/8 and dated 5 February 2007; 25% of the public shares that were previously held by the Privatization Administration were privatized by a public offering and the Bank's shares were registered to Capital Market Board records by decision number 16/47 t dated 26 April 2007. The shares were traded on the Borsa istanbul A.$. as of 10 May 2007. As per the decree of the Higher Council of Privatization numbered 2012/150 and dated 4 October 2012; 23.92% of the public shares that were previously held by the Privatization Administration were privatized by a second public offering and privatization was completed on 21 November 2012. The shares belonging to the Prime Ministry Privatization Administration were transferred to Turkey Wealth Fund on 10 March 2017 pursuant to the Decree of the Higher Council for Privatization No. 2017/1 dated 3 February 2017. The Bank's service activities and operating areas: The Bank's operating areas include, commercial financing and corporate banking, fund management operations, retail banking and credit card operations. As of 31 December 2018, the Bank operates with a total of 994 branches consisting of 988 domestic and 6 foreign branches that are 5 in Cyprus and I in Bahrain. Domestic branches include 47 satellite branches. The Bank has also 3 representative office that are I in England, I in Singapore and I in Iran. 17 3. SIGNIFICANT ACCOUNTING POLICIES The project financial statements have been prepared in accordance with generally accepted accounting principles and practices. The Bank did not recognize the accrued interest income on the amounts due from loan customers and the accrued interest expenses on the amount due to World Bank, any commission amount and any other charges on the balances in the project financial statements, although such accruals were included in its statutory financial statements. These project financial statements are presented in USD. The significant accounting policies are as follows: 3.1 Designated account Designated account presents Word Bank Fund which is not yet disbursed to MSMEs and LEs. Undisbursed amount as of the current period is USD 21,363,122.21. Designated account is recognized initially at their principal amounts, and subsequently are continued to be measured with their principal amounts. 3.2 Sub-loans to beneficiary enterprises Sub-loans to beneficiary enterprises are financial assets which are not traded in an active market and have fixed or floating payments. Sub-loans to beneficiary enterprises are recognized initially at their principal amounts, and subsequently are continued to be measured with their principal amounts. Disbursements to the local firms other than USD are translated into USD at the prevailing exchange rates as of the date of the disbursements. The collections from the local firms are converted with the exchange rates prevailing on the collection dates. The balance includes EUR 68,079.842.77, USD 23,337,809.37 and TRY 130,685,335.23 of principal amounts which makes USD 160,344,848.28 in total, as translated with the prevailing exchange rates at the disbursement dates when loans were used. The Loan Agreements do not define exchange rates to be used during the lifetime of the Project. 3.3 Amounts due to World Bank Amounts due to World Bank are recognized initially at their principal amounts, and subsequently are continued to be measured with their principal amounts. The balance includes USD 160,344,848.28 that is used from IBRD fund of USD 181,707,970.49. 4. RESTRICTED USE OF FUNDS AND OTHER ASSETS In accordance with the loan agreement between the Bank and IBRD, funds available in the Special Account are restricted to project purposes only. 18 5. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN The balance allocated to Tiirkiye Halk Bankasi A.S. to be on-lent out of the proceeds of the loan to the Bank under its respective subsidiary loan agreement is USD 200,000,000. The Bank is obliged to pay a front-end fee in an amount equal to one quarter of one percent (0.25)% of the loan amount, subject to any waiver of a portion of such fee as may be determined by the IBRD from time to time. The loan is a Fixed Spread Loan (FSL) for USD 200,000,000, commitment linked with level repayment of principle, front-end fee amounting to USD 500,000 financed from the Borrower's own sources, with all conversion options, a 4 year grace period, and 20 years of final maturity, March 15 and September 15 payment dates. In order to draw down finds under the Access to Finance for Micro Small and Medium Enterprise and Large Enterprise Supply Chain Finance Project, the Bank is entering into sub-loan agreements with beneficiary enterprises. The sub-loan agreements are in accordance with the Project sub-loan terms and conditions and prudent banking practices. Sub-loans are being provided for working capital and investment expenditures. Financial covenants: The key covenants with basically the financial effects are detailed below. a) Sub-loans to MSMEs may be made for working capital and investment purposes. Sub-loans to LEs may be made for investment purposes only, including incremental working capital. b) At least fifteen percent (15%) of the Loan financing Sub-loans to MSMEs is made for: (a) Sub-loans financing Investment Subprojects located in the Priority Regions; or (b) Sub loans financing Working Capital Subprojects where the goods consultant services and non-consulting services so financed are used in the Priority Regions. c) The amount of an individual sub-loan will not exceed USD 3.5 million equivalent for MSMEs and USD 6 million equivalent for LEs, except as the World Bank shall otherwise agree. The aggregate amount of outstanding Sub-loans to any one MSME or LE shall not exceed USD 5 million equivalent and USD 10 million equivalent, respectively. d) All investment sub-loans to MSMEs must have at least two years maturity and to LEs at least three years maturity. e) For sub-loans above USDI million equivalent (excluding sub-projects in Priority Regions), sub- beneficiaries to have a financial debtiequity ratio of not more than 85:15 after the receipt of the sub- loan, unless agreed otherwise by the World Bank. f) The first two sub-loans, irrespective of size, will be subject to prior review by the World Bank. Sub- loans to be provided to a MSME exceeding USD 2,5 million equivalent and to a LE exceeding USD 4,5 million equivalent will require prior approval by the World Bank. g) The relevant authorities must certify that the MSMEs and LEs (sub-beneficiaries) and sub-projects meet environmental laws and standards in force in Turkey. h) Contracts from sub-borrowers where the contracted firms are on the World Bank lists of debarred or suspended firms will not be eligible for financing. i) At least 60 percent of the Loan will be used to fund MSMEs. j) Sub-loans not to be supporting or include the purchase of land or used equipment. k) MSMEs must meet the eligibility criteria defined below: MSMEs are defined as firms with less than TRY 40,000,000 equivalent in sales and less than 250 employees. All private MSMEs (private ownership of more than 50 percent), irrespective of their sector, will be eligible for participation as sub beneficiaries on a commercial basis. 1) LEs must meet the eligibility criteria defined below: LEs are defined as firms with at least 25% of their annual sales for MSMEs and less than 1,000 employees. All private LEs (private ownership of more than 50 percent), irrespective of their sector, will be eligible for participation as sub beneficiaries on a commercial basis. 19 5. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN (Continued) A Project Implementation Unit (PIU) was established under the International Banking and Structured Financing Directorate of the Bank. The sub-loans extended to the MSMEs and LEs from the IBRD funds are followed up in the Bank's general management information system coherent with the procedures of other loans tracked within the system, accounted and reported for. All transactions for the transfers from the IBRD, transfers to MSMEs and LEs or to their suppliers and other Project transactions are accounted for in the main accounting system of the Bank. 6. IBRD ADVANCES Withdrawal Number Date Amount in USD(*) 1 16 February 2016 40,000,000.00 2 22 June 2017 11,009,211.75 3 28 August 2017 26,776,699.43 4 27 September 2017 32,325,704.77 5 27 October 2017 26,383,415.19 6 8 December 2017 18,867,045.43 7 26 June 2018 26,345,893.93 181,707,970.49 (*) This table shows disbursements from IBRD to the Bank 20 7. TABLE OF USES OF FUNDS BY LOAN TERMS AND SUB-LOANS IN PRIORITY REGIONS AS OF THE SEMESTER ENDED 31 DECEMBER 2018 TORKIVE HALK BANKASI A.$. Micro Small and Medium Enterprises and Large Enterprises in the Supply Chain Project Loan terms and Sub-Loans in Priority Regions as of the Semester ended 31 December 2018 in USD Cumulative Project Cumulative Priority Portfolio Regions Portfolio USDor USDor TL equivalent TL equivalent SUB-LOANS EXTENDED TO MSMEs 153,012,781.52 7,645,488.80 Investment Loans 34,162.502.88 6,407,421,30 Short to Medium Term Loans* Long Term Loans* - 34,162,502.88 6,407,421.30 Working Capital Loans 118.850,278.64 1,238,067.50 Short to Medium Term Loans* Long Term Loans" - 118,850,278.64 1,238,067.50 SUB-LOANS EXTENDED TO LEs 7,332.066.76 Investment Loans 7,332,066.76 Short to Medium Term Loans* 7.332,066.76 Long Term Loans** Working Capital Loans Short to Medium Term Loans* Long Term Loans* TOTAL PORTFOLIO 160,344,848.28 7,645,488.80 SHARE OF SUB-LOANS TO PRIORITY REGIONS IN MSME PORTFOLIO (should be 15% by Project closing) 4.99% SHARE OF MSME SUB-LOANS IN TOTAL PORTFOLIO (should be 60% by Project Closing) 95.43% * Short to Medium Term Between 2-3 years Long Term Longer than 3 years 21 7. SUBSEQUENT EVENTS None. 8. OTHER MATTERS On 16 May 2018 a former deputy CEO of the Bank was sentenced for the indictment of the court case in the USA at which he was a defendant on the violation of the USA sanctions involving Iran. The Bank is not a trialist or defendant in this case. The respective court in this trial has not issued any administrative or monetary decision against the Bank. 22