TÜRKİYE SINAİ KALKINMA BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Consolidated Financial Statements As at and for the Year Ended 31 December 2018 With Independent Auditors’ Report 5 April 2019 This report contains 5 pages of independent auditors’ report on audit of consolidated financial information and 121 pages of consolidated financial information. Türkiye Sinai Kalkınma Bankası Anonim Şirketi and Its Subsidiaries Table of Contents Pages Independent auditors’ report 1-5 Consolidated statement of financial position 6-8 Consolidated statement of profit or loss and other comprehensive income 9-12 Consolidated statement of changes in equity 13-14 Consolidated statement of cash flows 15-16 Notes to the consolidated financial statements 12-121 Güney aımşız Deneit ve TeL. +90 212 315 303:3 SMMMAS Fax +902122305291 MasLak Mahallesi Eski Büyükdere aycan Cad Orjin Maslak PLaza Na 27 Trc:aret Sıcıl Na :479920 Bullding a better Sarıyer 34685 working world Istanbul Turkiye - REPORT ON CONSOL[DATED FJNMNCIAL STATEMENTS Report on the Audit of the Consolidated Financial Statements To the Shareholdcrs of Türkiye Sınai Kalkınma Bankası A.Ş.: Qualifled Opinion We have nudited the consolidated fınancial statements of Türkiye Sınai Kalkınma Bankası A.Ş. (the “Bank”) and its subsidiaries (together referred to as the “Group”), which comprise the consolidated statement of fınancial position as at December 31, 2018, and the consolidated statement of profit er loss, consolidated statement of proit or Ioss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summar of significant accounting policies. in our opinion, except for the etlects of the matter on the consolidated financial statemenis deseribed in the Basis for Qualifıed Opinion paragraph. the accompanying consolidated fınancial statements present fairiy, in alI material respects, the consolidated fınancial position of the Group as at December 31,2018, and its consolidated fınancial performance and its consolidated cash flows for the year then ended in accordance with international Financial Reporting Standards (IFRS). Basis for qualified opinion As explained in Note 25, the accompanying consolidated fınancial statements as at 31 December 2018 include a free reserve for possible risks amounting to TL 120,000 thousands. of which TL 60,000 thousands and TL 60,000 thousands was provided in current and prior years respectively by the Group management for possible results of the circumstances which may arise from possible changes in the economy and market conditions and include the reversal ofdeferred tax asset atan amount ofTL 13,200 thousands, which was accounted based on the free provision provided in 31 December 2017. Due to this provision which does not meet the accounting principles of fAS 37, the “Retained eamings” as of 31 December 2018 is understated by TL 46,800 thousands after deducting the fax effect, the other provisions are overstated by TL 120.000 thousands and the “net income” k understated by TL 73,200 thousands. We conducted our audit in accordance with international Standards on Auditing (ISAs). Our responsibilities under those standards are furiher described in the Auditor’s responsibiiities for the audit of the tinancial statements section of our report. \Ve are independent of the Group in accordance wiih the international Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical rcquirements that are relevant to our audit of the flnancial statements in Turkey, and we have fulfılled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obrained k suflicient and appropriate to provide a basis for our qualified opinion. Arnomb(,rfırnığfEnetS Yot,nqokıiiaiLırnıti,e EY Buildinq a better workinq world Key andit matters Key aLıdit matiers are those matters that, in mır professional judgement, were of most signiflcance in our atıdit of the [inancInI statements of the current period. Key audit rnalters vere addressed in the context of onr audit of the [manda! statements asa whole, and in forrning our opinion thereon, and ve do not provide a separate opinion on these matters. \Ve have ftıifihled the responsibilitles described in the Auditor’s responsibilities for the audit of the financial staternents section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statemenis. The results of our audit procedures, including the procedures performed to address the matters below, provide the ba5is for our audit opinion on the accompanying financial statements. Key Audit Matter How the matter is addresscd in nur audit Fügancial inpact of transidon to JFRS 9 “Fhnıncia! Jnsıruııwnts” slaıulard aııd recognidon of iınpairmeıt on flınmciai asseis and re!awd iınportaııt diçeloçares As presented in Note 3.23, as of 1 January 20! 8, the Our audit procedures included among others include: Bank adopted the IFRS 9 “Financial !nstruments” -Evaluating the appropriateness of managernent’s standard and due to the adoption, the Bank started selection of accounting policies based on the requirements calculate and recognize expected credit losses of financial assets in accordance with IFRS 9. We of IFRS 9, our business understanding and industry considered the transition to IFRS 9 and irnpairment of practice. fınancial assets as a key audit rnaUer due to: -ldentifing and testing re!evant controls and new İT - Balance sheet and offbalance sheet items that are systems by involving Information technology and Process subject to expected credit Ioss calculation k audit specialists material for the fınancial statements -Evaluating the reasonableness of rnanagement’s key - Transition to !FRS 9 effect 3.3% on the Group’s judgements and estimates made in expected credit loss equity calculations, including selection of methods, modeis, - Complex accounting requirements of [FRS 9 assurnptions and data sources and evaluating the - The ciassifıcation of the fınancial assets is based appropriateness of management’s selection of accounting on the Bank’s business model and characteristics policies based on the requirements of IFRS 9, our business of the contractual cash flows in accordance with understanding and industıy practice IFRS 9 and the Group uses significant judgrnent on the the assessrnent of the business model and -Evaluating the understanding and the control of Group’s business model assessment and the test on the identification ofthe comp!ex contractual cash flow characteristics of [manda! instruments. contracrual cash flows - The Group determines the fair value of fınancial -EX1mimtıg the fınancial instruments classifıcation and assets measured at fair value by leve! 3 related measurement models (fair value hierarchy Level 3 business model category non-observable in fair fınancial instruments) and comparing thern with IFRS 9 value measuremcnt due to the existence of standard requirements s igni Iicant estimates and assumpı ions -Involving Financial risk management specialists to determination challenge signifıcant assumptions /judgements relating to - The model that k established by the Bank credit risk grading, signiflcant incrcase in credit risk, rnanagcment to calculate the expected credit losses detinition of default. probabiliiy of default. macro has the compllance risk whether it is established economic variables. and recoverv rates and performing based on the requirements of IFRS 9 and other Joan review from the selected samples practices A memberfrrm ol Ernst Younn Giaba’ Limked EY Bujlding a better working world - The new or revised processes that k began £0 tıse -Assessing the completeness, accuracy and relevance of with the transition of IFRS 9, have complex and the data used for the calculation of expected credit Ioss intensive control environment - The new, siınifıcanı and complex judgments and -Evaluating the appropriateness and tested the estimations needed for the calculation of expected mathematical accumcy of Expected credit Ioss models eredit losses and applied. - The complex disclosure requirements of IFRS. -Evaluating the judgmcnts and estimates used for the individually assessed financial assets - Evaluating the reasonableness of and tested the post model adjustments. -Auditing of the IFRS 9 disclosures. Peıısion Fıınd Ob!igatioııs As presented in Note 3.19 “Employee benefits” and it has been addressed whether there have been any Note 22 “Employee Benelits Pension scheme”, the — signiflcant changes in regulations goveming pension valuation of the Pension Fund liabilities requires Iiabilities, employee beneflıs plans during the period. that judgment in determining appropriate assumptions such could lead to adjust the valuation of employee benetits. as defıning the transferrable social benefıts, discount rates, salary increases, demographic assumptions, Support from actuariaj auditor who k in the same audit inilation rate estimates and the impact of any changes in network within our finn, has been taken to assess the individual pension plans. The Bank Management uses appropriateness of the actuarial assumptions and Fund actuaries to assist in assessing these assumptions. calculations performed by the extemal actuary. We further focused on the accuracy and adequacy of the deficit and Considering the subjectivity of key assumptions and also disclosures on key assumptions related to pension estimate used in the calculations of transferrable ftrnd. Iiabilities and the effects of the potential changes in the estimates used together with the uncertainty around the transfer date and giyen the fact that technical interest rate is prescribed under the aw, we considered this to be a key audit matter. Deriwıtive Fişunıciat Jnstrmneııts Derivative tinancial instruments including foreign Gür audit procedures involve obtaining written exchange contracts, cunency and interest rate swaps, contirmations from the third parties and comparing the currency and interest rate options, futures and other details of the related derivative transactions. Our audit derivative fınancial instruments which are heid for procedures included among others involve reviewing trading are initially recognized on the statement of policies regarding fair value measurement accepted by the tinancial position at fair value and subsequently are re- bank management fair value calculations of the selected measured at their fair value. Details of related amounts derivative financial instruments which is carried out by are explnined in differences related ro derivative valuation expens in our audit team and the assessment of flnancial assets/Iiabilities heid-for-tradins disclosures in used estimations and the judgements and testing of Note 34 “Derivative fınancial instruments”. operating effectiveness of the key controls in the process of fair value determination. Fair value of the derivative tinancial instruments is determined by selecting most convenient market data Our procedures included, amonıtst oıhers, recalculating and applying valuation tcchniques to those panicular fair value calculation and disclosures relating to derivative derivative products. Derivative Financial Instruments financial instruments considering the requircments of are considered by üs asa key audit matter because ofthe international Accounting Standards (“IAS”) and subjectivity in the estimates, assumptions and international Financial Repofling Standards (“IFRS”). judgements used. 5 A memb’r flrm of€rnst Younq Gobai Limıted EY Buliding a better working world Responsihilitles of the Board of Directon for the consolidated financial statements The Management is responsible for the preparation and fair presentation of the consohidated önancial staternents in aceordance with IFRSs. and for such intemal control as management determines 15 necessary tü enable the preparation of the consolidated hinancial statements that are free from material misstatement, whether due to fraud or enor. in preparing the consolidated financial statements, the management is responsible for assessing the Group’s abiiity to continue asa going concem, disclosing, as applicable, matters related to going concem and using the going concem basis of accounting uniess management either intends to Iiquidate the Group or to cease operations, or has no realistic altemative but to do so. The Board of Directors are responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilitles for the audit of the consohidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated ünanciah statements as a whole are free from material misstatement, whether due 10 fraud or error, and to issue an auditor’s report that incitldes our opinion. Reasonable assurance is a hugh level ofassumnce, but is nota guamntee that an audit conducted in accordance wiih iSAs wili aiways detect a material misstatement when it exists. Misstatements can arise from fmud or error and are considered material if, individualiy or in the aggregate. they couid reasonabiy be expected tü influence the economic decisions ofusers taken on the basis ofthese consolidated financial statements. As part ofan audit in accordance with ISAs, we exercise professional judgment and ınaintain professional skepticism throughout the audit. We aiso: • identiI’ and assess the risks of material misstaternent of the consolidated fınancial statements, whether due tü fraud or error. design and perform audit procedures responsive tü those risks, and obtain audit evidence that is sufflcient and appropriate to provide a basis for our opinion. The risk of not detecring a material misstatement resulting from fraud is higher than for one resuhting from eror, as fmud rnay involve collusion. forgery, intentional omissions, misrepresentations. or the override of intemal control. • Obtain an understanding of intenıai control relevant tü the audit in order to design audit procedures tlıat are appropriate in the circumstances. but not for the purpose of expressing an opinion on the effectiveness of the Group’s intemaf control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accotınting estimates and related disclosLlres ınade by the Board of Directors • Conclude on the appropriateness of the Board of Director’s use of the going concern basis of accounting and, based on the audit evidence obtained. wlıetlıer a material uncedainty exists related tü events or conditions (hat may cast significnnt doubt on the Group’s ability tü continue as a going concem. If we conclude that a materiah uncertainty exists, we are required tü draw attention in our nuditor’s report tü the related disclosures in the consoiidated önancial statements Dr. ifsuch disclosures are inadequate. tü rnodifv our opinion. Our concinsions are based on the audit evidence obtained up tü the date of our auditor’s report. 1 iowever. future events or condirions rnay catıse the Group Lo cease to continuc as ü going concenı. 1 A member flrm of Emri Youno Globjl E imited EY Buliding a better working world • Evaluate the overahl presentation, structure and content of the consolidated financial staternents, ineluding the diselosures, and whether the consolidated [inancInI statements represent the underiying transactions and events in a manner chat achieves fair presentation. • Obtain sufflcient appropriate auditevidence regarding the [manda! information of the entities or business activides within the Group to express an opinion on the consolidated [mancini staternents. \Ve are responsible for the direction, supenision and performance of the group audit. We rernain soleiy responsible for our audit opinion. We communicate with the Board of Directors regarding, among other maflers, the planned scope and timing of the audit and signiticant audit findings, incinding any significant deficiencies in intemal control that ıve identify during our audit. We also provide the Board of Directors with a statement that sve have cornplied with relevant ethical requirements regarding independence, and to cornrnunicate with thern ali relationships and other rnatters that may reasonably be thought to bear on our independence, and where applicabie, related safeguards. Frorn the rnaflers communicated with the Board of Directors we determine those matters that were of rnost significance in the audit of the consolidated [mancini statements of the current period and are therefore the key audit matters. We describe these rnatters in our auditor’s report uniess 1mw or reguhation precludes public disclosure about the matter or when, in extremely rare circumstances, ve determine that a matter should not be communicated in our report because the adverse consequences of doing 50 would reasonabiy be expected to outweigh the public interest beneflts ofsuch communication. The engagement panner who supervised and conciuded this independent auditor’s report is Yaşar Bivas. Güney Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi A rnember tirm of Ernst Sc Yotıng Global Limited Partner 5 April 2019 Istanbul, Turkey D Amember flrm ofErn,ı Vouno Global Limıted TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 31 December ASSETS Notes 2018 Cash and cash equivalents 7 1,393,542 Reserve deposits at Central Bank 7 730,030 Financial assets measured at fair value through profit or loss 8 9,859 Financial assets measured at fair value through other comprehensive income 10 3,427,495 -Financial assets measured at fair value through other comprehensive income as pledge 17 171,653 Financial assets measured at amortized cost 10 2,153,313 -Financial assets measured at amortized cost as pledge 17 248,394 Derivative financial assets 34 979,221 Loans and advances to customers 9 27,843,080 Investments in equity-accounted investees 428,490 Goodwill 12 383 Property and equipment 13 292,651 Investment property 14 247,793 Intangible assets 15 3,867 Deferred tax assets 21 3,844 Property and equipment held for sale purpose 1 Other assets 16 755,249 Total assets 38,268,818 31 December ASSETS Notes 2017 Cash on hand 7 24 Balances with Central Bank 7 15,433 Reserve deposits at Central Bank 7 831,678 Loans and advances to banks 7 493,687 Funds lent under repurchase agreements 3 Financial assets at fair value through profit or loss 336,093 - Trading financial assets 8 9,305 - Derivative financial instruments 34 326,788 Loans and advances to customers 9 22,304,828 Investment securities 4,628,479 -Available for sale investment securities 2,925,182 -Available for sale investment securities as pledges 17 171,250 -Held to maturity investment securities 979,969 -Held to maturity investment securities as pledges 17 552,078 Investments in equity-accounted investees 11 374,425 Goodwill 12 383 Property, plant and equipment 13 245,798 Investment property 14 243,145 Intangible assets 15 2,580 Deferred tax assets 21 13,530 Other assets 16 304,564 Total assets 29,794,650 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 6 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 31 December LIABILITIES Notes 2018 Funds borrowed 18 23,819,670 Money market balances 24 402,278 Debt securities issued 19 6,949,189 Derivative financial liabilities 34 620,082 Derivatives used for hedging purposes 34 172,258 Current account of loan customers 32,529 Taxes and dues payable 11,741 Employee benefits 22 43,605 Corporate tax liability 21 82,363 Provisions 25 132,562 Other liabilities 20 169,310 Subordinated loan 23 1,549,774 Total liabilities 33,985,361 EQUITY Share capital Nominal paid in capital 26 2,800,000 Inflation adjustment to capital 26 13,563 Total capital 26 2,813,563 Share premium 516 Legal reserves 273,239 Fair value reserve (127,817) Revaluation reserve 260,373 Translation reserve 15,704 Actuarial Gain/(Loss) (566) Retained earnings 1,009,823 Total equity attributable to equity holders of the Bank 4,244,835 Non-controlling interests 26 38,622 Total equity 4,283,457 Total liabilities and equity 38,268,818 Commitments and contingencies 35 65,537,851 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 7 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 31 December LIABILITIES Notes 2017 Obligations under repurchase agreements 17 610,775 Derivative liabilities 34 232,403 Funds borrowed 18 19,001,627 Debts securities issued 19 3,746,229 Payables to money market 24 701,147 Current account of loan customers 12,901 Derivative liabilities held for hedging purposes 34 78,682 Taxes and dues payable 9,986 Employee benefits 22 24,886 Corporate tax liability 21 43,662 Provisions 25 63,343 Other liabilities 20 178,282 Subordinated loan 23 1,146,236 Total liabilities 25,850,159 EQUITY Share capital Nominal paid in capital 26 2,400,000 Inflation adjustment to capital 26 13,563 Total capital 2,413,563 Share premium 428 Legal reserves 241,758 Fair value reserve (32,477) Revaluation reserve 214,231 Translation reserve 7,847 Actuarial Gain/(Loss) (30) Retained earnings 1,046,452 Total equity attributable to equity holders of the Bank 3,891,772 Non-controlling interests 26 52,719 Total equity 3,944,491 Total liabilities and equity 29,794,650 Commitments and contingencies 35 49,139,855 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 8 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 1 January – 31 December Notes 2018 Interest income Interest income on loans and advances to customers 2,133,352 Interest on money market placements 107,098 Interest income on securities 762,490 Interest income on loans and advances to banks 78,878 Interest income on reserve deposits at central banks 10,258 Interest income on finance leases 6,060 Other interest income 11,973 Total interest income 3,110,109 Interest expenses Interest expense on obligations under repurchase agreements and money market borrowings (307,521) Interest expense on funds borrowed and subordinated loan (581,108) Interest expense on debt securities issued (491,351) Other interest expenses (1,411) Total interest expense (1,381,391) Net interest income 1,728,718 Fee and commission income 63,929 Fee and commission expense (12,531) Net fee and commission income 29 51,398 Securities trading income / (loss), net 2,202 Derivative trading income / (loss), net (616,348) Foreign exchange gains / (loss), net 284,946 Net trading income / (loss), net (329,200) Net impairment loss 30 (472,649) Net operating income after impairment loss 978,267 Other operating income 31 19,093 Other operating expenses 33 (209,944) Dividend income 32 5,525 Share of profit of equity-accounted investees 11 90,705 Profit before income tax 21 883,646 Income tax expense 21 (221,597) Profit for the period 662,049 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 9 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 1 January – 31 December Notes 2017 Interest income Interest income on loans and advances to customers 1,314,800 Interest on money market placements 51,435 Interest income on securities 432,988 Interest income on loans and advances to banks 65,034 Interest income on reserve deposits at central banks 5,617 Interest income on finance leases 1,659 Other interest income 2,289 Total interest income 1,873,822 Interest expenses Interest expense on obligations under repurchase agreements and money market borrowings (253,328) Interest expense on funds borrowed and subordinated loan (339,360) Interest expense on debt securities issued (262,943) Other interest expenses (912) Total interest expense (856,543) Net interest income 1,017,279 Fee and commission income 53,752 Fee and commission expense (11,090) Net fee and commission income 29 42,662 Securities trading income / (loss), net 5,851 Derivative trading income / (loss), net (209,793) Foreign exchange gains / (loss), net 138,914 Net trading income / (loss), net (65,028) Net impairment loss on financial assets 30 (178,140) Net operating income after impairment loss 816,773 Other operating income 31 33,546 Other operating expenses 33 (170,186) Dividend income 32 5,421 Share of profit of equity-accounted investees 11 43,861 Profit before income tax 21 729,415 Income tax expense 21 (145,980) Profit for the period 583,435 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 10 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 1 January – Notes 31 December 2018 Profit for the period 662,049 Items that will never be reclassified to profit or loss: Remeasurement of employee termination benefits (684) Revaluation of tangible assets 47,172 Related tax (882) Items that are or may be reclassified subsequently to profit or loss: Net change in fair value of financial assets at fair value through other comprehensive income (149,408) Translation reserve 7,857 Equity-accounted investees - share of OCI (2,431) Related tax 33,398 Other comprehensive income for the period, net of tax (64,978) Total comprehensive income for the period 597,071 1 January – Profit attributable to: Notes 31 December 2018 Equity holders of the Bank 669,542 Non-controlling interests (7,493) Profit for the period 662,049 Total comprehensive income attributable to: Equity holders of the Bank 604,564 Non-controlling interests (7,493) Total comprehensive income for the period 597,071 Earnings per share Basic earnings per share (in full TL) 28 0.2391 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 11 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 1 January – Notes 31 December 2017 Profit for the period 583,435 Items that will never be reclassified to profit or loss: Remeasurement of employee termination benefits (380) Revaluation of tangible assets 16,315 Related tax (2,031) Items that are or may be reclassified subsequently to profit or loss: Net change in fair value of available-for-sale financial assets 37,243 Equity-accounted investees - share of OCI 7,264 Related tax (2,803) Other comprehensive income for the period, net of tax 55,608 Total comprehensive income for the period 639,043 1 January – Profit attributable to: Notes 31 December 2017 Equity holders of the Bank 589,137 Non-controlling interests (5,702) Profit for the period 583,435 Total comprehensive income attributable to: Equity holders of the Bank 644,299 Non-controlling interests (5,256) Total comprehensive income for the period 639,043 Earnings per share Basic earnings per share (in full TL) 28 0.2455 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 12 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) Attributable to equity holders of the Bank Inflation Non- Share adjustment Share Legal Fair value Revaluation Translation Actuarial Retained controlling Total Notes Capital to capital premium reserves reserve reserve Reserve Gain/(Loss) earnings Total interests Equity Balance at 1 January 2017 2,050,000 13,563 428 216,827 (70,131) 200,047 4,243 250 925,061 3,340,288 57,969 3,398,257 Total comprehensive income for the period Profit for the period - - - - - - - - 589,137 589,137 (5,702) 583,435 Other comprehensive income Remeasurement of defined benefit liability - - - - - - - (380) - (380) - (380) Net change in fair value of available for sale financial assets 33,193 - 3,604 - - 36,797 446 37,243 Revaluation of tangible assets - - - - - 16,315 - - - 16,315 - 16,315 Equity-accounted investees - share of OCI - - - - 7,264 - - - - 7,264 - 7,264 Tax on other comprehensive income - - - - (2,803) (2,131) - 100 - (4,834) - (4,834) Total other comprehensive income - - - - 37,654 14,184 3,604 (280) - 55,162 446 55,608 Total comprehensive income for the period - - - - 37,654 14,184 3,604 (280) 589,137 644,299 (5,256) 639,043 Transactions with owners of the Bank Contributions and distributions Capital increase 26 350,000 - - - - - - - (350,000) - - - Dividend distribution - - - - - - - - (92,801) (92,801) - (92,801) Transfer to legal reserves - - - 24,931 - - - - (24,931) - - - Other changes - - - - - - - - (14) (14) 6 (8) Total transactions with the owners of the Company 350,000 - - 24,931 - - - - (467,746) (92,815) 6 (92,809) Balance at 31 December 2017 26 2,400,000 13,563 428 241,758 (32,477) 214,231 7,847 (30) 1,046,452 3,891,772 52,719 3,944,491 The accompanying notes form an integral part of these consolidated financial statements. 13 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) Attributable to equity holders of the Bank Inflation Non- Share adjustment Share Legal Fair value Revaluation Translation Actuarial Retained controlling Total Notes Capital to capital premium reserves reserve reserve Reserve Gain/(Loss) earnings Total interests Equity Balance at 1 January 2018 2,400,000 13,563 428 241,758 (32,477) 214,231 7,847 (30) 1,046,452 3,891,772 52,719 3,944,491 Corrections and accounting policy changes - - - - 23,101 - (169,096) (145,995) (87) (146,082) Balance at 1 January 2018 2,400,000 13,563 428 241,758 (9,376) 214,231 7,847 (30) 877,356 3,745,777 52,632 3,798,409 Total comprehensive income for the period Profit for the period - - - - - - - - 669,542 669,542 (7,493) 662,049 Other comprehensive income Remeasurement of defined benefit liability - - - - - - - (684) - (684) - (684) Net change in fair value financial assets at fair value through other comprehensive income - - - - (149,408) - 7,857 (141,551) - (141,551) Revaluation of tangible assets - - - - - 47,172 - - - 47,172 - 47,172 Equity-accounted investees - share of OCI - - - - (2,431) - - - - (2,431) - (2,431) Tax on other comprehensive income - - - - 33,398 (1,030) - 148 - 32,516 - 32,516 Total other comprehensive income - - - - (118,441) 46,142 7,857 (536) - (64,978) - (64,978) Total comprehensive income for the period - - - - (118,441) 46,142 7,857 (536) 669,542 604,564 (7,493) 597,071 Transactions with owners of the Bank Contributions and distributions Capital increase 26 400,000 - - - - - - - (400,000) - - - Dividend distribution - - - - - - - - (109,505) (109,505) - (109,505) Transfer to legal reserves - - - 31,481 - - - - (31,481) - - - Other changes - - 88 - - - - - 3,911 3,999 (6,517) (2,518) Total transactions with the owners of the Company 400,000 - 88 31,481 - - - - (537,075) (105,506) (6,517) (112,023) Balance at 31 December 2018 26 2,800,000 13,563 516 273,239 (127,817) 260,373 15,704 (566) 1,009,823 4,244,835 38,622 4,283,457 The accompanying notes form an integral part of these consolidated financial statements. 14 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 31 December Notes 2018 Cash flows from operating activities: Interests and commissions received 2,601,223 Other operating activities, net (1,342,871) Cash payments to employees and suppliers 675,059 Interests and commissions paid (155,153) Dividends received 5,525 Operating profit before changes in operating assets / liabilities 1,783,783 (Increase)/decrease in operating assets: Loans and advances to customers 1,204,032 Balances with central banks 102,478 Financial assets at fair value through profit or loss (1,541) Other assets (494,768) (Increase)/decrease in operating liabilities: Funds borrowed (1,621,868) Obligations under repurchase agreements and money market fundings (909,263) Other liabilities (3,020) Net cash outflows from operating activites before taxes and duties paid 59,833 Income taxes and other duties paid (104,310) Net cash outflows from operating activities (44,477) Cash flows from investing activities: Cash paid for purchase of investment securities (680,955) Cash obtained from sale of investment securities 590,195 Decrease in investments in equity participations (3,000) Proceeds from sale of tangible assets 94 Purchase of tangible assets (4,924) Sale of financial assets measured at amortized cost (227,528) Other (2,543) Net cash inflows/ outflows from investing activities (328,661) Cash flows from financing activities: Increase in loans and advances from banks and other institutions, net 1,318,590 Dividends paid (109,865) Other 20 Net cash inflows from financing activities 1,208,745 Effect of exchange rate changes 45,970 Net increase in cash and cash equivalents 881,577 Cash and cash equivalents at 1 January (7) 504,248 Cash and cash equivalents at 31 December (7) 1,385,825 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 15 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 31 December Notes 2017 Cash flows from operating activities: Interests and commissions received 1,631,942 Interests and commissions paid (846,414) Other operating activities, net 296,357 Cash payments to employees and suppliers (122,637) Dividends received 5,421 Operating profit before changes in operating assets / liabilities 964,669 (Increase)/decrease in operating assets: Loans and advances to customers (2,839,528) Balances with central banks (217,998) Financial assets at fair value through profit or loss 4,853 Other assets 63,340 (Increase)/decrease in operating liabilities: Funds borrowed 639,937 Obligations under repurchase agreements and money market fundings 55,399 Other liabilities (24,420) Net cash inflows / outflows from operating activites before taxes and duties paid (1,353,748) Income taxes and other duties paid (122,638) Net cash inflows / outflows from operating activities (1,476,386) Cash flows from investing activities: Cash paid for purchase of investment securities (781,787) Cash obtained from sale of investment securities 867,314 Purchase of investments in equity participations - Proceeds from sale of tangible assets 329 Purchase of tangible assets (4,736) Other (1,282) Net cash outflows from investing activities 79,838 Cash flows from financing activities: Increase in loans and advances from banks and other institutions 1,077,000 Dividends paid (92,801) Net cash inflows from financing activities 984,199 Effect of exchange rate changes 3,656 Net increase in cash and cash equivalents (408,693) Cash and cash equivalents at 1 January 912,941 Cash and cash equivalents at 31 December (7) 504,248 Note: The prior period financial statements and related disclosures are not restated as permitted by IFRS 9 transition rules. Since, 2017 and 2018 financial statements are prepared on different principles, 2017 financial statements are presented separately. The accompanying notes form an integral part of these consolidated financial statements. 16 Notes to the consolidated financial statements Page 1 Reporting entity 18-19 2 Basis of preparation 20-22 3 Significant accounting policies 23-54 4 Financial risk management 55-78 5 Financial instruments 79-80 6 Operating segments 81-84 7 Cash and cash equivalents, balances with central bank, loans and advances to banks, money market placements 85-87 8 Financial assets at fair value through profit or loss 88 9 Loans and advances to customers 88-91 10 Investment securities 91-92 11 Investments in equity-accounted investees 93-94 12 Goodwill 94 13 Property and equipment 95-96 14 Investment property 97-98 15 Intangible assets 98 16 Other assets 99 17 Obligations under repurchase agreements 99-100 18 Funds Borrowed 100 19 Debt securities issued 103 20 Other Liabilities 103 21 Taxation 104-108 22 Employee Benefits 108-109 23 Subordinated Loan 109 24 Payables to money market 109 25 Provisions 110 26 Capital and reserves 110-111 27 Dividends 111 28 Earnings per share 111 29 Net fee and commission income 113 30 Net impairment loss on financial assets 113 31 Other operating income 114 32 Dividend income 114 33 Other operating expenses 114 34 Derivative financial instruments 115-116 35 Commitments and contingencies 117-119 36 Related Parties 120 37 Ratings 121 38 Events after the reporting period 121 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 1. REPORTING ENTITY Türkiye Sınai Kalkınma Bankası AŞ (“TSKB” or the “Bank”) was established on 31 May 1950 with the support of the World Bank and the cooperation of the Government of the Republic of Turkey, the Central Bank of Turkey and the leading Turkish commercial banks of Turkey. TSKB is the first investment and development bank of Turkey. TSKB is operating with the mission of providing assistance to private sector enterprises in all sectors of the economy primarily in the industrial sector, encouraging and assisting the participation of private and foreign capital incorporations established and to be established in Turkey, and assisting the development of the capital markets in Turkey. TSKB and Sınai Yatırım Bankası AŞ (“SYB”), sister bank with similar mission, were merged pursuant to the decisions of the respective shareholders as sanctioned by the Banking Regulation and Supervision Agency (“BRSA”) decision no: 659 dated 27 March 2002, in accordance with Article 18 of the Banking Act no: 4389. The registered office of the Bank is at Meclisi Mebusan Cad. 81 Fındıklı, Istanbul, Turkey. The Bank and its subsidiaries are hereinafter referred to as the “Group”. TSKB started its activities in 1950 financing the private sector investments in Turkey and today it provides loans and project finance with the goal of sustainable development to corporations in different fields. As a leader in meeting the long term finance needs of the private sector, TSKB also continues to offer solutions with respect to the newest needs and client demands. Furthermore, through offering the equity shares of such companies to the public, TSKB has been a significant milestone in this field and thus assumed a prominent and vital role in fostering the development of capital markets. Türkiye İş Bankası A.Ş. has the authority of managing and controlling power of the Parent Bank directly or indirectly, alone or together with other shareholders. Shareholders of the Parent Bank are as follows: Current Period Share Shareholding Paid in Unpaid Name Surname/Commercial Title Capital Rate (%) Capital Capital T. İş Bankası A.Ş. Group 1,425,780 50.92 1,425,780 - T. Vakıflar Bankası T.A.O. 234,570 8.38 234,570 - Under Custody at Merkezi Kayıt Kuruluşu (Other Institutions and Individuals) 1,139,650 40.70 1,139,650 - Total 2,800,000 100.00 2,800,000 - Prior Period Share Shareholding Paid in Unpaid Name Surname/Commercial Title Capital Rate (%) Capital Capital T. İş Bankası A.Ş. Group 1,217,027 50.71 1,217,027 - T. Vakıflar Bankası T.A.O. 201,060 8.38 201,060 - Under Custody at Merkezi Kayıt Kuruluşu (Other Institutions and Individuals) 981,913 40.91 981,913 - Total 2,400,000 100.00 2,400,000 - The Parent Bank shares are traded in Istanbul Stock Exchange (“BIST”) since 26 December 1986. The Parent Bank’s 50.92% of the shares belongs to İş Bank Group and 38.60% of these shares are in free floating and traded in BIST National Market with “TSKB” ticker. The Bank has opened two branches in Izmir and Ankara in April 2006 to enhance marketing and valuation operations. The consolidated financial statements of the Bank as at and for the period ended 31 December 2018 are available upon request from the Bank’s registered office and website. 18 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 1. REPORTING ENTITY (Continued) Information about the consolidated subsidiaries and equity accounted associates Yatırım Finansman Menkul Değerler AŞ Yatırım Finansman Menkul Değerler AŞ was established and registered with Istanbul Trade Registry on 15 October 1976 and it was announced in the Turkish Trade Registry Gazette No: 81 on 25 October 1976. The company’s objective is to perform capital market operations specified in the Company’s main contract in accordance with the Capital Markets Board (“CMB”) and the related legislation. The company was merged with TSKB Menkul Değerler AŞ on 29 December 2006. The share of Türkiye Sınai Kalkınma Bankası A.Ş. is 95.78%. The company’s headquarters is located at Istanbul/Turkey. TSKB Gayrimenkul Yatırım Ortaklığı AŞ The core business of TSKB Gayrimenkul Yatırım Ortaklığı AŞ (“TSKB GYO”) is real estate trust to construct and develop a portfolio of properties and invest in capital market instruments linked to properties. The company was established on 3 February 2006. The company’s shares are traded in BIST since April 2010. The share of Türkiye Sınai Kalkınma Bankası A.Ş. is 85.41%. The company’s headquarters is located at Istanbul/Turkey. İş Finansal Kiralama AŞ İş Finansal Kiralama AŞ was established on 8 February 1988 and it has been performing its operations in accordance with the Financial Leasing, Factoring and Financing Companies Law No: 6361. The company started its leasing operations in July 1998. The company’s headquarters is located at Istanbul/Turkey. The share of the Bank in the Company is 29.46%. İş Faktoring AŞ İş Faktoring AŞ was incorporated in Turkey on 4 July 1993 and started its operations in October 1993 and is conducting its operations in accordance with the Financial Leasing, Factoring and Financing Companies Law No: 6361. The company’s main operation is domestic and export factoring transactions. Its parent company is İş Finansal Kiralama AŞ with 78.23% shareholding. The direct share of Türkiye Sınai Kalkınma Bankası AŞ is 21.75%. The company’s headquarters is located at Istanbul/Turkey. İş Girişim Sermayesi Yatırım Ortaklığı AŞ The principal business of İş Girişim Sermayesi Yatırım Ortaklığı AŞ is to make long-term investments in existing companies in Turkey or to be established in Turkey, having a development potential and are in need of financing. The direct share of Türkiye Sınai Kalkınma Bankası AŞ is 16.67%. The company’s headquarters is located at Istanbul/Turkey. 19 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 2. BASIS OF PREPARATION 2.1. Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The Bank maintains its books of accounts and prepares its statutory financial statements in accordance with the Banking Law and the “Regulation on Accounting Applications for Banks and Safeguarding of Documents” published in the Official Gazette No. 26333 dated 1 November 2006, which refers to Turkish Accounting Standards and Turkish Financial Reporting Standards issued by Public Oversight Accounting and Auditing Standards Authority “POAASA” and additional explanations and notes related to them and other decrees, notes and explanations related to accounting and financial reporting principles published by the Banking Regulation and Supervision Agency (“BRSA”) and other relevant rules promulgated by the Turkish Commercial Code, Capital Markets Board and Tax Regulations. The subsidiaries maintain their books of accounts based on statutory rules and regulations applicable in their jurisdictions. The accompanying financial statements are derived from statutory financial statements with adjustments and reclassifications for the purpose of presentation in accordance with IFRS. The accompanying consolidated financial statements were authorized for issue by the Bank management on 05 April 2019. 2.2. Basis of Measurement The consolidated financial statements have been prepared on the historical cost basis as adjusted for the effects of inflation that lasted until 31 December 2005, except for the following; · derivative financial instruments are measured at fair value · financial assets measured at fair value through profit or loss are measured at fair value · financial assets measured at fair value through other comprehensive income are measured at fair value · investment property and property and equipment are measured at fair value. The methods used to measure fair values are discussed further in Note 3.8, 3.10, 3.15, 3.16. 20 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 2. BASIS OF PREPARATION (Continued) 2.2. Basis of Measurement (continued) International Accounting Standard (“IAS”) 29, which deals with the effects of inflation in the financial statements, requires that financial statements prepared in the currency of a hyperinflationary economy to be stated in terms of the measuring unit current at the reporting date and the corresponding figures for previous periods be restated in the same terms. One characteristic that necessitates the application of IAS 29 is a cumulative three year inflation rate approaching or exceeding 100%. The cumulative three-year inflation rate in Turkey has been 35.61% at 31 December 2005, based on the Turkish nation-wide wholesale price indices announced by Turkish Statistical Institute. This, together with the sustained positive trend in the quantitative factors such as financial and economical stabilization, decrease in the interest rates and the appreciation of TL against the US Dollars (“USD”), have been taken into consideration to categorize Turkey as a non- hyperinflationary economy under IAS 29 effective from 1 January 2006. Therefore, IAS 29 has not been applied to the financial statements of the Company as at and for the year ended 31 December 2006 and thereafter. 2.3 Functional and Presentation Currency These consolidated financial statements are presented in TL, which is the Bank’s functional currency. Except as otherwise indicated, financial information presented in TL has been rounded to the nearest thousand. 2.4 Use of Estimates and Judgments The preparation of the consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. Critical accounting judgements made in applying the Bank’s accounting policies include: Current year Allowances for credit losses The specific counterparty component of the total allowances for impairment applies to claims evaluated individually for impairment and is based upon management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgments about the counterparty’s financial situation and the net realizable value of any underlying collateral. Assets accounted for at amortised cost are evaluated for impairment on a basis described in accounting policy Note 3.8. Prior years Impairment of financial assets described in explanations on prior period accounting policies not valid for the current period in Note 3.24. 21 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 2. BASIS OF PREPARATION (Continued) 2.4 Use of Estimates and Judgments (continued) Key sources of estimation uncertainty Determining fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The Group’s accounting policy on fair value measurements is discussed in Note 3.8 – measurement. Income taxes The Bank is subject to income taxes. Significant estimates are required in determining the provision for income taxes. Management records deferred tax assets to the extent that it is probable that sufficient taxable profits will be available to allow all or part of the deferred tax assets to be utilized. The recoverability of the deferred tax assets is reviewed regularly. Reserve for employee severance payments In accordance with the existing social legislation, the Bank is required to make lump-sum payments to employees upon termination of their employment based on certain conditions. In calculating the related liability to be recorded in the financial statements, the Bank uses assumptions such as discount rate, turnover of employees and future change in salaries/limits in order to make the best estimate. These estimations disclosed in Note 3.19 are reviewed regularly. 22 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 3.1 Basis of Consolidation The consolidated financial statements incorporate the consolidated financial statements of the Bank and entities controlled by the Bank (its subsidiaries). Control is achieved where the Bank has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of profit or loss from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the consolidated financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling share of changes in equity since the date of the combination. The consolidated financial statements of the entities below have been consolidated with those of the Bank in the accompanying consolidated financial statements. The ownership percentages stated below comprise the total of the Group’s holdings used in consolidation: The Group’s Subsidiaries Sector Share (%) Yatırım Finansman Menkul Değerler AŞ Securities brokerage 95.78 TSKB Gayrimenkul Yatırım Ortaklığı AŞ Real estate investment trust 85.41 The financial statements of the companies below are accounted for under the equity method: The Group’s Associates Sector Share (%) İş Finansal Kiralama AŞ Leasing 29.46 İş Girişim Sermayesi Yatırım Ortaklığı AŞ Private equity 21.75 İş Faktoring AŞ Factoring 16.67 The following equity investments have been accounted at cost; they have not been consolidated their consolidation would not have a material effect on income for the year or on equity. The Group’s Entity Sector Share (%) TSKB Gayrimenkul Değerleme AŞ Real-Estate Appraiser 99.99 TSKB Sürdürülebilirlik Danışmanlığı AŞ Consultancy 99.83 23 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.1 Basis of Consolidation (continued) Business Combinations Business combinations are accounted for using the acquisition method as at the acquisition date – i.e. when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Non-controlling interests Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Subsidiaries Subsidiaries are investees controlled by the Group. The Group ‘controls’ an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. Investments in Associates (Equity-accounted Investees) An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. As at the reporting date, the Group has investments in associates with a position to exercise significant influence through participation in the financial and operating policy decisions of the investee. Investments in associates are accounted for using the equity method (equity-accounted investees) and are recognized initially at cost. The cost of the investment includes transaction costs. The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income, after adjustments to align the accounting policies with those of the Group, from the date that significant influence until the date that significant influence ceases. 24 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.1 Basis of Consolidation (continued) Investments in Associates (Equity-accounted Investees) (continued) When the Group’s share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognized at the date of acquisition is recognized as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss. Where a group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate. Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related non-controlling interests and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 3.2 Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Foreign currency differences arising on retranslation are recognized in profit or loss, except for differences arising on the retranslation of equity instruments measured at fair value through other comprehensive income, which are recognized directly in equity. 25 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.2 Foreign currency (continued) Foreign currency transactions (continued) The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the accompanying consolidated financial statements, the results and financial position of each entity are expressed in Turkish Lira, which is the functional currency of the Group, and the presentation currency for the accompanying consolidated financial statements. In order to hedge its exposure to certain foreign exchange risks, the Group enters into forward contracts, swaps and options (see below for details of the Group’s accounting policies in respect of such derivative financial instruments). As at 31 December 2018 and 31 December 2017, foreign currency assets and liabilities of the Group are mainly in US Dollar and Euro. As at 31 December 2018 and 31 December 2017, exchange rates of US Dollar and Euro are as follows: 2018 2017 Period End Average Period End Average 1 US Dollar 5.1350 4.7827 3.7525 3.8195 1 Euro 5.8678 5.6243 4.4824 4.5225 3.3 Interest Interest income and expense are recognised in the profit or loss using the effective interest method. Interest income is recorded according to the effective interest rate method (rate equal to net present value of future cash flows or financial assets and liabilities) defined in the IFRS 9 “Financial Instruments” standard by applying the effective interest rate to the gross carrying amount of a financial asset except for: purchased or originated credit-impaired financial assets or financial assets that are not purchased or originated credit-impaired financial assets but subsequently have become credit-impaired financial assets. If the financial asset is impaired and classified as a non-performing receivable, the Parent Bank applies the effective interest rate on the amortized cost of the asset for subsequent reporting periods. Such interest income calculation is made on an individual contract basis for all financial assets subject to impairment calculation. It is used effective interest rate during calculation of loss given default rate in expected credit loss models and accordingly, the calculation of expected credit losses includes an interest amount. If the credit risk of the financial instrument improves to the extent that the financial asset is no longer considered as impaired and the improvement can be attributed to an incident that eventually takes place (such as an increase in the loan's credit rating), interest income at subsequent reporting periods are calculated by applying the effective interest rate to the gross amount. Interest income and expense presented in the statement of comprehensive income statement include: · The interest income on fınancial assets and liabilities at amortized cost on an effective interest rate basis · The interest income on held for trading investments and fair value through other comprehensive income investments. · Coupons earned on fixed income securities and accrued discount and premium on treasury bills and other discounted instruments 26 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4 Fees and commissions Except for fees and commissions that are integral part of the effective interest rates of financial instruments measured at amortized costs, the fees and commissions are accounted for in accordance with IFRS 15 Revenue from Contracts with Customers. Except for certain fees related with certain banking transactions and recognized when the related service is given, fees and commissions received or paid, and other fees and commissions paid to financial institutions are accounted under accrual basis of accounting throughout the service period. Income from asset purchases to a third party or by natural or legal persons contracts are recognized in the period they occur. 3.5 Net trading income Net trading income includes gains and losses arising from disposals of financial assets at fair value through profit or loss, the disposal of financial assets through other comprehensive income, gains and losses on derivative financial instruments held for trading purpose and foreign exchange differences. 3.6 Dividends Dividend income is recognized when the right to receive the income is established. 3.7 Income tax Income tax comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: · temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; · temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and · taxable temporary differences arising on the initial recognition of goodwill. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will be available against which they can be used. 27 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.7 Income tax (continued) Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Turkish tax legislation does not permit a parent company and its subsidiaries to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis. Tax exposures In determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax position and whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. 3.8 Financial assets and financial liabilities Initial measurement of financial instruments Initial recognition of financial instruments the Parent Bank shall recognize a financial asset or a financial liability in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument. A regular way purchase or sale of financial assets shall be recognized and derecognized, as applicable, using trade date accounting or settlement date accounting. Purchase and sale transactions of securities are accounted at the settlement date. The classification of financial instruments at initial recognition depends on the contractual conditions and the relevant business model. Except for the assets in the scope of IFRS 15 Revenue from contracts with customers, at initial recognition, the Parent Bank measures financial asset or financial liabilities at fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit/loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Classification of financial instruments On which category a financial instruments shall be classified at initial recognition depends on both the business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. Assessment of business model As per IFRS 9, the Parent Bank’s business model is determined at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The business model does not depend on the intent of the management on an individual financial intermediary, so the condition is not a classification approach on the basis of a financial instrument but an evaluation by combining the financial assets. When the business model used for the management of financial assets is being evaluated, all evidence is taken into account. Such evidence includes the following: - How the performance of financial assets held by the business model and business model is reported by the key executive personnel, - Risks affecting the performance of the business model (financial assets held within the business model) and, in particular type of management, 28 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8 Financial assets and financial liabilities (continued) Assessment of business model (continued) - How the additional payments to the managers are determined (for example, whether additional payments are determined according to the fair value of the assets being managed or on the contractual cash flows collected). Business model evaluation is not based on scenarios in which the operator is not expected to be at a reasonable level, such as the "worst case" or "pressure case" scenarios. The same business model does not require a change in the classification of other financial assets as long as the cash flows are realized differently from the expected future date when the business model is assessed, the error correction is made in the financial statements or all relevant information available at the time of the valuation of the business model is taken into account. However, when evaluating the business model for newly created or newly acquired financial assets, information about how past cash flows have been taken into account along with other relevant information is also taken into account. The business models that comprise the bet are composed of three categories. These categories are as follows: - Business model aimed to hold assets in order to collect contractual cash flows: This is a model whose objective is to hold assets in order to collect contractual cash flows are managed to realise cash flows by collecting contractual payments over the life of the instrument. The financial assets that are held within the scope of this business model are measured at amortized cost when the contractual terms of the financial asset meet the condition of giving rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. - Business model whose objective is to hold assets in order to collect contractual cash flows: The Parent Bank may hold financial assets in this business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. Fair value change of the financial assets that are held within the scope of this business model are accounted under other comprehensive income when the contractual terms of the financial asset meet the condition of giving rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. - Other Business Model: Financial assets are measured at fair value through profit or loss if they are not held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets The contractual cash flows including solely principle and interest on principle As per IFRS 9, the Parent Bank classifies a financial asset on the basis of its contractual cash flow characteristics if the financial asset is held within a business model whose objective is to hold assets to collect contractual cash flows or within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. In order to assess whether the element provides consideration for only the passage of time, an entity applies judgement and considers relevant factors such as the currency in which the financial asset is denominated and the period for which the interest rate is set. When the contractual conditions are exposed to the risks which are not consistent with the basic lending arrangement or variability of cash flows, the relevant financial asset is measured at fair value through profit or loss. 29 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8 Financial assets and financial liabilities (continued) 3.8.1 Measurement categories of financial assets and liabilities Financial Assets As of 1 January 2018, the Bank classified all its financial assets based on the business model for managing the financial assets. Effect of this classification is explained in Note 3.23 in Section Three. In this context, Financial assets are classified in three main categories as listed below: -Financial assets measured at fair value through profit/loss -Financial assets measured at fair value through other comprehensive income and -Financial assets measured at amortized cost Financial assets measured at the fair value through profit or loss Financial assets at fair value through profit/loss are financial assets other than the ones that are managed with business model that aimed to hold to collect contractual cash flows or business model that aims to collect both the contractual cash flows and cash flows arising from the sale of the assets; and in case of the contractual terms of the financial asset do not lead to cash flows representing solely payments of principal and interest at certain date; that are either acquired for generating a profit from shortterm fluctuations in prices or are financial assets included in a portfolio aiming to short-term profit making. Financial assets at the fair value through profit or loss are initially recognized at fair value and remeasured at their fair value after recognition. All gains and losses arising from these valuations are reflected in the income statement. According to uniform chart of accounts explanations interest income earned on financial asset and the difference between their acquisition costs and amortized costs are recorded as interest income in the statement of profit or loss. The differences between the amortized costs and the fair values of such assets are recorded under trading account income/losses in the statement of profit or loss. In cases where such assets are sold before their maturities, the gains/losses on such sales are recorded under trading account income/losses. Financial assets measured at fair value through other comprehensive income In addition to Financial assets within a business model that aims to hold to collect contractual cash flows and aims to hold to sell, financial asset with contractual terms that lead to cash flows are solely payments of principal and interest at certain dates, they are classified as fair value through other comprehensive income. Financial assets at fair value through other comprehensive income are recognized by adding transaction cost to acquisition cost reflecting the fair value of the financial asset. After the recognition, financial assets at fair value through other comprehensive income are measured at fair value. Interest income calculated with effective interest rate method arising from financial assets at fair value through other comprehensive income and dividend income from equity securities are recorded to income statement. “Unrealized gains and losses” arising from the difference between the amortized cost and the fair value of financial assets at fair value through other comprehensive income are not reflected in the income statement of the period until the acquisition of the asset, sale of the asset, the disposal of the asset, and impairment of the asset and they are accounted under the “Accumulated Other Comprehensive Income or Loss Reclassified Through Profit or Loss” under shareholders’ equity. Equity securities, which are classified as financial assets at fair value through other comprehensive income, that have a quoted market price in an active market and whose fair values can be reliably measured are carried at fair value. Equity securities that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are carried at cost, less provision for impairment. 30 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8 Financial assets and financial liabilities (continued) 3.8.1 Measurement categories of financial assets and liabilities (continued) Financial Assets (continued) Financial Assets at Fair Value Through Other Comprehensive Income (Continued) During initial recognition an entity can choose in a irrecovable was to record the changes of the fair value of the investment in an equity instrument that is not held for trading purposes in the other comprehensive income. In the case of this preference, the dividend from the investment is taken into the financial statements as profit or loss. Financial Assets Measured at Amortized Cost Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are classified as financial assets measured at amortized cost. Financial assets measured at amortized cost are initially recognized at acquisition cost including the transaction costs which reflect the fair value of those instruments and subsequently recognized at amortized cost by using effective interest rate method. Interest income obtained from financial assets measured at amortized cost is accounted in income statement. In the “Fair value through other comprehensive income” and “measured at amortized cost” securities portfolio of the Bank, there are Consumer Price Indexed (CPI) Bonds. The Parent Bank considered expected inflation index of future cash flows prevailing at the reporting date while calculating internal rate of return of the Consumer Price Indexed (CPI) marketable securities. The effect of this application is accounted as interest received from marketable securities in the consolidated financial statements.These securities are valued and accounted according to the effective interest method based on the real coupon rates and the reference inflation index at the issue date and the estimated inflation rate. As stated in the Investor’s Guide of CPI Government Bonds by Republic of Turkey Undersecretariat of Treasury the reference indices used to calculate the actual coupon payment amounts of these securities are based on the previous two months CPI’s. The Parent Bank determines the estimated inflation rate accordingly. The inflation rate is estimated by considering the expectancies of the Central Bank and the Bank which are updated as needed within the year. Loans and Advances to Customers Loans are financial assets that have fixed or determinable payments terms and are not quoted in an active market. When the Group is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified as a finance lease and a receivable equal to the net investment in the lease is recognized and presented within loans and advances. Loans and advances are initially recognized at acquisition cost plus transaction costs presenting their fair value and thereafter measured at amortized cost using the "Effective Interest Rate (internal rate of return) Method". All loans and advances of the Parent Bank has classified under Measured at Amortized Cost, after loan portfolio passed the test of “All cash flows from contracts are made only by interest and principal” during the transition period. The Bank classifies its loans and advances, which do not pass solely payments of principal and interest on the principal amount test (SPPI), under Financial Assets at Fair Value Through Profit and Loss. 31 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8 Financial assets and financial liabilities (continued) 3.8.1 Measurement categories of financial assets and liabilities (continued) Explanations on expected credit losses As of 1 January 2018, the Group allocates the expected loss provison for impairment on assets and loans measured at amortized cost and fair value through other comprehensive income and loan commitments not measured at fair value through profit/loss based and non cash loans on IFRS 9. IFRS 9 introduces a forward-looking expected credit loss (ECL) approach, which is intended to result in an earlier recognition of credit losses based on an ECL impairment approach compared with the incurred-loss impairment approach for financial instruments under IAS 39, Financial Instruments: Recognition and Measurement and the loss-provisioning approach for financial guarantees and loan commitments. At each reporting date, the Group shall assess whether the credit risk on a financial instrument has increased significantly since initial recognition. The Group Bank considers the changes in the default risk of financial instrument, when making the assessment. The expected credit loss estimates are required to be unbiased, probability-weighted and include supportable information about past events, current conditions, and forecasts of future economic conditions. These financial assets are divided into three categories depending on increase in credit risk observed since their initial recognition; Stage 1: For the financial assets at initial recognition or that do not have a significant increase in credit risk since initial recognition. Impairment for credit risk is recorded in the amount of 12-month expected credit losses. 12-month expected credit loss is calculated based on a probability of default realized within 12 months after the reporting date. Such expected 12-month probability of default is applied on an expected exposure at default, multiplied with loss given default rate and discounted with the original effective interest rate. Stage 2: In the event of a significant increase in credit risk since initial recognition, the financial asset is transferred to Stage 2. Impairment for credit risk is determined on the basis of the instrument’s lifetime expected credit losses. Calculation of expected credit losses is similar to descriptions above, but probability of default and loss given default rates are estimated through the life of the instrument. Stage 3: Stage 3 includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime expected credit losses are recognized and interest revenue is calculated on the net carrying amount. The probability of default is taken into account as 100%. The default assessment of the Bank is made according to the following conditions: 1. Objective Default Definition: It means debt having past due more than 90 days. Current definition of default in the Bank and its consolidated financial subsidiaries is based on a more than 90 days past due definition. 2. Subjective Default Definition: It means a debt is considered is unlikely to be paid. Whenever an obligor is considered is unlikely to pay its credit obligations, it should be considered as defaulted regardless of the existence of any past-due amount or of the number of days past due. 32 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8 Financial assets and financial liabilities (continued) 3.8.1 Measurement categories of financial assets and liabilities (continued) Debt instruments measured at fair value through other comprehensive income As of 1 January 2018, the impairment requirements in accordance with IFRS 9 are applies for the recognition and measurement of a loss allowance for financial assets that are measured at fair value through other comprehensive income. However, the loss allowance shall be recognised in other comprehensive income and shall not reduce the carrying amount of the financial asset in the statement of financial position. The expected credit loss is reflected in other comprehensive income and the accumulated amount is recycled to statement of profit/loss following the derecognition of related financial asset. Calculation of expected credit losses The expected credit loss estimates are required to be unbiased, probability-weighted and include supportable information about past events, current conditions, and forecasts of future economic conditions. Risk parameters used in IFRS 9 calculations are included in the future macroeconomic information. While macroeconomic information is included, macroeconomic forecasting models and multiple scenarios used in the Internal Capital Assessment Process (“ICAAP”) are considered. Within the scope of IFRS 9, the probability of default (PD), Loss given default (LGD) and Exposure at default (EAD) models have been developed. The models developed under IFRS 9 are based on the following segmentation elements: - Loan portfolio (corporate /specilization) - Product type - Credit risk rating notes (ratings) - Colleteral type - Duration since origination of a loan - Remaining time to maturity - Exposure at default Probability of Default (PD): PD refers to the likelihood that a loan will default within a specified time horizon given certain characteristics. Based on IFRS 9, two different PDs are used in order to calculate expected credit losses: - 12-month PD: as the estimated probability of default occurring within the next 12 months following the balance sheet date. - Lifetime PD: as the estimated probability of default occurring over the remaining life of the financial instrument. The Bank uses internal rating systems for loan portfolio. The internal rating models used include customer financial information and knowledge of survey responses based on expert judgement. Probability of default calculation has been carried out based on past information, current conditions and forward looking macroeconomic parameters. Loss Given Default (LGD): If a loan default occurs, it represents the economic loss incurred on the loan. It is expressed as a percentage. Exposure at Default (EAD): For cash loans, it corresponds to the amount of loan granted as of the reporting date. For non-cash loans and commitments, it is the value calculated through using credit conversion factors. Credit conversion factor corresponds to the factor which adjusts the potential increase of the exposure between the current date and the default date. 33 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8 Financial assets and financial liabilities (continued) 3.8.1 Measurement categories of financial assets and liabilities (continued) Significant increase in credit risk As of the reporting date, if the credit risk on a financial instrument has not increased significantly since initial recognition, the loss allowance for that financial instrument is measured at an amount equal to 12- month expected credit losses. However, if there is a significant increase in credit risk of a financial instrument since initial recognition, the Bank measures loss allowance regarding such instrument at an amount equal to lifetime expected credit losses. The Bank makes qualitative and quantitative assessments regarding assessment of significant increase in credit risk of financial assets to be classified as stage 2 (Significant Increase in Credit Risk). Credit risk is based on a comparison of the probability of default calculated at the origination of the loan and the probability of default assigned for the same loan as of the reporting date. If there is a significant deterioration in PD , it is considered that there is a significant increase in credit risk and the financial asset is classified as stage 2. In this context, the Bank has calculated thresholds at which point the relative change is a significant deterioration. When determining the significant increase in the parent bank credit risk, The Parent Bank also assessed the absolute change in the PD date on the transaction date and on the reporting date. If the absolute change in the PD ratio is above the threshold values, the related financial asset is classified as stage 2. The Bank classifies the financial asset as Stage 2 (Significant Increase in Credit Risk) where any of the following conditions are satisfied as a result of a qualitative assessment: - Loans overdue more than 30 days as of the reporting date - Loans classified as watchlist - When there is a change in the payment plan due to restructuring Financial Liabilities Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Financial liabilities are classified as either equity instruments or other financial liabilities. Other financial liabilities Other financial liabilities, including borrowings, debt securities issued and subordinated liabilities are the Group’s sources of debt funding. Funds borrowed, debt securities issued and subordinated liabilities Debt securities issued and subordinated liabilities are the Group’s main sources of debt funding, funds borrowed, debt securities issued and subordinated liabilities are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method, except where the Group designates liabilities at fair value through profit or loss. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. All other borrowing costs are recognized in profit or loss in the period in which they are incurred. 34 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.9 Offsetting, derecognition and restructuring of financial instruments a. Offsetting of financial instruments Financial assets and liabilities are offset when the Bank has a legally enforceable right to set off, and when the Bank has the intention of collecting or paying the net amount of related assets and liabilities or when the Bank has the right to offset the assets and liabilities simultaneously. Otherwise, there is not any offsetting transaction about financial assets and liabilities. b. Derecognition of financial instruments Derecognition of financial assets due to change in contractual terms Based on IFRS 9, the renegotiation or modification of the contractual cash flows of a financial asset can lead to the derecognition of the existing financial asset. When the modification of a financial asset results in the derecognition of the existing financial asset and the subsequent recognition of the modified financial asset, the modified asset is considered a ‘new’ financial asset. When the Bank assesses the characteristics of the new contractual terms of the financial asset, it evaluates the contractual cash flows including foreign currency rate changes, conversion to equity, counterparty changes and solely principal and interest on principle. When the contractual cash flows of a financial asset are renegotiated or otherwise modified and the renegotiation or modification does not result in the derecognition of that financial asset, it is recalculated the gross carrying amount of the financial asset and recognized a modification gain or loss in profit or loss. Where all risks and rewards of ownership of the asset have not been transferred to another party and the Bank retains control of the asset, the Bank continues to recognize the remaining portion of the asset and liabilities arising from such asset. When the Bank retains substantially all the risks and rewards of ownership of the transferred asset, the transferred asset continues to be recognized in its entirety and the consideration received is recognized as a liability. Derecognition of financial assets without any change in contractual terms The asset is derecognized if the contractual rights to cash flows from the financial asset are expired or the related financial asset and all risks and rewards of ownership of the asset are transferred to another party. Except for equity instruments measured at fair value through other comprehensive income, the total amount consisting of the gain or loss arising from the difference between the book value and the amount obtained and any accumulated gain directly accounted in equity shall be recognized in profit/loss. Derecognition of financial liabilities It shall be removed a financial liability (or a part of a financial liability) from the statement of financial position when, and only when, it is extinguished when the obligation specified in the contract is discharged or cancelled or expires. c. Reclassification of financial instruments Based on IFRS 9, the Parent Bank shall reclassify all affected financial assets at amortised cost to financial assets measured at fair value through other comprehensive income and fair value through profit or loss in the subsequent accounting when, and only when, it changes its business model for managing financial assets. The Parent Bank has fulfilled the requirements of reclassification during transition to IFRS 9 and such reclassification details are presented in Note 3.23. 35 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.9 Offsetting, derecognition and restructuring of financial instruments (Continued) d. Restructuring and refinancing of financial instruments The Parent Bank may change the original contractual terms of a loan (maturity, repayment structure, guarantees and sureties) which were previously signed, in case the loan cannot be repaid or if a potential payment difficulty is encountered based on the new financing power and structure of the borrower. Restructuring is to change the financial terms of existing loans in order to facilitate the payment of debt. Refinancing is granting a new loan by the Parent Bank which will cover either the principal or the interest payment in whole or in part of one or a few existing loans due to the anticipated financial difficulty which the customer or group encounter currently or will encounter in the future. Changes in the original terms of a credit risk can be made in the current contract or through a new contract. Resturected Loans can be classified in standart loans unless the firm has difficulty in payment. Companies which have been restructured and refinanced can be removed from the watchlist when the following conditions are met: - Subsequent to the through review of company's financial data and its owners' equity position, at circumstances when it is not anticipated that the owner of the company will face financial difficulties; and it is assessed that the restructured debt will be paid on time (starting from the date when the debt is restructured all due principal and interest payments are made on time). - At least 2 years should pass over the date of restructuring (or if it is later), the date of removal from non-performing loan category, at least 10% (or the ratio specified in the legislation) of the total principal amount at the time restructuring /refinancing shall be paid and no overdue amount (principal and interest) shall remain at the date of restructuring / refinancing. In order for the restructured non-performing loans to be classified to the watchlist category, the following conditions must be met: Recovery in debt service. - At least one year should pass over the date of restructuring - Payment of all accrued and overdue amounts by debtor (interest and principal) since the date of restructuring /refinancing or the date when the debtor is classified as nonperforming (earlier date to be considered) and fulfillment of the payment condition of all overdue amounts as of the date of restructuring /refinancing - Collection of all overdue amounts, disappearance of the reasons for classification as nonperforming receivable (based on the conditions mentioned above) and having no overdue more than 30 days as of the date of reclassification During the follow-up period of at least two years following the date of restructuring / refinancing, if there is a new restructuring / refinancing or a delay of more than 30 days, the transactions which were non-performing at the beginning of the follow-up period are classified as non-performing loans again. 36 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.10 Derivatives held for risk management purposes and hedge accounting The Parent Bank is exposed to financial risk which depends on changes in foreign exchange rates and interest rates due to activities and as part of banking activities uses derivative instruments to manage financial risk that especially associated with fluctuations in foreign exchange and interest rate. Mainly derivative instruments used by the Group are foreig currency forwards, swaps, and option agreements. IFRS 9 permits to defer application of IFRS 9 hedge accounting and continue to apply hedge accounting in accordance with IAS 39 as a policy choice. Accordingly, the Parent Bank continue to apply hedge accounting in accordance with IAS 39 in this context. Derivatives held for risk management purposes are measured at fair value in the statement of financial position. Fair value hedge: A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or an unrecognised firm commitment. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in income immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognised in income relating to the hedged item. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or a liability with corresponding gain or loss recognised in profit or loss. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to income from that date. 3.11 Repurchase transactions The Group enters into purchases/sales of investments under agreements to resell/repurchase substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognized. The amounts paid are recognized as receivables from reverse repurchase agreements in the accompanying consolidated financial statements. The receivables are shown as collateralized by the underlying security. Investments sold under repurchase agreements continue to be recognized in the consolidated statement of financial position and are measured in accordance with the accounting policy for either financial assets at fair value through profit or loss, financial assets measured at amortised cost or financial assets at fair value through other comprehensive income as appropriate. The proceeds from the sale of the investments are reported as obligations under repurchase agreements. Income and expenses arising from the repurchase and resale agreements over investments are recognized on an accruals basis over the period of the transaction and are included in “interest income” or “interest expense”. 3.12 Property and equipment Recognition and measurement Items of property and equipment except land and building are measured at cost less accumulated depreciation and accumulated impairment losses. Items of property and equipment, which have been acquired before 31 December 2005, are measured at restated cost for the effects of inflation as at 31 December 2005, less accumulated depreciation and accumulated impairment losses. Items of property and equipment acquired after 31 December 2005 are measured at cost less accumulated depreciation and accumulated impairment losses. 37 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.12 Property and equipment (continued) Recognition and measurement As of the third quarter of the 2015, the Group changed its accounting policy and adopted revaluation method for land and buildings under scope of IAS 16. The useful life of real estates are mentioned in expertise reports. In case of the cost of tangible assets are over the fair value of the assets, within the framework of “Impairment of Assets” (IAS 36), the value of the asset is reduced to its “fair value” and the impairment is recognised in expense accounts. The positive difference between the net book value of real estate property and the expertise values which are determined by the independent expert companies are recognised under shareholders’ equity. Related valuation models such as cost model, market value and discounted cash flow projections approaches are used in valuation of real estates. The initial cost of property and equipment comprises its purchase price, including import duties and non-refundable purchase taxes and any directly attributable costs of bringing the assets to its working condition and location for its intended use. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and is recognized in other income/other expenses in profit or loss. Subsequent costs The cost of replacing a component of an item of property or equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. Depreciation Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance leases are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the current and comparative years are as follows: Buildings 50 years Vehicles 5 years Furniture and Fittings 5 years Computer Equipment 4 years Software 3 years Leasehold and Leasehold Improvements lease term or 5 years Depreciation methods, useful lives and residual values are reassessed at each reporting date and adjusted if appropriate. 38 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.13 Investment property Investment property, which is property held to earn rentals and/or for capital appreciation, is stated at its fair value at the reporting date. Gains or losses arising from changes in the fair value of investment property are included in profit or loss for the year in which they arise. Fair value of investment properties are determined by using market value, discounted cash flow projections approach and cost model. 3.14 Goodwill Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognized at the date of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period. On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. 3.15 Intangible assets Intangible assets acquired before 31 December 2005 are measured at restated cost for the effects of inflation as at 31 December 2005 less accumulated amortisation and accumulated impairment losses. Intangible assets acquired after 31 December 2005 are measured at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure on intangible assets is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is recognized in profit or loss on a straight-line basis over the estimated useful lives of the intangible assets. The estimated useful life of intangible assets is 3 to 5 years. Amortisation methods, useful lives and residual values are reviewed at the end of each reporting period and adjusted if appropriate. 39 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.16 Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessor Amounts due from lessees under finance leases are recorded as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases. Lease receivables are classified under loans in the accompanying statement of financial position. Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term. The Group as lessee Assets held under finance leases are recognized as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group’s general policy on borrowing costs. Rentals payable under operating leases are charged to profit or loss on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. 40 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.17 Impairment of non-financial assets The carrying amounts of the Group’s non-financial assets, other than investment property and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. An impairment loss is recognized if the carrying amount of an asset or its Cash Generating Unit (CGU) exceeds its estimated recoverable amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGU. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The Group’s corporate assets do not generate separate cash inflows and are utilised by more than one CGU. Corporate assets are allocated to CGUs on a reasonable and consistent basis and tested for impairment as part of the testing of the CGU to which the corporate asset is allocated. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs) and then to reduce the carrying amount of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognized. 41 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.18 Provisions A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 3.19 Employee benefits Defined benefit plans A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee and his / her dependants will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A provision is maintained for the present value of the defined benefit obligation, in respect of service up to the reporting date, based on the projected unit credit method. The charge in the income statement comprises current service cost and interest on the obligation. “T. Sınai Kalkınma Bankası Memur ve Müstahdemleri Yardım ve Emekli Vakfı” and “T. Sınai Kalkınma Bankası AŞ Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Vakfı” (the “Pension Funds”) are separate legal entities and foundations recognized by an official decree, providing all qualified Bank employees with pension plan benefits. The Pension Funds are defined benefit plan under which the Bank pays fixed contributions as employer share of monthly premium contributions, and is not obliged to pay any other additional obligation. The liability to be recognized in the statement of financial position in respect of defined benefit plan is the present value of the defined benefit obligation at the reporting date less the fair value of assets. The Bank does not have the legal right to access the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan, and therefore, no assets are recognized in the accompanying statement of financial position in respect of any surplus in the fund. The defined benefit obligation is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using expected interest rates for Turkish Lira. Paragraph 1 of the provisional Article 23 of the Banking Act (“Banking Act”) No: 5411 published in the Official Gazette No: 25983 on 1 November 2005 requires the transfer of banking funds to the Social Security Institution within 3 years as of the enactment date of the Banking Act. Under the Banking Act, in order to account for obligations, actuarial calculations will be made considering the income and expenses of those funds by a commission consisting of representatives from various institutions. Such calculated obligation shall be settled in equal instalments in maximum 15 years. Nonetheless, the related Article of the Banking Law was annulled by the Constitutional Court’s decision No: E. 2005/39 and K. 2007/33 dated 22 March 2007 that were published in the Official Gazette No: 26479 on 31 March 2007 as of the release of the related decision, and the execution of this article was cancelled as of its publication of the decision and the underlying reasoning for the cancellation of the related article was published in the Official Gazette No: 26731 on 15 December 2007. After the publication of the reasoning of the cancellation decision of the Constitutional Court, articles related with the transfer of banks pension fund participants to Social Security Institution based on Social Security Law numbered 5754 were accepted by the Grand National Assembly of Turkey on 17 April 2008 and published in the Official Gazette No: 26870 on 8 May 2008. 42 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.19 Employee benefits (continued) Present value for the liabilities of the transferees as of the transfer date would be calculated by a commission that involves representatives of Social Security Institution, Ministry of Finance, Turkish Treasury, State Planning Organization, BRSA, SDIF, banks and banks’ pension fund institutions and technical interest rate, used in actuarial account, would be 9.80%. If salaries and benefits paid by the pension fund of banks and income and expenses of the pension funds in respect of the insurance branches, stated in the Law, exceeds the salaries and benefits paid under the regulations of Social Security Institution, such differences would be considered while calculating the present value for the liabilities of the transferees and the transfers are completed within 3 years beginning from 1 January 2008. According to the provisional Article 20 of 73th article of Law No. 5754 dated 17 April 2008, has become effective on 8 May 2008 and was published in the Official Gazette No: 26870, transfer of Pension Funds to Social Security Institution in three years has been anticipated. Related resolution of the Council of Ministers related to four-year extension was published in the Official Gazette No: 28277 dated 8 March 2012. It has been resolved that the transfer process has been extended two year with Council of Ministers’ Decree, has become effective on 9 April 2011 and was published in the Official Gazette No: 27900. The transfer had to be completed until 8 May 2013. Accordingly, it has been resolved that, one more year extension with Council of Minister Decree No:2013/467, has become effective on 3 May 2013 and was published in the Official Gazette No:28636 and transfer need to be completed until 8 May 2014. However, it has been decided to extend the time related to transfer by the decision of the Council of Ministers published in the Official Gazette No. 28987 dated 30 April 2014 for one more year due to not to realize the transfer process. In accordance with the Health and Safety Law which became effective on 4 April 2015 and published in the Official Gazette No: 29335 and dated 23 April 2015 and together with some amendments and statutory decree, Council of Ministers authorized for the determination of transfer date to the Social Security institution and there is no decision taken by the Cabinet with regards to issue date of financial statements. Unmet social benefits and payments of the pension fund participants and other employees that receive monthly income although they are within the scope of the related settlement deeds would be met by pension funds and the institutions employ these participants after the transfer of pension funds to the Social Security Institution. The present value of the liabilities, subject to the transfer to the Social Security Institution, of the Pension Fund as of 31 December 2018 has been calculated by an independent actuary in accordance with the actuarial assumptions in the Law and as per actuarial report dated 15 January 2019. There is no need for technical or actual deficit to book provision as of 31 December 2018. In addition, the Bank’s management anticipates that any liability that may come out during the transfer period and after, in the context expressed above, would be financed by the assets of the Pension Fund and would not cause any extra burden on the Bank. The income tax charge is composed of the sum of current tax and deferred tax. 43 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.19 Employee benefits (continued) Employment termination benefits In accordance with the existing labour law in Turkey, the Group entities are required to make lump- sum payments to employees who have completed one year of service and whose employment is terminated without cause or who retire, are called up for military service or die. Such payments are calculated on the basis of 30 days' pay maximum of pay ceiling announced by the Government per year of employment at the rate of pay applicable at the date of retirement or termination. Reserve for employee severance indemnity is computed and reflected in the consolidated financial statements on a current basis. The management of the Group used some assumptions in the calculation of the reserve for employee severance indemnity. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognized for the amount expected to be paid under short-term cash bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. 3.20 Earnings per share Earnings per share from continuing operations disclosed in the accompanying consolidated income statement is determined by dividing the net profit for the year by the weighted average number of shares outstanding during the year attributable to the shareholders of the Bank. In Turkey, companies can increase their share capital by making a pro-rata distribution of shares (“Bonus Shares”) to existing shareholders from retained earnings. For the purpose of earnings per share computations, such Bonus Shares issued are regarded as issued shares. 3.21 Fiduciary assets Assets held by the Group in a fiduciary, agency or custodian capacity for its customers are not included in the consolidated statement of financial position, since such items are not treated as assets of the Group. 3.22 Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Board of Directors (being chief operating decision maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available. 3.23 Adoption effect of IFRS 9 Financial Instruments Effective 1 January 2018, the Group adopted IFRS 9, Financial Instruments, which replaces IAS 39, Financial Instruments: Recognition and Measurement and substantially changes the classification, measurement and impairment of financial assets, income statement and balance sheet presentation and disclosure of financial instruments and other arrangements in scope. IFRS 9 sets out the new principles for the classification and measurement of financial instruments, impairment for credit risk on financial assets and general hedge accounting. 44 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.23 Adoption effect of IFRS 9 Financial Instruments (Continued) In accordance with the transition rules option provided by the IFRS 9 "Financial Instruments", the Group is not restated the prior period financial statements and recognized the transition effect of the standard as of January 1, 2018 under equity’s “Retained earnings” accounts. Explanation of the effect of the Group's application of IFRS 9 is stated below: Reconciliation of statement of financial position balances as at the transition of IFRS 9 Before IFRS 9 IFRS 9 Measurement Method Book Value Measurement Method Book Value 31 December 1 January Financial Assets 2017 2018 Cash and cash equivalents (including loans and balances to banks) Amortised cost 509,147 Amortised cost 509,147 Reserve deposits at Central Bank Amortised cost 831,678 Amortised cost 831,678 Financial assets at fair Financial assets at fair value value through profit or loss 9,305 through profit or loss 9,305 Marketable securities Financial assets at fair Financial assets at fair value value through other through other comprehensive comprehensive income 3,096,432 income 3,096,432 Amortised Cost 1,532,047 Amortised Cost 1,532,047 Financial assets at fair Financial assets measured at value through profit or loss 326,788 fair value through profit or loss 326,788 Derivative financial assets Financial assets at fair Financial assets at measured value through other fair value through other comprehensive income - comprehensive income - Loans and advances to customers (Gross) Amortised Cost 22,400,467 Amortised Cost 22,400,467 Reconcilation of the opening balances of the provision for expected credit losses to IFRS 9 Book Value Before Book Value After IFRS 9 IFRS 9 31 December 2017 Remeasurements 1 January 2018 Loans Stage 1 & Stage 2 96,483 134,849 231,332 Stage 3 52,731 (653) 52,078 Financial Assets(*) - 4,185 4,185 Other Assets - 1,037 1,037 Non-Cash Loans Stage 1 and Stage 2 - 4,215 4,215 Stage 3 583 - 583 Total 149,797 143,633 293,430 Investment in Associates (Net) 374,425 (18,630) 355,795 TOTAL 162,263 (*)Within the scope of IFRS 9, provisions include provisions for Financial Assets Fair Value through Other Comprehensive Income, Receivables from Banks and Receivables from Money Markets. 45 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.23 Adoption effect of IFRS 9 Financial Instruments Effects on equity with IFRS 9 transition As permitted in IFRS 9, the difference between the book value of 1 January 2018 at the date of application reflected in the opening aspect of equity. The explanations about the transition effects to IFRS 9 presented in the equity items are given below: As of 1 January 2018, due to first time adoption of IFRS 9, total shareholders’ equity figure decreased by TL 130,576 thousands (after tax) composing of negative expected credit losses calculation impact amounting to TL 162,263 thousands and positive deferred tax impact amounting to TL 31,687 thousands. 3.24 Explanations on prior period accounting policies not valid for the current period lnterest income and interest expense Interest income and expense are recognised in the profit or loss using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of financial instrument, but not future credit losses. The effective interest rate is established on initial recognition of the fınancial asset and liability and is not revised subsequently. The calculation of the effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. Interest income and expense presented in the statement of comprehensive income statement include: • the interest income on fınancial assets and liabilities at amortised cost on an effective interest rate basis • the interest income on held for trading investments and available for sale investments. Interest income is suspended when loans are impaired and is excluded from interest income until received. Financial assets and liabilities a) Financial Assets All financial assets are initially measured at fair value, plus transaction costs. Financial assets are classified into the following specified categories: fınancial assets as 'at fair value through profıt or loss' (FVTPL), 'available-for-sale' (AFS) financial assets and 'loans and receivables'. The classification depends on the nature and purpose of the fınancial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortized cost of a fınancial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period to the net carrying amount on initial recognition. Income is recognized on an effective interest basis for debt instruments other than those fınancial assets designated as at FVTPL. 46 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.24 Explanations on prior period accounting policies not valid for the current period (continued) Financial assets and liabilities (continued) a) Financial Assets (continued) Financial assets at FVTPL Financial assets at fair value through profıt or loss are fınancial assets held for trading and financial assets designated under this category upon initial recognition. A fınancial asset is classified in this category if acquired principally for the purpose of selling in the short-term or achieved more relevant accounting measurement. Derivatives are also categorized as held for trading unless they are designated as hedges. Available for sale financial assets Quoted equity investments and quoted certain debt securities held by the Group that are traded in an active market are classified as being available-for-sale fınancial assets and are stated at fair value. The unquoted equity investments that are not traded in an active market but are also classifıed as available- for-sale fınancial assets are stated at cost since their value cannot be reliably measured. Gains and losses arising from changes in fair value are recognized in other comprehensive income and accumulated in the investments revaluation reserve with the exception of impairment losses, interest calculated using the effective interest method, and foreign exchange gains and losses on monetary assets, which are recognized in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss. Dividends on available for sale equity instruments are recognized in profıt and loss when the Group has the right to receive any payment. The fair value of available for sale monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the prevailing exchange rate at the reporting date. The change in fair value attributable to translation differences that result from a change in amortized cost of the asset is recognized in profıt or loss, and other changes are recognized in equity. Due from banks and loans and advances to customers Due from banks and loans and advances to customers are non-derivative fınancial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell immediately or in the near term. When the Group is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of an asset to the lessee, the arrangement is classifıed as a fınance lease and a receivable equal to the net investment in the lease is recognised and presented within loans and advances. When the Group purchases a fınancial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fıxed price on a future date ("reverse repo or stock borrowing"), the arrangement is accounted for as amounts due from banks, and the underlying asset is not recognised in the Group's consolidated financial statements. Due from banks and loans and advances to customers are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. 47 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.24 Explanations on prior period accounting policies not valid for the current period (continued) Financial assets and liabilities (continued) a) Financial Assets (continued) Impairment of financial assets Financial assets, other than those at fair value through profit or loss are subject to impairment testing at each balance sheet date to determine whether there is any indication of impairment of fınancial asset or fınancial asset group. An entity shall assess at each balance sheet date whether there is any objective evidence that a fınancial asset or group of fınancial assets is impaired. A fınancial asset or group of fınancial assets is impaired and impairment losses are incurred, if and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that loss event or events has an impact on the estimated future cash flows of the fınancial asset or group of fınancial assets that can be reliably estimated. For loans and receivables, the amount of impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. The carrying amount of the fınancial asset is reduced through the use of an allowance account. Changes in allowance accounts are recognized in profit or loss. With the exception of available for sale equity instruments, if, in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. Increase in fair value of available for sale fınancial assets subsequent to impairment is recognized in directly in equity. Derecognition of fınancial assets The Group derecognizes a fınancial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the fınancial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred fınancial asset, the Group continues to recognize the fınancial asset and also recognizes a collateralized borrowing for the proceeds received. Derecognition of financial liabilities The Group derecognizes fınancial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. 48 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.25 The new standards, amendments and interpretations The accounting policies adopted in preparation of the consolidated financial statements as at 31 December 2018 are consistent with those of the previous financial year, except for the adoption of new and amended IFRS and IFRIC interpretations effective as of 1 January 2018. The effects of these standards and interpretations on the Group’s financial position and performance have been disclosed in the related paragraphs. i) The new standards, amendments and interpretations which are effective as at 1 January 2018 are as follows: IFRS 15 Revenue from Contracts with Customers The IASB issued IFRS 15 Revenue from Contracts with Customers. The new five-step model in the standard provides the recognition and measurement requirements of revenue. The standard applies to revenue from contracts with customers and provides a model for the sale of some non-financial assets that are not an output of the entity’s ordinary activities (e.g., the sale of property, plant and equipment or intangibles). IFRS 15 effective date is 1 January 2018. The Group assessed the effect of IFRS 15 “Revenue from Contracts with Customers” standard and the amendments did not have an impact on the financial position or performance of the Group. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments. The final version of IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is built on a logical, single classification and measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. Built upon this is a forward-looking expected credit loss model that will result in more timely recognition of loan losses and is a single model that is applicable to all financial instruments subject to impairment accounting. In addition, IFRS 9 addresses the so-called ‘own credit’ issue, whereby banks and others book gains through profit or loss as a result of the value of their own debt falling due to a decrease in credit worthiness when they have elected to measure that debt at fair value. The Standard also includes an improved hedge accounting model to better link the economics of risk management with its accounting treatment. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. As of 1 January 2018, due to first time adoption of IFRS 9, total shareholders’ equity figure decreased by TL 130,576 thousands (after tax) composing of negative expected credit losses calculation impact amounting to TL 162,263 thousands and positive deferred tax impact amounting to TL 31,687 thousands. Explanations on adoption of IFRS 9 is explained in Note 3.23. IFRS 7 Financial Instruments: Disclosures IFRS 7, Financial Instruments: Disclosures was updated in line with IFRS 9, Financial Instruments. The Group adopted the revised standard on 1 January 2018. Given the first quarter of 2018 includes the date of initial application of IFRS 9, and to meet the general disclosure requirements for annual periods to describe the nature and effects of changes to policies and methods made since the last annual reporting, the Group provides the IFRS 9 transition disclosures as set out by IFRS 7 in the first quarter of 2018. A full set of disclosures as required by revised IFRS 7 will be provided in the Group’s annual Financial Statements as of and for the year ended 31 December 2018. IFRS 2 Classification and Measurement of Share-based Payment Transactions (Amendments) The IASB issued amendments to IFRS 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments, provide requirements on the accounting for: 49 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.25 The new standards, amendments and interpretations (continued) i) The new standards, amendments and interpretations which are effective as at 1 January 2018 are as follows (continued): IFRS 2 Classification and Measurement of Share-based Payment Transactions (Amendments) (continued) a. the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; b. share-based payment transactions with a net settlement feature for withholding tax obligations; and c. a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. These amendments are applied for annual periods beginning on or after 1 January 2018. The amendments are not applicable for the Group and did not have an impact on the financial position or performance of the Group. IFRS 4 Insurance Contracts (Amendments) In September 2016, the IASB issued amendments to IFRS 4 Insurance Contracts The amended Standard will: a. give all companies that issue insurance contracts the option to recognise in other comprehensive income, rather than profit or loss, the volatility that could arise when IFRS 9 Financial instruments is applied before the new insurance contracts Standard is issued; and b. give companies whose activities are predominantly connected with insurance an optional temporary exemption from applying IFRS 9 Financial instruments until 2021. The entities that defer the application of IFRS 9 Financial instruments will continue to apply the existing financial instruments Standard—IAS 39. These amendments are applied for annual periods beginning on or after 1 January 2018. The amendments are not applicable for the Group and did not have an impact on the financial position or performance of the Group. IAS 40 Investment Property: Transfers of Investment Property (Amendments) The IASB issued amendments to IAS 40 'Investment Property '. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. These amendments are applied for annual periods beginning on or after 1 January 2018. The amendments did not have a significant impact on the financial position or performance of the Group. IFRIC 22 Foreign Currency Transactions and Advance Consideration The interpretation clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The Interpretation states that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. An entity is not required to apply this Interpretation to income taxes; or insurance contracts (including reinsurance contracts) it issues or reinsurance contracts that it holds. 50 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.25 The new standards, amendments and interpretations (continued) i) The new standards, amendments and interpretations which are effective as at 1 January 2018 are as follows (continued): IFRIC 22 Foreign Currency Transactions and Advance Consideration (continued) The interpretation is effective for annual reporting periods beginning on or after 1 January 2018. The interpretation is not applicable for the Group and did not have an impact on the financial position or performance of the Group. Annual Improvements to IFRSs - 2014-2016 Cycle The IASB issued Annual Improvements to IFRS Standards 2014–2016 Cycle, amending the following standards: - IFRS 1 First-time Adoption of International Financial Reporting Standards: This amendment deletes the short-term exemptions about some IFRS 7 disclosures, IAS 19 transition provisions and IFRS 10 Investment Entities. These amendments are applied for annual periods beginning on or after 1 January 2018. IAS 28 Investments in Associates and Joint Ventures: This amendment clarifies that the election to measure an investment in an associate or a joint venture held by, or indirectly through, a venture capital organisation or other qualifying entity at fair value through profit or loss applying IFRS 9 Financial Instruments is available for each associate or joint venture, at the initial recognition of the associate or joint venture. These amendments are applied for annual periods beginning on or after 1 January 2018. The amendments are not applicable for the Group and did not have an impact on the financial position or performance of the Group. ii) Standards issued but not yet effective and not early adopted Standards, interpretations and amendments to existing standards that are issued but not yet effective up to the date of issuance of the consolidated financial statements are as follows. The Group will make the necessary changes if not indicated otherwise, which will be affecting the consolidated financial statements and disclosures, when the new standards and interpretations become effective. IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments) In December 2015, the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting. Early application of the amendments is still permitted. An entity shall apply those amendments prospectively. The Group is in the process of assessing the impact of the amendments on financial position or performance of the Group. IFRS 16 Leases The IASB has published a new standard, IFRS 16 'Leases'. The new standard brings most leases on- balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 supersedes IAS 17 'Leases' and related interpretations and is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted. 51 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.25 The new standards, amendments and interpretations (continued) ii) Standards issued but not yet effective and not early adopted (continued) IFRS 16 Leases (continued) Lessees have recognition exemptions to applying this standard in case of short-term leases (i.e., leases with a lease term of 12 months or less) and leases of ’low-value’ assets (e.g., personal computers,office equipment, etc.). At the commencement date of a lease, a lessee measures the lease liability at the present value of the lease payments that are not paid at that date (i.e., the lease liability), at the same date recognises an asset representing the right to use the underlying asset (i.e., the right- of-use asset) and depreciates it during the lease term. The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate. Lessees are required to recognise the interest expense on the lease liability and the depreciation expense on the right-of- use asset separately. Lessees are required to remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). Under these circumstances, the lessee recognises the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. The effect of the standard on the financial statement of the Group would be between 0.10% and 0.12%. IFRIC 23 Uncertainty over Income Tax Treatments The interpretation clarifies how to apply the recognition and measurement requirements in “IAS 12 Income Taxes” when there is uncertainty over income tax treatments. When there is uncertainty over income tax treatments, the interpretation addresses: (a) whether an entity considers uncertain tax treatments separately; (b) the assumptions an entity makes about the examination of tax treatments by taxation authorities; (c) how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and (d) how an entity considers changes in facts and circumstances. An entity shall apply this Interpretation for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. If an entity applies this Interpretation for an earlier period, it shall disclose that fact. On initial application, an entity shall apply the interpretation either retrospectively applying IAS 8, or retrospectively with the cumulative effect of initially applying the Interpretation recognised at the date of initial application. The Group is in the process of assessing the impact of the interpretation on financial position or performance of the Group. IFRS 17 - The new Standard for insurance contracts The IASB issued IFRS 17, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. IFRS 17 model combines a current balance sheet measurement of insurance contract liabilities with the recognition of profit over the period that services are provided. IFRS 17 will become effective for annual reporting periods beginning on or after 1 January 2021; early application is permitted. The amendments are not applicable for the Group and did not have an impact on the financial position or performance of the Group. 52 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.25 The new standards, amendments and interpretations (continued) ii) Standards issued but not yet effective and not early adopted (continued) Prepayment Features with Negative Compensation (Amendments to IFRS 9) In October 2017, the IASB issued minor amendments to IFRS 9 Financial Instruments to enable companies to measure some prepayable financial assets at amortised cost. Applying IFRS 9, a company would measure a financial asset with so-called negative compensation at fair value through profit or loss. Applying the amendments, if a specific condition is met, entities will be able to measure at amortised cost some prepayable financial assets with so-called negative compensation. Definition of a Business (Amendments to IFRS 3) In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 Business Combinations. The amendments are intended to assist entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendments: - clarify the minimum requirements for a business; - remove the assessment of whether market participants are capable of replacing any missing elements; - add guidance to help entities assess whether an acquired process is substantive; - narrow the definitions of a business and of outputs; and - introduce an optional fair value concentration test. The amendments to IFRS 3 are effective for annual reporting periods beginning on or after 1 January 2020 and apply prospectively. Earlier application is permitted. Definition of Material (Amendments to IAS 1 and IAS 8) In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that, ’Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity. The amendments clarify that materiality will depend on the nature or magnitude of information, or both. An entity will need to assess whether the information, either individually or in combination with other information, is material in the context of the financial statements. The amendments to IAS 1 and IAS 8 are required to be applied for annual periods beginning on or after 1 January 2020. The amendments must be applied prospectively and earlier application is permitted. Prepayment Features with Negative Compensation (Amendments to IFRS 9) In October 2017, the IASB issued minor amendments to IFRS 9 Financial Instruments to enable companies to measure some prepayable financial assets at amortised cost. Applying IFRS 9, a company would measure a financial asset with so-called negative compensation at fair value through profit or loss. Applying the amendments, if a specific condition is met, entities will be able to measure at amortised cost some prepayable financial assets with so-called negative compensation. 53 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 3. SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.25 The new standards, amendments and interpretations (continued) ii) Standards issued but not yet effective and not early adopted (continued) Prepayment Features with Negative Compensation (Amendments to IFRS 9) (continued) The amendments are effective from annual periods beginning on or after 1 January 2019, with early application permitted. The amendments are not applicable for the Group and will not have an impact on the financial position or performance of the Group. Amendments to IAS 28 Investments in Associates and Joint Ventures (Amendments) In October 2017, the IASB issued amendments to IAS 28 Investments in Associates and Joint Ventures. In this amendment the IASB clarified that the exclusion in IFRS 9 applies only to interests a company accounts for using the equity method. A company applies IFRS 9 to other interests in associates and joint ventures, including long-term interests to which the equity method is not applied and that, in substance, form part of the net investment in those associates and joint ventures. The amendments are effective for annual periods beginning on or after 1 January 2019, with early application permitted. Overall, the Group expects no significant impact on its balance sheet and equity. Annual Improvements – 2015–2017 Cycle In December 2017, the IASB announced Annual Improvements to IFRS Standards 2015–2017 Cycle, containing the following amendments to IFRSs: · IFRS 3 Business Combinations and IFRS 11 Joint Arrangements — The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business. · IAS 12 Income Taxes — The amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) should be recognised in profit or loss, regardless of how the tax arises. IAS 23 Borrowing Costs — The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings. The amendments are effective from annual periods beginning on or after 1 January 2019, with early application permitted. The Group is in the process of assessing the impact of the amendments on financial position or performance of the Group. Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) On 7 February 2018, the IASB published Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement” to harmonise accounting practices and to provide more relevant information for decision-making. The amendments require entities to use updated actuarial assumptions to determine current service cost and net interest for the remainder of the annual reporting period after a plan amendment, curtailment or settlement occurs. An entity shall apply these amendments for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted. If an entity applies these amendments for an earlier period, it shall disclose that fact. The Group is in the process of assessing the impact of the amendments on financial position or performance of the Group. 54 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT The Group has exposure to the following risks from its use of financial instruments: · credit risk, · liquidity risk, · market risk, · operational risk. This note presents information about the Group’s exposure to each of the risks below, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Risk management framework The Board of Directors of the Bank has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board of Directors monitors the effectiveness of the risk management system through the Audit Committee. Consequently, the Risk Management Department of the Bank, which carries out the risk management activities and works independently from executive activities, report to the Board of Directors. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. The risks are measured using internationally accepted methodologies, in compliance with local and international regulations, and the Bank’s structure, policy and procedures. It is aimed to develop these methodologies to enable the Bank to manage the risks effectively. At the same time, studies for compliance with the international banking applications, such as Basel II, are carried out. Through its normal operations, the Group is exposed to a number of risks, the most significant of which are liquidity, credit, operational and market risk. The risk management group exercises its functions according to the International Regulations of the Risk Management Group, and directly reports to the Board of Directors. Responsibility for the management of these risks rests with the Board of Directors, which delegates the operational responsibility to the Bank’s general management and appropriate sub- committees. 55 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Credit risk The sectoral breakdown of loans is documented monthly and limitations are made according to evaluations. There is no limitation applied geographically. Monitoring and checking is made for the treasury operations. Risk limits are identified for the operations implemented. The credit monitoring department screens the creditworthiness of loan customers once every six months regularly. The debtors’ creditworthiness is screened regularly in accordance with the related legislation. Their financial statements are obtained as prescribed in the legislation. The credit limits have been set by the Board of Directors, the Banks credit committee and the credit management. The Bank takes enough collateral for the loans and other receivables extended. The collaterals obtained consist of personal surety ship, mortgage, cash blockage and client checks. Limits have also been set for transactions with banks. Credit risks are managed on the counterparty's creditworthiness and limits. The definitions of past due and impaired loans and information related to impairment and provisions are provided in Section 3.8.1 Explanations on expected credit losses. Credit risk by risk groups Set out below is an analysis of loans as at 31 December 2018 by customer groups and impairment: Small 31 December 2018 Corporate Other Total Business Stage 1 loans to customers 18,678,696 6,011,016 128,765 24,818,477 Stage 2 loans to customers 2,764,024 179,535 - 2,943,559 Stage 3 loans to customers 556,100 36,274 4,836 597,210 Total gross loans to customers 21,998,820 6,226,825 133,601 28,359,246 Less: Stage 1 expected credit loans (35,021) (99,188) (1,328) (135,537) Less: Stage 2 expected credit loans (14,820) (196,320) - (211,140) Less: Stage 3 expected credit loans (34,533) (130,120) (4,836) (169,489) Total expected credit loss (84,374) (425,628) (6,164) (516,166) Total Loans and advances to customer 21,914,446 5,801,197 127,437 27,843,080 Set out below is an analysis of loans as at 31 December 2017 by customer groups and impairment: Small Portfolio Corporate Business Other Reserve Total Neither past due nor impaired 17,140,122 4,289,397 106,219 - 21,535,738 Past due not impaired 864,729 - - - 864,729 Individually impaired 14,263 35,259 4,053 - 53,575 Total gross 18,019,114 4,324,656 110,272 - 22,454,042 Less: reserve for individually impaired loans (14,676) (34,415) (3,640) - (52,731) Less: reserve for collectively impaired loans - - - (96,483) (96,483) Total reserve for impairment (14,676) (34,415) (3,640) (96,483) (149,214) Total, net 18,004,438 4,290,241 106,632 (96,483) 22,304,828 56 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Credit risk (continued) Impairment allowance for loans and advances to customers Impairment allowance for loans and 31 December 2018 advances to customers Stage 1 Stage 2 Stage 3 Total Internal rating grade Performing Above Average Grade 2,951 - - 2,951 Average Grade 114,809 77,173 - 191,982 Below Grade 17,777 119,513 - 137,290 Past due but not impaired - 14,454 - 14,454 Non-performing Individually impaired - - 169,489 169,489 Total 135,537 211,140 169,489 516,166 Impairment allowance for off-balance sheet financial assets Impairment allowance for loans and 31 December 2018 advances to customers Stage 1 Stage 2 Stage 3 Total Internal rating grade Performing Above Average Grade 779 - - 779 Average Grade 7,697 1,411 - 9,108 Below Grade 361 1,003 - 1,364 Past due but not impaired - - - - Non-performing Individually impaired - - 736 736 Total 8,837 2,414 736 11,987 57 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Credit risk (continued) Exposure to credit risk Due from Loans and advances banks to customers 31 December 31 December Notes 2018 2018 Carrying amount (1) 806,997 27,843,080 Non-performing financial assets - 597,210 Gross amount - 597,210 Specific provision for Stage 3 - (169,489) Generic provision for Stage 1 and 2 (234) (346,677) Neither past due nor impaired 806,997 26,524,471 Past due but not impaired - 10,833 Carrying amount 806,997 26,616,348 Restructured and rescheduled loans and other receivables - 936,072 Carrying amount - 936,072 Carrying amount (amortised cost) 806,997 27,552,420 (1) Includes fair value through profit or loss loans. 58 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Credit risk (continued) Information by major sectors and type of counterparties Loans(1) Significant Expected Credit Sectors Defaulted increase in credit Losses (IFRS 9) (Stage 3) risk (Stage 2) Agriculture - - - Farming and Stockbreeding - - - Forestry - - - Fishery - - - Manufacturing 1,541,322 563,077 261,213 Mining and Quarrying - 195 195 Production 179,778 6,975 23,552 Electricity, Gas and Water 1,361,544 555,907 237,466 Services 940,633 25,302 97,452 Wholesale and Retail Trade - 1,236 1,236 Accommodation and Dining 2,378 738 791 Transportation and Telecommunication 136,988 57 15,811 Financial Institutions - 2,504 2,504 Real Estate, Rental and Management 801,267 20,618 76,961 Services Professional Services - 149 149 Educational Services - - - Health and Social Services - - - Others 170,944 8,831 21,964 Total 2,652,899 597,210 380,629 (1) Breakdown of cash loans. 59 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Credit risk (continued) The table below shows the maximum exposure to credit risk for the components of the statement of financial position; 31 December 2018 Gross maximum exposure Cash and cash equivalents, balances and reserve deposit at the Central Bank and other banks 2,123,572 Financial assets at fair value through profit or loss 9,859 Financial assets at fair value through other comprehensive income 3,427,495 Financial assets measured at amortized cost 2,153,313 Derivative financial assets 979,221 Loans and advances to customers 27,843,080 Guarantees and collaterals 3,173,807 Other Assets 755,249 Total 40,465,596 31 December 2017 Gross maximum exposure Cash and cash equivalents, balances and reserve deposit at the Central Bank and other banks 1,340,822 Interbank money market placements - Funds lent under repurchase agreements 3 Trading financial asset 9,305 Derivatives held for trading 326,788 Derivatives held for hedging purposes - Loans and advances to customers 22,304,828 Held to maturity investment securities 1,532,047 Available-for-sale investment securities 3,096,432 Guarantees and collaterals 2,573,711 Other Assets 304,564 Total 31,488,500 60 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Credit risk (continued) Credit quality per class of loans and advances as at 31 December 2018 is as follows: Carrying Amount ECL Allowance Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total On-Balance Sheet Financial Assets Cash and cash equivalents (including reserves at Central Bank) 2,124,072 - - 2,124,072 500 - - 500 Securities 5,585,289 - - 5,585,289 4,481 - - 4,481 Loans and advances to customers 24,818,477 2,943,559 597,210 28,359,246 135,537 211,140 169,489 516,166 Other assets 756,571 - - 756,571 1,322 - - 1,322 Total 33,284,409 2,943,559 597,210 36,825,178 141,840 211,140 169,489 522,469 Off-Balance Sheet Financial Assets LCs and Acceptances 3,157,356 13,486 2,965 3,173,807 7,430 419 736 8,585 Other 2,430,739 68,961 - 2,499,700 1,407 1,995 - 3,402 Total 5,588,095 82,447 2,965 5,673,507 8,837 2,414 736 11,987 Movement for impairment allowance for off-balance sheet financial assets: 31 December 2018 Letters of Other Letters of quarantee and undrawn Total credit acceptances commitments Balances at 31 December 2017 583 - - 583 Impact of adopting IFRS 9 at 1 January 2018 942 1,939 1,334 4,215 Balances at 1 January 2018 1,525 1,939 1,334 4,798 Charge for the year 9,373 6,288 6,145 21,806 Recoveries (5,794) (4,746) (4,077) (14,617) Amounts written off - - - - Unwind of transformed into cash - - - - Unwind of discount (recognized in interest income) - - - - At 31 December 2018 5,104 3,481 3,402 11,987 61 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Credit risk (continued) 31 December 2018 Stage 1 Stage 2 Stage 3 Balances at 31 December 2017 - - 583 Impact of adopting IFRS 9 at 1 January 2018 4,199 16 - Balances at 1 January 2018 4,199 16 583 Transfer to Stage 1 (687) 687 - Transfer to Stage 2 - (153) 153 Transfer to Stage 3 - - - Debt sales and write offs - - - Recoveries and reversals (9,648) (4,969) - Provision for the period 12,171 5,244 - Effects of movements in exchange rates 2,802 1,589 - Balances at the end of the period 8,837 2,414 736 Carrying amount per class of financial assets whose terms have been renegotiated: 31 December 31 December 2018 2017 Loans and advances to customers Corporate lending 820,012 70,860 Small business lending 116,060 120,978 Total 936,072 191,838 Credit risk is evaluated according to the Bank’s internal rating. Non-financial service customers included in credit portfolio are rated with respect to the Bank’s internal rating and ratings of the financial service customers, which are rated by external rating firms, are matched to the Bank’s internal ratings. With the transition to IFRS 9, the Bank changed its internal rating model in 2018. Due to the preparation of internal rating models in the current period and prior period on different principles, the previous period has not been included in footnote. Information of credit amounts rated by internal rating model is given table below for the current period. Loan Quality Categories Current Period % Above Average Grade 26.93 Average Grade 61.19 Below Average Grade 9.97 Impaired (1) 1.91 Total 100.00 (1) Loans belong to the financial subsidiaries subject to line-by-line consolidation method are considered as unrated. Impaired loans are presented in the table above. As of the reporting date, the total of the Bank’s cash and non-cash loans and financial lease receivables (gross amount including the non performing loans, excluding the expected credit losses) is TL 31,533,053 and TL 129,102 of these customers have not been rated. 62 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Liquidity risk Liquidity risk is a substantial risk in Turkish markets, which exhibit significant volatility. The Group is exposed to a certain degree of mismatch between the maturities of its assets and liabilities. In order to manage this risk, the Group measures and manages its cash flow commitments on a daily basis, and maintains liquid assets which it judges sufficient to meet its commitments. The Group uses various methods, including predictions of daily cash positions, to monitor and manage its liquidity risk to avoid undue concentration of funding requirements at any point in time or from any particular source. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. For the purposes of monitoring and assessing the liquidity position of the Bank’s assets and liabilities, the liquidity rate is weekly calculated. The ratio during the year was as follows: 31 December 31 December 2018 2017 % % Average during the period 238.95 208.07 The table below presents the last three months’ consolidated liquidity ratios in accordance with the BRSA regulations: Period TL+FC FC 31 October 2018 249.55% 399.21% 30 November 2018 308.81% 431.50% 31 December 2018 456.50% 395.47% 63 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Liquidity risk (continued) As at 31 December 2018 the estimated maturity analysis for certain assets and liabilities is as follows: Up to 3 to 12 Over No 3 Months Months 1 Year Maturity Total ASSETS Cash and cash equivalents - - - 27 27 Balances with Central Bank - - - 12,928 12,928 Reserve deposits at Central Bank 423,408 - - 306,622 730,030 Loans and advances to banks 750,186 - - 56,811 806,997 Interbank money market placements 573,233 - - - 573,233 Funds lent under securities repurchase agreements 357 - - - 357 Trading financial assets 1,064 3,908 3,435 1,452 9,859 Derivative financial instruments 125,373 129,926 723,922 - 979,221 Loans and advances to customers 2,937,446 4,856,198 20,049,436 - 27,843,080 Financial assets at fair value through other comprehensive income 34,122 697,216 2,594,707 101,450 3,427,495 Financial assets measured at amortized cost 39,727 154,272 1,959,314 - 2,153,313 Total 4,884,916 5,841,520 25,330,814 479,290 36,536,540 LIABILITIES Obligations under repurchase agreements 179,001 - - - 179,001 Derivative liabilities 158,127 78,317 383,638 - 620,082 Derivative liabilities held for hedging purposes - 20,652 151,606 - 172,258 Funds borrowed 598,089 3,193,322 20,028,259 - 23,819,670 Debt securities issued (1) - 1,797,030 6,701,933 - 8,498,963 Payables to money market 223,277 - - - 223,277 Current account of loan customers 32,529 - - - 32,529 Taxes and dues payable 11,741 - - - 11,741 Corporate tax liability 82,363 - - - 82,363 Employee benefits 22,973 28,714 51,687 Total 1,308,100 5,089,321 27,265,436 28,714 33,691,571 (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. 64 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Liquidity risk (continued) As at 31 December 2017 the estimated maturity analysis for certain assets and liabilities is as follows: Up to 3 to 12 Over No 3 Months Months 1 Year Maturity Total ASSETS Cash and cash equivalents - - - 24 24 Balances with Central Bank - - - 15,433 15,433 Reserve deposits at Central Bank 420,135 - - 411,543 831,678 Loans and advances to banks 474,198 - - 19,489 493,687 Interbank money market placements - - - - - Funds lent under securities repurchase agreements 3 - - - 3 Trading financial assets 1,120 4,233 2,932 1,020 9,305 Derivative financial instruments 51,024 46,610 229,154 - 326,788 Derivative assets held for hedging purposes - - - - - Loans and advances to customers 2,270,316 4,746,682 15,287,830 - 22,304,828 Available-for-sale investment securities 87,338 405,362 2,525,592 78,140 3,096,432 Held-to-maturity investment securities - - 1,532,047 - 1,532,047 Total 3,304,134 5,202,887 19,577,555 525,649 28,610,225 LIABILITIES Obligations under repurchase agreements 576,653 34,122 - - 610,775 Derivative liabilities 67,778 46,889 117,736 - 232,403 Derivative liabilities held for hedging purposes - - 78,682 - 78,682 Funds borrowed 602,934 3,027,738 15,370,955 - 19,001,627 Debt securities issued (1) - - 4,892,465 - 4,892,465 Payables to money market 701,147 - - - 701,147 Current account of loan customers 12,901 - - - 12,901 Taxes and dues payable 9,986 - - - 9,986 Corporate tax liability 43,662 - - - 43,662 Employee benefits 12,735 - - 12,151 24,886 Total 2,027,796 3,108,749 20,459,838 12,151 25,608,534 (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. 65 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Liquidity risk (continued) Analysis of financial liabilities by remaining contractual maturities; Up to 1 1-3 3-12 1-5 Over 5 As at 31 December 2018 Month Months Months years years Adjustments Total Liabilities Payables to stock exchange money market 223,277 - - - - - 223,277 Funds borrowed 250,750 473,529 3,564,137 11,932,773 10,745,190 (3,146,709) 23,819,670 Obligations under repurchase agreements 178,943 97 - - - (39) 179,001 Debt securities issued (1) 49,424 58,732 2,169,217 7,473,832 - (1,252,242) 8,498,963 Current account of customers 32,529 - - - - - 32,529 Total 734,923 532,358 5,733,354 19,406,605 10,745,190 (4,398,990) 32,753,440 (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. Up to 1 1-3 3-12 1-5 Over 5 As at 31 December 2017 Month Months Months years years Adjustments Total Liabilities Payables to stock exchange money market 701,958 - - - - (811) 701,147 Funds borrowed 218,189 384,059 3,267,276 8,525,381 8,343,922 (1,737,200) 19,001,627 Obligations under repurchase agreements 577,003 88 34,143 - - (459) 610,775 Debt securities issued (1) - 42,919 235,703 4,404,866 1,514,306 (1,305,329) 4,892,465 Current account of customers 12,901 - - - - - 12,901 Total 1,510,051 427,066 3,537,122 12,930,247 9,858,228 (3,043,799) 25,218,915 (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. Analysis of contractual expiry by maturity of the Bank’s derivative financial instruments; Up to 1 3-12 1-5 Over 5 As at 31 December 2018 Month 1-3 Months Months years years Total Gross settled: Swap agreements 5,333,532 2,671,841 4,451,310 22,771,113 14,227,994 49,455,790 Forward contracts 1,313,247 727,695 785,000 975,007 - 3,800,949 Options 726,110 1,028,724 3,476,077 37,597 - 5,268,508 Other - 13,401 - - - 13,401 Total 7,372,889 4,441,661 8,712,387 23,783,717 14,227,994 58,538,648 Up to 1 3-12 1-5 Over 5 As at 31 December 2017 Month 1-3 Months Months years years Total Gross settled: Swap agreements 1,917,047 1,008,794 1,761,054 16,948,589 9,168,288 30,803,772 Forward contracts 434,377 2,454,434 1,737,976 199,318 - 4,826,105 Options 391,076 2,209,193 2,051,703 - - 4,651,972 Other 72,830 - - - - 72,830 Total 2,815,330 5,672,421 5,550,733 17,147,907 9,168,288 40,354,679 66 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Market risk Market risk is the possibility of a risk being incurred by the portfolio or position accepted within the scope of trading portfolio as a result of interest rates, equity prices, commodity prices in financial markets and exchange rate fluctuations. The purpose of market risk management is to manage, within the appropriate parameters, the risks which the Bank might be exposed to with a proactive approach and thus maximize the Bank’s risk adjusted return. Interest rate , exchange rate, stock and commodity price risks are the major elements of market risk. In order to control these risks in a healthy manner the core principal is to manage transactions carried out in money and capital markets such that they do not form concentration in terms of instrument, maturity, currency, interest type and other similar parameters, and in a “well diversified” manner in accordance with their risk levels. Moreover, the creditworthiness of issuers of financial instruments causing market risk is monitored carefully. Market Risk is managed by using consistent risk measurements and criteria fluctuation level of interest rates and/or prices and Value at Risk calculations, establishing appropriate procedures for control and monitoring compliance with identified risk limits and risk appetite. Market risk is measured, monitored and reported by the Department of Risk Management. The Bank uses two main approaches in the calculation of market risk BRSA Standard Method and Value at Risk (VaR) approach. Market risk measurement, monitoring and reporting is carried out by the Risk Management Department. In the calculation of the market risk, the Bank uses two basic approaches as the BRSA Standard Method and Risk Value of Return (VaR) approach. The standard method is applied in the calculation of capital adequacy on a monthly basis. VaR calculations are performed periodically and are reported to the senior management. Monte Carlo simulation method is used for VaR calculations. The VaR model is based on the assumptions of a 99% confidence interval and a 1-day holding period, and the accuracy of the model is assured by back-testing which is based on the comparison of calculated VaR Value against incurred losses. Besides, stress tests are conducted so as to identify the impacts on VaR which will be highly damaging, although their occurrence is a low possibility. Interest Rate Risk The Group is exposed to interest rate risk either through market value fluctuations of statement of financial position items, i.e. price risk, or the impact of rate changes on interest sensitive assets and liabilities. In Turkey, interest rates are highly volatile and this may result in significant changes in prices of financial instruments including government bonds and treasury bills. The major sources of funding are borrowings. Interest rate sensitivity of the assets, liabilities and off-balance sheet items are managed by the Group. Progressive forecasting is determined with simulation reports, interest rate fluctuation effects are identified with sensitivity reports and scenario analyses. 67 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Market risk (continued) Interest Rate Risk (continued) The below table summarizes the Group’s exposure to interest rate risks as at 31 December 2018: , Non Up to 3 3 to 12 Over 1 Interest Months Months Year Bearing Total ASSETS Cash and cash equivalents - - - 27 27 Balance with the Central Bank - - - 12,928 12,928 Reserve deposits at Central Bank 423,408 - - 306,622 730,030 Loans and advances to banks 750,186 - - 56,811 806,997 Interbank money market placements 573,233 - - - 573,233 Funds lent under securities resale agreements 357 - - - 357 Trading assets 1,065 3,908 3,434 1,452 9,859 Derivative assets 722,041 208,577 48,603 979,221 Derivative assets used for hedging purposes - - - - - Loans and advances to customers 12,395,691 9,081,756 6,365,633 - 27,843,080 Financial assets at fair value through other comprehensive income 224,584 1,341,530 1,759,931 101,450 3,427,495 Financial assets measured at amortized cost 1,216,351 672,132 264,830 - 2,153,313 Total 16,306,916 11,307,903 8,442,431 479,290 36,536,540 LIABILITIES Obligations under repurchase agreements 179,001 - - - 179,001 Derivative liabilities 396,422 178,496 45,164 - 620,082 Derivative liabilities used for hedging purposes 65,881 106,377 - - 172,258 Funds borrowed 12,810,841 4,753,669 6,255,160 - 23,819,670 Debt securities issued (1) - 1,797,030 6,701,933 - 8,498,963 Payables to stock exchange money market 223,277 - - - 223,277 Current account of loan customers 32,529 - - - 32,529 Taxes and dues payable - - - 82,363 82,363 Corporate tax liability - - 11,741 11,741 Employee benefits - - - 51,687 51,687 Total 13,707,951 6,835,572 13,002,257 145,791 33,691,571 Total Balance Sheet Position 2,598,965 4,472,331 (4,559,826) 333,499 2,844,969 Total Off Balance Sheet Position (3,611,642) (3,335,297) 7,218,803 - 271,864 Total Position (1,012,677) 1,137,034 2,658,977 333,499 3,116,833 (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. 68 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Market risk (continued) Interest Rate Risk (continued) The below table summarizes the Group’s exposure to interest rate risks as at 31 December 2017: Non Up to 3 3 to 12 Over 1 Interest Months Months Year Bearing Total ASSETS Cash and cash equivalents - - - 24 24 Balance with the Central Bank - - - 15,433 15,433 Reserve deposits at Central Bank 420,135 - - 411,543 831,678 Loans and advances to banks 474,198 - - 19,489 493,687 Interbank money market placements - - - - - Funds lent under securities resale agreements 3 - - - 3 Trading assets 1,120 4,233 2,932 1,020 9,305 Derivative assets 221,862 79,523 25,403 326,788 Derivative assets used for hedging purposes - - - - - Loans and advances to customers 10,101,230 8,076,128 4,127,470 - 22,304,828 Available-for-sale investment securities 244,176 1,047,061 1,727,055 78,140 3,096,432 Held-to-maturity investments securities 924,897 409,824 197,326 - 1,532,047 Total 12,387,621 9,616,769 6,080,186 525,649 28,610,225 LIABILITIES Obligations under repurchase agreements 576,653 34,122 - - 610,775 Derivative liabilities 153,834 66,116 12,453 - 232,403 Derivative liabilities used for hedging purposes 7,030 32,311 39,341 - 78,682 Funds borrowed 10,429,043 4,065,817 4,506,767 - 19,001,627 Debt securities issued (1) - - 4,892,465 - 4,892,465 Payables to stock exchange money market 701,147 - - - 701,147 Current account of loan customers 12,901 - - - 12,901 Taxes and dues payable - - - 9,986 9,986 Corporate tax liability - - - 43,662 43,662 Employee benefits - - - 24,886 24,886 Total 11,880,608 4,198,366 9,451,026 78,534 25,608,534 Total Balance Sheet Position 507,013 5,418,403 (3,370,840) 447,115 3,001,691 Total Off Balance Sheet Position (1,472,942) (3,750,901) 5,291,174 - 67,331 Total Position (965,929) 1,667,502 1,920,334 447,115 3,069,022 (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. 69 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Market risk (continued) Interest Rate Sensitivity (continued) As at 31 December 2018, a summary of average interest rates for different assets and liabilities are as follows: TL Euro US Dollar % % % Assets Cash & Balances with Central Bank 11.35 - 2.10 Banks 22.92 2.90 2.30 Money market placements 24.59 - - Loans and advances to customers 19.10 4.49 7.46 Financial assets at FVOPL 27.62 - 10.05 Financial assets at FVOCI 16.94 5.62 4.32 Financial assets measured at amortized cost 16.76 - 6.77 Liabilities Funds borrowed 10.30 1.07 3.29 Money market balances 22.59 0.75 1.50 Marketable securities issued - - 5.71 Current account of loan customers 15.00 0.75 1.50 As at 31 December 2017, a summary of average interest rates for different assets and liabilities are as follows: TL Euro US Dollar % % % Assets Cash & Balances with Central Bank 3.48 - 1.43 Banks 15.47 1.00 - Interbank money market placements - - - Funds lent under repurchase agreements 11.01 - - Loans and advances to customers 14.90 4.00 6.16 Available-for-sale investment securities 11.71 5.61 4.55 Held-to-maturity investment securities 11.69 - 5.59 Liabilities Obligations under repurchase agreements 12.05 0.28 0.50 Funds borrowed 7.74 1.01 2.37 Payables to stock exchange money market 13.58 - - Marketable securities issued - - 5.71 Current account of loan customers 8.00 0.25 0.50 70 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Market risk (continued) Interest Rate Sensitivity (continued) The economic valuation differences of the Bank arising from fluctuations on interest rates, in different currencies that is calculated in accordance with the communiqué are presented in the table below. Current Period Revenue/Shareholders’ Applied Shock Revenue/ Loss Equity – Loss / (+/- x basis point) Currency Shareholders’ Equity TL +500 / (400) basis point (127,184) / 114,525 (2.10%) / 1.89% Euro +200 / (200) basis point 99,169 / (35,554) 1.64% / (0.59%) US Dollar +200 / (200) basis point 90,703 / (123,367) 1.65% / (2.04%) Total (for Negative Shocks) (44,396) (0.73%) Total (for Positive Shocks) 71,688 1.18% Applied Shock Revenue/Shareholders’ Prior Period (+/- x basis point) Revenue/ Loss Equity – Loss/ Currency Shareholders’ Equity TL +500 / (400) basis point (91,944) / 83,505 (1.91%) / 1.74% Euro +200 / (200) basis point 56,563/ (18,688) 1.18% / (0.39%) US Dollar +200 / (200) basis point (70,306) / 79,127 (1.46%) / 1.65% Total (for Negative Shocks) 143,944 3.00% Total (for Positive Shocks) (105,687) (2.20%) Other Price Risks Equity price sensitivity The sensitivity analysis below has been determined based on the exposure to stock price risks at the reporting date. The Group is exposed to equity price risks arising from equity investments of firms traded in Istanbul Stock Exchange. Since these investments are classified as financial assets held for trading, only the net profit/loss will be affected. As at the reporting date, equity price sensitivity of the Group has been analyzed. The analysis has been based on the assumption that the inputs (equity prices) to the valuation model are 20% higher/lower while all other variables are constant. The Group classifies its equity investments both as financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income. Therefore, the net profit/loss is not affected as long as the Group does not sell its equity investments classified as financial assets at fair value through other comprehensive income. Unless the equity share investments classified as assets financial assets at fair value through other comprehensive incomeare disposed of or impaired, the net profit/loss will not be affected. 71 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Market risk (continued) Currency risk (continued) The Group is exposed to currency risk through transactions in foreign currencies and through its investment in foreign operations. Management of currency risk Risk policy of the Group is based on keeping the transactions within defined limits and keeping the currency position well-balanced. The Group has established a foreign currency risk management policy that enables the Group to take a position between lower and upper limits which are determined, taking total equity of the Group into account. The below table summarizes the foreign currency position of the Group as at 31 December 2018: Other Foreign Euro US Dollar Currencies Total Assets Cash and cash equivalents including Central Bank 6,511 91 - 6,602 Reserve deposits at Central Bank 299,745 417,127 13,401 730,273 Loans and advances to banks 155,566 612,773 2,423 770,762 Derivative financial instruments 42,247 75,877 1,609 119,733 Money market placements - - Loans and advances to customers 12,276,612 13,701,012 - 25,977,624 Financial assets at fair value through other comprehensive income 75,973 1,131,841 - 1,207,814 Financial assets measured at amortized cost - 419,420 - 419,420 Derivative assets held for hedging purposes - - - - Other assets 79,490 571,643 - 651,133 Total Assets 12,936,144 16,929,784 17,433 29,883,361 Liabilities Obligations under repurchase agreements 89,326 48,132 - 137,458 Derivative financial liabilities held for trading 32,160 48,533 - 80,693 Funds borrowed 11,521,560 12,171,103 - 23,692,663 Marketable securities issued (1) - 8,498,963 - 8,498,963 Current account of loan customers 20,119 11,696 - 31,815 Derivative liabilities held for hedging purposes - 172,258 - 172,258 Other liabilities 17,532 26,957 1,330 45,819 Total Liabilities 11,680,697 20,977,642 1,330 32,659,669 Net Statement of Financial Position 1,255,447 (4,047,858) 16,103 (2,776,308) Off Balance Sheet Position Derivatives to sell 1,902,722 6,761,213 153,506 8,817,441 Derivatives to buy (3,276,277) (2,805,061) (168,498) (6,249,836) (1,373,555) 3,956,152 (14,992) 2,567,605 Net Position (118,108) (91,706) 1,111 (208,703) (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. 72 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Market risk (continued) Currency risk (continued) The below table summarizes the foreign currency position of the Group as at 31 December 2017: Other Foreign Euro US Dollar Currencies Total Assets Cash and cash equivalents including Central Bank 4,794 68 - 4,862 Reserve deposits at Central Bank 349,351 409,497 72,830 831,678 Loans and advances to banks 14,819 12,131 1,759 28,709 Derivative financial instruments 25,936 30,715 1,365 58,016 Money market placements - - - - Loans and advances to customers 9,199,489 10,951,604 - 20,151,093 Available-for-sale investment securities 55,335 983,207 - 1,038,542 Held-to-maturity investments - 197,326 - 197,326 Derivative Assets held for hedging purposes - - - - Other assets 10,242 199,842 - 210,084 Total Assets 9,659,966 12,784,390 75,954 22,520,310 Liabilities Obligations under repurchase agreements 98,426 62,712 - 161,138 Derivative financial liabilities held for trading 19,638 10,724 285 30,633 Funds borrowed 9,559,098 9,221,510 7 18,780,615 Marketable securities issued (1) - 4,892,465 - 4,892,465 Current account of loan customers 5,922 5,801 - 11,723 Derivative liabilities held for hedging purposes - 78,682 - 78,682 Other liabilities 18,882 40,794 2,573 62,534 Total Liabilities 9,701,966 14,312,688 2,865 24,017,519 Net Statement of Financial Position (42,000) (1,528,298) 73,089 (1,497,209) Off Balance Sheet Position Derivatives to sell 1,090,414 4,529,407 487,346 6,107,167 Derivatives to buy (1,284,834) (3,020,662) (559,456) (4,864,952) (194,420) 1,508,745 (72,110) 1,242,215 Net Position (236,420) (19,553) 979 (254,994) (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. 73 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Market risk (continued) Foreign currency sensitivity No long or short position is taken due to the uncertainties and changes in the markets therefore; no exposure to foreign currency risk is expected. However, possible foreign currency risks are calculated on a weekly and monthly basis under the standard method in the foreign currency risk table and their results are reported to the official authorities and the Group’s top management. Thus, foreign currency risk is closely monitored. Foreign currency risk, as a part of general market risk, is also taken into consideration in the calculation of Capital Adequacy Standard Ratio. No short position is taken regarding foreign currency risk, whereas, counter position is taken for any foreign currency risks arising from customer transactions as to avoid foreign currency risk. The Group is mostly exposed to Euro and US Dollar currencies. The following table details the Group’s sensitivity to 10% increase/decrease in the TL against US Dollar, Euro and other currencies. % Increase Effect on profit or loss (1) Effect on equity (2) 31 December 31 December 31 December 31 December 2018 2017 2018 2017 US Dollar 10% (9,715) (2,555) 544 600 Euro 10% (11,842) (23,808) 31 166 Other 10% 111 98 - - % Decrease Effect on profit or loss (1) Effect on equity (2) 31 December 31 December 31 December 31 December 2018 2017 2018 2017 US Dollar 10% 9,715 2,555 (544) (600) Euro 10% 11,842 23,808 (31) (166) Other 10% (111) (98) - - (1) Values expressed are before the tax effect. (2) Effect on equity does not include effect on profit/loss. The Group’s sensitivity to foreign currency has increased during the current period mainly due to the change in currency position. 74 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Capital management – regulatory capital BRSA, the regulatory body of the banking industry, sets and monitors capital requirements for the Bank. In implementing current capital requirements, BRSA requires the banks to maintain a prescribed ratio of a minimum of 8% of total capital to total risk-weighted assets. BRSA regulation requires the calculation of the capital adequacy ratio based on the consolidated financial statements of the Bank and its financial subsidiaries. The BRSA also requires the banks to maintain prescribed ratios of minimum 6% and 4.5% of Tier1 and Tier 2 capital, respectively, to total value at credit, market and operational risks starting from 1 January 2016. Total capital and Capital adequacy ratio have been calculated in accordance with the “Regulation on Equity of Banks” and “Regulation on Measurement and Assessment of Capital Adequacy of Banks”. As of 31 December 2018, the capital adequacy ratio of the Group has been calculated as 15.99% (31 December 2017:17.03%). The Bank and its financial subsidiaries’ consolidated regulatory capital is analysed into two tiers: · Tier 1 capital, is composed of share capital, legal, statutory, other profit and extraordinary reserves, retained earnings, translation reserve and non-controlling interests after deduction of goodwill, prepaid expenses and other certain costs. · Tier 2 capital, is composed of the total amount of general provisions for loans, restricted funds, fair value reserves of financial assets at fair value through other comprehensive income and equity investments, subordinated loans received and free reserves set aside for contingencies. · Tier 1 capital, is composed of share capital, legal, statutory, other profit and extraordinary reserves, other comprehensive income, retained earnings, translation reserve and non- controlling interests after deduction of goodwill, leasehold improvements on operational leases and other certain costs. · Tier 2 capital, which includes qualifying subordinated liabilities and general provisions. The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Bank and its individually regulated operations have complied with externally imposed capital requirements throughout the year and the previous year. 75 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Capital management – regulatory capital (continued) The Bank’s and its financial subsidiaries’ regulatory capital position on a consolidated basis at 31 December 2018 and 31 December 2017 was as follows: 2018 2017 Tier 1 capital 4,144,042 3,682,968 Tier 2 capital 1,901,952 1,261,881 Deductions from capital - (5,223) Total regulatory capital 6,045,994 4,939,626 Total Risk Weighted Assets 37,814,453 29,002,503 Capital ratios Total regulatory capital expressed as a percentage of total credit risk, counterparty credit risk, market risk and operational risk 15.99% 17.03% Total Tier 1 capital expressed as a percentage of total credit risk, counterparty credit risk, market risk and operational risk 10.96% 12.70% As at 31 December 2018, the Bank’s capital adequacy ratio on an unconsolidated basis is 16.20% (31 December 2017: 17.05%). The Group’s consolidated capital adequacy ratio as at 31 December 2018 is 15.99% (31 December 2017: 17.03%). Operational risk Operational risk amount of the Group is measured with Basic Indicator Method referring to “Regulation on Measurement and Assessment of Capital Adequacy of Banks” According to this method; the calculation is performed parallel to the practice within the country, by multiplying 15% of the Group’s last three years’ average gross revenue with 12.5. The amount, calculated as TL 1,521,866 as at 31 December 2018 (31 December 2017: TL 1,252,570) represents the operational risk. Yearly gross income, as presented on the income statement; is calculated with net interest income plus net fee and commission, dividend income except from subsidiaries and associates, trading profit/loss and other operational income minus profit/loss gain on sale of assets other than of trading accounts, extraordinary income, operational expense for support service from a bank and recoveries from insurance. Fair values of financial instruments The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. • Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments. • Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. 76 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Fair values of financial instruments (continued) • Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The consolidated financial statements include holdings in unlisted shares which are measured at their historical costs as fair values could not be determined reliably. Based on the fair value hierarchy, the Group’s financial assets and liabilities are categorized as follow: 31 December 2018 Total Level 1 Level 2 Level 3 Financial Assets Financial assets at FVPL 300,519 4,887 - 295,632 Loans 290,660 - - 290,660 Government bonds and Treasury bills 8 8 - - Equity shares 1 1 - - Mutual funds 1,454 1,454 - - Debt securities issued by corporations 8,396 3,424 - 4,972 Derivative assets 979,221 - 979,221 - Derivatives used for hedging purposes - - - - Financial assets at FVOCI (1) 3,416,229 3,260,049 72,786 83,394 Government bonds and Treasury bills 2,008,419 2,008,419 - - Eurobonds 1,165,035 1,165,035 - - Equity shares 90,188 10,149 72,786 7,253 Debt securities issued by corporations 152,587 76,446 - 76,141 Financial Liabilities Derivative liabilities 620,082 - 620,082 - Derivatives used for hedging purposes 172,258 - 172,258 - (*) As of 31 December 2018, securities that are not publicly traded and the determination of fair values could not be obtained reliably amounting to TL 11,266 have been measured at cost. 31 December 2017 Total Level 1 Level 2 Level 3 Financial Assets Trading assets 9,305 21 9,284 - Government bonds and Treasury bills - - - - Equity shares 21 21 - - Debt securities issued by corporations 9,284 - 9,284 - Derivative assets 326,788 - 326,788 - Derivatives used for hedging purposes - - - - Available for sale investment securities 3,086,470 2,880,453 51,301 154,716 Government bonds and Treasury bills 1,821,667 1,821,667 - - Eurobonds 1,009,955 1,009,955 - - Equity shares 68,178 10,680 51,301 6,197 Debt securities issued by corporations 186,670 38,151 - 148,519 Financial Liabilities Derivative liabilities 232,403 - 232,403 - Derivatives used for hedging purposes 78,682 - 78,682 - (1) As of 31 December 2017, securities that are not publicly traded and the determination of fair values could not be obtained reliably amounting to TL 9,962 have been measured at cost. 77 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 4. FINANCIAL RISK MANAGEMENT (Continued) Fair values of financial instruments (continued) The reconciliation from the beginning balances to ending balances for fair value measurements in Level 3 for the year ended 31 December 2018. 31 December 2018 31 December 2017 Balance at the beginning of the year 154,716 172,233 Purchases 8,684 143,747 Redemption or sales (61,622) (162,796) Valuation differences 5,227 1,532 Transfer 272,264 - Balance at the end of the year (1) 379,269 154,716 (1) As of 31 December 2018, provision amounting to TL 243 is allocated in “Financial assets at FVOCI” due to transiton of IFRS 9. 78 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 5. FINANCIAL INSTRUMENTS Carrying amounts and fair values The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy for financial instruments measured at fair value. It does not include fair value information for financial assets and liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value Carrying amount Fair value Investments, Loans and including Financial assets receivables derivatives Total Level 1 Level 2 Level 3 Total 31 December 2018 Financial assets measured at fair value Financial assets at FVPL - 300,519 300,519 4,887 - 295,632 300,519 Derivative financial instruments - 979,221 979,221 - 979,221 - 979,221 Derivative assets held for hedging purposes - - - - - - - Investment securities - FVOCI (1) - 3,427,495 3,427,495 3,260,049 72,786 83,394 3,416,229 Financial assets not measured at fair value Cash and cash equivalents and due from banks (including central banks, excluding cash on hand) 2,123,549 - 2,123,549 - - - - Loans and advances to customers 27,552,420 - 27,552,420 - - - - Financial assets measured at amortized cost - 2,153,313 2,153,313 - - - - 29,675,969 6,860,548 36,536,517 31 December 2017 Financial assets measured at fair value Trading assets - 9,305 9,305 21 9,284 - 9,305 Derivative financial instruments - 326,788 326,788 - 326,788 - 326,788 Derivative assets held for hedging purposes - - - - - - - Investment securities - Available-for-sale - 3,096,432 3,096,432 2,880,453 51,301 154,716 3,086,470 Financial assets not measured at fair value Due from banks (including central banks) 1,340,798 - 1,340,798 - - - - Loans and advances to customers 22,304,828 - 22,304,828 - - - - Investment securities - Held-to-maturity - 1,532,047 1,532,047 - - - - 23,645,626 4,964,572 28,610,198 (1) As of 31 December 2018, securities that are not publicly traded and the determination of fair values could not be obtained reliably amounting to TL 11,266 (31 December 2017: TL 9,962) have been measured at cost. 79 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 5. FINANCIAL INSTRUMENTS (Continued) Carrying amounts and fair values (continued) Carrying amount Fair value Loans and Financial liabilities borrowings Derivatives Total Level 1 Level 2 Level 3 Total 31 December 2018 Financial liabilities measured at fair value Derivative financial instruments held for trading - 620,082 620,082 - 620,082 - 620,082 Derivative liabilities held for hedge accounting - 172,258 172,258 - 172,258 - 172,258 Financial liabilities not measured at fair value Obligations under repurchase agreements 179,001 - 179,001 - - - - Funds borrowed 23,819,670 - 23,819,670 - - - - Payables to stock exchange money market 223,277 - 223,277 - - - - Debt securities issued (1) 8,498,963 - 8,498,963 7,671,428 - - 7,671,428 32,720,911 792,340 33,513,251 31 December 2017 Financial liabilities measured at fair value Derivative financial instruments held for trading - 232,403 232,403 - 232,403 - 232,403 Derivative liabilities held for hedge accounting - 78,682 78,682 - 78,682 - 78,682 Financial liabilities not measured at fair value Obligations under repurchase agreements 610,775 - 610,775 - - - - Funds borrowed 19,001,627 - 19,001,627 - - - - Payables to money market 701,147 - 701,147 - - - - Debt securities issued 4,892,465 - 4,892,465 4,909,263 - - 4,909,263 25,206,014 311,085 25,517,099 (1) Includes Tier 2 subordinated bonds which are classified on the balance sheet as subordinated loans. 80 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 6. OPERATING SEGMENTS An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Board of Directors (being chief operating decision maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available. For management purposes, the Group is currently organized into two operating divisions – “banking” and “stock brokerage and other”. These divisions are the basis on which the Group reports its primary segment information. Principal activities of the Group are as follows: Banking: investment and development bank with all corporate and commercial banking activities excluding accepting customer deposits. Stock brokerage and other: intermediary stock brokerage activities, portfolio management and investment management and real estate investment trust activities. 81 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 6. OPERATING SEGMENTS (Continued) CONSOLIDATED STATEMENT OF PROFIT Stock OR LOSS brokerage (1 January – 31 December 2018) Banking and other Combined Eliminations Total Interest income 3,034,857 75,280 3,110,137 (28) 3,110,109 Interest expense (1,281,465) (99,954) (1,381,419) 28 (1,381,391) Net interest income 1,753,392 (24,674) 1,728,718 - 1,728,718 Net fee and commission income 19,001 32,397 51,398 - 51,398 Net securities trading income / (loss) 2,013 189 2,202 - 2,202 Net derivative trading income / (loss) (477,108) (139,240) (616,348) - (616,348) Net foreign currency gain / (loss) 207,864 77,082 284,946 - 284,946 Net impairment loss on financial assets (471,193) (1,456) (472,649) - (472,649) Net operating income after impairment losses 1,033,969 (55,702) 978,267 - 978,267 Other operating income 4,160 66,112 70,272 (51,179) 19,093 Other operating expenses (162,873) (59,715) (222,588) 12,644 (209,944) Dividend income 4,011 1,514 5,525 - 5,525 Share of profit of equity-accounted investees 90,705 90,705 90,705 Profit before income tax 969,972 (47,791) 922,181 (38,535) 883,646 82 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 6. OPERATING SEGMENTS (Continued) CONSOLIDATED STATEMENT OF PROFIT Stock OR LOSS brokerage (1 January – 31 December 2017) Banking and other Combined Eliminations Total Interest income 1,826,236 47,631 1,873,867 (45) 1,873,822 Interest expense (786,945) (69,643) (856,588) 45 (856,543) Net interest income 1,039,291 (22,012) 1,017,279 - 1,017,279 Net fee and commission income 14,435 28,227 42,662 - 42,662 Net securities trading income / (loss) 5,863 (12) 5,851 - 5,851 Net derivative trading income / (loss) (219,765) 11,799 (207,966) 1,827 (209,793) Net foreign currency gain / (loss) 168,387 (29,473) 138,914 - 138,914 Net impairment loss on financial assets (176,614) (1,526) (178,140) - (178,140) Net operating income after impairment losses 831,597 (12,997) 818,600 1,827 816,773 Other operating income 12,821 47,428 60,249 (26,703) 33,546 Other operating expenses (132,441) (47,406) (179,847) 9,661 (170,186) Dividend income 18,002 2,151 20,153 (14,732) 5,421 Share of profit of equity-accounted investees 43,861 - 43,861 - 43,861 Profit before income tax 773,840 (10,824) 763,016 (33,601) 729,415 83 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 6. OPERATING SEGMENTS (Continued) Stock CONSOLIDATED brokerage STATEMENT OF FINANCIAL POSITION Banking and other Combined Eliminations Total At 31 December 2018 Total assets 37,554,348 873,620 38,427,968 (159,150) 38,268,818 Total liabilities 33,479,107 506,658 33,985,765 (404) 33,985,361 Equity before net profit & non-controlling interests 3,415,525 416,799 3,832,324 (257,031) 3,575,293 Net profit attributable to equity holders of the Bank 659,716 (49,837) 609,879 59,663 669,542 Non-controlling interests - - - 38,622 38,622 Total equity 4,075,241 366,962 4,442,203 (158,746) 4,283,457 Total liabilities and equity 37,554,348 873,620 38,427,968 (159,150) 38,268,818 At 31 December 2017 Total assets 28,748,016 1,107,446 29,855,462 (60,812) 29,794,650 Total liabilities 25,005,260 845,635 25,850,895 (736) 25,850,159 Equity before net profit & non-controlling interests 3,156,275 275,117 3,431,392 (128,757) 3,302,635 Net profit attributable to equity holders of the Bank 586,481 (13,306) 573,175 15,962 589,137 Non-controlling interests - - - 52,719 52,719 Total equity 3,742,756 261,811 4,004,567 (60,076) 3,944,491 Total liabilities and equity 28,748,016 1,107,446 29,855,462 (60,812) 29,794,650 84 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 7. CASH AND CASH EQUIVALENTS, BALANCES WITH CENTRAL BANK, LOANS AND ADVANCES TO BANKS, MONEY MARKET PLACEMENTS Cash and cash equivalent comprise balances with less than three months’ maturity from the date of acquisition, including cash on hand, deposits from banks and other short-term highly liquid investments with original maturities of three months or less. 31 December 31 December 2018 2017 Cash on hand 27 24 Loans and advances to banks (with original maturity of less than 3 months) (1) 806,997 493,687 Unrestricted balances with the Central Ban 12,928 15,433 Funds lent under repurchase agreements 357 3 Interbank money market placements (2) 573,233 - Total cash and cash equivalents in the consolidated statement of financial position 1,393,542 509,147 Accruals on cash and cash equivalents (7,717) (4,899) Total cash and cash equivalents in the consolidated statement of cash flows 1,385,825 504,248 (1) As of 31 December 2018, provision amounting to TL 234 is allocated in “Loans and advances to banks” due to transiton of IFRS 9. (2) As of 31 December 2018, provision amounting to TL 23 is allocated in “Interbank Money Market Placements” due to transiton of IFRS 9. Cash And Cash Equivalents 31 December 31 December 2018 2017 Cash on hand – Turkish Lira (“TL”) 27 24 Total cash on hand 27 24 There is no blockage on the use of cash and cash equivalents as of 31 December 2018 (31 December 2017: None). Balances With Central Bank a) Unrestricted balances with Central Bank 31 December 31 December 2018 2017 Demand deposits – TL 6,326 10,571 Demand deposits – FC 6,602 4,862 Total 12,928 15,433 b) Reserve Deposits at Central Bank 31 December 31 December 2018 2017 Foreign currency reserves (1) 730,030 831,678 Total 730,030 831,678 (1) As of 31 December 2018, provision amounting to TL 243 is allocated in “Balance with the Central Bank of Turkey” due to transiton of IFRS 9. 85 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 7. CASH AND CASH EQUIVALENTS, BALANCES WITH CENTRAL BANK, LOANS AND ADVANCES TO BANKS (Continued) Balances With Central Bank (continued) b) Reserve Deposits at Central Bank (continued) As per the Communiqué numbered 2005/1 “Reserve Deposits” of the CBRT, banks keep reserve deposits at the CBRT for their TL and FC liabilities mentioned in the communiqué. Reserves are calculated and set aside every two weeks on Fridays for 14 days periods. Interest rate for the required reserves in Turkish Lira is paid by 13% effective rate since 21 September 2018. The CBRT Required reserves of 2 May 2015 has started to pay interest to the Required reserves, reserve options and unrestricted account held in US dollars according to regulation released at 5 May 2015. As per the “Communiqué on Amendments to be Made on Communiqué on Required Reserves” of Central Bank of Turkey, numbered 2011/11 and 2011/13, required reserves for Turkish Lira and Foreign currency liabilities are set at Central Bank of Turkey based on rates mentioned below. Reserve rates prevailing at 31 December 2018 are presented in table below: Reserve Rates for Turkish Lira Liabilities (%) Original Maturity Reserve Ratio Until 1 year maturity (1 year include) 8 1-3 year maturity (3 year include) 4,5 More than 3 year maturity 1,5 Reserve Rates for FC Liabilities (%) Reserve Ratio Reserve Ratio Original Maturity If the fund borrowed If the fund borrowed Before 28.08.2015 After 28.08.2015 Until 1 year maturity (1 year included) 15 20 1-2 year maturity (2 year included) 9 15 2-3 year maturity (3 year included) 7 10 3-5 year maturity (5 year included) 6 6 More than 5 year maturity 5 4 Loans And Advances To Banks 31 December 31 December 2018 2017 Domestic Banks Demand deposits – TL 22,084 2,601 Time deposits – TL 14,385 462,377 Demand deposits – FC 584,319 12,753 Time deposits – FC 150,804 11,820 771,592 489,551 Foreign Banks Time deposits – TL - - Demand deposits – FC 35,639 4,136 Time deposits – FC - - 35,639 4,136 Total 807,231 493,687 86 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 7. CASH AND CASH EQUIVALENTS, BALANCES WITH CENTRAL BANK, LOANS AND ADVANCES TO BANKS (Continued) Loans And Advances To Banks (continued) The time deposits above mature within 2 – 45 days and earn interest at rates ranging 24.80-25.75% for TL balances, 2.30 – 3.15 % for foreign currency balances as at the reporting date (31 December 2017: Maturity: 4 - 60 days; interest rate 12.60-15.90% for TL balances and 0.45-1.00% for foreign currency). Expected credit loss for balances with Central Bank at 31 December 2018 is as follows: 31 December 2018 Stage 1 Stage 2 Stage 3 Balances at 31 December 2017 - - - Impact of adopting IFRS 9 at 1 January 2018 12 - - Balances at 1 January 2018 12 - - Transfer to Stage 1 - - - Transfer to Stage 2 - - - Transfer to Stage 3 - - - Debt sales and write offs - - - Recoveries and reversals (83) - - Provision for the period 314 - - Effects of movements in exchange rates - - - Balances at the end of the period 243 - - Expected credit loss for banks as at 31 December 2018 is as follows: 31 December 2018 Stage 1 Stage 2 Stage 3 Balances at 31 December 2017 - - - Impact of adopting IFRS 9 at 1 January 2018 513 - - Balances at 1 January 2018 513 - - Transfer to Stage 1 - - - Transfer to Stage 2 - - - Transfer to Stage 3 - - - Debt sales and write offs - - - Recoveries and reversals (777) - - Provision for the period 498 - - Effects of movements in exchange rates - - - Balances at the end of the period 234 - - Expected credit loss for interbank money market placements as at 31 December 2018 is as follows: 31 December 2018 Stage 1 Stage 2 Stage 3 Balances at 31 December 2017 - - - Impact of adopting IFRS 9 at 1 January 2018 4 - - Balances at 1 January 2018 4 - - Transfer to Stage 1 - - - Transfer to Stage 2 - - - Transfer to Stage 3 - - - Debt sales and write offs - - - Recoveries and reversals (10) - - Provision for the period 29 - - Effects of movements in exchange rates - - - Balances at the end of the period 23 - - 87 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 8. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 31 December 31 December 2018 2017 Government bonds and treasury bills in TL 8 - Debt securities issued by corporations 8,396 8,285 Equity shares 1 21 Mutual funds 1,454 999 Total 9,859 9,305 There are no government bonds and treasury bills include securities given as collateral or blocked as at the reporting date (31 December 2017: None). 9. LOANS AND ADVANCES TO CUSTOMERS 31 December 2018 Short-term and current portion of long term loans 1,754,869 Long-term loans 26,007,167 Total performing loans 27,762,036 Non-performing loans 597,210 Total loans 28,359,246 Less: Specific provision for stage 3 (169,489) Less: Generic provision for impairment losses on loans (346,677) Total loans (1) 27,843,080 (1) Includes fair value through profit or loss loans. 31 December 2017 Short-term and current portion of long term loans 1,509,224 Long-term loans 20,891,243 Total performing loans 22,400,467 Non-performing loans 53,575 Total loans 22,454,042 Less: Specific provision for impairment losses on loans (52,731) Less: Collective provision for impairment losses on loans (96,483) Total loans 22,304,828 88 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 9. LOANS AND ADVANCES TO CUSTOMERS (Continued) Movements in the reserve for impairment losses on loans for the year ended 2018 and 2017 are as follows: 1 January – 31 December 2018 Specific provision for cash loans: As at 31 December 2017 52,731 Adoption of IFRS (653) As at 1 January 2018 52,078 Charge for the year 273,782 Collections (9,100) Reserve released and write offs (147,271) As at 31 December 169,489 Collective provision for cash loans: As at 31 December 2017 96,483 Adoption of IFRS 134,849 As at 1 January 2018 231,332 Charge for the year 115,345 Provision released and write offs - As at 31 December 346,677 Total reserve for impairment losses on loans 516,166 1 January – 31 December 2017 Specific provision for cash loans: As at 1 January 2017 10,485 Charge for the year 42,636 Collections - Reserve released and write offs (390) As at 31 December 52,731 Collective provision for cash loans: As at 31 December 2017 Adoption of IFRS As at 1 January 2018 37,628 Charge for the year 68,855 Provision released and write offs (10,000) As at 31 December 96,483 Total reserve for impairment losses on loans 149,214 89 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 9. LOANS AND ADVANCES TO CUSTOMERS (Continued) Loans can be further analysed by customer groups as follows: 31 December 2018 Corporate customers 21,998,820 SME bussiness 6,226,825 Other 133,601 Less: Allowance for ECL/impairment losses (516,166) Total 27,843,080 31 December 2017 Corporate customers 18,019,114 Small business 4,324,656 Other 110,272 Total 22,454,042 31 December 2018 31 December 2017 Currency US Dollar 11,235,036 10,256,493 Euro 13,594,940 8,149,422 Turkish Lira 1,837,965 2,301,967 Foreign currency indexed TL loans 1,691,305 1,746,160 Total 28,359,246 22,454,042 Foreign currency indexed loans represent loans extended in Turkish Lira but the related principal and interest are repaid in Turkish Lira equivalent of the currency to which they are indexed. As at 31 December 2018 and 31 December 2017, the aging analysis of past due but not impaired loans per customer groups is as follows: 31 December 2018 Less than More than 91 31-60 days 61-90 days Total 30 days days Current Period Corporate and Commercial Loans 10,631 - - - 10,631 SME Loans 202 - - - 202 Others - - - - - Total 10,833 - - - 10,833 31 December 2017 Less than More than 31-60 days 61-90 days Total 30 days 91 days Prior Period Corporate and Commercial Loans 568,338 - 296,391 - 864,729 SME Loans - - - - - Others - - - - - Total 568,338 - 296,391 - 864,729 Of the total aggregate amount of gross past due but not yet impaired loans and advances to customers, the fair value of collaterals, capped with the respective outstanding loan balances including those not past due, that Parent Bank has TL 85,498 of loans as of 31 December 2018 (31 December 2017: TL 820,521). 90 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 9. LOANS AND ADVANCES TO CUSTOMERS (Continued) Loans and advances to customers not impaired amounting to TL 17,006,183 have floating interest rates (31 December 2017: TL 13,512,101) and the remaining TL 10,755,853 have fixed interest rates (31 December 2017: TL 8,888,366). Expected credit loss of loans and advances to customers movement as at 31 December 2018 is as follows: 31 December 2018 Stage 1 Stage 2 Stage 3 Balances at 31 December 2017 32,751 63,732 52,731 Impact of adopting IFRS 9 at 1 January 2018 117,017 17,832 (653) Balances at 1 January 2018 149,768 81,564 52,078 Transfer to Stage 1 - - - Transfer to Stage 2 (74,323) 74,323 - Transfer to Stage 3 (12,442) (221,866) 234,308 Debt sales and write offs - - (147,271) Recoveries and reversals (10,365) - (9,100) Provision for the period 91,386 225,501 27,207 Effects of movements in exchange rates (8,487) 51,618 12,267 Balances at the end of the period 135,537 211,140 169,489 10. INVESTMENT SECURITIES Financial assets at fair value through other comprehensive income 31 December 31 December 2018 2017 Government bonds and treasury bills in TL 2,008,418 1,821,667 Eurobonds 1,165,035 1,009,955 Debt securities issued by corporations 152,588 186,670 Equity shares 101,454 78,140 Total (1) 3,427,495 3,096,432 (1) As of 31 December 2018, provision amounting to TL 243 is allocated in “Financial assets at FVOCI” due to transiton of IFRS 9. The above government bonds and treasury bills include those pledged under securities repurchase agreements with customers amounting to TL 41,531 as at the reporting date (31 December 2017: TL 171,250). The blocked securities kept in the Central Bank, the Istanbul Stock Exchange and Takasbank ISE Settlement and Custody Bank Inc. (Clearing House) for the purposes of liquidity requirement and trading guarantee on interbank, bond, repurchase and reverse repurchase markets as at 31 December 2018 and 31 December 2017 are as follows: 2018 2018 2017 2017 Nominal Carrying Nominal Carrying Government Bonds and Treasury Bills Value Value Value Value Central Bank- Open Market Operations 321,000 294,387 426,933 423,398 Clearing House – Blocked Securities 209,400 197,334 328,692 329,748 Other (International Bank) Foreign Currency 1,054,156 961,927 665,208 636,146 1,584,556 1,453,648 1,420,833 1,389,292 91 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 10. INVESTMENT SECURITIES (Continued) The Group’s equity shares in Financial assets at fair value through other comprehensive income investment securities are as follows: Ownership 31 December Ownership 31 December % 2018 % 2017 Investee İstanbul Takas ve Saklama AŞ 1.62 27,481 1.62 19,952 İş Yatırım Ortaklığı AŞ 6.95 10,149 6.95 10,680 European Investment Fund-EIF 0.17 21,515 0.17 15,713 Turkish Growth and Innovation Fund-TGIF 10 20,263 10 12,108 İş Portföy Yönetimi AŞ 9.9 6,197 9.9 6,197 Ege Tarım Ürünleri Lisanslı Depoculuk AŞ 10.05 1,056 10.05 1,056 Cam Elyaf Sanayi AŞ - - - - TSKB Gayrimenkul Değerleme AŞ (1) 99.99 379 99.99 379 Borsa İstanbul A.Ş. 0.1 3,527 0.1 3,527 TSKB Sürdürülebilirlik Danışmanlığı AŞ (1) 99.76 4,230 99.19 1,230 Others <1.00 6,657 <1.00 7,298 Total equity shares in financial assets at fair value through other comprehensive income 101,454 78,140 (1) The investments in TSKB Gayrimenkul Değerleme AŞ and TSKB Sürdürülebilirlik Danışmanlığı AŞ have not been consolidated since their effect on consolidated income and net assets is not significant. Financial assets measured at amortized cost 31 December 31 December 2018 2017 Government bonds and treasury bills in TL 2,153,313 1,532,047 Total 2,153,313 1,532,047 The movement of the financial assets measured at amortized cost as follows: 31 December 31 December 2018 2017 Balance at 1 January 1,532,047 1,375,729 Additions 227,528 - Redemptions - (836) Impairment provision - (1,903) Exchange differences 51,793 13,914 Interest income accruals 343,573 145,143 Total (1) 2,154,941 1,532,047 (1) As of 31 December 2018, provision amounting to TL 1,628 is allocated in “Financial assets measured at amortized cost” due to transiton of IFRS 9. 92 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 11. INVESTMENTS IN EQUITY-ACCOUNTED INVESTEES As at 31 December 2018 and 31 December 2017, the following entities are accounted for under the equity method in the accompanying consolidated financial statements: Ownership 31 December (%) Nominal 2018 Investee İş Finansal Kiralama AŞ 29.46 204,850 319,645 İş Faktoring AŞ 21.75 13,811 65,494 İş Girişim Serm. Yat. Ort. AŞ 16.67 12,442 43,351 231,103 428,490 Ownership 31 December (%) Nominal 2017 Investee İş Finansal Kiralama AŞ 28.56 185,726 247,371 İş Faktoring AŞ 21.75 13,811 83,226 İş Girişim Serm. Yat. Ort. AŞ 16.67 12,442 43,828 211,979 374,425 The Group’s share of profit in its equity-accounted investees for the year ended 31 December 2018 was TL 90,705 (31 December 2017: TL 43,861). In 2017 the Group has received no dividends from its investments in equity-accounted investees (31 December 2017: TL 14,732). The Group’s equity-accounted investees are listed on BIST, except for İş Faktoring AŞ. Based on their closing prices of TL 4.63 of İş Finansal Kiralama AŞ and TL 2.03 of İş Girişim Serm. Yat. Ort. AŞ, the fair value of the Group’s investment in listed entities is TL 970,443 (31 December 2017: TL 1.48 of İş Finansal Kiralama AŞ and TL 1.74 of İş Girişim Serm. Yat. Ort. AŞ, the fair value of the Group’s investment is TL 295,558). Summary financial information for equity-accounted investees is as follows: Current Fair 31 December 2018 Total assets Equity Period Profit Value İş Finansal Kiralama AŞ 8,681,652 1,085,014 197,536 945,385 İş Faktoring AŞ 2,770,655 301,124 147,016 46,010 İş Girişim Serm. Yat. Ort. AŞ 262,226 259,965 3,074 25,058 11,714,533 1,646,103 347,626 1,016,453 Current Fair 31 December 2017 Total assets Equity Period Profit Value İş Finansal Kiralama AŞ 5,068,687 839,681 74,200 273,946 İş Faktoring AŞ 4,267,774 188,753 49,530 - İş Girişim Serm. Yat. Ort. AŞ 259,379 256,923 946 21,612 9,595,840 1,285,357 124,676 295,558 93 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated. 11. INVESTMENTS IN EQUITY-ACCOUNTED INVESTEES (Continued) Current Period Prior Period Balance at the Beginning of the Period 374,425 322,922 Effect of IFRS 9 (18,630) - Balance at January 1, 2018 355,795 322,922 Movements During the Period 72,695 51,503 Purchases - - Bonus Shares Received - - Current Year Share of Profit - - Sales - - Revaluation Increase/Decrease (1) 88,213 51,503 Provision for Impairment / Reversals - - Other (15,518) - Balance at the End of the Period 428,490 374,425 Capital Commitments - - Share Percentage at the End of the Period (%) - - (1) Includes the differences of the equity method accounting. 12. GOODWILL Cost Balance at 1 January 2017 383 Balance at 31 December 2017 383 Balance at 31 December 2018 383 Impairment At 1 January 2017 - At 31 December 2017 - At 31 December 2018 - Carrying Amount Balance at 1 January 2017 383 Balance at 31 December 2017 383 Balance at 31 December 2018 383 The above goodwill is attributable to Yatırım Finansman Menkul Değerler AŞ. The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the investees are determined from cash flows projections. The Bank’s management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the investees. The growth rates are based on industry growth forecasts. As at 31 December 2018, the recoverable amount of the investee is higher than the amount of goodwill; therefore, no impairment on goodwill is realized. 94 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 13. PROPERTY AND EQUIPMENT Current Current Prior Period Period Revaluation Current Current Period Period End Additions Disposals Surplus Period End Cost Land and buildings 242,240 2,719 - 46,965 291,924 Assets held under finance leases 5,221 - (29) - 5,192 Vehicles 1,057 - (57) - 1,000 Assets held for resale - - - - - Other 28,988 2,170 (1,118) - 30,040 Total Cost 277,506 4,889 (1,204) 46,965 328,156 Accumulated depreciation Land and buildings (278) (20) - (520) (818) Assets held under finance leases (5,093) (32) 29 - (5,096) Vehicles (703) (206) 57 - (852) Assets held for resale - - - - - Other (25,634) (4,201) 1,096 - (28,739) Total accumulated depreciation (31,708) (4,459) 1,182 (520) (35,505) Impairment provision Land and buildings - - - - - Assets held under finance leases - - - - - Vehicles - - - - - Assets held for resale - - - - - Other - - - - - Total impairment provision - - - - - Net book value 245,798 430 (22) 46,445 292,651 95 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 13. PROPERTY AND EQUIPMENT (Continued) Prior Current Current Current Period Period Period Revaluation Period Prior Period End Additions Disposals Surplus Other (1) End Cost Land and buildings 225.925 - - 16.315 - 242.240 Assets held under finance leases 5.242 - (21) - - 5.221 Vehicles 1.475 - (418) - - 1.057 Assets held for resale 576 - - - (576) - Other 25.479 3.750 (241) - - 28.988 Total Cost 258.697 3.750 (680) 16.315 (576) 277.506 Accumulated depreciation Land and buildings 515 (793) - - - (278) Assets held under finance leases (4.999) (115) 21 - - (5.093) Vehicles (825) (234) 356 - - (703) Assets held for resale - - - - - - Other (21.853) (4.000) 219 - - (25.634) Total accumulated depreciation (27.162) (5.142) 596 - - (31.708) Impairment provision Land and buildings - - - - - - Assets held under finance leases - - - - - - Vehicles - - - - - - Assets held for resale (207) (18) - - 225 - Other - - - - - - Total impairment provision (207) (18) - - 225 - Net book value 231.328 (1.410) (84) 16.315 (351) 245.798 (1) Impairment on assets for resale is classified under other assets from tangible assets in prior period. 96 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 14. INVESTMENT PROPERTY 31 December 31 December 2018 2017 Fair value of investment properties 247,793 243,145 247,793 243,145 The Group’s investment properties are held under freehold interests. In the current period, the Group has 3 investment properties with a total net book value of TL 247,793 (31 December 2017: TL 243,145) belonging to the Bank’s subsidiary operating in the real- estate investment trust sector. The total external rent income earned by the Group from its investment properties is TL 9,460 in the current period (31 December 2017: TL 8,657). The movement of investment properties as at 31 December 2018 and 31 December 2017 are as follows: Closing Closing Balance Balance of Current Period of Prior Change in Current Period Additions Disposals Fair Value Period Tahir Han 25,425 - - 2,706 28,131 Pendorya Mall 152,990 5 - 1,160 154,155 Adana Hotel Project 64,730 - - 777 65,507 Total 243,145 5 - 4,643 247,793 Closing Closing Balance of Balance of Prior Change in Current Prior Period Period Additions Disposals Fair Value Period Tahir Han 23,020 - - 2,405 25,425 Pendorya Mall 143,690 947 - 8,353 152,990 Adana Hotel Project 64,613 10 - 107 64,730 Total 231,323 957 - 10,865 243,145 97 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 14. INVESTMENT PROPERTY (Continued) Fair value measurement The Group’s investment properties are valued annually by an independent real estate appraisal company. The fair value of investment properties are within the scope of Level 3 according to valuation techniques. Reconciliation of Level 3 is given at the following table: 1 January – 1 January – 31 December 2018 31 December 2017 Balance 1 Januarry 217,720 208,303 Addition 5 957 Disposal - - Recognized in other income from other operations Change in fair value - - Recognized in other expense from other operations Change in fair value 1,937 8,460 Transfer - - Total 219,662 217,720 Tahir Han has considered as Level 2 as of December 31, 2018. 15. INTANGIBLE ASSETS The intangible fixed assets include software that are amortised principally on straight line basis which amortise the assets over their expected useful lives. 31 December 31 December 2018 2017 Acquisition cost Balance at 1 January 6,537 5,232 Additions 2,505 1,305 Disposals - - Balance at 31 December 9,042 6,537 Accumulated amortisation Balance at 1 January (3,957) (3,139) Charge for the year (1,218) (818) Disposals - - Balance at 31 December (5,175) (3,957) Net Book Value, as at 31 December 3,867 2,580 98 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 16. OTHER ASSETS 31 December 31 December 2018 2017 Cash guarantees given 582,340 180,100 Prepaid expenses 63,287 54,997 VAT carried forward 4,692 7,395 Deposits, guarantees and colleterals given 3,535 7,134 Prepaid taxes 2,021 4,485 Trade receivables 10,697 3,100 Receivables from brokerage customers - 322 Other (*) 88,677 47,031 Total 755,249 304,564 (*) Positive market valuation differences for hedged items amounted TL 65,911 is included (December 31, 2017: TL 29,985). Expected credit loss for other assets at 31 December 2018 is as follows: 31 December 2018 Stage 1 Stage 2 Stage 3 Balances at 31 December 2017 - - - Impact of adopting IFRS 9 at 1 January 2018 1,037 - - Balances at 1 January 2018 1,037 - - Transfer to Stage 1 - - - Transfer to Stage 2 - - - Transfer to Stage 3 - - - Debt sales and write offs - - - Recoveries and reversals (1,312) - - Provision for the period 1,597 - - Effects of movements in exchange rates - - - Balances at the end of the period 1,322 - - 17. OBLIGATIONS UNDER REPURCHASE AGREEMENTS The securities sold under repurchase agreements and corresponding obligations are as follows: 2018 2018 Carrying Carrying Value of Value of 2018 Underlying Corresponding Repurchase Securities Liability Value Financial assets at fair value through other 171,653 41,543 41,575 comprehensive income Financial assets measured at amortized cost 248,394 137,458 137,465 420,047 179,001 179,040 99 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 17. OBLIGATIONS UNDER REPURCHASE AGREEMENTS (Continued) 2017 2017 Carrying Carrying Value of Value of 2017 Underlying Corresponding Repurchase Securities Liability Value Available for sale investment securities 171,250 119,164 119,191 Held to maturity investment securities 552,078 491,611 492,303 723,328 610,775 611,494 The repurchase agreements have maturity periods between 1-90 days (31 December 2017: 4-372 days). The Group has applied interest rates of 0.75%-1.5% for foreign currency, 15.00% for Turkish Lira agreements (31 December 2017: 0.25%-0.5% for foreign currency, 7.00%-12.31% for Turkish Lira). Included in the carrying value of the obligations under repurchase agreements, the interest accrued amounts to TL 1 (31 December 2017: TL 381). 18. FUNDS BORROWED 31 December 31 December 2018 2017 Short-term funds 5,000 164,852 Short-term portion of medium and long-term funds 3,894,228 3,360,542 Medium and long-term funds 19,920,442 15,476,233 Total 23,819,670 19,001,627 31 December 31 December 2018 2017 Foreign currencies 23,692,663 18,780,615 Turkish Lira 127,007 221,012 Total 23,819,670 19,001,627 The Group did not have any default of principal, interest on redemption amounts or other breaches of loan covenants as of 31 December 2018 (31 December 2017: None). 100 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 18. FUNDS BORROWED (Continued) As at 31 December 2018, interest rates and maturities of bank borrowings are as follows: 31 December 2018 Amount Maturity Interest Rate (%) Min Max Min Max Foreign Currency Borrowings International Bank for Reconstruction and Development (IBRD) -EFIL II 236,561 15/01/2020 2.77 2.77 -EFIL III 379,538 15/01/2021 2.77 2.77 -EFIL IV 1,177,743 15/07/2036 2.57 2.57 -IBRD SME 150,353 15/03/2021 2.62 2.62 -IBRD-Renewable Energy Loan 3,395,664 15/03/2019 15/03/2044 0.45 3.59 -IBRD EFIL IV Limit Increase 1,372,461 15/12/2038 0.45 3.59 -IBRD Innovative Access to Finance 1,246,194 15/03/2042 0.41 3.25 7,958,514 European Investment Bank (EIB) 6,058,524 15/06/2005 26/10/2030 0.03 4.54 Kreditanstalt Für Wiederaufbau (KFW) 2,576,419 30/06/2020 30/12/2032 1.29 3.35 Council of European Development Bank (CEB) 1,020,709 15/10/2019 24/12/2025 0.05 3.81 Association of French Development (AFD) 882,669 31/07/2021 30/11/2026 0.25 1.25 Domestic bank borrowings 243,652 28/02/2024 04/01/2027 5.00 5.50 Syndicated Loan 1,123,552 18/07/2019 18/07/2019 0.95 3.47 European Bank for Reconstruction and Development EBRD 345,445 10/03/2022 27/01/2025 2.95 5.49 Islam Development Bank (IDB) 1,516,894 19/02/2023 24/03/2030 2.72 3.95 International Finance Corporation 431,857 15/12/2019 17/03/2025 5.32 5.75 Credit Suisse 513,701 23/03/2023 23/03/2023 2.00 2.09 Banco De Sabadell 168,971 27/11/2028 03/01/2029 1.37 1.37 JP Morgan Securities 122,108 05/06/2020 05/06/2020 2.90 2.90 Oesterreichische Entwicklungsbank AG (OEB) 89,503 15/12/2026 15/12/2026 2.60 2.60 Citibank 104,251 26/09/2022 26/09/2022 3.44 3.44 JBIC-Japan Bank for International Cooperation 535,894 27/03/2027 27/03/2027 4.10 4.40 15,734,149 Total foreign currency borrowings 23,692,663 Turkish Lira Borrowings Credit Suisse 90,915 23/09/2021 23/09/2021 9.95 9.95 JP Morgan Securities 31,092 08/07/2020 08/07/2020 9.05 9.05 Domestic bank borrowings 5,000 02/01/2019 02/01/2019 24.00 24.00 Total Turkish Lira borrowings 127,007 Total 23,819,670 101 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 18. FUNDS BORROWED (Continued) As at 31 December 2017, interest rates and maturities of bank borrowings are as follows: 31 December 2017 Amount Maturity Interest Rate (%) Min Max Min Max Foreign Currency Borrowings International Bank for Reconstruction and Development (IBRD) -EFIL II 286,762 15/01/2020 1.71 1.71 -EFIL III 392,592 15/01/2021 1.71 1.71 -EFIL IV 916,490 15/07/2036 1.51 1.51 -IBRD SME 157,706 15/03/2021 1.51 1.51 -IBRD-Renewable Energy Loan 2,311,153 15/03/2018 15/03/2044 0.39 2.42 -IBRD EFIL IV Limit Increase 1,069,792 15/12/2038 0.39 2.42 -IBRD Innovative Access to Finance 847,745 15/03/2042 0.38 2.11 5,982,240 European Investment Bank (EIB) 4,665,088 15/06/2005 31/05/2028 0.01 3.59 Kreditanstalt Für Wiederaufbau (KFW) 2,217,768 30/11/2006 30/12/2032 0.18 3.35 Council of European Development Bank (CEB) 711,849 16/04/2018 27/12/2024 0.05 2.57 Association of French Development (AFD) 679,051 30/11/2018 30/11/2026 0.25 1.23 Domestic bank borrowings 359,286 02/01/2018 02/01/2018 1.50 1.50 Syndicated Loan 1,170,096 16/07/2018 16/07/2018 1.15 2.61 European Bank for Reconstruction and Development EBRD 183,151 10/03/2022 10/03/2022 2.95 4.40 Intesa 89,980 28/02/2018 26/04/2018 1.40 1.40 Islam Development Bank (IDB) 1,212,503 19/02/2023 24/03/2030 2.72 3.95 International Finance Corporation 254,684 15/12/2018 15/12/2022 4.61 5.26 Credit Suisse 375,334 23/03/2023 23/03/2023 2.00 2.09 Banco De Sabadell 141,555 27/11/2028 03/01/2029 1.37 1.37 JP Morgan Securities 89,233 05/06/2020 05/06/2020 2.90 2.90 Oesterreichische Entwicklungsbank AG (OEB) 76,930 15/12/2026 15/12/2026 2.60 2.60 Citibank 113,927 25/09/2018 26/09/2022 2.34 3.79 JBIC-Japan Bank for International Cooperation 217,628 27/03/2027 27/03/2027 3.00 3.33 Doha Bank 44,832 26/03/2018 26/03/2018 1.40 1.40 Ing Bank 157,641 31/08/2018 31/08/2018 1.35 1.35 Standard Chartered Bank 37,839 18/09/2020 18/09/2020 2.91 2.91 12,798,375 Total foreign currency borrowings 18,780,615 Turkish Lira Borrowings Credit Suisse 159,880 11/07/2019 23/09/2021 7.30 9.95 Domestic bank borrowings 61,132 02/01/2017 08/07/2020 9.05 9.05 Total Turkish Lira borrowings 221.012 Total 19,001,627 102 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 19. DEBT SECURITIES ISSUED 31 December 31 December 2018 2017 Debt securities issued 6,949,189 3,746,229 Total 6,949,189 3,746,229 As of 27 October 2014, the Parent Bank issued the debt instruments which have nominal value of USD 350 Million, redemption date of 30 October 2019 with fixed interest rate of 5.375%, 5 years maturity and semi-annual coupon payment. As of 22 April 2015, the Bank has performed the similar issuance of Eurobond with the nominal amount of USD 350 Million. Interest rate of these debt instruments determined as 5.125% which have the redemption date of 22 April 2020 with fixed interest rate, 5 years maturity and semi-annual coupon payment. Selling of Greenbond which was issued by the Bank in abroad with nominal value of USD 300 Million, 5 years maturity and for financing the green and sustainable projects has been completed on 18 May 2016. The return of these bonds which have the redemption date of 18 May 2021 and 5 years maturity is determined as 5.048% and the coupon rate as 4.875%. As of 16 January 2018, the Parent Bank issued the debt instruments which have nominal value of USD 350 Million, redemption date of 16 January 2023 with fixed interest rate of 5.608%, 5 years maturity and semiannual coupon payment. 20. OTHER LIABILITIES 31 December 31 December 2018 2017 Unearned revenue 104,754 102,571 Payables to clearing accounts 34,333 38,971 Guarantees given 12,330 28,254 Other 17,893 8,486 Total 169,310 178,282 103 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 21. TAXATION Corporate Tax The Group is subject to taxation in accordance with the tax procedures and the legislation effective in Turkey. Corporate income tax is 22% (for 2018, 2019 and 2020, corporate tax income announced as 22%) on the statutory corporate income tax base, which is determined by modifying accounting income for certain exclusions and allowances for tax purposes as at 31 December 2018 (31 December 2017: 20%). Provision is made in the accompanying consolidated financial statements for the estimated charge based on the Group’s results for the year. According to the Corporate Tax Law, 75% of the capital gains arising from the sale of tangible assets and investments owned for at least two years are exempted from corporate tax on the condition that such gains are reflected in the equity from the date of the sale. The remaining 25% of such capital gains are subject to corporate tax. Turkish tax legislation does not permit a parent company and its subsidiary to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis. In Turkey, advance tax returns are filed on a quarterly basis. Advance corporate income tax rate applied in 2018 is 22% (31 December 2017: 20%). Losses can be carried forward for offset against future taxable income for up to 5 years. However, losses cannot be carried back for offset against profits from previous periods. There is no procedure for a final and definitive agreement on tax assessments. Companies file their tax returns between 1-25 April following the close of the accounting year to which they relate. Tax authorities may, however, examine such returns and the underlying accounting records and may revise assessments within five years. Income Withholding Tax In addition to corporate taxes, companies should also calculate income withholding taxes and funds surcharge on any dividends distributed, except for companies receiving dividends who are Turkish residents and Turkish branches of foreign companies. Income withholding tax applied in between 24 April 2003 – 22 July 2006 is 10% and commencing from 23 July 2006, this rate has been changed to 15% upon the Council of Ministers’ Resolution No: 2006/10731. Undistributed dividends incorporated in share capital are not subject to income withholding tax. Dividends paid to the resident institutions and the institutions working through local offices or representatives in Turkey are not subject to withholding tax. As per the decisions no.2009/14593 and 2009/14594 of the Council of Ministers published in the Official Gazette no.27 dated 3 February 2009, certain duty rates included in the articles no.15 and 30 of the new Corporate Tax Law no.5520 are revised. Accordingly, the withholding tax rate on the dividend payments other than the ones paid to the non-resident institutions generating income in Turkey through their operations or permanent representatives and the resident institutions is 15%. In applying the withholding tax rates on dividend payments to the non-resident institutions and the individuals, the withholding tax rates covered in the related Double Tax Treaty Agreements are taken into account. Appropriation of the retained earnings to capital is not considered as profit distribution and therefore is not subject to withholding tax. 104 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 21. TAXATION (Continued) Transfer Pricing In Turkey, the transfer pricing provisions have been stated under the Article 13 of Corporate Tax Law with the heading of “disguised profit distribution via transfer pricing”. The General Communiqué on disguised profit distribution via Transfer Pricing sets details about implementation. If a taxpayer enters into transactions regarding sale or purchase of goods and services with related parties, where the prices are not set in accordance with arm's length principle, then related profits are considered to be distributed in a disguised manner through transfer pricing. Such disguised profit distributions through transfer pricing are not accepted as tax deductible for corporate income tax purposes. Deferred Tax Taxes on income for the year also comprise deferred taxes. Deferred income tax is provided, using the balance sheet method, on all taxable temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liability and asset are recognized when it is probable that the future economic benefits resulting from the reversal of temporary differences will flow to or from the Bank. Deferred tax asset is recognized to the extent that it is probable that future taxable profit will be available against which the deferred tax asset can be utilised. Currently enacted or substantively enacted tax rates are used to determine deferred taxes on income. These differences usually result in the recognition of revenue and expenses in different reporting periods for IFRS and tax purposes. 105 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 21. TAXATION (Continued) Deferred Tax (continued) For calculation of deferred tax asset and liabilities, the rate of 22% (31 December 2017: 22%) is used. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. a) Statement of financial position: 31 December 31 December 2018 2017 Corporate tax provision 147,709 161,659 Corporate tax paid in advance (65,346) (117,997) Corporate tax liability 82,363 43,662 b) Statement of Profit or Loss: 31 December 31 December 2018 2017 Corporate tax expense 147,709 161,659 Deferred tax (income)/expense 73,888 (15,679) 221,597 145,980 The deferred taxes on major temporary differences as at the reporting dates are as follows: 31 December 31 December 2018 2017 Loan commissions 23,032 22,563 Impairment losses on loans 79,690 34,243 Reserve for employee severance indemnity and unused vacation provision 3,258 2,605 Others 3,337 1,842 Total deferred tax asset 109,317 61,253 Valuation of marketable securities (38,458) (20,635) Borrowing commissions (12,329) (10,869) Accruals on derivative financial instruments (43,533) (8,823) Useful life differences on property and equipment (787) (592) Others (10,366) (6,804) Total deferred tax liability (105,473) (47,723) 106 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 21. TAXATION (Continued) Deferred Tax (continued) Reflected as: 31 December 31 December 2018 2017 Deferred tax assets 109,317 61,253 Deferred tax liabilities (-) (105,473) (47,723) Total deferred tax assets, net 3,844 13,530 Taxation can be reconciled to the profit per the income statement as follows: % 31 December % 31 December 2018 2017 Reconciliation of Taxation Income before taxation 883,646 729,415 Tax at the statutory income tax rate 22.00 (194,402) 20.00 (145,883) Tax effect of income that is deductible in determining taxable income (0.26) 2,285 (0.31) 2,248 Tax effect of undeductable expenses 3.35 (29,570) 0.04 (271) Tax effect of dividend income 0.09 (808) (0.42) 3,029 Tax effect of other deductions (0.10) 898 0.70 (5,103) Income tax expense 25.08 (221,597) 19.70 (145,980) Movements in temporary differences for the years ended 31 December 2018 and 2017 are as follows: Recognized in other Balance at IFRS 9 Recognized in comprehensive Balance at 1 January Effect profit or loss income 31 December 2018 Loan commissions 22,563 - 469 - 23,032 Impairment losses on loans 34,243 31,687 13,760 - 79,690 Reserve for employee severance indemnity and - unused vacation provision 2,605 653 - 3,258 Valuation of marketable securities (20,635) - (51,221) 33,398 (38,458) Useful life differences on property and equipment (592) - (195) - (787) Borrowing commissions (10,869) - (1,460) - (12,329) Accruals on derivative financial instruments (8,823) - (34,710) - (43,533) Other (4,962) - (1,184) (882) (7,029) Net deferred tax asset / (liability) 13,530 31,687 (73,888) 32,516 3,844 107 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 21. TAXATION (Continued) Deferred Tax (continued) Recognized in other Balance at Recognized in comprehensive Balance at 1 January profit or loss income 31 December 2017 Loan commissions 17,378 5,185 - 22,563 Impairment losses on loans 8,988 25,255 - 34,243 Reserve for employee severance indemnity and unused vacation provision 2,151 354 100 2,605 Valuation of marketable securities 2,149 (19,981) (2,803) (20,635) Useful life differences on property and equipment (457) (135) - (592) Borrowing commissions (8,791) (2,078) - (10,869) Accruals on derivative financial instruments (2,958) (5,865) - (8,823) Other (15,775) 12,944 (2,131) (4,962) Net deferred tax asset / (liability) 2,685 15,679 (4,834) 13,530 22. EMPLOYEE BENEFITS 2018 2017 Movement of reserve for employee severance indemnity Balance at 1 January 9,761 9,101 Interest cost 1,036 849 Service cost 2,145 712 Loss/(Gain) due to Settlements / Reductions / Terminations 74 41 Payment during the year (1,458) (1,335) Actuarial difference 669 393 Balance at 31 December 12,227 9,761 Movement of provision for unused vacations Balance at 1 January 2,390 1,803 Provision for the year 1,577 1,424 Provisions released (1,140) (837) Balance at 31 December 2,827 2,390 Movement of provision for bonus payments Balance at 1 January 12,735 10,909 Provision for the year 28,161 12,363 Bonus paid (12,155) (10,344) Income and expenses of the prior period (190) (193) Balance at 31 December 28,551 12,735 Employee benefits 43,605 24,886 108 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 22. EMPLOYEE BENEFITS (Continued) a) Pension scheme The Parent Bank has established two pension schemes, “Türkiye Sınai Kalkınma Bankası Anonim Şirketi Memur ve Müstahdemleri Yardım ve Emekli Vakfı” and “Türkiye Sınai Kalkınma Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Vakfı” which are funded defined benefit plans covering substantially all employees. The assets of the plan are held independently of the Group’s assets in the Pension Funds. As per the latest actuarial valuation carried out as at 31 December 2018, the Bank has no obligation to book any provision for the Pension Fund “Türkiye Sınai Kalkınma Bankası Anonim Şirketi Memur ve Müstahdemleri Yardım ve Emekli Vakfı”. b) Reserve for employee severance indemnity Under the Turkish Labour Law, the Group entities are required to pay termination benefits to each employee who has completed one year of service and whose employment is terminated without due cause, is called up for military service, dies or who retires after completing 25 years of service (20 years for women) and reaches the retirement age (58 for women and 60 for men). Since the legislation was changed on 8 September 1999, there are certain transitional provisions relating to the length of service prior to retirement. Such payments are calculated on the basis of 30 days pay maximum full TL 5,434 as at 31 December 2018 (31 December 2017: full TL 4,732) per year of employment at the rate of pay applicable at the date of retirement or termination. Reserve for retirement pay is computed and reflected in the consolidated financial statements on a current basis. The reserve has been calculated by estimating the present value of future probable obligation of the Group arising from the retirement of the employees. The calculation was based upon the retirement pay ceiling announced by the Government. The principal assumptions used for the purpose of the calculations are as follows: 2018 2017 Interest rate 16.00% 12.00% Expected rate of increase in salaries and eligible ceiling 11.30% 7.00% Discount rate 4.22% 4.67% 23. SUBORDINATED LOAN As of 28 March 2017, the Parent Bank issued the sustainable subordinated debt securities which have nominal value of USD 300 million, redemption date of 29 March 2022 with fixed interest rate of 7.625% semiannual coupon payment. As of the end of the period, the value of the borrowing instrument is TL 1,549,774 (31 December 2017: TL 1,146,236). 24. PAYABLES TO MONEY MARKET 31 December 31 December 2018 2017 Interbank money market transactions - 202,143 Istanbul Stock Exchange money market transactions 223,277 499,004 Obligations under repurchase agreements 179,001 610,775 Total 402,278 1,311,922 Payables to stock exchange money markets have a maturity of 2-30days (31 December 2017: 4- 31days days) with between 23.50% and 25.00% (31 December 2017: between 12.75% and 15.05%) of interest rates. 109 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 25. PROVISIONS 31 December 31 December 2018 2017 Free Provision 120,000 60,000 Legal Cases 575 2,729 Unindemnified non-cash loans 736 583 Expected credit loss for non-cash loans 11,251 - Other - 31 132,562 63,343 Free provision amounting to TL 120,000 has been provided by the Bank management in the current period for possible results of the circumstances which may arise from possible changes in the economy and market conditions (31 December 2017: 60,000). 26. CAPITAL AND RESERVES Share Capital As at 31 December 2018, the authorized and issued capital consists of 280,000,000,000 shares of 0.01 Turkish Lira (full) each as reflected in the statutory consolidated financial statements. Ordinary shares carry voting rights in proportion to their nominal value. Authorized Paid-In 31 December 2018 % Capital Capital Shareholders T. İş Bankası AŞ (1) 50.92 1,425,780 1,425,780 T. Vakıflar Bankası T.A.O. 8.38 234,570 234,570 Under Custody at Merkezi Kayıt Kuruluşu (Other Institutions and Individuals) 40.70 1,139,650 1,139,650 100.00 2,800,000 2,800,000 Components of Capital: Nominal capital 2,800,000 2,800,000 Effect of inflation 13,563 13,563 2,813,563 2,813,563 Authorized Paid-In 31 December 2017 % Capital Capital Shareholders T. İş Bankası AŞ (*) 50.71 1,217,027 1,217,027 T. Vakıflar Bankası T.A.O. 8.38 201,060 201,060 Under Custody at Merkezi Kayıt Kuruluşu (Other Institutions and Individuals) 40.91 981,913 981,913 100.00 2,400,000 2,400,000 Components of Capital: Nominal capital 2,400,000 2,400,000 Effect of inflation 13,563 13,563 2,413,563 2,413,563 (1) T. İş Bankası A.Ş. Group share is calculated by considering T. İş Bankası A.Ş.’s purchases in free floating of BIST as of 31 December 2018 of Bank shares. 110 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 26. CAPITAL AND RESERVES (Continued) In the meeting of the General Assembly held on 23 March 2018, it has been resolved that, paid-in capital of the Parent Bank will be increased from TL 2,400,000 to TL 2,800,000 by adding TL 400,000. In respect of the resolution of the General Assembly, all of this increase will be incorporated from the profit of the year 2017. The increase in paid-in capital was approved by the BRSA on 26 April 2018 and disclosed in the dated 7 June 2017 and numbered 9605 Turkish Trade Registy Gazette. In the meeting of the General Assembly held on 23 March 2017, it has been resolved that, paid-in capital of the Parent Bank will be increased from TL 2,050,000 to TL 2,400,000 by adding TL 350,000. In respect of the resolution of the General Assembly, all of this increase will be incorporated from the profit of the year 2016. The increase in paid-in capital was approved by the BRSA on 27 April 2017 and disclosed in the dated 12 June 2017 and numbered 9345 Turkish Trade Registy Gazette. Legal reserves The legal reserves consist of first and second legal reserves in accordance with the Turkish Commercial Code. The first legal reserve is appropriated out of the statutory profits at the rate of 5%, until the total reserve reaches a maximum of 20% of the entity’s share capital. The second legal reserve is appropriated at the rate of 10% of all distributions in excess of 5% of the entity’s share capital. The first and second legal reserves are not available for distribution unless they exceed 50% of the share capital, but may be used to absorb losses in the event that the general reserve is exhausted. Fair value reserve The fair value reserve comprises the cumulative net change in the fair value of financial assets at fair value through other comprehensive income, until the assets are derecognised or impaired. Revaluation reserve As of the third quarter of 2015, the Bank, has changed its accounting policies from historical cost method to revaluation method for the real estate properties which are held for own use in accordance with “IAS 16 - Property, Plant and Equipment”. The positive difference between the net book value of real estate property values and the expertise values which are determined by the certifiedvaluation companies are recorded in “Revaluation surplus on tangible assets” under the shareholders’ equity. Dividends At the Ordinary General Assembly of the Bank held on 23 March 2018, it was decided to distribute a dividend of TL 96,000 to shareholders and TL 13,505 to personnel, members of Board of Directors and to allocate TL 31,481 to legal reserves from retained earnings. 111 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 26. CAPITAL AND RESERVES (Continued) Non-controlling interests As at the reporting date the non-controlling interests are as follows: 31 December 31 December 2018 2017 Capital 44,159 47,008 Share premium 77 165 Fair value reserve 856 579 Legal reserve 125 118 Retained earnings 908 10,558 Actuarial gain/loss (10) (7) Current period net income (7,493) (5,702) 38,622 52,719 27. DIVIDENDS In March 2018, dividends amounting to TL 109,505 were paid. In March 2017, the dividends paid were TL 92,801. 28. EARNINGS PER SHARE Basic earnings per share are calculated by dividing the net profit for the period attributable to ordinary shareholders by the weighted average number of shares outstanding during the period concerned. A summary of the weighted average number of shares outstanding for the year ended 31 December 2018 and 2017 and the basic earnings per share calculation is as follows (assuming that the cash increases did not involve a bonus element): 1 January – 1 January – 31 December 31 December 2018 2017 Number of shares outstanding at 1 January 2,400,000,000 2,050,000,000 New shares issued Conversion of existing reserves (1) 400,000,000 350,000,000 Number of shares outstanding at the period end 2,800,000,000 2,400,000,000 Weighted average number of shares during the period 2,800,000,000 2,400,000,000 Profit for equity holders of the Bank 669,542 589,137 Basic earnings per share (in full Kurus) 0.2391 0.2455 (1) Capital increase is made through internal resources and prior period’s earnings per share figure is revised by using the number of shares subsequent to the capital increase. There is no dilution of shares as of 31 December 2018. 112 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 29. NET FEE AND COMISSION INCOME 1 January- 1 January- 31 December 31 December 2018 2017 Non-Cash Loans 20,932 15,625 Gains on Brokerage Commissions 34,678 28,941 Commissions from Initial Public Offering 920 1,360 Investment Fund Management Income 2,113 2,092 Other 5,286 5,734 Fee and commission income 63,929 53,752 Non-Cash Loans (2,876) (2,400) Other (9,655) (8,690) Fee and commission expense (12,531) (11,090) Net fee and commission income 51,398 42,662 30. NET IMPAIRMENT LOSS ON FINANCIAL ASSETS 1 January- 31 December 2018 Expected credit loss for stage 1 and 2 123,547 Free provision 60,000 Expected credit loss for stage 3 280,722 Marketable securities impairment expenses 7,607 Associates and subsidiaries - Other 773 472,649 1 January- 31 December 2017 Portfolio reserve for loans 68,855 Free provision 60,000 Specific provision for loans 42,636 Marketable securities impairment expenses 3,988 Associates and subsidiaries 2,402 Other 259 178,140 113 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 31. OTHER OPERATING INCOME 1 January- 1 January- 31 December 31 December 2018 2017 Rent income 4,642 8,956 Increase in value of investment properties 9,590 10,865 Provisions released 1,789 10,651 Gain on sale of assets 73 244 Other 2,999 2,830 19,093 33,546 32. DIVIDEND INCOME 1 January- 1 January- 31 December 31 December 2018 2017 Financial assets at FVOCI 4,612 4,519 Other 913 902 5,525 5,421 33. OTHER OPERATING EXPENSES 1 January- 1 January- 31 December 31 December 2018 2017 Personnel expenses 133,604 103,242 Other administrative expenses 42,406 34,196 Depreciation, impairment and amortisation 6,404 5,997 Marketing expenses 970 1,121 Taxes and dues other than on income 6,028 5,360 Other 20,532 20,270 209,944 170,186 114 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 34. DERIVATIVE FINANCIAL INSTRUMENTS The Group is party to a variety of foreign currency forward contracts, swaps and options in the management of its exchange rate exposures. The instruments are primarily denominated in TL, US Dollar and Euro. The Bank has entered into extinguishing cross-currency interest rate swaps as part of its strategy to hedge TL denominated fixed rate assets. These swap arrangements provide that, on the occurrence of certain credit-related events in relation to the company (such as failure to make a payment), the swap arrangements may immediately terminate with no further payments due and payable by either party. As of 31 December 2018, the fair value of such swaps is TL 423,104 with a total outstanding nominal value of USD 200 million. The average maturity of such swaps range between 2020 and 2022 years. 2018 2018 2017 2017 Assets Liabilities Assets Liabilities Currency swaps 659,811 (394,648) 206,665 (135,793) Options 59,646 (59,646) 42,519 (42,423) Foreign currency forward contracts 152,353 (93,917) 21,909 (21,669) Interest rate swaps 107,411 (71,871) 55,695 (32,518) 979,221 (620,082) 326,788 (232,403) Derivatives held for risk management Due to the Bank and its affiliates’ overall interest rate risk position and funding structure, its risk management policies require that it should minimize its exposure to changes in interest rates within certain guidelines. Interest rate swaps are used for this puposes as derivative financial instruments. In this respect, the fixed rate Eurobond issued by the Bank and a portion of fixed rate funds borrowed are subject to fair value hedge accounting. The Bank enters into interest rate swap agreements in order to hedge the change in fair values of its fixed rate financial liabilities. The changes in the fair value of the hedged fixed rate financial liabilities and hedging interest rate swaps are recognised under the statement of profit/loss. At the beginning and later period of the hedging transaction, the aforementioned hedging transactions are expected to offset changes occurred in the relevant period of the hedging transaction and hedged risk (attributable to hedging risk) and effectiveness tests are performed in this regard. The fair value of derivatives designated as fair value hedges are as follows: 2018 2018 2017 2017 Instrument type Assets Liabilities Assets Liabilities Interest Rate Swap - (172,258) - (78,682) - (172,258) - (78,682) 115 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 34. DERIVATIVE FINANCIAL INSTRUMENTS (Continued) At the reporting date, the total amounts of outstanding derivatives to which the Group is committed are as follows: 31 December 31 December 2018 2017 Forward foreign exchange contracts – buy 1,938,460 2,413,168 Forward foreign exchange contracts – sell 1,862,489 2,412,937 Currency swaps – buy 7,461,461 3,573,706 Currency swaps – sell 7,254,194 3,433,776 Interest rate swaps – buy 8,356,003 6,607,120 Interest rate swaps – sell 8,356,003 6,607,120 Currency option – buy 2,634,254 2,325,986 Currency option – sell 2,634,254 2,325,986 Other – sell 13,401 72,830 116 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 35. COMMITMENTS AND CONTINGENCIES 31 December 31 December 2018 2017 Swap and forward agreements 35,228,610 25,047,827 Revocable and irrevocable commitments 3,727,591 6,132,575 Derivative financial instruments for hedging purposes 18,028,129 10,582,050 Option agreements 5,268,508 4,651,972 Letters of guarantee 1,582,993 1,475,645 Letters of credit 1,590,814 1,079,303 Capital commitments for subsidiaries and associates (*) 97,805 78,890 Bank acceptences - 18,763 Other commitments 13,401 72,830 65,537,851 49,139,855 (*) The Bank, the European Investment Fund (European Investment Fund - EIF), to be established by Turkey, Growth and Innovation Fund (Turkish Growth and Innovation Fund - TGIF) purchase of shares of the fund established under the name situated remaining amount that commitment. Fiduciary Activities The Group provides custody, investment management and advisory services to third parties. Those assets that are held in a fiduciary capacity are not included in the accompanying consolidated financial statements. The nominal values of the assets held by the Group in agency or custodian capacities and financial assets under portfolio management amounted to TL 1,407,835 as at 31 December 2018 (31 December 2017: TL 1,299,527). As at 31 December 2018, securities at custody with market value amounted to TL 3,989,000 (31 December 2017: TL 4,676,000). Securities Blocked and Letters of Guarantee Given to Borsa Istanbul (BIST) as Collateral for Trading on Markets As at 31 December 2018, according to the general requirements of the BIST, letters of guarantee amounting to TL 425,100 (31 December 2017: TL 406,700) had been obtained from various local banks and were provided to BIST for bond and stock market transactions. Also, as at 31 December 2018 there is no letter of guarantee were given to the CMB (31 December 2017: none). The Group’s trading securities given as collateral or blocked amounted to TL 382 at the reporting date (31 December 2017: TL 263). Litigations In the normal course of its operations, the Group can be constantly faced with legal disputes, claims and complaints. The necessary provision, if any, for those cases are provided based on management estimates and professional advice. There are 61 legal cases against the Group which are amounting to TL 5,209 as of the reporting date (31 December 2017: TL 4,976 for 56 legal cases). Tax Audit Committee inspectors made an investigation for the years 2008-2011 about the payments made by the Bank and employees to “Türkiye Sınai Kalkınma Bankası A.Ş. Mensupları Munzam Sosyal Güvenlik ve Yardımlaşma Vakfı” (“the Foundation”) established in accordance with the decisions of the Turkish Commercial Law and the Civil Law as made to all foundations in the sector. According to this investigation it has been communicated that the amount the Bank is obliged to pay is a benefit in the nature of fee for the members of the Foundation worked at the time of payment, the amount the Foundation members are obliged to pay should not been deducted from the basis of fee; accordingly tax audit report was issued with the claim that it should be taken penalized income tax surcharge / penalized stump duty deducted from allowance and total amount of TL 17,325 tax penalty notice relating to period in question to the Bank relying on this report. 117 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 35. COMMITMENTS AND CONTINGENCIES (Continued) Litigations (continued) Some of the lawsuits are decided favourable, remaining of lawsuits are decided unfavourable by the tax courts of first instance. On the other hand, appeal and objection have been requested by the Parent Bank against the decision of the Court with respect to the Parent Bank and by the administration against the decision of the Court with respect to the administration and completion of appeal process is waited. The tax and penalty notices related to the decision of the tax court of first instance against the Parent Bank are accrued by administration depending on legal process and as of 31 July 2014 the Parent Bank has made total payments amounting to TL 22,091. A similar case has been submitted to the Constitutional Court (AYM) in the form of individual remedies by the main shareholder of the parent Bank in relation to the parent Bank’s liabilites to pay, the Constitutional Court gave the decision with court file number 2014/6192. According to court decision published in the Official Gazette dated 21 February 2015 and numbered 29274, the assessments against the parent Bank was contrary to the principle of legality and the Parent Bank’s property rights has been violated. This decision is considered to be a precedent for the parent Bank and an amount of TL 12,750 corresponding to the portion that the parent Bank was obliged to pay for the related period is recognised as income in the prior period. There is a lawsuit for Pendorya Mall of TSKB GYO registered in Pendik, Doğu District, plot 105, map 865, parcel 64 against IBB and Karacan Yapı at Pendik 2nd Court of First Instance Pendorya Mall claiming the road intersects his own property and demanding compensation amounting TL 7. TSKB GYO has been involved in the lawsuit as intervening party. Relating to immovable property, subject of litigation discovery review and expert reports were submitted to the court file. Objections to the report and statement of TSKB GYO has been given. IBB Presidency has declared that expropriation proceedings related to the subject have been initiated. For this reason, lawsuit was removed from “Possessory Actions” and converted to the “Confiscating without expropriating” by the judge. Accepting in the new case, the plaintiff claimed compensation from the Administration and in order to determine the amount of compensation the Court decided an expert examination since the information provided by the Land Registry and the Municipality was not deemed sufficient. Expert reports submitted to the Court on 30 May 2013 and the Court decided to add Pendik Municipality as a defendant in the case. At the latest hearing on 24 December 2013 it was decided to accept the expert reports and Pendik Municipality to pay the relevant amount (TL 645) to the plaintiff. The reasoned decision has been notified, the decision which has been appealed by the appellant and the respondent Pendik Municipality has turned deteriorate the Supreme Court decision was a request for the correction requested by the İstanbul Metropolitan Municipality (IMM). The decision has been requested adjustment by IMM and plaintiff Sağlam Satış ve Paz. A.Ş. (Malazlar A.Ş.). Breaking decision of the Supreme Court is expected to evaluate the requests for correction of decision. The Court decided to apply of Supreme Court’s decision to dismiss. Beyoglu Municipality approved the reclaim of TSKB GYO for the Building II which has the location as 1486 map and 76 parcel in Fındıklı in Beyoglu, Istanbul for the forfeiture because of zoning change. However, Municipality of Beyoglu sued because of no approbation by Istanbul Metropolitan Municipality, in order to keep rights on the subject. 118 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 35. COMMITMENTS AND CONTINGENCIES (Continued) Litigations (continued) The court made a decision as no solution for the relevant claim due to Beyoglu Municipality approved the reclaim. However, There has to be permission by Istanbul Metropolitan Municipality, and Cultural and Natural Heritage Preservation Board for the exact result. That’s why, decision was appealed by the company. The Council of State reversed the judgement based on unappropriate zoning plan changes with the decision of 28 March 2014. In addition, a new implementation development plan covering the Fındıklı Building II, which has been canceled by the judicial authorities and which is owned by TSKB GYO, is being prepared by the Municipality of Beyoğlu on December 21, 2010, the 1/1000 Scaled Beyoğlu District Protected Urban Site Protected Development Plan. For this content, TSKB GYO’s application were made in writing to the Beyoğlu Municipality on 28 October 2014 in order to plan by taking into account the 1/1000 Scale Implementation Plan which is being prepared by the Municipality of Beyoğlu and the Istanbul Metropolitan Municipality. The court requested the Municipality to ask the plan including the immovable subject to the decision of the Council of State is still in force as a result of the decision of dismissal and that the plan canceled by the court in the letter sent from the Municipality is still valid answered in the form. In the case which was started to discuss again in court; an expert opinion examination was made. The Court has ruled in favor of the Parent Bank by canceling the administrative proceeding. Against decision, within the legal period, Beyoglu Municipality has applied for the appeal law and it is expected that the file will be sent to Istanbul Regional Administrative Court for examination and, if necessary, for re-trial. A lawsuit was filed by one of the investors of TSKB GYO on the cancellation of the 5th, 7th and 9th articles decided at the Ordinary General Assembly meeting on 27 April 2018. Although the request for the case was demanded to stop the execution of the 5th and 7th articles, no decision was taken as of 31 December 2018. Responded with a petition and a legal opinion presented to lawsuit. The trial is ongoing. According to Legal Department of the Bank, it is not expected that the other lawsuits against the Bank will have a significant impact on the financial statements. Other The Group’s head office and 9 branches, including branches of subsidiaries, are subject to operational leasing. Additionally, 26 cars and 345 computers are within the context of operational leasing. The Group has no liability for operational leases as of the reporting date (31 December 2017: 9 branches and 24 cars and 291 computers are subject to operational leasing). 119 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 36. RELATED PARTIES For the purposes of the accompanying consolidated financial statements, shareholders of the Group and related companies, consolidated and non-consolidated equity participations and related companies, directors and key management personnel together with their families and related companies are referred to as "Related Parties" in this report. During the conduct of its business the Group had various significant transactions and balances with Related Parties during the year. The accompanying consolidated financial statements include the following balances due from or due to related parties: 31 December 31 December 2018 2017 Balances with related parties Loans and advances to customers 599,866 334,401 Balances with Parent Bank - - Balances with other related parties 599,866 334,401 Non-cash loans 262 260 Loans and advances to banks 566,850 1,517 Financial assets at fair value through other comprehensive income investment securities 12,694 12,922 Other assets 1,649 9 Other liabilities 1,448 69 Derivative financial instruments 364,732 444,536 1 January – 1 January – 31 December 31 December 2018 2017 Transactions with related parties Income from associates 90,705 43,861 Dividend income 5,525 5,421 Interest income 31,762 26,488 - Balances with Parent Bank 76 282 - Balances with other related parties 31,686 26,206 Foreign exchange gain (loss), net 22,177 27,628 Net fee and commission income / (expense), net 213 426 - Balances with Parent Bank - - - Balances with other related parties 213 426 Other income 442 397 - Balances with Parent Bank 34 30 - Balances with other related parties 408 367 Derivative financial instruments gains/losses (356,617) (30,731) Compensation of Key Management Personnel of the Group Benefits provided to key management personnel in the current period amount to TL 16,846 (31 December 2017: TL 15,828). 120 TÜRKİYE SINAİ KALKINMA BANKASI AŞ AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated) 37. RATINGS As at and for the year ended 31 December 2018, the Bank’s, ratings assigned by international rating agencies are as follows; Moody’s – 28 August 2018 Rating Outlook Long-term Foreign Currency Issuer Rating B2 Negative Short-term Foreign Currency Issuer Rating NP - Long-term Local Currency Issuer Rating B2 Negative Short-term Local Currency Issuer Rating NP - Long-term Foreign Currency Senior Debt B2 Negative Fitch Ratings– 1 October 2018 Rating Outlook Long-term Foreign Currency Issuer Default Rating B+ Negative Long-term Local Currency Issuer Default Rating BB Negative Short-term Foreign Currency Issuer Default Rating B - Short-term Local Currency Issuer Default Rating B - National Long Term Rating AA Stable Support Rating 4 - Support Rating Floor B+ - Senior Unsecured Long Term Debt B+ - 38. EVENTS AFTER THE REPORTING PERIOD None. 121