Türkiye İhracat Kredi Bankası Anonim Şirketi Financial Statements As At and For The Year Ended 31 December 2018 With Independent Auditors’ Report Thereon 23 May 2019 This report contains the “Independent Auditors’ Report” comprising 6 pages and; the “Financial statements and their explanatory notes” comprising 79 pages. TABLE OF CONTENTS Page Independent auditors’ report Statement of financial position 1 Statement of profit or loss 2 Statement of profit or loss and other comprehensive income 3 Statement of changes in equity 4 Statement of cash flows 5 Notes to the financial statements 6-79 TÜRKİYE İHRACAT KREDİ BANKASI AŞ STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 31 December 31 December Notes 2018 2017 ASSETS Cash and due from banks 6 4,234,607 3,546,284 Trading securities 7 11,710 Derivative financial instruments 8 443 15,553 Derivative assets held for risk management 4 711,768 133,606 Loans and advances 9 129,670,051 80,253,617 Investment securities -Financial assets measured at fair value through other comprehensive income 10 20,447 -Financial assets measured at amortized cost 10 3,249,301 -Available-for-sale 10 30,318 -Held-to-maturity 10 180,461 Property and equipment 11 6,612 6,235 Intangible assets 12 7,004 6,053 Investment property 13 2,141 2,236 Other assets 14 1,333,377 1,056,117 Total assets 139,235,751 85,242,190 LIABILITIES Funds borrowed 15 108,730,948 67,368,670 Debt securities in issue 16 17,178,988 10,279,210 Subordinated liabilities 17 2,995,130 31,596 Interbank money market deposits 15 139,005 152,000 Other liabilities and provisions 19 2,054,385 1,044,075 Derivative financial instruments 8 129,204 384,351 Derivative liabilities held for risk management 4 339,651 188,286 Retirement benefit obligations 20 21,855 19,116 Total liabilities 131,589,166 79,467,304 EQUITY 21 - Share capital 6,350,000 4,800,000 - Adjustment to share capital 38,091 38,091 Total paid in share capital 6,388,091 4,838,091 Legal reserves 379,260 349,896 Hedging reserves 49,233 (1,512) Fair value reserves 11,282 21,154 Retained earnings 818,719 567,257 Total equity 7,646,585 5,774,886 Total liabilities and equity 139,235,751 85,242,190 The accompanying notes form an integral part of these financial statements. 1 TÜRKİYE İHRACAT KREDİ BANKASI AŞ STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 1 January – 1 January - 31 December 31 December Notes 2018 2017 Interest income 22 3,391,095 2,238,086 Interest expense 22 (2,531,631) (1,224,198) Net interest income 859,464 1,013,888 Fees and commission income 350,141 21,409 Fees and commission expense (206,315) (28,491) Net fee and commission income 143,826 (7,082) Impairment losses on loans and advances 9 (108,635) (48,999) Foreign exchange gain/(losses), net 23 (1,135,887) 402,603 Gains/(losses) on financial assets through profit or loss, net 24 1,317,750 Gains/(losses) on financial instruments classified as held for trading, net 24 (685,377) Dividend income 151 - Other operating income 25 10,655 214,444 Operating profit before operating expenses 1,087,324 889,477 Operating expenses 26 (272,461) (321,002) Net profit for the period 814,863 568,475 The accompanying notes form an integral part of these financial statements. 2 TÜRKİYE İHRACAT KREDİ BANKASI AŞ 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 indicated) 1 January - 1 January - 31 December 2018 31 December 2017 Net profit for the period 814,863 568,475 Other comprehensive income 40,667 8,034 Items that will not be reclassified to profit or loss (206) (82) Remeasurements of the defined benefit asset (206) (82) Items that are or may be reclassified to profit or loss 40,873 8,116 Net change in fair values of financial assets measured at fair value through other comprehensive income (9,872) Net change in fair values of available-for-sale financial assets 9,194 Cash flow hedges - effective portion of changes in fair value 50,745 (1,078) Total comprehensive income for the period 855,530 576,509 The accompanying notes form an integral part of these financial statements. 3 TÜRKİYE İHRACAT KREDİ BANKASI AŞ STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) Share capital Share Adjustment to Total paid-in Legal Other Hedging Fair value Retained Total Notes capital share capital share capital reserves reserves reserves reserves earnings equity Balance at 1 January 2017 3,700,000 38,091 3,738,091 328,050 22,743 (434) 11,960 1,101,127 5,201,537 Profit for the period - - - - - - - 568,475 568,475 Other comprehensive income for the period - - - - - (1,078) 9,194 (82) 8,034 Total comprehensive income - - - - - (1,078) 9,194 568,393 576,509 Capital increase 1,100,000 - 1,100,000 - (22,743) - - (1,077,257) - Dividends to equity holders - - - - - - - (3,160) (3,160) Transfers to legal reserves - - - 21,846 - - - (21,846) - Balance at 31 December 2017 4,800,000 38,091 4,838,091 349,896 - (1,512) 21,154 567,257 5,774,886 Balance at 1 January 2018 (Previously reported) 21 4,800,000 38,091 4,838,091 349,896 - (1,512) 21,154 567,257 5,774,886 Impact of adopting IFRS 9 at 1 January 2018 (*) - - - - - - - 20,432 20,432 Restated balance at 1 January 2018 4,800,000 38,091 4,838,091 349,896 - (1,512) 21,154 587,689 5,795,318 Profit for the period - - - - - - - 814,863 814,863 Other comprehensive income for the period - - - - - 50,745 (9,872) (206) 40,667 Total comprehensive income - - - - - 50,745 (9,872) 814,657 855,530 Capital increase 21 1,550,000 - 1,550,000 - - - - (550,000) 1,000,000 Dividends to equity holders - - - - - - - (4,263) (4,263) Transfers to legal reserves - - - 29,364 - - - (29,364) - Balance at 31 December 2018 21 6,350,000 38,091 6,388,091 379,260 - 49,233 11,282 818,719 7,646,585 (*) See Note 3.23. The accompanying notes form an integral part of these financial statements. 4 TÜRKİYE İHRACAT KREDİ BANKASI AŞ STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 1 January - Not 31 December 1 January - es 2018 31 December 2017 Cash flows from operating activities: Net profit for the period 814,863 568,475 Adjustments for: Depreciation and amortisation 26 3,845 4,610 Provision for loan losses 9 108,635 48,999 Provision for employment termination benefits 20 2,532 1,983 Provision for unused vacation 19 2,265 1,700 Interest income, net (859,464) (1,013,888) Interest paid (1,455,142) (1,224,198) Interest received 3,287,387 2,165,125 Unrealised foreign exchange differences 962,032 1,116,446 Remeasurement of derivative financial instruments 459,270 (48,969) 3,326,233 1,620,283 Net increase in loans and advances (38,981,217) (10,747,602) Net decrease in financial assets at measured fair value through profit or loss 3,050 Net decrease in trading securities (980) Net (increase)/decrease in due from banks - 27,884 Proceeds from borrowings 156,041,531 83,649,359 Repayments of borrowings (123,558,057) (75,490,340) Net decrease/(increase) in other assets (264,480) (114,919) Net increase in other liabilities 894,021 (297,470) Net cash from/(used in) operating activities (2,538,929) (1,353,785) Cash flows from/(used in) investing activities: Acquisition of property and equipment 11 (2,745) (1,729) Acquisition of financial assets measured at amortised cost 10 (3,198,105) (238,756) Proceeds from financial assets measured at amortised cost 10 220,654 164,403 Acquisition of intangible assets 12 (2,238) (4,382) Net cash generated from investing activities (2,982,434) (80,464) Cash flows from/(used in) financing activities: Proceeds from interbank money market deposit 15 (12,995) 83,000 Proceeds from issue of debt securities 7,952,092 1,716,276 Proceeds from issue of subordinated liabilities (2,963,534) 56,689 Repayment of debt securities (824,860) (494,829) Dividends paid 21 (4,263) (3,160) Proceeds from capital increase 1,000,000 - Net cash from/(used in) financing activities 5,146,440 1,357,976 Effects of exchange-rate changes on cash and cash equivalents 1,062,572 365,358 Net increase/(decrease) in cash and cash equivalents 687,649 289,085 Cash and cash equivalents at the beginning of the year 3,546,284 3,257,199 Cash and cash equivalents at the end of the period 4,233,933 3,546,284 The accompanying notes form an integral part of these financial statements. 5 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 1 GENERAL INFORMATION Türkiye İhracat Kredi Bankası AŞ (the “Bank” or “Eximbank”) was established as Turkey’s “Official Export Credit Agency” on 25 March 1987 (transformed from “State Investment Bank”) as a development and investment bank and accordingly, the Bank does not accept deposits. The Bank’s head office is located at Saray Mahallesi, Ahmet Tevfik İleri Caddesi 19 Ümraniye İstanbul/Türkiye. As of 31 December 2018, the Bank has 2 regional directorates in Ankara and in İzmir, 13 branches and 5 liaison offices. As of 31 December 2018, the Bank has 709 employees (31 December 2017: 635 employees). The Bank has been mandated to support foreign trade through diversification of the exported goods and services, by increasing the share of exporters and entrepreneurs in international trade, and to create new markets for the exported commodities, to provide exporters and overseas contractors with support to increase their competitiveness and to ensure a lower risk environment in international markets. As a means of aiding export development services, the Bank provides loan, guarantee and insurance services in order to financially support export and foreign currency earning services. While performing the above mentioned operations, the Bank provides short, medium or long term, domestic and foreign currency lending funded by borrowings from domestic and foreign money and capital markets and from its own sources. On the other hand, the Bank also performs fund management (treasury) operations related to its core banking operations. These operations are domestic and foreign currency capital market operations, domestic and foreign currency money market operations, foreign currency market operations, derivative transactions, all of which are approved by the Board of Directors. The losses due to the political risks arising on loan, guarantee and insurance operations of the Bank, are transferred to the Undersecretariat of Treasury (“Turkish Treasury”) according to article 4/c of Act number 3332 that was appended by Act numbered 3659 and according to Act regarding the Public Financing and Debt Management, numbered 4749, dated 28 March 2002. 6 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 2 Basis of preparation 2.1 Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. The Bank maintains its books of account and prepares its statutory financial statements in Turkish Lira (“TL”) in accordance with the accounting practices as promulgated by the Banking Regulation and Supervision Agency (“BRSA”), the Turkish Commercial Code and the Turkish Tax Legislation. These financial statements have been prepared in accordance with IFRS. They were authorised for issue by the Bank’s Board of Directors on 23 May 2019. This is the first set of the Group’s annual financial statements in which IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers have been applied. Changes to significant accounting policies are described in Note 2.6. 2.2 Basis of measurement The 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 assets and liabilities which are stated at their fair values if reliable measures are available: derivative financial assets and liabilities, financial assets measured at fair value through profit or loss and financial assets measured at fair value through other comprehensive income. 2.3 Functional currency and presentation currency These financial statements are presented in TL, which is the Bank’s functional currency. Except as indicated, the financial information presented in TL has been rounded to the nearest thousand. 2.4 Accounting in hyperinflationary countries Financial statements of the Turkish entities have been restated for the changes in the general purchasing power of the Turkish Lira based on IAS 29 – Financial Reporting in Hyperinflationary Economies as at 31 December 2005. IAS 29 requires that financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the reporting date, and that corresponding figures for previous years 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 was 35.61% as at 31 December 2005, based on the Turkish nation-wide wholesale price indices announced by the Turkish Statistical Institute (“TURKSTAT”). This, together with the sustained positive trend in quantitative factors, such as the stabilisation in capital and money markets, decrease in interest rates and the appreciation of TL against the USD and other hard currencies have been taken into consideration to categorise Turkey as a non-hyperinflationary economy under IAS 29 effective from 1 January 2006. 7 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 2 Basis of preparation (continued) 2.5 Use of estimates and judgments The preparation of the financial statements requires management to make judgments, 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 recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas at estimation uncertainty and critical judgment in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes:  Note 3 and 4 – Derivative assets and liabilities held for risk management  Note 3 and 8 – Derivative financial instruments  Note 3 and 9 – Loans and advances  Note 3 and 17 – Other liabilities and provisions  Note 3 and 14 – Other assets  Note 3 and 6 – Cash and due from banks 2.6. Changes in accounting policies The accounting policies set out below have been applied consistently by the Bank to prior periods presented in these financial statements except for the impact of transition to IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contract with Customers” as of 1 January 2018 as explained below. In accordance with the transition rules of IFRS 9, the prior period financial statements and notes are not restated. Accounting policies and valuation principles used for the year 2018 and 2017 periods are separately presented in the footnotes. IFRS 15 provides single and comprehensive model and guidance regarding recognition of revenue and replaces IAS 18 “Revenue”. The Bank’s adoption process continues regarding IFRS 16 “Leases” which will be in effect starting from 1 January 2019. The accounting policies adopted in the preparation of the financial statements as at 31 December 2018 are consistent with those followed in the preparation of the financial statements of the prior year, except for the new standards and amendments to standards, including any consequential amendments to other standards summarized in related notes. Standards issued but not yet effective and not early adopted New standards, interpretations and amendments to existing standards are not effective at reporting date and earlier application is permitted; however the Bank has not early adopted are presented as follows. The Bank will make the necessary changes if not indicated otherwise, which will be affecting the financial statements and disclosures, after the new standards and interpretations become in effect. 8 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 2 Basis of preparation (continued) 2.6 Changes in accounting policies (continued) Standards issued but not yet effective and not early adopted (contined) IFRS 16 Leases On 13 January 2016, IASB issued the new leasing standard which will replace IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC 15 Operating Leases – Incentives, and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease and consequently changes to IAS 40 Investment Properties. IFRS 16 eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. Lessor accounting remains similar to current practice. IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with early adoption permitted provided that an entity also adopts IFRS 15 Revenue from Contracts with Customers. The Bank does not expect a significant impact in its financials. The revised Conceptual Framework The revised Conceptual Framework issued on 28 March 2018 by the IASB. The Conceptual Framework sets out the fundamental concepts for financial reporting that guide the Board in developing IFRS Standards. It helps to ensure that the Standards are conceptually consistent and that similar transactions are treated the same way, so as to provide useful information for investors, lenders and other creditors. The Conceptual Framework also assists companies in developing accounting policies when no IFRS Standard applies to a particular transaction, and more broadly, helps stakeholders to understand and interpret the Standards. The revised Conceptual Framework is more comprehensive than the old one – its aim is to provide the Board with the full set of tools for standard setting. It covers all aspects of standard setting from the objective of financial reporting, to presentation and disclosures. For companies that use the Conceptual Framework to develop accounting policies when no IFRS Standard applies to a particular transaction, the revised Conceptual Framework is effective for annual reporting periods beginning on or after 1 January 2020, with earlier application permitted. Annual Improvements to IFRSs 2015-2017 Cycle Improvements to IFRSs IASB issued Annual Improvements to IFRSs - 2015–2017 Cycle for applicable standards. The amendments are effective as of 1 January 2019. Earlier application is permitted. The Bank does not expect that application of these improvements to IFRSs will have significant impact on its financial statements. IFRS 3 Business Combinations and IFRS 11 Joint Arrangements IFRS 3 and IFRS 11 are amended to clarify how a company accounts for increasing its interest in a joint operation that meets the definition of a business. If a party obtains control, then the transaction is a business combination achieved in stages and the acquiring party remeasures the previously held interest at fair value. If a party maintains (or obtains) joint control, then the previously held interest is not remeasured. IAS 23 Borrowing Costs IAS 23 is amended to clarify that the general borrowings pool used to calculate eligible borrowing costs excludes only borrowings that specifically finance qualifying assets that are still under development or construction. Borrowings that were intended to specifically finance qualifying assets that are now ready for their intended use or sale – or any non-qualifying assets – are included in that general pool. 9 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 2 Basis of preparation (continued) 2.6 Changes in accounting policies (continued) Standards issued but not yet effective and not early adopted (contined) Annual Improvements to IFRSs 2015-2017 Cycle (continued) Amendments to IFRS 9 - Prepayment Features With Negative Compensation On 12 October 2017, IASB has issued amendments to IFRS 9 to clarify that financial assets containing prepayment features with negative compensation can now be measured at amortised cost or at fair value through other comprehensive income (FVOCI) if they meet the other relevant requirements of IFRS 9. Under IFRS 9, a prepayment option in a financial asset meets this criterion if the prepayment amount substantially represents unpaid amounts of principal and interest, which may include ‘reasonable additional compensation’ for early termination of the contract. The amendments are effective for periods beginning on or after 1 January 2019, with earlier application permitted The Bank is assessing the potential impact on its financial statements resulting from the application of the amendments to IFRS 9. Amendments to IAS 19 - Plan Amendment, Curtailment or Settlement On 7 February 2018, IASB issued Plan Amendment, Curtailment or Settlement (Amendments to IAS 19). The amendments clarify the accounting when a plan amendment, curtailment or settlement occurs. A company now uses updated actuarial assumptions to determine its current service cost and net interest for the period; and the effect of the asset ceiling is disregarded when calculating the gain or loss on any settlement of the plan and is dealt with separately in other comprehensive income (OCI). The amendments are effective for periods beginning on or after 1 January 2019, with earlier application permitted. The Bank is assessing the potential impact on its financial statements resulting from the application of the amendments to IAS 9. Amendments to IAS 1 and IAS 8 - Definition of Material In October 2018 the IASB issued Definition of Material (Amendments to IAS 1 and IAS 8). The amendments clarify and align the definition of ‘material’ and provide guidance to help improve consistency in the application of that concept whenever it is used in IFRS Standards. Those amendments are prospectively effective for annual periods beginning on or after 1 January 2020 with earlier application permitted. Amendments to IFRS 3 - Definition of a Business Determining whether a transaction results in an asset or a business acquisition has long been a challenging but important area of judgement. The IASB has issued amendments to IFRS 3 Business Combinations that seek to clarify this matter. The amendments include an election to use a concentration test. This is a simplified assessment that results in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of similar identifiable assets. If a preparer chooses not to apply the concentration test, or the test is failed, then the assessment focuses on the existence of a substantive process. The amendment applies to businesses acquired in annual reporting periods beginning on or after 1 January 2020. Earlier application is permitted. 10 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies The accounting policies set out below have been applied consistently by the Bank to prior periods presented in these financial statements except for the impact of transition to IFRS 9 and IFRS 15 as of 1 January 2018. 3.1 Foreign currency i) Foreign currency transactions Transactions are recorded in TL, which represents the Bank’s functional currency. Transactions denominated in foreign currencies are recorded at the exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies on the reporting date are retranslated to the functional currency at the exchange rate on that date. Foreign currency differences arising on retranslation are recognised in profit or loss and other comprehensive income statement. 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 official TL exchange rates used by the Bank for foreign currency translation are as follows: EUR / TL USD / TL 31 December 2018 6.0404 5.2801 31 December 2017 4.5138 3.7750 ii) Foreign operations The assets and liabilities are translated into presentation currency of the Bank at the rate of exchange ruling at the reporting date. 3.2 Interest income and expense Interest income and expense are recognised in 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 Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment, call and similar options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. Interest income and expense presented in the statement of profit or loss and other comprehensive income (OCI) include:  interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis;  interest for financial assets measured at fair value through other comprehensive income calculated on an effective interest basis, 11 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.3 Fees and commission and premium income and expense Fees and commission income and expenses that are integral to the effective rate on a financial asset or liability are included in the measurement of the effective rate. Other fees and commission income, including account servicing fees, investment management fees, sales commissions, placement fees and syndication fees, are recognised as the related services are performed in accordance with IFRS 15 Revenue from contracts with customers. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period. Premium income and expense Insurance programs of the Bank are composed of two schemes: short-term export credit insurance and medium and long-term export credit insurance. Premium income of the Bank under these two schemes represents premiums on policies written during the year, net of cancellations. In addition, since commencement of the insurance facility, the Bank has sought to reinsure the major portion (currently 70%) of its underwritten short-term commercial risks on the basis of a quota-share treaty concluded with a group of domestic and overseas reinsurance companies. Accordingly, expenses include the premiums paid to reinsurance companies. Premium income and expense representing reinsurer’s share of the premium are recognised in the financial statements on accrual basis over the period of related policy. Reinsurance commissions Reinsurance commission income received in relation to ceded premiums is recognised on an accrual basis. 3.4 Net trading income Net trading income comprises gains less loss related to trading assets and liabilities, and includes all realised and unrealised fair value changes, except for the unrealised gains of financial assets measured at fair value through other comprehensive income. 3.5 Dividends Dividend income is recognised when the right to receive the income is established. 12 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.6 Lease payments made Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest rate on the remaining balance of the liability. 3.7 Income tax expense According to Act number 3332 and article 4/b of Act number 3659, dated 25 March 1987 and 26 September 1990, respectively, the Bank is exempt from Corporate Tax. Due to the 3rd Article of the same act; the above mentioned exemption became valid from 1 January 1988. In accordance with clause 9 of the Provisional Article 1 of Corporate Tax Law No. 5520, which states “The provision of Article 35 shall not apply to exemptions, allowances and deductions included in other laws in relation to Corporation Tax prior to the effective date of the Law No. 5520”, the exemption from Corporation Tax continues. Accordingly, current tax and deferred tax are not recognised in these financial statements. 3.8 Explanations on forward transactions, options and derivative instruments Accounting policies applied as of 1 January 2018 The Bank uses derivative financial instruments in order to avoid exposure to foreign currency and interest rate risks. As of the balance sheet date, there are outstanding currency and interest rate swap purchase and sales contracts and forward transactions in TL and foreign currency. Derivatives are initially recorded with their fair values and related transaction costs as of the contract date are recorded in profit or loss. In the following periods of initial reporting, they are measured at their fair values. The result of this assessment, offsetting debit and credits stemming from each contract are reflected to the financial statements as a contract-based single asset and liability. The method of accounting gain or loss changes according to related derivative transaction whether to be held for cash flow hedges or not and to the content of hedge account. a.) Financial assets measured at fair value through profit or loss a.1.) Derivative financial assets held for trading Derivative financial instruments other than derivative instruments intended for the fair value hedging and cash flow hedge purposes of the Bank are accounted for as "trading purpose", economically providing effective protection against risks for the Bank. Liabilities and receivables arising from derivative transactions are recorded in off-balance sheet accounts at contractual amounts. Derivative financial instruments are measured at fair value in subsequent periods and if the fair value is positive, they are classified under "derivative financial assets measured at fair value through profit or loss”. If fair value is negative derivative transactions are classified under “derivative financial liabilities measured at fair value through profit or loss”. After valuation, differences of changes in fair value are reflected in the statement of profit or loss. a.2.) Derivative financial assets held for hedging purpose The Bank notifies in written the relationship between hedging instrument and related account, risk management aims of hedge and strategies and the methods using to measure of the hedge effectiveness. The Bank evaluates the method of hedge whether to be effective on the expected changes in fair values in this process or not or each result of hedge effectiveness whether to be between the range of 80% and 125%. 13 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.8 Explanations on forward transactions, options and derivative instruments (continued) Accounting policies applied as of 1 January 2018 (continued) a.2.) Derivative financial assets held for hedging purpose (continued) Changes in fair values of derivative transactions under fair value hedges are recorded in profit or loss together with changes in hedging asset or liability. The difference in current values of derivative transactions fair value hedge is shown in “Gains/Losses on derivative financial instruments” account. In the statement of financial position, change in fair value of hedged asset or liability during the hedge accounting to be effective is shown with the related asset or liability. In case of inferring hedge accounting, corrections made to the value of hedge account using straight-line amortization method within the days to maturity are reflected to “Income/losses from derivative financial instruments” account in the statement of profit or loss. b.) Financial assets measured at fair value through other comprehensive income b.1.) Derivative financial instruments held for hedging The Bank hedges its cash flow risk arising from floating-rate liabilities in foreign currency and TL by cross-currency swaps. In this context, the fair value changes of the effective portion of the hedging instruments are accounted under the “hedging reserves” account within equity. In the period in which the cash flows affect the statement of profit or loss for the hedged item, the hedging instrument relating to the profit/loss is extracted from equity and recognized in the statement of profit or loss. The hedge accounting is discontinued when the hedging instrument expires, is exercised, sold or no longer effective. While expiring, sale, discontinuing cash flow hedge accounting or when no longer effective, the cumulative gains/losses recognised in shareholders’ equity and presented under hedging reserves are continued to be kept in this account. When the cash flows of hedged item incur, the gain/losses accounted for under shareholders’ equity are transferred to statement of profit or loss. Effectiveness tests are performed at the beginning of the hedge accounting period and at each reporting period. The hedge accounting is applied as long as the test results are between the range of 80%-125% of effectiveness. IFRS 9 permits to defer application of IFRS 9 hedge accounting and continue to apply hedge accounting in accordance with TAS 39 as a policy choice. Accordingly, the Bank continues to apply hedge accounting in accordance with TAS 39 in this context. 14 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.9 Explanations on financial assets Accounting policies applied as of 1 January 2018 The Bank recognises its financial assets as “Financial Assets Measured at Fair Value Through Profit/Loss”, “Financial Assets Measured at Fair Value Through Other Comprehensive Income” or “Financial Assets Measured at Amortized Cost”. At initial recognition, financial assets are measured at fair value. In the case if financial assets are not measured at fair value through profit or loss, transaction costs are added or deducted to/from their fair value. During the initial recognition of a financial asset into the financial statements, business model determined by the Bank management and the nature of contractual cash flows of the financial asset are taken into consideration. Classification and measurement of financial instruments The classification of financial instruments at the time of initial recognition depends on the characteristics of the relevant business model and contractual cash flows used for management. In accordance with IFRS 9, if a financial asset is held under a business model that is intended to collect a business model or contractual cash flows for the purpose of collecting contractual cash flows and that is intended to sell financial assets, such financial asset is classified based on the characteristics of the contractual cash flows. During the transition period, the Bank conducted the test of whether the entire loan portfolio’s contractual cash flows are comprised only of interest and principal and all of the Bank’s portfolio is recognized under “Financial assets measured at amortised cost”. Business model Evaluation In accordance with IFRS 9, the business model is determined at a level that demonstrates how the financial asset groups are managed together to achieve a specific management objective. Measurement categories of financial assets and liabilities As of the effective date of IFRS 9 standard; 1 January 2018, the Bank started to classify its’ financial assets based on the business model it uses to manage these assets. Three main categories to classify financial assets are: - Financial assets at fair value through profit or loss (“FVPL”) - Financial assets at fair value through other comprehensive income (“FVOCI”) - Financial assets measured at amortized cost Financial assets measured at fair value through profit/loss Financial assets measured at fair value through profit or loss are financial assets that are managed with the business model other than the business model that aims to collect and sell the contractual cash flows and the contractual terms of the financial assets, do not result in cash flows that include interest payments arising only from the principal and principal balance at specific dates; are financial assets that are acquired in order to generate profits from fluctuations in prices and similar factors in the short term in the market or are part of a portfolio aimed at achieving profit in the short term regardless of the reason for the acquisition. Financial assets measured at fair value through profit or loss are initially recognized at cost in the financial statements. All regular way purchases and sales of financial assets are recognized and derecognized at the settlement date. 15 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.9 Explanations on financial assets (continued) Accounting policies applied as of 1 January 2018 (continued) Financial assets measured at fair value through profit/loss (continued) The government bonds and treasury bills recognized under financial assets measured at fair value through profit/loss which are traded on Borsa İstanbul AŞ (“BIST”) are valued with weighted average prices settled on BIST as of the reporting date; and those government bonds and treasury bills traded on BIST but which are not subject to trading on BIST as of the reporting date are valued with weighted average prices at the latest trading date. The financial assets classified under trading financial assets and whose fair values cannot be measured reliably are carried at amortized cost using the “effective yield method”. The difference between the purchase cost and the amortized cost at the selling date is recorded as interest income. If the selling price of a financial asset measured at fair value through profit/loss is above its amortized cost as of the sale date, the positive difference between the selling price and the amortized cost is recognized as income under trading gains on securities and if the selling price of a trading security is lower than its amortized cost as of the sale date, the negative difference between the selling price and the amortized cost is recognized as expense under trading expense in the statement of profit or loss. As of 31 December 2018, the Bank does not have any financial liabilities at fair value through profit or loss. Financial assets at fair value through other comprehensive income In accordance with IFRS 9, if all of the following conditions are met, the related financial assets are measured by reflecting the fair value difference in other comprehensive income. - Management of financial assets through a business model aimed at collecting and selling their contractual cash flows and - The contractual terms of the financial asset leading to cash flows that include interest payments caused by the principal and principal balance on certain dates. Financial Assets Measured at Fair Value Through Other Comprehensive Income are valued at fair value in the periods subsequent to their acquisition. If the underlying fair value is not realized in the active market conditions, it is accepted that the fair value is not determined reliably and the fair value is determined by using the discounted value of other comprehensive income and reflected at amortized cost, are accounted for by rediscount. Difference between the fair value of financial assets at fair value through other comprehensive income and their amortized costs; unrealized profits and losses, is not shown on the periods’ of profit or loss statement until the value of the financial asset is collected, the asset is sold or disposed of and it is followed under the account “other comprehensive income and expenses to be reclassified to profit or loss” in the shareholder’s equity section. When the values of these marketable securities are collected or when they are disposed of, the accumulated fair value differences reflected in the shareholder’s equity before are transferred to the profit or loss statement. However, the Bank may, at initial recognition, irrevocably choose the method of reflecting changes in fair value to other comprehensive income for specific investments on equity instruments that would normally be measured at fair value through profit or loss. Marketable securities classified as financial assets at fair value through other comprehensive income which represent share in capital are accounted at their fair value. As an exception, the cost may be an appropriate estimation method for the determination of fair value. This is only possible when there is enough recent information on the measurement of fair value or when the fair value can be measured by more than one method and it is certain that one of these methods represent the fair value estimation in the best way. 16 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.9 Explanations on financial assets (continued) Accounting policies applied as of 1 January 2018 (continued) Financial assets measured at fair value through profit/loss (continued) As of 1 January 2018, the date of transition of IFRS 9, the securities which are irrevocably classified under “Financial assets at fair value through other comprehensive income” are listed as follows: - Garanti Faktoring A.Ş. - Kredi Garanti Fonu A.Ş. - Borsa İstanbul A.Ş. Financial assets measured at amortized cost The Bank may keep its financial assets at amortized cost as long as the following conditions are met. - Retention of the financial asset in the context of a business model aimed at collecting contractual cash flows - The contractual terms of the financial asset lead to cash flows that include interest payments on principal and principal balances on certain dates. Financial assets measured at amortized cost are initially recorded at acquisition cost values with the addition of transaction costs and are measured at amortized cost using effective interest rate method after being recorded. Interest income obtained from financial assets measured at amortised cost is accounted in statement of profit or loss. Loans are financial assets that have fixed or determinable payments and are not quoted in an active market. These loans are initially recognized at cost of acquisition with the addition of transaction costs, and are measured at amortized cost using “the effective interest rate (internal rate of return) method” after their recognition. The Bank has been tested “whether contractual cash flows consist of only interest and principal or not” in its the all loan portfolio and after all portfolio has passed the test, the Bank has started to measure all the loans at amortised cost. Explanations on impairment of financial assets As of 1 January 2018, the Bank recognizes provisions for impairment in accordance with IFRS 9 requirements. Equity instruments are not subject to impairment assessment. At each reporting date, it is assessed whether there has been a significant increase in the carrying amount of the financial instrument within the scope of the impairment since the financial statements for the first time. When this evaluation is performed, the change in the expected default risk of the financial instrument is used. 17 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.9 Explanations on financial assets (continued) Accounting policies applied as of 1 January 2018 (continued) Explanations on expected credit losses The expected credit losses are estimated to be unbiased, weighted according to probabilities, and include information that can be supported about past events, current conditions and future economic conditions. Risk parameters used in IFRS 9 calculations are included in the future macroeconomic information. Probability of default (PD): It expresses the probability of default of credit in a certain period of time. The PD and LD parameters used in the calculation of the expected credit loss are calculated as including both current and expected loop changes as instant PD (point in time, PIT). The Bank uses two different default probability values to calculate expected credit losses in accordance with IFRS 9. 1. 12-month default probability: Estimation of default probability within 12 months after the reporting date 2. Lifetime default probability: Estimation of default probability over the expected life of the financial instrument Lost Given Default (LGD): If the borrower is in default, it refers to the economic loss caused by the loan. The ratio is expressed as. Exposure at Default (EAD): Represents the outstanding balance of cash loans as of the date of the report. In non-cash loans and commitments, it is the value calculated by applying the credit conversion rate. Financial assets are divided into the following three categories based on the increase in the credit risks observed since the initial acquisition of financial assets: Stage 1(12-month expected credit losses): For the financial assets at initial recognition or that do not have a significant increase in credit risk since initial recognition this instruments are impaired at an amount equal to 12-month expected credit losses (resulting from the risk of default within the next 12 months) Stage 2 (Lifetime expected credit losses for non-impaired assets): Includes financial assets which have a significant increase in credit risk since initial recognition but an unbiased evidence does not occur. Lifetime expected credit losses are recognized for these financial instruments. Stage 3 (Lifetime expected credit losses for credit-impaired financial assets): 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. This general model is applied to all instruments within the scope of IFRS 9 impairment. Measurement of expected credit losses In practice, for exposures classified in stage 1 and stage 2, expected credit losses are measured as the product of the probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”), discounted at the effective interest rate of the exposure (“EIR”). They result from the risk of default within the next 12 months (stage 1), or from the risk of default over the maturity of the facility (stage 2). 18 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.9 Explanations on financial assets (continued) Accounting policies applied as of 1 January 2018 (continued) Measurement of expected credit losses(continued) For exposures classified in stage 3, expected credit losses are measured as the value, discounted at the effective interest rate, of all cash shortfalls over the life of the financial instrument. Cash shortfalls represent the difference between the cash-flows that are due in accordance with the contract, and the cash- flows that are expected to be received. Maturity All contractual terms of the financial instrument (including prepayment, extension and similar options) over the life of the instrument are taken into account. Probabilities of Default (PD) The Probability of Default is an estimate of the likelihood of default over a given time horizon. The measurement of expected credit losses requires the estimation of both 1 year probabilities of default and lifetime probabilities of default. Loss Given Default (LGD) The Loss Given Default is the difference between the contractual cash-flows and the expected cash-flows. The LGD is expressed as a percentage of the EAD. Exposure at Default (EAD) The Exposure at Default of an instrument is the anticipated outstanding amount owed by the obligor at the time of default. Forward looking The amount of expected credit losses is measured on the basis of probability-weighted scenarios, in view of past events, current conditions and reasonable and supportable economic forecasts. 19 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.9 Explanations on financial assets (continued) Accounting policies applied as of 1 January 2018 (continued) Measurement of expected credit losses(continued) Significant increase in credit risk In the event of a significant increase in credit risk, the financial asset is transferred to Stage 2. Qualitative considerations taken into determining the significant increase in the credit risk of a financial asset as follows; - Delay days as of the reporting date is 30 or more - Refinancing and restructuring the credit account - Loans under close monitoring Definition of default The Bank considers a financial asset to be in default when: - the borrower is unlikely to pay its credit obligations to the Bank in full; - the borrower is more than 90 days past due on any material credit obligation to the Bank. Overdrafts are considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than the current amount outstanding; or - it is becoming probable that the borrower will restructure the asset as a result of bankruptcy due to the borrower’s inability to pay its credit obligations. In assessing whether a borrower is in default, the Bank considers indicators that are: - qualitative: e.g. breaches of covenant; - quantitative: e.g. overdue status and non-payment on another obligation of the same issuer to the Group; and - based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. 3.11 Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short- term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. 20 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.12 Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self- constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives are assigned accordance with the existing statutory tax law. The estimated useful life for the current and comparative periods is as follows: Years Buildings 50 years Vehicles 5 years Other tangible assets 1 - 50 years Leasehold improvements are depreciated on a straight-line method over a period of time of their lease contract. Depreciation methods, useful lives and residual values are reviewed at each financial period end and adjusted if appropriate. 3.13 Intangible assets Software acquired by the Bank is stated at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure on software assets is capitalised 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 recognised in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use. The estimate useful lives of software are three to five years. 3.14 Investment property Investment properties consist of properties held for obtaining lease income and/or held for recognizing fair value increase. Investment properties are accounted with the cost amount after deduction of accumulated depreciation and permanent impairment losses. Investment properties are depreciated in accordance with the useful life principles with straight-line depreciation method. Gains or losses rising from the disposal or out of usage of the investment property, shall be determined as the difference between the net income from the sale and the carrying amount of the asset and shall be recognized in profit or loss in the period of disposal or out of usage. 21 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.15 Assets held for sale Assets classified as held for sale are measured at the lower of carrying value and fair value less costs to sell. 3.16 Impairment of non-financial assets The carrying amounts of the Bank’s non-financial assets, other than 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. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit 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. An impairment loss in respect of other assets, impairment losses recognised in prior periods is 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 recognised. 3.17 Funds borrowed and subordinated liabilities Funds borrowed 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. 3.18 Debt securities Debt securities issued are carried at “amortized cost” using the “effective interest method”, except where the Bank chooses to carry the liabilities at fair value through profit or loss. 3.19 Provisions A provision is recognised if, as a result of a past event, the Bank 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. A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract. 22 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.20 Employee benefits Reserve for employee severance indemnity Reserve for employee severance indemnity represents the present value of the estimated future probable obligation of the Bank arising from the retirement of the employees and calculated in accordance with the Turkish Labour Law. Employment termination benefit is not a funded liability and there is no requirement to fund it. Employment termination benefit is calculated based on the estimation of the present value of the employee’s probable future liability arising from the retirement. IAS 19 (2011) (“Employee Benefits”) requires actuarial valuation methods to be developed to estimate the bank’s obligation under defined employee plans. IAS 19 (2011) (“Employee Benefits”) has been revised effective from the annual period beginning after 1 January 2013. In accordance with the revised standard, actuarial gain / loss related to employee benefits shall be recognised in other comprehensive income. Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus if the Bank 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. The Bank does not have any internally set defined contribution plan. 3.21 Events after the reporting period Events after the reporting period that provide additional information about the Bank’s position at the reporting dates (adjusting events) are reflected in the financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes when material. 3.22 Explanations on prior period accounting policies not valid for the current period Trading assets and liabilities ‘Trading assets and liabilities’ are those assets and liabilities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the statement of financial position, with transaction costs recognised in profit or loss. Any gains or losses resulting from such valuation are recorded in profit or loss. Any positive difference between the historical cost and amortised cost of financial assets are recognised under the “Interest Income” account, and in case the fair value of the asset is over the amortised cost, the positive difference is recognised in the “Gains and Losses on Financial Instruments Classified as Held for Trading – Trading Income” account. If the fair value is less than the amortised cost, the negative difference is recognised under the “Gains and Losses on Financial Instruments Classified as Held for Trading – Trading Expense” account. Any profit or loss resulting from the disposal of those assets before their maturity date is recognised within the framework of the same principles. Trading assets and liabilities are not reclassified subsequent to their initial recognition, except that non-derivative trading assets, other than those designated at fair value through profit or loss on initial recognition, may be reclassified out of the fair value through profit or loss – i.e. trading – category if they are no longer held for the purpose of being sold or repurchased in the near term and the following conditions are met.  If the financial asset would have met the definition of loans and advances (if the financial asset had not been required to be classified as held-for-trading at initial recognition), then it may be reclassified if the Bank has the intention and ability to hold the financial asset for the foreseeable future or until maturity.  If the financial asset would not have met the definition of loans and advances, then it may be reclassified out of the trading category only in rare circumstances. 23 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.22 Explanations on prior period accounting policies not valid for the current period (continued) Loans and advances Loans originated by the Bank by providing money directly to the borrower or to a sub-participation agent are categorised as loans originated by the Bank and are carried at amortised cost, net of any provision for impairment losses. All originated loans are recognised when cash is advanced to borrowers. Cash guarantees received for loans and advances given are recorded under “other liabilities” upon receipt and repaid back to the borrower on the maturity date when the Bank collects all amounts due. A provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the provision is the difference between the carrying amount and recoverable amount, being the present value of expected cash flows, including the amount recoverable from guarantees and collateral, discounted based on the original effective interest rate. The level of the provision is also based on applicable banking regulations. An additional provision for loan impairment is established to cover losses that are judged to be present in the lending portfolio at the balance sheet date, but which have not been specifically identified as such. The provision made during the year is charged against the income for the year. Loans that cannot be recovered are written off against the allowance for impairment losses. Such loans are written off after all the necessary legal proceedings have been completed and the amount of the loan loss is finally determined. Recoveries of amounts previously provided for are treated as a reduction from provision for impairment losses for the period. Held-to-maturity Held-to-maturity securities are financial assets with fixed maturities that the Bank has the intent and ability to hold until maturity. Investment securities held-to-maturity is initially recognised at cost. Investment securities held-to-maturity are accounted for by using a discounting method based on internal rate of return applied on the net investment amounts after the deduction of provision for impairments. Interest earned on held-to-maturity securities are recognised as interest income and reflected in profit or loss. Available-for-sale financial investments Available-for-sale investments are non-derivative investments that are not designated as another category of financial assets. Unquoted equity investments whose fair value cannot be reliably measured are carried at cost. All other available-for-sale investments are carried at fair value. Unrealised gains and losses are recognised directly in equity in the “Available-for-sale reserve”. Interest income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognised in profit or loss. If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from other comprehensive income to profit or loss. Reversals in respect of equity instruments classified as available-for-sale are not recognised in profit or loss. Reversals of impairment losses on debt instruments are reversed through profit or loss; if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss. Other fair value changes are recognised directly in other comprehensive income until the investment is sold or impaired and the balance in other comprehensive income is recognised in profit or loss. 24 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.22 Explanations on prior period accounting policies not valid for the current period (continued) Identification and measurement of impairment The Bank reviews its loan portfolios to assess impairment on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence comprises observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. The Bank uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Impairment losses on available-for-sale investment securities are recognised by transferring the difference between the amortised acquisition cost and current fair value out of equity to profit or loss. When a subsequent event causes the amount of impairment loss on an available-for-sale debt security to decrease, the impairment loss is reversed through profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in other comprehensive income. Changes in impairment provisions attributable to time value are reflected as a component of interest income. A write off is made when all or part of a loan is deemed uncollectible or in the case of debt forgiveness. Such loans are written off after all the necessary legal and regulatory procedures have been completed and the amount of the loss has been determined. Write offs are charged against previously established allowances and reduce the principal amount of a loan. Subsequent recoveries of amounts written off are included in profit or loss. 3.23 Explanations of IFRS 9 “Financial Instruments” IFRS 9 “Financial Instruments”, which is effective as at 1 January 2018 replaced IAS 39 “Financial Instruments: Recognition and Measurement”, related to the classification and measurement of financial instruments. 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. In accordance with the transition rules option provided by the IFRS 9 “Financial Instruments”, the Bank did not restate the prior period financial statements and recognized the transition effect of the standard in retained earnings as of 1 January 2018. 25 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.23 Explanations of IFRS 9 financial instruments (continued) Reconciliation of statement of financial position balances to IFRS 9 Reclassifications and remeasurements for the first time application of IFRS 9 “Financial Instruments” as of 1 January 2018 are presented below: IFRS 9 IFRS 9 31 December Reclassification Measurement 1 January 2017 Effect Effect 2018 ASSETS Cash and due from banks 3,546,284 - (1,841) 3,544,443 Financial assets measured at fair value through profit or loss - 3,094 - 3,094 Trading securities 11,710 (11,710) - - Derivative financial instruments 15,553 - - 15,553 Derivative assets held for risk management 133,606 - - 133,606 Loans and advances 80,253,617 - 27,259 80,280,876 Investment securities -Financial assets measured at fair value through other comprehensive - 30,318 - 30,318 i -Financial assets measured at amortized cost - 189,077 1,749 190,826 -Available-for-sale 30,318 (30,318) - - -Held-to-maturity 180,461 (180,461) - - Property and equipment 6,235 - - 6,235 Intangible assets 6,053 - - 6,053 Investment property 2,236 - - 2,236 Other assets 1,056,117 - (1,240) 1,054,877 Total assets 85,242,190 - 25,927 85,268,117 LIABILITIES Funds borrowed 67,400,266 - - 67,400,266 Debt securities in issue 10,279,210 - - 10,279,210 Interbank money market deposits 152,000 - - 152,000 Other liabilities and provisions 1,044,075 - 5,495 1,049,570 Derivative financial instruments 384,351 - - 384,351 Derivative liabilities held for risk management 188,286 - - 188,286 Retirement benefit obligations 19,116 - - 19,116 Total liabilities 79,467,304 - 5,495 79,472,799 EQUITY - Share capital 4,800,000 - - 4,800,000 - Adjustment to share capital 38,091 - - 38,091 Total paid in share capital 4,838,091 - - 4,838,091 Legal reserves 349,896 - - 349,896 Other reserves - - - - Hedging reserves (1,512) - - (1,512) Fair value reserves 21,154 - - 21,154 Retained earnings 567,257 - 20,432 587,689 Total equity 5,774,886 - 20,432 5,795,318 Total liabilities and equity 85,242,190 - 25,927 85,268,117 26 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 3 Significant accounting policies (continued) 3.23 Explanations of IFRS 9 financial instruments (continued) Reconciliation of the opening balances of the provision for expected credit losses to IFRS 9 The table below shows the reconciliation of the provision for impairment of the Bank as of 31 December 2017 and the provision for the expected loss model as measured in accordance with IFRS 9 as of 1 January 2018. IFRS 9 Before IFRS 9 In scope of IFRS 9 Measurement Effect 31 December 2017 1 January 2018 1 January 2018 Loans 320,711 (27,259) 293,452 -Stage 1 126,575 (120,461) 6,114 -Stage 2 2,407 (1,935) 472 -Stage 3 191,729 95,137 286,866 Financial assets 247 3,094 3,341 -Due from banks 247 1,841 2,088 -Financial assets measured at amortized cost 13 13 -Other assets 1,240 1,240 Insurance technical provisions 66,082 5,495 71,577 Total 387,040 (18,670) 368,370 Effects on equity with IFRS 9 transition According to paragraph 15 of Article 7 of IFRS 9 “Financial Instruments”, it is stated that it is not compulsory to restate previous period information in accordance with IFRS 9 and if the previous period information is not restated, it is stated that the difference between the book value of 1 January 2018 at the date of application has to be reflected in the opening balances on equity. The difference amounting to TL 18,670 which is an income between the provision for impairment of the previous period of the Bank and the provision for loss that is measured and in accordance with IFRS 9 impairment model as of 1 January 2018 is presented as “Impact of adopting IFRS 9 at 1 January 2018” in the statement of shareholders’ equity. As of 1 January, with the adoption of IFRS 9, some public debt securities with the amount of TL 8,616 under “financial assets at fair value through profit or loss” portfolio are classified as “financial assets measured at amortised cost” due to fact that they are assessed within the scope of a business model whose objective is achieved by collecting contractual cash flows. The difference between the carrying amount at the initial acquisition date and the carrying amount at 1 January 2018 is TL 1,762 is followed under equity. As of 1 January 2018, due to first time adoption of IFRS 9, total shareholders’ equity figure increased by TL 1,762 composing of positive classification impact of financial assets, positive expected credit losses calculation impact amounting to TL 18,670. Since the previous categories under TAS 39 have been excluded from use, the Bank also reclassified financial assets in accordance with IFRS 9 and there is no equity effect of these classification transactions. 27 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (a) Strategy in using financial instruments As of 31 December 2018, the loan portfolio of the Bank constitutes 93% (31 December 2017: 94%) of total assets. In short, medium and long term lending (except for fund sourced and country loans), the Bank is taking the risk of the Turkish banking system, however medium-to-long term country loans are under the political risk guarantee of the Turkish Treasury. The Board of Directors of the Bank sets risk limits and parameters for the transactions having significant implications for the operations of the Bank. The objective of the Bank’s asset and liability management and use of financial instruments is to limit the Bank’s exposure to liquidity risk, interest rate risk and foreign exchange risk, while ensuring that the Bank has sufficient capital adequacy. (b) Credit risk According to article numbered 25 of the decree (regulating the “Articles of Association” of the Bank) of the Council of Ministers dated 17 June 1987; the scope of the annual operations of the Bank is determined by the Bank’s Annual Program that is approved by Supreme Advisory and Credit Guidance Committee (“SCLGC”). SCLGC is chaired by the Prime Minister or State Minister appointed by the Prime Minister and includes executive managers. The Board of Directors of the Bank is authorised to allocate the risk limits of loan, guarantee and insurance premium to country, sector and commodity Banks, within the principles set by the Annual Program. In accordance with the collateralisation policy of the Bank, the Bank is taking the risks of short term loans to domestic banks. The cash and non-cash limits of domestic banks for short term and medium and long term credits are approved by the Board of Directors. The Board of Directors fulfilled authorisations for the determination of loan limits for a person or legal entity, limited with only the loans which were given with respect to specified guaranties, within the framework of the 5th item in the Regulation related with Loan Transactions. The risk limits of the foreign country loans are determined by annual programs which are approved by SCLGC within the foreign economic policy. Country loans are granted with the approval of the Board of Directors and the approval of the Minister and the Council of Ministers; according to article 10 of Act number 4749 dated 28 March 2002 related to the regulation of Public Finance and Debt Management. The fundamental collateral of the foreign country loans are the government guarantee of the counter country and the guarantee of banks that the Bank accepts as accredited. The limit of a country is restricted by both “maximum limit that can be undertaken” and “maximum amount that can be used annually”. Each year major portion of the commercial and politic risks emerged in Short Term Export Insurance Program is transferred to international reinsurance companies under renewed agreements. According to the Article 4/C of Act number 3332 that was appended by Act number 3659 and Act regarding the regulation of Public Financing and Debt Management dated 28 March 2002, the losses incurred by the Bank in its credit, guarantee and insurance transactions as a result of political risks are covered by the Turkish Treasury. The Bank reviews reports of OECD country risk ratings, reports of the members of the International Union of Credit and Investment Insurers, reports of independent credit rating institutions and the financial statements of the banks risks of which are undertaken during the assessment and review of the loans granted. In addition, country reports and short term country risk classifications prepared within the Bank are also utilised. 28 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) The risks and limits of companies and banks are followed by both loan and risk departments on a weekly and monthly basis. In addition, all of the foreign exchange denominated operations and other derivative transactions of the Bank are carried out under the limits approved by the Board of Directors. Business and geographic distribution of the loan risks runs parallel with the export composition of Turkey and this is followed up by the Bank regularly. Impairment and provisioning policies The Bank reviews its loan portfolios to assess impairment on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence comprises observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. The Bank uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. The Bank considers evidence of impairment for loans and advances at a specific asset level. The classification of the loan portfolio of the Bank under the following categories is as follows: 31 December 2018 31 December 2017 Corporate Personnel Corporate Personnel loans loans loans Loans Neither past due nor impaired 129,003,905 15,407 79,780,804 10,081 Past due but not impaired 678,636 - 489,212 - Individually impaired 342,508 - 294,231 - Total loans and advances 130,025,049 15,407 80,564,247 10,081 Expected credit losses- Stage 1 (33,225) - Expected credit losses- Stage 2 (1,826) - Expected credit losses- Stage 3 (335,354) - Allowance for impairment losses - - (320,711) - Net loans and advances 129,654,644 15,407 80,243,536 10,081 As of 31 December 2018 and 31 December 2017, loans and advances that are past due but not impaired are as follows: 31 December 2018 31 December 2017 Past due up to 30 days 52,996 469,592 Past due 30-60 days 516,931 18,693 Past due 60-90 days 108,709 927 Past due 90 days-one year - - Total loans and advances that are past due but not impaired 678,636 489,212 29 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) In line with the mission of the Bank, the Bank grants loans only to corporate customers either directly or indirectly through banks and financial institutions and follows its credit portfolio under categories specified below: 31 December 2018 31 December 2017 Corporate Personnel Corporate Personnel loans loans loans loans Standard loans and advances 129,003,905 15,407 79,780,804 10,081 Loans and advances under close monitoring(1) 678,636 - 489,212 - Impaired loans and advances 342,508 - 294,231 - Total loans and advances 130,025,049 15,407 80,564,247 10,081 Expected credit losses- Stage 1 (33,225) - Expected credit losses- Stage 2 (1,826) - Expected credit losses- Stage 3 (335,354) - Allowance for impairment losses (320,711) - Net loans and advances 129,654,644 15,407 80,243,536 10,081 (1) As of 31 December 2018, loans and advances under close monitoring includes loans amounting to TL 481,363 (31 December 2017: TL 201,883) that were not past due but had been extended to customers whose other loans are under close monitoring. As of 31 December 2018 and 31 December 2017 the fair value of collaterals held for total loans and advances are as follows: 31 December 2018 31 December 2017 Corporate Personnel Corporate Personnel Loans loans loans Loans Loans guaranteed by other banks 118,450,393 - 71,761,902 - Loans guaranteed by a third party - 15,407 - 10,081 Total 118,450,393 15,407 71,761,902 10,081 Unsecured exposures(1) 11,574,656 - 8,802,345 - Total loans and advances 130,025,049 15,407 80,564,247 10,081 (1) Unsecured exposures represent loans and advances granted to domestic banks, foreign banks and other financial institutions and individually impaired loans. As of 31 December 2018, the Bank does not have repossessed collateral (31 December 2017: None). 30 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) Bank’s credit rating system The risk assessment of banks and other financial institutions The Bank requests independent auditor’s report in addition to financial statements and related notes and net foreign currency position from banks and other financial institutions on a quarterly basis. Financial statement information derived from the independent audit or review reports of banks and other financial institutions is recorded into a database in a standard format and percentage changes and ratios related with the capital adequacy, asset quality, liquidity and profitability of the banks and other financial institutions are calculated. In addition, the standard ratios for capital adequacy, asset quality, liquidity and profitability ratios are redefined periodically considering the operations of the banks and acceptable intervals for standard ratios are defined. In accordance with the standard ratios, the risk ratings of banks are defined by assigning grades from 1 to 4 to banks and other financial institutions. Banks with grade 1 consist of the lowest risk profile of banks and financial institutions and banks with grade 4 consist of the highest risk profile of banks and financial institutions. In accordance with the risk concentration of the banks and other financial institutions, the final risk is determined by considering qualitative factors such as shareholding structure, group companies, credit ratings from international credit rating institutions, quality of management and also information obtained from media. As of 31 December 2018, loans granted by the Bank to banks and other financial institutions amount to TL 15,404,098 (31 December 2017: TL 10,732,413). As of 31 December 2018 and 31 December 2017, the concentration level of the loans and advances to banks and other financial institutions which are neither past due nor impaired in accordance with the defined financial analysis of the Bank is as follows: 31 December 2018 31 December 2017 Rating class Concentration level (%) Concentration level (%) Low 1-2 58 76 Medium 3 40 21 High 4 2 3 31 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) The risk assessment of the companies: In the risk evaluation of the companies, the Bank obtains financial and organisational information both from the companies and also from various sources (such as Central Bank of the Republic of Turkey (“CBRT”) records, Trade Registry Gazette, Chamber of Trade records, information obtained from the Undersecretariat of Foreign Trade, banks and companies operating in the same sector) and uses investigation and verification methods. In addition to the analysis of the last three year financial statements of the companies, the Bank also analyses the current status of the sectors in which the companies operate, economic and political changes affecting the target sectors in the international markets, the advantages and disadvantages of the companies compared to their rival companies operating in or outside Turkey. In case the company is a member of a group of companies not organised as a holding company, the developments that affect the Bank’s operations are monitored and outstanding bank debts of the Bank are also assessed and company analysis reports are prepared taking into account the group risk as well. The Bank does not utilise a separate rating system regarding the risk assessment of the companies. As of 31 December 2018 and 31 December 2017, the analysis of credit limits for top 60 corporate customers constituting approximately 41% and 42%, respectively of total loans to corporate customers amounting to TL 57,904,365 (31 December 2017: TL 33,369,352) and whose loans are neither past due nor impaired at 31 December 2018 and 31 December 2017 is as follows; 31 December 2018 31 December 2017 Credit limits (TL) Concentration level (%) Concentration level (%) 0 - 20,000 - - 20,000 - 40,000 - - 40,000 - 60,000 - - Over 60,000 100.00 100.00 Total 100.00 100.00 As of 31 December 2018 and 31 December 2017, the classification and allowance percentages of the loans and advances of the Bank are as follows: 31 December 2018 31 December 2017 Loans and Allowance Loans and Allowance advances for loan advances for loan (%) losses (%) (%) losses (%) Standard loans and advances 99.22 - 99.02 0.16 Loans and advances under close monitoring 0.52 - 0.61 0.00 Impaired loans and advances 0.26 0.68 0.37 0.36 Total 100.00 0.68 100.00 0.52 32 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) The Bank’s maximum exposure to credit risk as of 31 December 2018 and 31 December 2017: 31 December 2018 31 December 2017 Credit risk exposures relating to on-balance Due from banks 4,234,607 3,546,284 Loans and advances to - Domestic banks and other financial institutions 10,977,261 8,437,884 - Foreign banks and other financial institutions 4,426,830 2,294,529 - Corporate customers other than banks and 114,265,960 69,521,204 Derivative assets held for trading 443 15,553 Derivative assets held for risk management 711,768 133,606 Trading securities - 11,710 Investment securities -Financial assets measured at amortized cost 3,249,301 -Held to maturity 180,461 Credit risk exposures relating to off-balance Financial guarantees 9,083,093 6,241,263 Total 146,949,263 90,382,494 There are no financial assets that are past due but not impaired and there are no past due or impaired financial assets at 31 December 2018 and 31 December 2017, other than loans and advances explained above. As of 31 December 2018 and 31 December 2017, the trading securities and investment securities (held to maturity securities) are issued by the Turkish Treasury, the controlling shareholder of the Bank. The table below shows the concentration level of due from banks for domestic banks and financial institutions which constitute approximately 55% of due from banks account at 31 December 2018 and 60% of due from banks account at 31 December 2017; 31 December 2018 31 December 2017 Concentration level Rating class (%) Concentration level (%) Low 1-2 58 76 Medium 3 40 21 High 4 2 3 33 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) As of 31 December 2018 and 31 December 2017, the geographical distribution of the on-balance sheet assets exposed to credit risk: EU OECD Other Turkey countries countries(1) USA Countries Total Cash and due from banks 525,344 1,186,202 2,110 2,520,951 - 4,234,607 Loans and advances to - Domestic banks and other financial institutions 10,977,261 - - - - 10,977,261 - Foreign banks and other financial institutions - - - 4,426,830 4,426,830 - Corporate customers and personnel 114,265,960 - - - - 114,265,960 Financial assets measured at fair value through profit or loss - - - - - - Derivative assets held for trading - 443 - - - 443 Derivative assets held for risk management - 711,768 - - - 711,768 Investment securities - Financial assets measured at amortized cost 3,249,301 - - - - 3,249,301 As of 31 December 2018 129,017,866 1,898,413 2,110 2,520,951 4,426,830 137,866,170 (1) The OECD countries except for EU countries, Canada and USA. EU OECD Other Turkey countries countries(1) USA Countries Total Cash and due from banks 2,450,143 196,368 898,527 1,246 - 3,546,284 Loans and advances to - Domestic banks and other financial institutions 8,437,884 - - - - 8,437,884 - Foreign banks and other financial institutions - - - - 2,294,529 2,294,529 - Corporate customers and personnel 69,521,204 - - - - 69,521,204 Trading securities 11,710 - - - - 11,710 Derivative assets held for trading - 15,553 - - - 15,553 Derivative assets held for risk management - 133,606 - - - 133,606 Investment securities - Held-to-maturity 180,461 - - - - 180,461 As of 31 December 2017 80,601,402 345,527 898,527 1,246 2,294,529 84,141,231 (1) The OECD countries except for EU countries, Canada and USA. 34 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (c) Market risk Market risk refers to the possibility of loss that may arise due to interest, exchange rate and price changes arising from fluctuations in the financial markets in the positions of the Bank on its balance sheet and off- balance sheet accounts and consequent changes in the Bank income / expense item and equity profitability. In order to hedge against the market risk that the Bank may be exposed to as a result of financial activities, all Turkish Lira (TL) and foreign currency securities portfolio for trading purposes are evaluated on a daily basis with the current rates in the market. In order to limit the possible loss that may arise from market risk, the maximum amount of transactions that can be carried per day, including securities transactions, the maximum amount of transactions and the limit for termination of damages are applied within the limits set by the Board of Directors for all trading transactions. “Exchange Rate” and “Interest Rate” are calculated based on the “Standard Method and Market Risk Measurement Method” published by the BRSA in the calculation of the market risk exposed to the Bank in the Capital Adequacy Analysis Form. Derivative transactions are initially measured at fair value and transaction costs that are attributable to them are recognized in profit or loss as they are incurred. They are valued with their fair values in subsequent periods. This valuation result is reflected in the financial statements as a single asset or liability on a contract basis by netting off the receivables and payables arising from each contract within their fair values. The method of accounting for the resulting profit or loss varies depending on whether the derivative is intended for hedging or not and the content of the hedged asset. Risk Weighted Amounts Outright Products 1 Interest rate risk (general and specific) 95,675 2 Stock risk (general and specific) - 3 Foreign exchange risk 16,825 4 Commodity risk - Options 5 Simplified approach - 6 Delta-plus method 4,288 7 Scenario approach - 8 Securitizations - 9 Total 116,788 (d) Currency risk Foreign currency denominated assets and liabilities, together with purchase and sale commitments give rise to foreign exchange exposure. The Bank’s foreign exchange position is followed daily, and the transactions are performed in accordance with the expectations in the market and within the limits determined by the Risk Management Principles approved by the Board of Directors of the Bank. The Bank attempts to maintain a square position in foreign exchange through its on-balance sheet and off- balance sheet activities. As part of its strategy to manage the impact of exchange rates and to hedge against foreign exchange exposure, the Bank enters into swap transactions. Short-term currency swap transactions, carried out during the year to meet exporters’ foreign exchange loan demand and to manage the Bank’s foreign currency risk. The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Included in the table are the Bank’s assets, liabilities and equity at carrying amounts, categorised by currency. 35 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (d) Currency risk (continued) The table below summarises the Bank’s exposure to foreign currency exchange rate risk as monitored by management at 31 December 2018 and 31 December 2017. 31 December 2018 USD EUR Other TL Total Cash and due from banks 3,610,101 259,549 23,057 341,900 4,234,607 Financial assets measured at fair value through profit or loss - - - - - Derivative financial instruments 191 170 - 82 443 Derivative assets held for risk management 711,768 - - - 711,768 Loans and advances 48,977,723 73,869,192 241,712 6,581,424 129,670,051 Investment securities - Financial assets measured at fair value through other comprehensive income - - - 20,447 20,447 - Financial assets measured at amortized cost - - - 3,249,301 3,249,301 Property and equipment and intangible assets - - - 13,616 13,616 Investment property - - - 2,141 2,141 Other assets 384,583 286,165 2,152 660,477 1,333,377 Total assets 53,684,366 74,415,076 266,921 10,869,388 139,235,751 Funds borrowed 49,016,864 59,525,888 188,196 - 108,730,948 Subordinated loans - - - 2,995,130 2,995,130 Debt securities in issue 17,178,988 - - - 17,178,988 Interbank money market deposits - - - 139,005 139,005 Derivative financial instruments 4,241 3,342 121,541 80 129,204 Derivative liabilities held for risk management 339,651 - - - 339,651 Other liabilities 1,185,378 701,878 12,897 154,232 2,054,385 Reserve for employment termination benefits - - - 21,855 21,855 Equity - - - 7,646,585 7,646,585 Total liabilities and equity 67,725,122 60,231,108 322,634 10,956,887 139,235,751 Net balance sheet position (14,040,756) 14,183,968 (55,713) (87,499) - Off balance sheet derivative instruments net notional position 14,568,901 (14,174,523) (57,441) 336,937 673,874 At 31 December 2018, assets and liabilities denominated in foreign currency were translated into Turkish lira using foreign exchange rate of TL 5.2801= US Dollar 1 (“USD”) and TL 6,0404 = EUR 1. 36 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (d) Currency risk (continued) 31 December 2017 USD EUR Other TL Total Cash and due from banks 1,861,696 646,574 14,181 1,023,833 3,546,284 Trading securities - - - 11,710 11,710 Derivative financial instruments 10,169 128 7 5,249 15,553 Derivative assets held for risk management 56,542 - - 77,064 133,606 Loans and advances 30,797,165 40,199,266 183,525 9,073,661 80,253,617 Investment securities - Available-for-sale - - - 30,318 30,318 - Held-to-maturity - - - 180,461 180,461 Property and equipment and intangible assets - - - 12,288 12,288 Investment property - - - 2,236 2,236 Other assets 346,257 300,185 211 409,464 1,056,117 Total assets 33,071,829 41,146,153 197,924 10,826,284 85,242,190 Funds borrowed 35,414,561 31,018,565 935,544 - 67,368,670 Subordinated loans 31,596 - - - 31,596 Debt securities in issue 10,279,210 - - - 10,279,210 Interbank money market deposits - - - 152,000 152,000 Derivative financial instruments 234,009 124,885 3,157 22,300 384,351 Derivative liabilities held for risk management 177,042 - - 11,244 188,286 Other liabilities 506,930 288,093 1,502 247,550 1,044,075 Reserve for employment termination - - - 19,116 19,116 Equity - - - 5,774,886 5,774,886 Total liabilities and equity 46,643,348 31,431,543 940,203 6,227,096 85,242,190 Net balance sheet position (13,571,519) 9,714,610 (742,279) 4,599,188 - Off balance sheet derivative instruments net notional position 13,415,681 (9,737,749) 737,799 4,415,731 8,831,462 At 31 December 2017, assets and liabilities denominated in foreign currency were translated into Turkish lira using foreign exchange rate of TL 3,7750 = US Dollar 1 (“USD”) and TL 4,5138 = EUR 1. 37 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (d) Currency risk (continued) As of 31 December 2018 and 31 December 2017, the effect of the devaluation of TL by 10% against other currencies mentioned below, on net profit and equity of the Bank, are presented in the table below. The analysis covers all foreign currency denominated assets and liabilities. The other variables, especially interest rates are assumed to be fixed. 31 December 2018 31 December 2017 Effect on Effect on Effect on Effect on net profit equity(1) net profit equity(1) USD 52,815 52,815 (15,584) (15,584) EUR 945 945 (2,314) (2,314) Other currencies (11,316) (11,316) (448) (448) Total 42,444 42,444 (18,346) (18,346) (1) Effect on equity also includes effect on net income. As of 31 December 2018 and 31 December 2017, the effect of the appreciation of TL by 10% against other currencies with all other variables held constant, on net profit and equity of the Bank is the same as the total amount with a negative sign as presented in the above table. (e) Interest rate risk The Bank estimates the effects of the changes in interest rates on the profitability of the Bank by analysing TL and foreign currency denominated interest rate sensitive assets and liabilities considering both their interest components as being fixed rate or variable rate and also analysing their weights among the Bank’s total assets and liabilities. Long or short positions arising from interest rate risk are determined by currency types at the related maturity intervals (up to 3 months, 3 months to 1 year, 1 year to 5 years and over 5 years) as of the period remaining to repricing date, considering the repricing of TL and foreign currency-denominated interest sensitive assets and liabilities at maturity date (for fixed rate) or at interest payment dates (for floating rate). By classifying interest sensitive assets and liabilities according to their repricing dates, Bank’s exposure to possible variations in market interest rates are determined. The Bank determines maturity mismatches of assets and liabilities by analysing the weighted average days to maturity of TL and foreign currency-denominated (for each currency and in total in terms of their USD equivalents) assets and liabilities. According to the Risk Management Policy approved by the Board of Directors, the Bank emphasises the matching of assets and liabilities with fixed and floating interest rates and under different currencies and also pays special attention to the level of maturity mismatch of assets and liabilities with floating and fixed interest rates in relation to the asset size of the Bank in order to limit the negative effects of interest rate changes on the Bank’s profitability. 38 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (e) Interest rate risk (continued) As of 31 December 2018 and 31 December 2017, the tables below summarise the Bank’s assets and liabilities in carrying amounts classified in terms of periods remaining to contractual repricing dates; 31 December 2018 Up to 3 3 months 1 year to Over Non-interest Months to 1 year 5 years 5 years bearing Total Cash and due from banks 4,104,031 - - - 130,576 4,234,607 Financial assets measured at fair value through profit or loss - - - - - - Derivative financial instruments 284 - 159 - - 443 Derivative assets held for risk management 318,310 378,346 2,527 12,585 - 711,768 Loans and advances 44,869,947 84,041,639 636,570 13,254 108,641 129,670,051 Investment securities - Financial assets measured at fair value through other comprehensive income - - - - 20,447 20,447 - Financial assets measured at amortized cost 26,718 251,741 10,347 2,960,495 - 3,249,301 Property and equipment and intangible assets - - - - 13,616 13,616 Investment property - - - - 2,141 2,141 Other assets 318,594 378,346 2,687 12,584 621,166 1,333,377 Total assets 49,637,884 85,050,072 652,290 2,998,918 896,587 139,235,751 Funds borrowed 33,839,371 74,891,577 - - - 108,730,948 Subordinated loans 2,995,130 - - - - 2,995,130 Debt securities in issue 7,931,922 9,247,066 - - - 17,178,988 Interbank money market deposits 139,005 - - - - 139,005 Derivative financial instruments 7,003 122,178 23 - - 129,204 Derivative liabilities held for risk management 109,695 226,188 649 3,119 - 339,651 Other liabilities 14,752 17,361 - - 2,022,272 2,054,385 Reserve for employee benefits - - - - 21,855 21,855 Total liabilities 42,041,748 84,504,370 672 2,998,249 2,044,127 131,589,166 Net repricing gap 7,596,136 545,702 651,618 669 (1,147,540) 7,646,585 39 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (e) Interest rate risk (continued) 31 December 2017 Non- Up to 3 3 months 1 year to Over interest months to 1 year 5 years 5 years bearing Total Cash and due from banks 2,864,354 - - - 681,930 3,546,284 Trading securities - - - 11,710 11,710 Derivative financial instruments 3,081 12,269 203 - - 15,553 Derivative assets held for risk management 38,660 94,946 - - - 133,606 Loans and advances 35,224,021 44,493,552 433,542 - 102,502 80,253,617 Investment securities - Available-for-sale - - - - 30,318 30,318 - Held-to-maturity 17,208 142,161 21,092 - - 180,461 Property and equipment and intangible assets - - - - 12,288 12,288 Investment property - - - - 2,236 2,236 Other assets 38,660 94,946 - - 922,511 1,056,117 Total assets 38,185,984 44,837,874 454,837 - 1,763,495 85,242,190 Funds borrowed 33,208,140 34,160,530 - - - 67,368,670 Subordinated loans - 31,596 - - - 31,596 Debt securities in issue 3,732,210 4,565,724 1,981,276 - - 10,279,210 Interbank money market deposits 152,000 - - - - 152,000 Derivative financial instruments 95,132 4,564 284,655 - - 384,351 Derivative liabilities held for risk management 81,447 106,839 - - - 188,286 Other liabilities 186,540 154,600 284,837 - 418,098 1,044,075 Reserve for employee benefits - - - - 19,116 19,116 Total liabilities 37,455,469 38,992,257 2,550,768 31,596 437,214 79,467,304 Net repricing gap 730,515 5,845,617 (2,095,931) (31,596) 1,326,281 5,774,886 40 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (e) Interest rate risk (continued) The tables below summaries the range for effective average interest rates by major currencies for monetary financial instruments of the Bank at 31 December 2018 and 31 December 2017: 31 December 2018 USD (%) EUR (%) JPY (%) GBP (%) TL (%) Assets Cash and due from banks - - - - - -Cash equivalents - - - - - -Time deposits in foreign banks 1.84 0.03 - - - -Time deposits in domestic banks - - - - 17.96 -Interbank money market placements - - - - 16.21 Financial assets measured at fair value through profit or loss - - - - - Loans and advances 2.97 1.46 1.15 1.54 8.29 Investment securities - - - - - - Financial assets measured at amortized cost - - - - 11.41 Liabilities Funds borrowed 2.77 0.52 1.18 2.00 - Subordinated loans - - - - 12.54 Debt securities in issue 5.35 - - - - Interbank money market deposits - - - - 18.60 31 December 2017 USD (%) EUR (%) JPY (%) GBP (%) TL (%) Assets Cash and due from banks - - - - - -Cash equivalents 1.09 0.01 - - 11.95 -Time deposits in foreign banks - - - - - -Time deposits in domestic banks - - - - - -Interbank money market placements - - - - 13.26 Trading securities - - - - 8.49 Loans and advances 2.29 1.27 0.98 1.30 8.78 Investment securities - - - - - -Held-to-maturity - - - - 11.57 Liabilities Funds borrowed 1.28 0.53 1.70 1.18 12.18 Subordinated loans 1.84 - - - - Debt securities in issue 5.18 - - - - Interbank money market deposits - - - - - 41 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (e) Interest rate risk (continued) In the analysis presented below, the sensitivity of profit or loss is the effect in the interest rates on the net interest income of floating rate financial assets and liabilities at 31 December 2018 and 31 December 2017. The sensitivity of the shareholders’ equity at 31 December 2018 and 31 December 2017 is calculated through revaluating the financial assets measured at fair value through other comprehensive income taking into account the possible changes in interest rates, where applicable. The tax effects are not considered in the analysis. The other variables, especially exchanges rates, are assumed to be fixed in this analysis. Applied shock Gains/shareholders’ 31 December (+/- x basis Gains / equity – losses/ 2018 Currency points) losses shareholders’ equity (%) 1 TL 500 (12,161) (0.11) (400) (35,452) (0.33) 2 EURO 200 33,573 0.31 (200) (27,197) (0.25) 3 USD 200 52,893 0.50 (200) (54,377) (0.51) Total (For negative shocks) (117,026) (1.09) Total (For positive shocks) 74,305 0.70 Applied shock Gains/shareholders’ equity 31 December (+/- x basis Gains / – losses/ shareholders’ 2017 Currency points) losses equity (%) 1 TL 500 (104,751) (1.78) (400) 89,704 1.52 2 EURO 200 (37,714) (0.64) (200) 7,796 0.13 3 USD 200 154,829 2.63 (200) (166,210) (2.82) Total (For negative shocks) (68,710) (1.17) Total (For positive shocks) 12,364 0.21 (f) Liquidity risk A major objective of the Bank’s asset and liability management is to ensure that sufficient liquidity is available to meet the Bank’s commitments and to satisfy the Bank’s own liquidity needs. The Bank measures and manages its cash flow commitments on a daily basis, and maintains liquid assets determined by the Board of Directors which it judges sufficient to meet its commitments. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the liquidity management of the Bank. The ability to fund the existing and prospective debt requirements is managed by maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit lines and the ability to close out market positions. It is unusual for banks ever to be completely matched since the maturity, interest rates and the types of business transactions are different. An unmatched position potentially enhances profitability, but also increases the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange rates. The Bank uses the TL and foreign currency cash flow schedules prepared weekly, monthly and annually in the decision making process of the liquidity management. 42 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (f) Liquidity risk (continued) The Bank's liquidity coverage rates for 31 December 2018 are presented in the table below. Total Unweighted Value Total Weighted Value (Average) (*) (Average) (*) Current Period TL+FC FC TL+FC FC High-Quality Liquid Assets 1 Total high-quality liquid assets (HQLA) 2,867,716 453,355 Cash Outflows - - - 2 Retail deposits and deposits from small business customers, of which: - - - - 3 Stable deposits - - - - 4 Less stable deposits - - - - 5 Unsecured wholesale funding, of which: - - - - 6 Operational deposits - - - - 7 Non-operational deposits - - - - 8 Unsecured funding 10,737,211 10,662,945 4,780,246 4,705,980 9 Secured wholesale funding 10 Other cash outflows of which: - - - - 11 Outflows related to derivative exposures and other collateral requirements 119,636 114,633 119,636 114,633 12 Outflows related to restructured financial instruments - - - - 13 Payment commitments and other off-balance sheet commitments granted for debts to financial markets 237,302 236,004 94,920 94,401 14 Other revocable off-balance sheet commitments and contractual obligations - - - - 15 Other irrevocable or conditionally revocable off-balance sheet obligations 9,272,627 9,272,627 463,631 463,631 16 Total Cash Outflows 5,458,433 5,378,645 Cash Inflows 17 Secured receivables - - - - 18 Unsecured receivables 17,375,185 15,894,294 11,960,977 10,643,961 19 Other cash inflows 13,014 8,079 13,013 8,079 20 Total Cash Inflows 17,388,199 15,902,373 11,973,990 10,652,040 Max limit applied values 21 Total HQLA 2,867,716 453,355 22 Total Net Cash Outflows 1,366,397 1,347,050 23 Liquidity Coverage Ratio (%) 209.78% 33.66% (*) The average of last three months’ liquidity coverage ratio calculated by weekly simple averages. 43 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (f) Liquidity risk (continued) The Bank's liquidity coverage rates for 2017 are presented in the table below. Total Unweighted Value Total Weighted Value (Average) (*) (Average) (*) Prior Period TL+FC FC TL+FC FC High-Quality Liquid Assets 1 Total high-quality liquid assets (HQLA) 615,186 590,769 Cash Outflows 2 Retail deposits and deposits from small business customers, of which: - - - - 3 Stable deposits - - - - 4 Less stable deposits - - - - 5 Unsecured wholesale funding, of which: - - - - 6 Operational deposits - - - - 7 Non-operational deposits - - - - 8 Unsecured funding 6,572,323 6,491,306 2,869,366 2,836,959 9 Secured wholesale funding - - 10 Other cash outflows of which: - - - - 11 Outflows related to derivative exposures and other collateral requirements 20,338 9,246 20,338 9,246 12 Outflows related to restructured financial instruments - - - - 13 Payment commitments and other off-balance sheet commitments granted for debts to financial markets 264,508 262,007 105,803 104,802 14 Other revocable off-balance sheet commitments and contractual obligations - - - - 15 Other irrevocable or conditionally revocable off-balance sheet obligations 5,689,840 5,689,840 284,491 284,491 16 Total Cash Outflows 3,279,998 3,325,498 Cash Inflows 17 Secured receivables - - - - 18 Unsecured receivables 10,777,787 7,959,329 7,240,841 4,800,873 19 Other cash inflows 25,363 7,499 25,362 7,499 20 Total Cash Inflows 10,803,150 7,966,828 7,266,203 4,808,372 Max limit applied values 21 Total HQLA 615,186 590,769 22 Total Net Cash Outflows 821,044 809,919 23 Liquidity Coverage Ratio (%) 74.93% 72.94% (*) The average of last three months’ liquidity coverage ratio calculated by weekly simple averages. With regard of the Liquidity Coverage Ratio, banks disclose the essential issues as follows: a) Cash inflows and outflows do not have significant fluctuations because the Bank is less complex and cash inflows are higher than cash outflows during the period. b) The Bank’s high quality liquid asset stock primarily consists of cash, the accounts held at CBRT and unencumbered government bonds which are issued by Turkish Treasury. c) Important funding sources of the Bank are funds from CBRT rediscount loans, syndicated loans, short- term bilateral and trade loans from domestic and overseas banks, medium and long-term funds borrowed from international financial institutions like World Bank, European Investment Bank (EIB), Council of Europe Development Bank (CEB) and Islamic Development Bank (IDB) and funds obtained from capital market transactions by issuing debt securities. 44 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (f) Liquidity risk (continued) d) The most important items in derivatives held for hedging purposes are forwards for currency risks and swap transactions within the scope of interest rate risk. e) The Bank distributes funding sources between CBRT, domestic banks and international development and investment banks carefully and in a balanced manner. The Bank’s principle to take first quality collaterals like guarantee letters and aval. To prevent concentration risk the bank monitoring the breakdown of the collaterals taken from banks and made policy limit controls for to not take risks up to 20% of each banks’ total cash and non-cash loans. f) Taking into account the legal and operational liquidity transfer inhibiting factors, the needed funds and the liquidity risk exposure based on the Bank itself, the branches in foreign countries and consolidated partnerships: None. g) Taken in the calculation of liquidity coverage ratio but not included in the disclosure template in the second paragraph and the information regarding the other cash inflows and cash outflows items which are thought to be related to the Bank's liquidity profile: None. As of 31 December 2018 and 31 December 2017, the table below analyses the assets and liabilities of the Bank into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity dates. 31 December 2018 Up to 3 months 1 year to Over 5 No stated 3 months to 1 year 5 years years maturity Total Cash and due from banks 4,104,031 - - - 130,576 4,234,607 Financial assets measured at fair value through profit or loss - - - - - - Derivative financial instruments 284 - 159 - - 443 Derivative assets held for risk management - 117,356 369,407 225,005 - 711,768 Loans and advances 28,877,268 73,326,611 22,192,926 5,273,246 - 129,670,051 Investment securities - Financial assets measured at fair value through other comprehensive income - - - - 20,447 20,447 - Financial assets measured at amortised cost 26,718 251,741 10,347 2,960,495 - 3,249,301 Property and equipment and intangible assets - - - - 13,616 13,616 Investment property - - - - 2,141 2,141 Other assets - - - - 1,333,377 1,333,377 Total assets 33,008,301 73,695,708 22,572,839 8,458,746 1,500,157 139,235,751 Funds borrowed 24,272,835 61,791,949 14,551,165 8,114,999 - 108,730,948 Subordinated loans - - - 2,995,130 - 2,995,130 Debt securities in issue - 3,981,105 10,462,743 2,735,140 - 17,178,988 Interbank market deposits 139,005 - - - - 139,005 Derivative financial instruments 2,767 123,073 3,364 129,204 Derivative liabilities held for risk management - 21,930 227,228 90,493 - 339,651 Other liabilities 14,505 17,361 - - 2,022,519 2,054,385 Reserve for employee benefits - - - - 21,855 21,855 Total liabilities 24,429,112 65,935,418 25,244,500 13,935,762 2,044,374 131,589,166 Net liquidity gap 8,579,189 7,760,290 (2,671,661) (5,477,016) (544,217) 7,646,585 45 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (f) Liquidity risk (continued) 31 December 2017 Up to 3 months 1 year to Over 5 No maturity 3 months to 1 year 5 years years stated Total Cash and due from banks 2,864,354 - - - 681,930 3,546,284 Trading securities - - - - 11,710 11,710 Derivative financial instruments 3,081 12,269 203 - - 15,553 Derivative assets held for risk management 38,660 94,946 - - - 133,606 Loans and advances 22,446,729 37,244,587 16,516,704 4,045,597 - 80,253,617 Investment securities - Available-for-sale - - - - 30,318 30,318 - Held-to-maturity 17,208 142,161 21,092 - - 180,461 Property and equipment and intangible assets - - - - 12,288 12,288 Investment property - - - - 2,236 2,236 Other assets - - - - 1,056,117 1,056,117 Total assets 25,370,032 37,493,963 16,537,999 4,045,597 1,794,599 85,242,190 Funds borrowed 33,208,140 34,160,530 - - - 67,368,670 Subordinated loans - 31,596 - - - 31,596 Debt securities in issue - - 8,457,438 1,821,772 - 10,279,210 Interbank market deposits 152,000 - - - - 152,000 Derivative financial instruments 95,132 4,564 284,655 - - 384,351 Derivative liabilities held for risk management 81,447 106,839 - - - 188,286 Other liabilities (40,712) 51,524 (58,520) 289,333 802,450 1,044,075 Reserve for employee benefits - - - - 19,116 19,116 Total liabilities 33,496,007 34,323,457 8,715,169 2,111,105 821,566 79,467,304 Net liquidity gap (8,125,975) 3,170,506 7,822,830 1,934,492 973,033 5,774,886 The undiscounted cash flows of the financial liabilities of the Bank into relevant maturity groupings based on the remaining period at 31 December 2018 and 31 December 2017 to the contractual maturity dates are presented in the tables below: 31 December 2018 Demand Carrying and up to 3 months 1 year to Over 5 No maturity amount 3 months to 1 year 5 years years stated Total Funds borrowed 108,730,948 24,579,812 62,255,980 17,268,691 14,061,105 - 118,165,588 Subordinated loans 2,995,130 181,513 181,513 1,452,102 4,716,886 6,532,014 Debt securities in issue 17,178,988 193,054 4,573,081 12,588,088 2,720,902 - 20,075,125 Interbank money market deposits 139,005 139,181 - - - - 139,181 Other financial liabilities(1) 1,513,587 17,518 162,364 230,591 180,962 2,230,004 2,821,439 Total financial liabilities 130,557,658 25,111,078 67,172,938 31,539,472 21,679,855 2,230,004 147,733,347 (1) Tax liabilities amounting TL 14,752, funds amounting TL 13 and unearned income accruals and suspend account amounting TL 526,033 are not included in other financial liabilities. 46 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (f) Liquidity risk (continued) 31 December 2017 Demand Carrying and up to 3 months 1 year to Over 5 No amount 3 months to 1 year 5 years years maturity Total Funds borrowed 67,368,670 23,861,749 29,334,904 10,190,789 5,355,933 - 68,743,375 Subordinated loans 31,596 - 31,780 - - - 31,780 Debt securities in issue 10,279,210 138,023 405,841 9,840,377 1,988,953 - 12,373,194 Interbank money market deposits 152,000 152,179 - - - - 152,179 Other financial liabilities(1) 781,315 54,420 56,088 226,135 289,334 155,338 781,315 Total financial liabilities 78,612,791 24,206,371 29,828,613 20,257,301 7,634,220 155,338 82,081,843 (1) Tax liabilities amounting TL 9,962, funds amounting TL 13 and unearned income accruals and suspend account amounting TL 252,785 are not included in other financial liabilities. The undiscounted cash inflows and outflows of derivative transactions of the Bank at 31 December 2018 and 31 December 2017 are presented in the tables below: 31 December 2018 Up to 3 months 1 year to Over 5 3 months to 1 year 5 years years Total Derivatives held for trading: Foreign exchange derivatives: - Outflow 942,428 1,296,861 290,027 2,578,420 5,107,736 - Inflow 942,076 1,310,427 646,816 2,720,902 5,620,221 Interest rate derivatives: - Outflow 207,631 1,121,817 2,500,747 - 3,830,195 - Inflow 234,128 1,091,454 2,497,438 - 3,823,020 Derivatives held for risk management: Foreign exchange derivatives: - Outflow 91,515 2,091,995 8,359,658 1,823,650 12,366,818 - Inflow 185,172 2,420,372 9,326,406 1,855,059 13,787,009 Interest rate derivatives: - Outflow 87,603 3,601,775 6,229,716 - 9,919,094 - Inflow 70,950 3,528,324 6,060,558 - 9,659,832 Total outflow 1,329,177 8,112,448 17,380,148 4,402,070 31,223,843 Total inflow 1,432,326 8,350,577 18,531,218 4,575,961 32,890,082 47 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (f) Liquidity risk (continued) 31 December 2017 Up to 3 months 1 year to Over 5 3 months to 1 year 5 years years Total Derivatives held for trading: Foreign exchange derivatives: - Outflow 4,152,541 251,320 4,956,320 2,628,333 11,988,514 - Inflow 4,112,381 301,218 3,870,703 2,023,691 10,307,993 Interest rate derivatives: - Outflow 334,524 1,273,681 1,942,957 - 3,551,162 - Inflow 343,938 1,258,786 1,940,402 - 3,543,126 Derivatives held for risk management: Foreign exchange derivatives: - Outflow 2,446,097 1,566,838 3,331,674 - 7,344,609 - Inflow 2,463,958 1,567,473 2,752,400 - 6,783,831 Interest rate derivatives: - Outflow 15,680 342,722 5,041,261 2,007,722 7,407,385 - Inflow 15,218 322,975 4,917,342 1,988,953 7,244,488 Total outflow 6,948,842 3,434,561 15,272,212 4,636,055 30,291,670 Total inflow 6,935,495 3,450,452 13,480,847 4,012,644 27,879,438 48 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (g) Derivative financial instruments held for hedging purposes Starting from 1 January 2013, the Bank has hedged USD 610 million portion of debt securities from total possible fair value effects of changes in fair value arising from Libor interest rates with 5,375% and 5,875% fixed interest rate amounting USD 500 million and USD 750 million, with 5 years and 7 years of maturity respectively by using interest rate swaps in 2012 and 2013. Total amount of USD debt securities issued with 5,875% fixed interest rate and maturity of 7 years is USD 750 million and cross currency swap transactions were made by the Bank for the remaining portion of USD 140 million in 2012. Due to changes in fair value arising from movements in market interest rate ,starting from 13 August 2015, USD 120 million of the portion is subjected to fair value hedge and USD 20 million of the portion is subjected to cash flow hedge accounting of the total the remaining amount USD 140 million. The bond with the amount of USD 500 million, issued in September 2017 with a maturity of five years and a fixed interest payment rate of 4,25% per six months, is subjected o hedge accounting by cross currency swap transactions in September 2017. The bond with the amount of USD 500 million, issued in September 2014 with a maturity of seven years and a fixed interest payment rate of 5,000% per six months, is subjected o hedge accounting by cross currency swap transactions in April 2018. In addition, the bond with the amount of USD 500 million issued in May 2018 with a maturity of six years and a fixed interest payment rate of 6,125% per six months, is subjected o hedge accounting by cross currency swap transactions in May 2018. Also, changes in fair value of USD debt securities, issued in February 2016 and in October 2016 amounting to USD 500 million, with 5 years and 7 years maturities, respectively, with 5% and 5,375% fixed interest rates, arising from fluctuation in Libor interest rates are hedged by applying fair value hedge accounting with interest rate swap transactions. Fair value hedge accounting Starting from 1 January 2013, the Bank uses “Fair Value Hedge Accounting”. The impact of fair value hedge accounting is summarised below: 31 December 2018 Type of hedging Hedge item (asset Nature of hedge Net fair value of the instrument and liability) risks Asset Liability Interest rate Fixed interest rate US Fixed interest rate swaps dollar debt securities risk - 248,510 Cross currency Fixed interest rate US Currency and swap dollar debt securities interest rate risk 567,608 649 31 December 2017 Type of hedging Hedge item (asset Nature of hedge Net fair value of the instrument and liability) risks Asset Liability Interest rate Fixed interest rate US Fixed interest rate swaps dollar debt securities risk 12,857 177,042 Forward Originated CBRT- Fixed interest rate Transactions Rediscount TL Loans risk 77,064 11,244 The Bank evaluates the effectiveness of the hedge accounting at initial date and at every reporting period. Effectiveness test is performed by using “Dollar off-set method”. The Bank continues the hedge accounting if the effectiveness is between 80% and 125%. 49 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (g) Derivative financial instruments held for hedging purposes (continued) Fair value hedge accounting (continued) Changes in fair values of derivative transactions determined as hedge for fair value are recorded in profit or loss together with changes in hedging asset or liability. The difference in current values of derivative transactions fair value hedge is shown in “Trading gains and losses on derivative financial instruments” account. In the statement of financial position, change in fair value of hedge asset or liability during the hedge accounting to be effective is shown with the related asset or liability. If the underlying hedge does not conform to the hedge accounting requirements, according to the adjustments made to the carrying value (amortized cost) of the hedged item, for which the risk is hedged by a portfolio hedge, are amortized with the straight line method within the time to maturity and recognized under the profit or loss accounts. At the inception date, the Bank documents the relationship between the hedging instruments and hedged items required by the fair value hedge accounting in accordance with IAS 39 and its own risk management policies and principles. Every individual relationship is approved and documented in the same way in accordance with the Bank’s risk management policies. Effectiveness tests were chosen among methods allowed within the context of IAS 39 in accordance with the Bank’s risk management policies. The Bank’s assumptions, which used for determining fair values of derivative instruments, were used while calculating fair value of hedged items on the effectiveness tests. The effectiveness tests are performed and effectiveness of risk relations are measured on a monthly basis. The effectiveness tests are performed rewardingly at the beginning of risk relations. If the underlying hedge does not conform to the accounting requirements (out of 80%-125% effectiveness range) or if the management voluntarily decides to discontinue the hedging relation or the hedging instrument is sold or closed before its maturity, in the context of the fair value hedge, adjustments on the carrying value of the hedged item is reflected on the on “Gains/(losses) on financial assets measured at fair value through profit or loss” accounts by using straight line method of amortization. Cash flow hedge accounting Starting from 13 August 2015, the Bank uses “Cash Flow Hedge Accounting”. The impact of cash flow hedge accounting is summarised below: 31 December 2018 Type of Hedge item Net fair value of the Nature of Fair value hedging (asset and hedge risks of the hedge item instrument liability) Asset Liability Fixed interest Cross currency Currency rate US dollar 252 72,003 - swap risk debt securities Currency Floating interest Cross currency risk and rate US Dollar 48,981 72,157 90,492 swap interest rate borrowings risk 31 December 2017 Type of Hedge item Net fair value of the Nature of Fair value hedging (asset and hedge risks of the hedge item instrument liability) Asset Liability Fixed interest Cross currency Currency rate US dollar (1,512) 43,685 - swap risk debt securities 50 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (g) Derivative financial instruments held for hedging purposes (continued) Cash flow hedge accounting (continued) At the inception date, the Bank documents the relationship between the hedging instruments and hedged items required by the cash flow hedge accounting application in accordance with IAS 39 and its own risk management policies and principles. Every individual relationship is approved and documented in the same way. In accordance with the Bank’s risk management policies. The effectiveness tests are performed on a monthly basis. If the underlying hedge does not conform to the cash flow hedge accounting requirements (out of 80%-125% effectiveness range) or if the management voluntarily decides to discontinue the hedging relation or the hedging instrument is sold or closed before its maturity, the cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income from the period when the hedge was effective shall remain separately in equity until the forecast transaction occurs or is no longer expected to occur the net cumulative gain or loss is reclassified from other comprehensive income to profit or loss. (h) Fair value of financial instruments Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists. The estimated fair values of financial instruments have been determined by the Bank using available market information and appropriate valuation methodologies. However, judgment is necessarily required to interpret market data to develop the estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Bank could realise in a current market exchange. The following methods and assumptions were used to estimate the fair value of the Bank’s financial instruments: (i) Financial assets The fair values of certain financial assets carried at cost or amortised cost, including cash and due from banks (including receivables from CBRT) are considered to approximate their respective carrying values due to their short-term nature. The fair value of investment securities has been determined based on bid market prices at reporting dates. Loans and advances are net of provisions for impairment. The estimated fair value of loans and advances represents the discounted amount, at current market rates, of future cash flows expected to be received. The fair value of other financial assets is also considered to approximate their respective carrying values due to their nature. (ii) Financial liabilities The fair value of funds borrowed is based on market prices or are based on discounted cash flows using current interest rates prevailing at the reporting date. The fair value of other financial liabilities is also considered to approximate their respective carrying values due to their nature. 51 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (h) Fair value of financial instruments (continued) (iii) Derivative financial instruments The fair values of foreign exchange and interest rate swaps have been estimated based on quoted market rates prevailing at the reporting date. The following table summarises the carrying amounts and fair values of those significant financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value. 31 December 2018 31 December 2017 Carrying Fair Carrying Fair value value value value Financial assets: Cash and due from banks 4,234,607 4,234,607 3,546,284 3,546,284 Investment securities - Financial assets measured at fair value through other comprehensive income 5,056(1) 5,056 - Financial assets measured at amortized cost 3,249,301 2,600,786 - Held to maturity 180,461 187,182 - Available for sale 5,056(1) 5,056 Loans and advances 129,670,051 132,645,706 80,253,617 84,746,970 Financial liabilities: Funds borrowed 108,730,948 107,179,183 67,400,266 70,876,327 Debt securities in issue 17,178,988 16,600,759 10,279,210 10,646,746 Subordinated loans 2,995,130 2,901,759 31,596 31,487 Interbank money market deposits 139,005 139,005 152,000 152,000 (1) Garanti Faktoring AŞ shares amounting to TL 15,391 are not included (31 December 2017: TL 25,262). As of 31 December 2018, fair values of financial assets measured at amortized cost are determined as Level 1 and fair values of loans and advances are determined as Level 2. As of 31 December 2017, fair values of held to maturity investments are determined as Level 1 and fair values of loans and advances are determined as Level 2. Fair values of funds borrowed and debt securities are determined as Level 2. 52 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (h) Fair value of financial instruments (continued) The following table summarises the fair values of those financial assets and liabilities presented on the Bank’s statement of financial position based on the hierarchy of valuation technique as of 31 December 2018 and 31 December 2017. 31 December 2018 Level 1(1) Level 2(2) Level 3(3) Total Financial assets at fair value through profit or loss - Derivative financial instruments - 443 - 443 Derivative assets held for risk management - 711,768 - 711,768 Financial assets measured at fair value through other comprehensive income - Equity investments(4) 15,391 - - 15,391 Total assets 15,391 712,211 - 727,602 Financial liabilities at fair value through profit or loss Financial liabilities held for trading - Derivative financial instruments - 129,204 - 129,204 Derivative liabilities held for risk management - 339,651 - 339,651 Total liabilities - 468,855 - 468,855 (1) Fair values are calculated with quoted prices (unadjusted) in active markets for listed equity investments and debt instruments. This level includes listed equity investments and debt instruments actively traded on exchanges. (2) Fair values are calculated with observable input parameters (either directly as prices or indirectly as derived from prices) for derivative transactions. This level includes OTC derivative contracts. (3) Fair values are calculated with unobservable inputs for equity instruments. (4) Unlisted equity investments which are accounted with their cost amount to TL 5,056 are excluded. 53 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (h) Fair value of financial instruments (continued) 31 December 2017 Level 1(1) Level 2(2) Level 3(3) Total Financial assets at fair value through profit or loss Financial assets held for trading - Debt securities 11,710 - - 11,710 - Derivatives - 15,553 - 15,553 Derivative assets held for risk management - 133,606 - 133,606 Available-for-sale financial assets - Equity investments(4) 25,262 - - 25,262 Total assets 36,972 149,159 - 186,131 Financial liabilities at fair value through profit or loss Financial liabilities held for trading - Derivatives - 384,351 - 384,351 Derivative liabilities held for risk management - 188,286 - 188,286 Total liabilities - 572,637 - 572,637 (1) Fair values are calculated with quoted prices (unadjusted) in active markets for listed equity investments and debt instruments. This level includes listed equity investments and debt instruments actively traded on exchanges. (2) Fair values are calculated with observable input parameters (either directly as prices or indirectly as derived from prices) for derivative transactions. This level includes OTC derivative contracts. (3) Fair values are calculated with unobservable inputs for equity instruments. (4) Unlisted equity investments which are accounted with their cost amount to TL 5,056 are excluded. (i) Capital management The BRSA sets and monitors capital requirements for the Bank as a whole. The Bank is directly supervised by local regulators. In implementing current capital requirements, the BRSA requires the banks to maintain a prescribed ratio of minimum 8% of total capital to total value at credit, market and operational risks. The Bank regulatory capital is analysed into two tiers: - Tier 1 capital, which includes paid-in capital, share premium, legal reserves, retained earnings, other comprehensive income, translation reserve and non-controlling interests after deductions for goodwill and certain cost items. - Tier 2 capital, which includes qualifying subordinated liabilities and general provisions. The BRSA also requires the banks to maintain prescribed ratios of minimum 6% and 4.5% of Tier 1 and Tier 2 capital, respectively, to total value at credit, market and operational risks starting from 1 January 2014. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. 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. 54 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 4 FINANCIAL RISK MANAGEMENT (continued) (i) Capital management (continued) The Bank’s regulatory capital position on at 31 December 2018 and 31 December 2017 were as follows: 31 December 31 December 2018 2017 Tier I capital 7,647,045 5,767,566 Tier II capital 3,031,973 130,214 Total regulatory capital 10,679,018 5,897,780 Amount subject to credit risk 55,655,448 41,727,214 Amount subject to market risk 116,788 551,225 Amount subject to operational risk 1,447,228 1,246,957 Total regulatory capital expressed as a percentage of total value at credit, market and operational risks (%) 18.66 13.55 Total tier 1 capital expressed as a percentage of total value at credit, market and operational risks (%) 13.36 13.25 5 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS IN APPLYING ACCOUNTING POLICIES The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (a) Allowances for credit losses The measurement of impairment losses under IFRS 9 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. (b) Fair value of derivatives The fair values of financial instruments that are not traded in the organized markets are determined by using valuation techniques. The valuation techniques used in the determination of fair values are reviewed periodically and approved by experienced employees. 55 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 6 CASH AND DUE FROM BANKS 31 December 2018 31 December 2017 Cash funds: Cash on hand 29 26 29 26 Current accounts and demand deposits: Central Bank of Republic of Turkey (CBRT) 291 632,166 Foreign banks 3,709,263 1,096,141 3,709,554 1,728,307 Time deposits: Central Bank of Republic of Turkey (CBRT) - 986,260 Domestic banks 303,241 - 303,241 986,260 Interbank money market placements 222,649 831,691 Expected credit loss (866) - Total cash and due from banks 4,234,607 3,546,284 Cash and cash equivalents included in the statements of cash flows for the periods ended 31 December 2018 and 31 December 2017 are as follows: 31 December 2018 31 December 2017 Cash and due from banks 4,234,607 3,546,284 Less: interest accruals (1,540) - Add: Expected credit loss 866 Cash and cash equivalents 4,233,933 3,546,284 Cash and cash equivalents are mainly composed of bank deposits as of 31 December 2018 and 31 December 2017. 7 FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets measured at fair value through profit or loss 31 December 2018 Government bonds - Total - Trading Securities 31 December 2017 Government bonds 11,710 Total 11,710 As of 31 December 2018, the Bank does not have any securities subject to repurchase transactions (31 December 2017: TL 1,715). 56 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 8 DERIVATIVE FINANCIAL INSTRUMENTS The Bank utilises the following derivative instruments: “Currency and interest rate swaps” are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or interest rates. Currency swaps involve the exchange of principal as well. The Bank’s “credit risks” represents the potential cost of replacing the swap contracts if counterparties fail to perform their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a proportion of the notional amount of the contracts and the liquidity of the market. To control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its lending activities. The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the statement of financial position but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the Bank’s exposure to credit or price risks. The derivative instruments become favourable (as assets) or unfavourable (as liabilities) as a result of fluctuations in foreign exchange rates and interest rates. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable and, thus the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. The fair values of derivative instruments held as of 31 December 2018 and 31 December 2017 are set out in the following table: 31 December 2018 31 December 2017 Fair value Fair value Assets Liabilities Assets Liabilities Interest rate and currency swaps purchases and sales 337 - 1,307 - Forward purchases and sales 82 - 5,250 - Foreign currency swaps purchases and sales - (80) - (22,300) Cross currency and basis swaps purchases and sales - (129,120) 8,996 (362,051) Option purchases and sales 24 (4) - - Total derivative assets/(liabilities) 443 (129,204) 15,553 (384,351) Even though certain derivative transactions, while providing effective economic hedges under the Bank’s risk management position, do not qualify for hedge accounting under the specific rules in IAS 39 which is permitted to be applied in IFRS 9 and are therefore treated as derivatives held for trading. Hedge accounting is explained in detail in Note 4. The notional amounts of derivative transactions are explained in detail in Note 25. 57 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 9 LOANS AND ADVANCES The Bank follows loans and advances under one class as corporate loans; the classifications in the table below mainly refer to lending programs of the Bank to corporate customers; 31 December 2018 31 December 2017 Short-term Discount loans 78,262,582 42,428,369 Financial institutions 7,651,070 5,792,630 Export guaranteed loans 2,517,806 1,275,075 Specialised loans 263,665 270,743 Foreign country loans (political risks) - 5,893 Other guaranteed loans 193 112 88,695,316 49,772,822 Medium and long-term Export guaranteed loans 22,515,334 16,099,659 Export guaranteed investment loans 8,898,122 8,509,305 Financial institutions 3,428,541 2,645,095 Foreign country loans (political risks) 4,488,604 2,288,635 Specialised loans 320,792 365,797 Other 672,603 109,573 40,323,996 30,018,064 Performing loans 129,019,312 79,790,885 Loans under close monitoring 678,636 489,212 Impaired loans and advances 342,508 294,231 Gross loans and advances 130,040,456 80,574,328 Expected credit losses- Stage 1 (33,225) Expected credit losses- Stage 2 (1,826) Expected credit losses- Stage 3 (335,354) Allowance for loan losses (320,711) Net loans and advances 129,670,051 80,253,617 The Bank provides impairment provision for non-performing loans amounting to TL 342,508 (31 December 2017: TL 294,231) comprising 0.29% (31 December 2017: 0.37%) of the total loans outstanding at 31 December 2018. The Bank also provided an additional impairment provision amounting to TL 27,897 (31 December 2017: TL 26,480) for other components of the loan portfolio to cover the incurred of loss present in the lending relationship but not yet identified with a specific loan. 58 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 9 LOANS AND ADVANCES (continued) Movements in the provision for impairment losses for the periods ended 31 December 2018 and 31 December 2017 are as follows: 31 December 2018 31 December 2017 Balance at the beginning of the period 320,711 272,766 Impact of adopting IFRS 9 (27,259) Recoveries and reversals (31,682) (1,054) Provision for the period 108,635 48,999 Balance at the end of the period 370,405 320,711 Loans and advances to the public and private sectors are as follows: 31 December 2018 31 December 2017 Private sector 126,041,604 75,480,355 Public sector 3,628,447 4,773,262 129,670,051 80,253,617 10 INVESTMENT SECURITIES (a) Financial assets measured at fair value through other comprehensive income: 31 December 2018 Financial assets measured at fair value through other comprehensive income Equity investments - Listed 15,391 - Unlisted 5,056 Total 20,447 Available-for-sale securities 31 December 2017 Equity investments - Listed 25,262 - Unlisted 5,056 Total 30,318 There are no securities pledged under repurchase agreements or pledged as collateral with financial institutions. As of 31 December 2018, unrealised gain and losses arising from changes in the fair value of securities classified as financial assets measured at fair value through other comprehensive income are recognised in other comprehensive income unless there is objective evidence that the asset is impaired in which case they are charged to the statement of profit or loss. As of 31 December 2017, unrealised gain and losses arising from changes in the fair value of securities classified as available-for-sale securities are recognised in other comprehensive income unless there is objective evidence that the asset is impaired in which case they are charged to the statement of profit or loss. 59 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 10 INVESTMENT SECURITIES (continued) (a) Financial assets measured at fair value through other comprehensive income (continued): The breakdown of equity investments classified as financial assets measured at fair value through other comprehensive income at 31 December 2018 are as follows: Share % Carrying amount Equity investments 31 December 2018 31 December 2018 Business Garanti Faktoring AŞ 9.78 15,391 Factoring Kredi Garanti Fonu AŞ 1.54 4,896 Financial services Borsa İstanbul AŞ - 160 Financial services 20,447 The breakdown of equity investments classified as available-for-sale securities at 31 December 2017 are as follows: Share % Carrying amount Equity investments 31 December 2017 31 December 2017 Business Garanti Faktoring AŞ 9.78 25,262 Factoring Kredi Garanti Fonu AŞ 1.54 4,896 Financial services Borsa İstanbul AŞ - 160 Financial services 30,318 (b) Financial assets measured at amortised cost: Financial assets measured at amortised cost 31 December 2018 Debt securities - Government bonds 3,249,301 Total 3,249,301 Held-to-maturity securities 31 December 2017 Debt securities - Government bonds 180,461 Total 180,461 As of 31 December 2018, government bonds and treasury bills amounting to TL 427,154 (31 December 2017: TL 27,383) have been pledged as collateral with the CBRT and Borsa İstanbul AŞ-Settlement and Custody Bank. 60 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 10 INVESTMENT SECURITIES (continued) The movement of securities classified as financial assets measured at amortised costs as at 31 December 2018 are as follows: 31 December 2018 Balance at 1 January 180,461 Impact of adopting IFRS 9 (13) Purchases (1) 3,198,105 Redemptions (220,654) Interest income accruals 91,810 Expected credit loss (408) Total financial assets measured at amortised costs at the end of the period 3,249,301 (1) The Bank issued subordinated debts to a group accounted for under “Subordinated liabilities” with two transactions in 2018, in exchange acquired government securities, as disclosed under “financial assets measured at amortised cost”, from the same group as part of a qualified sale and purchase transition differing from market. The movement of securities classified as held-to-maturity securities as at 31 December 2017 are as follows: 31 December 2017 Balance at 1 January 98,549 Purchases 238,756 Redemptions (164,403) Interest income accruals 7,559 Total held-to-maturity securities at the end of the period 180,461 61 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 11 PROPERTY AND EQUIPMENT Other Leased Tangible Leasehold Buildings Assets Vehicles Assets Improvements Total Cost Opening balance, 1 January 2017 1,570 127 3,379 12,023 14,257 31,356 Additions - - - 1,729 - 1,729 Disposals - - - - - - Transfers (462) - - - - (462) Closing balance, 31 December 2017 1,108 127 3,379 13,752 14,257 32,623 Accumulated depreciation: Opening balance, 1 January 2017 925 127 2,478 7,546 12,071 23,147 Additions 27 - 360 1,413 1,724 3,524 Disposals - - - - - - Transfers (283) - - - - (283) Closing balance, 31 December 2017 669 127 2,838 8,959 13,795 26,388 Cost Opening balance, 1 January 2018 1,108 127 3,379 13,752 14,257 32,623 Additions - - - 2,745 - 2,745 Disposals - - - (281) - (281) Transfers 222 - - - - 222 Closing balance, 31 December 2018 1,330 127 3,379 16,216 14,257 35,309 Accumulated depreciation: Opening balance, 1 January 2018 669 127 2,838 8,959 13,795 26,388 Additions 25 - 237 1,834 462 2,558 Disposals - - - (384) - (384) Transfers 135 - - - - 135 Closing balance, 31 December 2018 829 127 3,075 10,409 14,257 28,697 As at 31 December 2017, net carrying value 439 - 541 4,793 462 6,235 As at 31 December 2018, net carrying value 501 - 304 5,807 - 6,612 62 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 12 INTANGIBLE ASSETS Intangible assets Cost Opening balance, 1 January 2017 6,106 Additions 4,382 Disposals - Closing balance, 31 December 2017 10,488 Accumulated amortisation: Opening balance, 1 January 2017 (3,349) Additions (1,086) Disposals - Closing balance, 31 December 2017 (4,435) Cost Opening balance, 1 January 2018 10,488 Additions 2,238 Disposals - Closing balance, 31 December 2018 12,726 Accumulated amortisation: Opening balance, 1 January 2018 (4,435) Additions (1,287) Disposals - Closing balance, 31 December 2018 (5,722) As at 31 December 2017, net carrying value 6,053 As at 31 December 2018, net carrying value 7,004 13 INVESTMENT PROPERTY As of 31 December 2018, The Bank has net investment property amounting to TL 2,141 (31 December 2017: TL 2,236). Istanbul service building which is previously accounted as tangible asset is classified to investment property account in accordance with IAS 40 Investment Property after the building is leased to Investment Support and Promotion Agency of Turkey. 63 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 14 OTHER ASSETS 31 December 2018 31 December 2017 Financial assets Upfront fees paid 971,953 498,214 Guarantees given 273,950 501,458 Notes receivable 28,116 25,050 Receivables from Reassurance Companies 17,506 6,812 Receivables from banks 62 6 Other 42,782 24,583 1,334,369 1,056,123 Expected credit losses (992) Provision for impairment on other assets (6) 1,333,377 1,056,117 15 FUNDS BORROWED AND INTERBANK MONEY MARKET DEPOSITS 31 December 2018 31 December 2017 Interbank money market deposits – TL 139,005 152,000 Domestic banks 80,352,936 44,419,307 Foreign banks 28,378,012 22,949,363 Funds borrowed 108,730,948 67,368,670 Funds borrowed and interbank money market deposits total 108,869,953 67,520,670 Average interest rate for interbank money market deposits is 23.44% (31 December 2017: 12.30%) and the maturity date of such deposits is 3 January 2019 (31 December 2017: 2 January 2018). 64 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 15 FUNDS BORROWED AND INTERBANK MONEY MARKET DEPOSITS (continued) The breakdown of funds borrowed as of 31 December 2018 and 31 December 2017 is as follows: Original currency amount Original Maturity date 31 December 2018 Interest rate (thousands) currency TL (year) Due to Central Bank (LIBOR/EURIBOR + %0) 75,478,111 (1) CBRT Loan 6,645,950 USD 35,091,281 (1) CBRT Loan 6,654,962 EUR 40,198,634 (1) CBRT Loan 27,972 GBP 188,196 (LIBOR/EURIBOR + Due to IFIs %0.01 - %2.9) 8,856,248 Black Sea Trade and Development Bank 50,273 EUR 303,667 23.10.2020 Counsel of Europe Development Bank 160,000 EUR 966,464 26.10.2022-8.02.2024 European Investment Bank 497,224 EUR 3,003,433 17.12.2021-29.07.2024 European Investment Bank 77,479 USD 409,098 16.01.2024-29.07.2024 Islamic Development Bank 273,039 USD 1,441,676 14.04.2026-25.10.2027 World Bank (EFIL) Loans 43,302 EUR 261,564 01.03.2038 World Bank (EFIL) Loans 163,249 USD 861,971 01.03.2038 World Bank (LTEF) Loans 304,611 USD 1,608,377 15.07.2038 (LIBOR/EURIBOR + Due to Commercial Banks %0.85 - %3.15) 24,396,589 Abu Dhabi Commercial Bank 50,051 USD 264,274 20.06.2019 China Development Bank 200,192 USD 1,057,032 18.09.2020 Citibank Dublin 25,177 USD 132,939 05.03.2020 Commercial Bank of Qatar 28,133 USD 148,544 28.05.2019 Emirates NBD 20,125 EUR 121,565 25.07.2019 First Abu Dhabi Bank 30,013 EUR 181,293 11.06.2019 HSBC 27,556 USD 145,498 13.05.2019 ING DIBA 90,533 EUR 546,854 04.12.2026 ING European Financial Services 200,536 EUR 1,211,316 11.11.2020 Intesa Sanpaolo SPA, Istanbul Branch 100,864 EUR 609,260 13.05.2019 Mizuho Corporate Bank Ltd 50,215 EUR 303,318 11.07.2019 Mizuho Corporate Bank Ltd 60,226 USD 317,998 22.05.2019 MUFG Bank London 12,308 USD 64,985 22.02.2019 MUFG Bank Turkey 100,210 EUR 605,310 11.06.2019 Standard Chartered Bank 100,236 USD 529,256 31.05.2019-17.06.2019 Sumitomo Mitsui Banking Corporation Dubai 23,529 USD 124,235 24.04.2019 Syndicated loan with MIGA Guarantee 720,527 EUR 4,352,273 28.03.2025-27.06.2028 Syndicated loan with MIGA Guarantee 831,947 USD 4,392,763 28.03.2025-27.06.2028 Syndicated loan 1,135,841 EUR 6,860,937 02.04.2019-22.04.2021 Syndicated loan 153,902 USD 812,619 02.04.2019-22.04.2021 ICBC Turkey Bank A.Ş. 250,201 USD 1,321,088 22.05.2020-04.06.2020 Türkiye Vakıflar Bankası T.A.O. 55,535 USD 293,231 30.11.2020 Total funds borrowed 17,858,975(2) 108,730,948 (1) CBRT loans are rediscount loans extended by CBRT, having wide range of maturity dates. (2) Balance is denominated by USD. 65 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 15 FUNDS BORROWED AND INTERBANK MONEY MARKET DEPOSITS (continued) Original currency amount Original Maturity date 31 December 2017 Interest rate (thousands) currency TL (year) Due to Central Bank (LIBOR/EURIBOR + %0) 42,024,185 (1) CBRT Loan 11,132,234 USD 42,024,185 (LIBOR/EURIBOR + %0.01 - Due to IFIs %1.55) 6,491,819 World Bank (EFIL) Loans 319,599 EUR 1,442,605 1.3.2038 European Investment Bank 623,654 EUR 2,815,049 6.8.2018-11.11.2020 Islamic Development Bank 272,179 USD 1,027,476 14.4.2026-25.10.2027 China Development Bank 200,082 USD 755,309 18.9.2020 Council of Europe Development B 100,000 EUR 451,380 16.5.2023- 26.10.2022 (LIBOR/EURIBOR/TIBOR + Due to Commercial Banks %1.03 - %2.97) 18,852,666 ICBC Turkey A.Ş. 250,820 USD 946,845 22.5.2020- 4.6.2020 ING European Financial Services 200,503 EUR 905,030 11.11.2020 Vida Finance 238,124 JPY 797,979 17.6.2019 Mizuho Corporate Bank Ltd 169,930 USD 641,485 11.9.2018-21.6.2018 ING DIBA 101,842 EUR 459,693 4.12.2026 Bank of Tokyo Mitsubishi Turkey 100,156 EUR 452,084 13.11.2018 HSBC London 86,706 USD 327,315 15.2.2018- 1.11.2018 Standard Chartered Bank 100,364 USD 378,875 8.5.2018-25.5.2018 Citibank Dublin 50,143 USD 189,290 4.6.2018-28.3.2025 Abu Dhabi Commercial Bank 50,011 USD 188,792 20.6.2019 Bank of Tokyo Mitsubishi London 37,712 USD 142,364 27.11.2018 Garanti International 30,052 EUR 135,648 17.8.2018 Doha Bank 25,027 USD 94,477 13.3.2018 Emirates NBD 20,024 EUR 90,385 31.5.2018 ABC International 20,016 EUR 90,349 7.3.2018-27.3.2018 Sumitomo Mitsui Banking Corporation Dubai 20,002 USD 75,506 25.10.2018 ICBC London 15,736 USD 59,402 9.7.2018 Syndicated Loans 12,877,147 Total funds borrowed 17,846,058(2) 67,368,670 (1) CBRT loans are rediscount loans extended by CBRT, having wide range of maturity dates. (2) Balance is denominated by USD. 66 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 15 FUNDS BORROWED AND INTERBANK MONEY MARKET DEPOSITS (continued) The repayment of the funds borrowed were as follows during 2018: Original FX Type Repayment Amount Date European Investment Bank USD 1,914,559 16 January 2018 European Investment Bank USD 2,840,906 29 January 2018 European Investment Bank EUR 2,375,000 29 January 2018 European Investment Bank USD 1,903,235 12 February 2018 HSBC London USD 19,510,820 15 February 2018 Citibank USD 20,000,000 16 February 2018 World Bank USD 4,148,051 1 March 2018 World Bank EUR 1,109,760 1 March 2018 ABC International Bank EUR 10,000,000 7 March 2018 International Islamic Trade Finance Corporation (ITFC) USD 436,000,000 9 March 2018 Doha Bank USD 24,990,000 13 March 2018 Syndicated loans USD 25,000,000 21 March 2018 Syndicated loans USD 242,500,000 21 March 2018 ABC International Bank USD 10,000,000 27 March 2018 Syndicated loans EUR 5,555,556 28 March 2018 Syndicated loans USD 10,416,667 28 March 2018 Syndicated loans EUR 370,500,000 29 March 2018 Syndicated loans USD 31,000,000 29 March 2018 European Investment Bank EUR 1,470,588 3 April 2018 Subordinated Loans USD 8,341,000 13 April 2018 Council of Europe Development Bank EUR 5,000,000 26 April 2018 Standard Chartered Bank USD 50,000,000 8 May 2018 Mizuho Bank EUR 40,000,000 22 May 2018 Standard Chartered Bank USD 50,000,000 25 May 2018 Emirates NBD USD 20,000,000 31 May 2018 Citibank USD 30,000,000 4 June 2018 ING Di-Ba EUR 5,652,632 4 June 2018 European Investment Bank EUR 1,470,588 18 June 2018 European Investment Bank EUR 10,000,000 19 June 2018 European Investment Bank EUR 5,000,000 20 June 2018 Mizuho Bank EUR 50,000,000 21 June 2018 European Investment Bank EUR 5,000,000 29 June 2018 ICBC London USD 15,500,000 6 July 2018 European Investment Bank USD 1,914,559 13 July 2018 Citibank Dublin USD 20,000,000 16 July 2018 European Investment Bank EUR 2,375,000 27 July 2018 European Investment Bank USD 2,840,906 27 July 2018 Syndicated loans USD 25,000,000 27 July 2018 Syndicated loans EUR 87,000,000 3 August 2018 Syndicated loans EUR 469,500,000 3 August 2018 Syndicated loans USD 87,000,000 10 August 2018 European Investment Bank USD 1,903,235 17 August 2018 Garanti International EUR 30,000,000 3 September 2018 World Bank EUR 1,109,760 4 September 2018 World Bank USD 4,148,051 11 September 2018 Mizuho Bank USD 110,000,000 14 September 2018 HSBC London USD 20,000,000 17 September 2018 Syndicated loans EUR 5,555,556 28 September 2018 Syndicated loans USD 10,416,667 28 September 2018 European Investment Bank EUR 1,470,588 3 October 2018 Mizuho Bank USD 30,000,000 5 October 2018 Sumitomo Mitsui Banking Corporation Dubai USD 20,000,000 25 October 2018 Council of Europe Development Bank EUR 5,000,000 26 October 2018 HSBC London USD 47,000,000 1 November 2018 MUFG Bank Turkey EUR 100,000,000 13 November 2018 Council of Europe Development Bank EUR 5,000,000 16 November 2018 MUFG Bank USD 37,614,791 27 November 2018 ING DIBA EUR 5,652,632 4 December 2018 International Islamic Trade Finance Corporation (ITFC) USD 363,500,000 10 December 2018 European Investment Bank EUR 1,470,588 17 December 2018 European Investment Bank EUR 10,000,000 19 December 2018 European Investment Bank EUR 5,000,000 20 December 2018 ICBC Turkey A.Ş. USD 125,000,000 26 December 2018 ICBC Turkey A.Ş. USD 125,000,000 27 December 2018 European Investment Bank EUR 5,000,000 31 December 2018 67 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 16 DEBT SECURITIES IN ISSUE Information regarding securities issued 31 December 2018 31 December 2017 Securities Issued 17,178,988 10,381,250 Discount on Issuance of Securities (-) 319,005 237,044 Bond Interest Accrual 337,668 135,004 Total 17,178,988 10,279,210 In April 2012, the Bank issued bonds amounting USD 500 million (TL 2,279,000). The bond is subject to annual fixed interest payment of 5.875% every six months and the total maturity is seven years. In October 2012, the Bank issued bonds amounting USD 250 million (TL 1,139,500). The bond is subject to annual fixed interest payment of 5.875% every six months and the total maturity is seven years. In September 2014, the Bank issued bonds amounting USD 500 million (TL 2,279,000). The bond is subject to annual fixed interest payment of 5.000% every six months and the total maturity is seven years. In February 2016, the Bank issued bonds amounting USD 500 million (TL 2,279,000). The bond is subject to annual fixed interest payment of 5.375% every six months and the total maturity is five years. In October 2016, the Bank issued bonds amounting USD 500 million (TL 2,279,000). The bond is subject to annual fixed interest payment of 5.375% every six months and the total maturity is seven years. In September 2017, the Bank issued bonds amounting USD 500 million (TL 2,279,000). The bond is subject to annual fixed interest payment of 4.250% every six months and the total maturity is five years. In May 2018, the Bank issued bonds amounting USD 500 million (TL 2,279,000). The bond is subject to annual fixed interest payment of 6.125% every six months and the total maturity is six years. 17. SUBORDINATED LIABILITIES 31 December 2018 31 December 2017 Subordinated debt instruments (*) 2,995,130 Subordinated loans (**) 31,596 Total 2,995,130 31,596 (*) In September 2018, the Bank issued subordinated debt instrument amounting TL 2,901,759 with a maturity of ten years and fixed rate of 12.54% with an early redeem option after fifth year of the date of issue. Subordinated loan includes interest expense on debt securities issued amounting to TL 93,371. (**) In July 2001, the Bank issued subordinated debt instrument amounting USD 31,487 with a maturity of seventeen years and interest rate 6 Month US Dollar Libor +5.25% with an early redeem option after fifth year of the date of issue. Subordinated loan includes interest expense on debt securities issued amounting to TL 109. 68 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 18 TAXATION According to Act number 3332 and article 4/b of Act number 3659, dated 25 March 1987 and 26 September 1990, respectively, the Bank is exempt from Corporate Tax. Due to the 3rd Article of the same act; the above mentioned exemption became valid from 1 January 1988. In accordance with clause 9 of the Provisional Article 1 of Corporate Tax Law No. 5520, which states “The provision of Article 35 shall not apply to exemptions, allowances and deductions included in other laws in relation to Corporation Tax prior to the effective date of the Law No. 5520”, the exemption from Corporation Tax continues. Accordingly, current and deferred taxes are not recognised in these financial statements. 19 OTHER LIABILITIES AND PROVISIONS The principal components of other liabilities are as follows: 31 December 2018 31 December 2017 Financial liabilities Guarantees received(1) 1,261,766 601,865 Unearned revenue 491,602 - Tax liability 14,752 9,962 Positive price difference on bonds issued(3) 4,744 237,044 Funds 13 13 Other 67,490 50,574 Non-financial liabilities Insurance technical provisions 96,755 Expected credit losses for non-cash loans 65,097 Dividend pay liabilities 37,544 27,404 BRSA expense provision 20,914 12,806 Vacation pay liability(2) 15,998 13,733 Other 42,807 25,577 2,054,385 1,044,075 (1) Guarantees received refers to cash guarantees obtained in relation to Rediscount Credits, which have increased in line with the increase in the amount of Rediscount Credits. (2) TL 2,265 of vacation pay liability provision is provided during 2018 (31 December 2017: TL 1,700). (3) In addition to the bond issuance transactions, positive price differences have come up. The transaction has been divided into installments until the maturity date according to the principle of periodicity in accounting and the sum corresponding to each month is accounted for by reducing expense rediscount. 69 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 20 RETIREMENT BENEFIT OBLIGATIONS As a result of IAS 19 (2011), the Bank started to recognise all actuarial gains and losses immediately in other comprehensive income in accordance with the change in IAS 19 (2011). As of 31 December 2018 actuarial gains/losses, calculated as TL 207 in relation to the reserve for employee termination benefits, are shown under shareholders’ equity and as TL 4,137 in relation to the current service cost and interest expense, are recognised in other comprehensive income in accordance with the change in IAS 19 (2011). IAS 19 (2011) “Employment Benefits” requires actuarial valuation methods to be developed to estimate the enterprise’s obligation for such benefits. Accordingly, the following actuarial assumptions were used in the calculation of the total liability as at 31 December 2018 and 31 December 2017. 31 December 31 December 2018 2017 Discount rate (%) 1.89 1.89 Rate to estimate the probability of retirement (%) 0.98 0.98 Movement in the reserve for employment termination benefits for the period ended 31 December 2018 and 31 December 2017 are as follows: 31 December 31 December 2018 2017 1 January 19,116 17,050 Current service cost 1,962 1,768 Interest expense 2,175 1,833 Actuarial losses 207 82 Payments during the period (1,605) (1,617) Total 21,855 19,116 70 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 21 SHARE CAPITAL The historical paid in share capital of the Bank is TL 6,350,000 (31 December 2017: TL 4,800,000) and consists of 6,35 billion (31 December 2017: 4,8 billion) authorised shares with a nominal value of TL 1 each. In 2017, the Bank has increased capital by TL 1,100,000 to be covered by internal resources within the framework of the registered share capital system that was implemented in 2017. The transaction has been announced in the Turkish Trade Registry Gazette dated 28 August 2017 and numbered 9398. Information on the share capital increase during the period and their sources Increase Profit reserves used Capital reserves used for Increase date amount Cash for increase increase 17 May 2018 1,550,000 1,000,000 550,000 - The Bank has decided to use the capital stock system that is registered in the Bank in the extraordinary general meeting that took place on 27 January 2017. The decision has been submitted to the trade register and has been published on Turkey Trade Registry Gazette on 30 January 2017, Numbered 9252. 31 December 2018 31 December 2017(*) Share capital - historical cost 6,350,000 4,800,000 Adjustment to share capital 38,091 38,091 Total paid in share capital 6,388,091 4,838,091 (*) See Note 2.7. The Bank is fully owned by the Turkish Treasury. The adjustment to share capital represents the restatement effect of cash and cash equivalent contributions to share capital in terms of equivalent purchasing power at 31 December 2005 after elimination of the accumulated deficit. There are no other reserves at 31 December 2018 (31 December 2017: None). The legal reserves amounting to TL 379,260 (31 December 2017: TL 349,896) 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. Retained earnings as per the statutory financial statements other than legal reserves are available for distribution, subject to the legal reserve requirement referred to below. Under the Turkish Commercial Code and in accordance with the Articles of Association of the Bank, the Bank is required to create the following legal reserves from appropriations of earnings, which are available for distribution only in the event of liquidation or losses: a) First legal reserve, appropriated at the rate of 5% of net income, until the total reserve is equal to 20% of issued and fully paid-in share capital. b) Second legal reserve, appropriated at the rate of 10% of the distribution of second dividend, in excess of the first legal reserve, appropriated at a rate of 5% and first dividend, appropriated at a rate of 8%. Fair value reserve The fair value reserve includes the cumulative net change in the fair value of financial assets measured at fair value through other comprehensive income until the investment is derecognised or impaired. As at 31 December 2018, such gains / (losses) recognised under equity in fair value reserves amounted to TL 11,282 (31 December 2017: TL 21,154). 71 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 22 NET INTEREST INCOME 31 December 2018 31 December 2017 Interest income on: Interest on loans and advances 3,046,371 2,092,254 Interest on deposits with banks 157,809 66,638 Interest on financial assets measured at amortized cost 113,444 - Interest on held to maturity investments 20,259 Interest on interbank money market placements 70,775 56,824 Interest on financial assets measured at fair value through profit or loss 47 - Interest on trading financial assets 1,127 Other interest income 2,649 984 Total interest income 3,391,095 2,238,086 Interest expense on: Interest on funds borrowed (1,526,741) (742,550) Interest on debt securities in issue (958,449) (468,138) Other interest expenses (46,441) (13,510) Total interest expense (2,531,631) (1,224,198) Net interest income 859,464 1,013,888 23 FOREIGN EXCHANGE GAINS AND LOSSES 31 December 2018 31 December 2017 Foreign exchange gain 95,709,000 24,424,696 Foreign exchange losses 96,844,887 (24,022,093) Net foreign exchange gains/(losses) (1,135,887) 402,603 24 GAINS AND LOSSES ON FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS 31 December 2018 Derivative income (*) 2,622,384 Derivative expenses (*) (1,304,565) Trading income 1 Trading expenses (70) Total 1,317,750 (*) Derivative income/expense include fair value hedge valuation differences amounting TL 1,103,759. 31 December 2017 Derivative income (*) 819,076 Derivative expenses (*) (1,502,795) Trading income (5) Trading expenses (1,653) Total (685,377) (*) Derivative income/expense include fair value hedge valuation differences amounting TL 176,628. 72 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 25 OTHER OPERATING INCOME 31 December 2018 31 December 2017 Insurance premium income(*) - 170,357 Commission from reinsurance companies(*) - 24,308 Other 10,655 19,779 Total 10,655 214,444 (*) Income from these transactions are presented in fee and commission income. 26 OPERATING EXPENSES 31 December 2018 31 December 2017 Staff costs 170,115 132,734 BRSA contribution expense 25,183 12,806 KOSGEB fee(*) 17,180 11,602 Taxes and duties expenses 16,296 8,288 Rent expenses 7,375 5,823 Employment termination benefits and unused vacation 5,096 1,983 Depreciation and amortisation charges 3,845 4,610 Premiums paid to reinsurance companies 774 82,426 Research expenses 63 11,474 Other 26,534 49,256 Total 272,461 321,002 (*) As the Bank’s more than 50% of the paid-in share capital is owned by the government entities, the Bank is obliged to pay annual fee at a rate of 2% of the corporate tax base of the Bank to Small and Medium Industries Development Organisation (“KOSGEB”) in accordance with the establishment law of KOSGEB. 27 COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of banking activities, the Bank undertakes various commitments and incurs certain contingent liabilities that are not presented in the balance sheets, including letters of guarantee, other guarantees and off-balance sheet derivative instruments. The management does not expect any material losses as a result of these transactions. The following is a summary of significant commitments and contingent liabilities: Legal proceedings 31 December 2018, there are legal proceedings outstanding against the Bank amounting to USD 418 thousand and TL 23 thousand. In addition, there are legal proceedings outstanding filed by the Bank. These legal proceedings amount to TL 178 thousand, USD 52 thousand and EUR 14 thousand. The Bank has not provided a provision for these legal proceedings, since possible outflow of resources embodying economic benefits to settle these contingent liabilities will be immaterial. A number of the outstanding litigation cases in Turkish courts relate to employee bonus payments. 73 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 27 COMMITMENTS AND CONTINGENT LIABILITIES (continued) Commitments under derivative instruments: The breakdown of swap transactions at 31 December 2018 and 31 December 2017 is as follows: 31 December 2018 31 December 2017 Foreign Foreign currency currency Currency amount TL amount TL Transaction type Interest rate swap purchases USD 2,088,256 11,026,199 2,495,616 9,610,451 EUR 186,500 1,126,534 - - Foreign currency swap purchases USD 176,462 931,736 1,052,818 3,974,389 Foreign currency forward purchases USD 160 844 1,070,123 4,039,717 TL 947 947 127,100 127,100 Cross currency swaps purchases USD 2,582,747 13,637,165 1,461,991 5,519,018 JPY 238,000,000 1,138,973 23,800,000 797,562 EUR 183,359 1,107,563 - - Option purchases TL 4,330 4,330 - - EUR 436 2,635 - - USD 300 1,584 - - Total purchases 28,978,510 24,068,237 Interest rate swap sales USD 2,088,256 11,026,199 2,495,616 9,610,451 EUR 186,500 1,126,534 - - Foreign currency swap sales EUR 144,800 874,650 706,000 3,186,744 GBP 7,500 50,459 10,750 54,676 JPY 145,896 6,982 151,807 5,087 TL - - 762,272 762,272 Foreign currency forward sales TL 944 944 4,081,610 4,081,610 USD 160 844 31,110 117,440 EUR - - - - Cross currency swaps sales TL 36,220 36,220 36,220 36,220 EUR 2,385,179 14,407,436 1,451,320 6,551,000 JPY 238,000,000 1,138,973 - - Option sales TL 4,330 4,330 - - EUR 436 2,635 - - USD 300 1,584 - - Total sales 28,677,790 24,405,500 Total 57,656,300 48,473,737 74 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 27 COMMITMENTS AND CONTINGENT LIABILITIES (continued) Maturity analysis of swap and forward transactions are as follows: 31 December 2018 Up to 3 3 months 1 year to Over 5 months to 1 year 5 years years Total Interest rate swap purchases 196,710 4,229,363 7,726,660 - 12,152,733 Foreign currency swap purchases 931,736 - - - 931,736 Forward foreign currency purchases 1,791 - - - 1,791 Cross currency swaps purchases - 2,985,749 6,336,121 6,561,831 15,883,701 Option purchases 8,549 - - - 8,549 Total purchases 1,138,786 7,215,112 14,062,781 6,561,831 28,978,510 Interest rate swap sales 196,710 4,229,363 7,726,660 - 12,152,733 Foreign currency swap sales 932,091 - - - 932,091 Forward foreign currency sales 1,788 - - - 1,788 Cross currency swaps sales - 2,991,686 6,020,101 6,570,842 15,582,629 Option sales 8,549 - - - 8,549 Total sales 1,139,138 7,221,049 13,746,761 6,570,842 28,677,790 31 December 2017 Up to 3 3 months 1 year to Over 5 months to 1 year 5 years years Total Interest rate swap purchases 333,766 1,224,611 6,164,574 1,887,500 9,610,451 Foreign currency swap purchases 3,974,389 - - - 3,974,389 Forward foreign currency purchases 2,518,385 1,648,432 - - 4,166,817 Cross currency swaps purchases - - 3,968,562 2,348,018 6,316,580 Option purchases - - - - - Total purchases 6,826,540 2,873,043 10,133,136 4,235,518 24,068,237 Interest rate swap sales 333,766 1,224,611 6,164,574 1,887,500 9,610,451 Foreign currency swap sales 4,008,779 - - - 4,008,779 Forward foreign currency sales 2,522,776 1,676,274 - - 4,199,050 Cross currency swaps sales - - 4,039,000 2,548,220 6,587,220 Option sales - - - - - Total sales 6,865,321 2,900,885 10,203,574 4,435,720 24,405,500 The above tables summarise the Bank’s derivative transactions that will be settled on a net basis into relevant maturity groupings based on the remaining period at the balance sheet date, in respective currencies. Accordingly, the difference between the “sale” and “purchase” transactions represents the net exposure of the Bank with respect to commitments arising from these transactions. 75 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 27 COMMITMENTS AND CONTINGENT LIABILITIES (continued) Credit related commitments: Letters of guarantee, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Cash requirements under these guarantees are considerably less than the amount of the commitment because the Bank does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded. The following table shows the outstanding credit related commitments of the Bank at 31 December 2018 and 31 December 2017: 31 December 2018 31 December 2017 Financial guarantees Other guarantees -Foreign currency (Note 4) 9,083,093 6,241,263 Total financial guarantees 9,083,093 6,241,263 The Bank provides cover for Turkish exporters, against credit risk by offering variety of programs. 76 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 28 SEGMENT ANALYSIS The main segments of the Bank are corporate banking and investment banking. Investment banking includes the treasury operations of the Bank whereas corporate banking includes all operations other than treasury (mainly all of the credit operations), which is reported in manner consistent with the internal reporting provided to the chief operating decision maker, the Assistant General Manager of Finance. The analysis is as follows: Corporate Investment 31 December 2018 banking banking Unallocated Total Segment revenue 3,407,474 1,659,976 2,342 5,069,792 Segment expenses (1,832,341) (970,638) (1,451,950) (4,254,929) Net profit 1,575,133 689,338 (1,449,608) 814,863 Interest income 3,049,020 342,075 - 3,391,095 Interest expense (1,572,254) (959,377) - (2,531,631) Depreciation and amortisation - - (3,845) (3,845) Impairment charges on loans (108,635) - - (108,635) Corporate Investment 31 December 2018 banking banking Unallocated Total Total segment assets 129,670,051 8,216,566 1,349,134 139,235,751 Segment liabilities 111,865,083 17,647,843 2,076,240 131,589,166 Equity - 60,515 7,586,070 7,646,585 Total liabilities and equity 111,865,083 17,708,358 9,662,310 139,235,751 Corporate Investment 31 December 2017 banking banking Unallocated Total Segment revenue 2,329,091 144,848 402,603 2,876,542 Segment expenses (800,664) (1,182,062) (325,341) (2,308,067) Net profit 1,528,427 (1,037,214) 77,262 568,475 Interest income 2,093,238 144,848 - 2,238,086 Interest expense (756,004) (468,194) - (1,224,198) Depreciation and amortisation - - (4,610) (4,610) Impairment charges on loans - (48,999) - (48,999) Corporate Investment 31 December 2017 banking banking Unallocated Total Total segment assets 80,138,105 3,285,740 1,818,345 85,242,190 Segment liabilities 67,400,266 11,003,847 1,063,191 79,467,304 Equity - - 5,774,886 5,774,886 Total liabilities and equity 67,400,266 11,003,847 6,838,077 85,242,190 77 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 28 SEGMENT ANALYSIS (continued) Reconciliation of segment results of operations to: Corporate Investment 31 December 2018 banking banking Unallocated Total Interest income 3,049,020 342,075 - 3,391,095 Fee and commissions income 347,799 - 2,342 350,141 Gains on financial instruments measured at fair value profit or loss - 1,317,750 - 1,317,750 Other operating income 10,655 151 - 10,806 Total segment revenue 3,407,474 1,659,976 2,342 5,069,792 Corporate Investment 31 December 2018 banking banking Unallocated Total Interest expense (1,572,254) (959,377) - (2,531,631) Fee and commissions expense (183,445) (11,261) (11,609) (206,315) Impairment charges on loans - (108,635) (108,635) Losses on financial instruments measured at fair value profit or loss - - - - Foreign exchange losses - - (1,135,887) (1,135,887) Other operating expenses - - (272,461) (272,461) Total segment expense (1,755,699) (970,638) (1,528,592) (4,254,929) Corporate Investment 31 December 2017 banking banking Unallocated Total Interest income 2,093,238 144,848 - 2,238,086 Fee and commissions income 21,409 - - 21,409 Foreign exchange gain - - 402,603 402,603 Other operating income 214,444 - - 214,444 Total segment revenue 2,329,091 144,848 402,603 2,876,542 Corporate Investment 31 December 2017 banking Banking Unallocated Total Interest expense (756,004) (468,194) - (1,224,198) Fee and commissions expense - (28,491) - (28,491) Impairment charges on loans - (48,999) - (48,999) Gains on financial instruments classified as held for trading, net - (685,377) - (685,377) Losses on financial instruments classified as held for trading, net - - - - Other operating expenses - - (321,002) (321,002) Total segment expense (756,004) (1,231,061) (321,002) (2,308,067) 78 TÜRKİYE İHRACAT KREDİ BANKASI AŞ NOTES TO THE INTERIM FINANCIAL STATEMENTS AS AT 31 DECEMBER 2018 (Amounts expressed in thousands of Turkish Lira (“TL”), unless otherwise indicated) 29 RELATED PARTIES Parties are considered to be related if one party has the ability to control the other party, is under common control or can exercise significant influence over the other party in making financial or operational decisions. For the purpose of this financial information the shareholders of the Bank together with state- controlled entities in Turkey are considered and referred to as related parties. Other related parties refer to entities controlled, jointly controlled or having significance influence by the Turkish Government. A number of banking transactions were entered into with related parties in the normal course of business. (a) Balances with related parties: 31 December 2018 31 December 2017 Due from banks: - Other related parties(1) 301,087 860,264 Loans and advances: - Other related parties(2) 3,495,686 2,510,720 Trading securities: - Shareholder(3) - 11,710 Investment securities (“Held to maturity”) - Shareholder(4) 3,249,722 180,461 Funds borrowed - Other related parties(5) 75,982,756 42,055,781 Other liabilities - Other related parties 1,650 1,100 (1) Average interest rate for due from banks is 23.27% (31 December 2017: 13.91%) (2) Average interest rate for loans and advances are 7.30% (31 December 2017: 4.05%) (3) As of 31 December 2018 there is no trading securities balance (31 December 2017: 8.2%) (4) Average interest rate for investment securities is 9.83% (31 December 2017: 9.5%) (5) Average interest rate for funds borrowed is 1.25% (31 December 2017: 0.93%) (b) Transactions with related parties: 31 December 2018 31 December 2017 Interest income on investment and trading securities: - Shareholder 113,491 21,385 Interest income on loans and advances: - Other related parties 83,477 65,326 Interest expense on funds borrowed: - Other related parties 659,596 279,861 Operating expenses (taxes paid) -Other related parties 16,296 8,288 (c) Remuneration of key management personnel: 31 December 2018 31 December 2017 Salaries and other short-term employee benefits 3,575 2,979 30 EVENTS AFTER THE REPORTING PERIOD On 24 January 2019, the Bank issued bonds amounting USD 500 million which is subject to 8.25% interest rate and having 5-years maturity. 79