Türkiye Halk Bankası Anonim Şirketi And Its Subsidiaries Consolidated Financial Statements As at and For the Year Ended 31 December 2017 With Independent Auditors’ Report Thereon Türkiye Halk Bankası Anonim Şirketi and Its Subsidiaries TABLE OF CONTENTS Page ------ Independent auditors’ report Consolidated statement of financial position 1 Consolidated statement of profit or loss and other comprehensive income 2-3 Consolidated statement of changes in equity 4 Consolidated statement of cash flows 5 Notes to the consolidated financial statements 7-87 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Consolidated Statement of Financial Position As at 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) Notes 31 December 2017 31 December 2016 Assets Cash on hand 8 2.208.138 1.543.129 Balances with Central Bank 9 17.658.013 11.268.177 Reserve deposits at Central Bank 9 16.815.227 17.400.661 Due from banks 10 7.602.135 3.037.247 Financial assets at fair value through profit or loss 483.494 449.224 - Trading securities 11 120.563 89.115 - Derivative financial instruments 27 362.931 360.109 Collaterals of borrowed securities 29 10.000.429 - Loans and advances 12 205.032.373 158.898.373 Insurance premium receivables 13 731.825 391.236 Investment securities: 39.689.350 33.826.855 - Available-for-sale investment securities 11 17.702.251 15.482.229 - Held-to-maturity investment securities 11 21.987.099 18.344.626 Investment in equity-accounted investees 14 357.755 286.103 Finance lease receivables 15 2.514.554 2.144.498 Property and equipment 16 3.746.279 3.260.536 Intangible assets 17 145.166 115.548 Non-current assets held for sale 18 533 1.280 Investment property 19 910.378 864.116 Deferred tax assets 25 465.405 440.540 Other assets 20 2.992.980 2.726.076 Total assets 311.354.034 236.653.599 Liabilities Deposits from banks 21 19.214.698 22.860.211 Deposits from customers 21 174.038.081 127.529.857 Obligations under repurchase agreements 22 4.348.200 10.844.612 Loan and advances from banks 23 22.783.118 23.928.919 Interbank money market borrowings 24 30.655.122 8.177.524 Derivative financial instruments 27 150.673 224.593 Debt securities issued 28 12.008.923 12.744.316 Borrowed securities 29 10.000.429 - Subordinated liabilities 28 1.004.385 - Insurance contract liabilities 13 2.479.385 1.666.823 Provisions 26 1.352.531 1.252.756 Income tax payables 25 195.638 64.610 Deferred tax liability 25 574.170 288.974 Other liabilities 26 6.236.132 5.062.980 Total liabilities 285.041.485 214.646.175 Equity Share capital 30 2.578.184 2.578.184 Share premium 39.737 39.737 Reserves 31 3.553.194 2.987.862 Retained earnings 31 19.931.310 16.188.483 Total equity attributable to equity holders of the Bank 26.102.425 21.794.266 Non-controlling interests 210.124 213.158 Total equity 26.312.549 22.007.424 Total liabilities and equity 311.354.034 236.653.599 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 1 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 1 January - 1 January - Notes 31 December 2017 31 December 2016 Interest income: -Interest income on loans 19.060.838 14.307.861 -Interest income on securities 3.767.324 2.571.403 -Interest income on finance leases 197.704 158.434 -Interest income on deposits at banks 390.202 171.744 -Interest income on other money market placements 57.090 703 -Other interest income 194.806 153.062 23.667.964 17.363.207 Interest expense: -Interest expense on deposits (11.084.754) (8.051.221) -Interest expense on other money market deposits (2.719.811) (798.909) -Interest expense on borrowings (540.285) (484.839) -Interest expense on debt securities issued (843.743) (589.250) -Other interest expense (117.289) (88.558) (15.305.882) (10.012.777) Net interest income 8.362.082 7.350.430 Fees and commission income 36 2.506.800 1.740.139 Fees and commission expenses 36 (585.666) (502.036) Net fee and commission income 1.921.134 1.238.103 Net trading income from securities 35.077 20.281 Net trading income / (loss) from derivative financial instruments (195.718) 11.158 Foreign exchange gain / (losses), net 239.266 151.515 Net impairment losses on financial assets (1.115.114) (1.644.992) Income from insurance operations 1.469.041 1.293.068 Cost of insurance operations (1.167.182) (1.170.476) Dividend income 11.639 37.986 Other operating income 34 381.695 422.274 Other operating expenses 35 (4.712.481) (4.000.048) Operating profit 5.229.439 3.709.299 Share of profit of equity-accounted investees 21.511 17.309 Profit before income tax 5.250.950 3.726.608 Income tax charge 25 (1.065.528) (708.350) Profit for the year 4.185.422 3.018.258 Other comprehensive income Items that will be never classified to profit or loss: Re-measurement of employee termination benefits 14.073 17.765 Revaluation differences of property and equipment 285.864 434.347 Related tax (142.311) (25.270) Items that are or may be reclassified subsequently to profit or loss: Fair value reserve (available-for-sale financial assets): Net change in fair value 171.619 (462.580) Net amount transferred to profit or loss (38.564) (21.586) Foreign currency translation differences (4.311) 43.912 Related tax 92.102 6.369 Other comprehensive income for the year, net of tax 378.472 (7.043) Total comprehensive income for the year 4.563.894 3.011.215 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 2 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Consolidated Statement of Profit or Loss and Other Comprehensive Income (continued) For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 1 January - 1 January - Notes 31 December 2017 31 December 2016 Profit attributable to: Equity holders of the Bank 4.172.937 3.012.408 Non-controlling interests 12.485 5.850 Profit for the year 4.185.422 3.018.258 Total comprehensive income attributable to: Equity holders of the Bank 4.552.099 2.999.483 Non-controlling interests 11.795 11.732 Total comprehensive income for the year 4.563.894 3.011.215 Basic earnings per share (full TL per share) 32 3,3383 2,4099 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 3 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Consolidated Statement of Changes in Equity For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) Total equity attributable to equity holders of the Bank Reserves Share Share Fair value Other Retained Non-controlling Total Notes capital premium reserve reserves earnings Total interest equity Balances at 1 January 2016 2.578.184 39.488 (290.301) 3.131.364 13.652.154 19.110.889 201.426 19.312.315 Total comprehensive income for the year Net profit of the period - - - - 3.012.408 3.012.408 5.850 3.018.258 Other comprehensive income, net of tax Re-measurement of employee termination benefits - - - - 14.212 14.212 - 14.212 Fair value reserve (available-for-sale financial assets): Net change in fair value - - (412.211) (65.764) - (477.975) 47 (477.928) Net amount transferred to profit or loss - - (21.586) - - (21.586) - (21.586) Revaluation differences of property and equipment - - - 434.347 - 434.347 - 434.347 Foreign currency translation differences - - - 43.768 - 43.768 144 43.912 Total other comprehensive income - - (433.797) 412.351 14.212 (7.234) 191 (7.043) Total comprehensive income for the year (433.797) 412.351 3.026.620 3.005.174 6.041 3.011.215 Transactions with the owners, recorded directly in equity Transfers to other reserves 31 - - - 168.405 (253.476) (85.071) - (85.071) Dividends to equity holders 31 - - - - (238.603) (238.603) - (238.603) Changes in ownership interests in subsidiaries Change in non-controlling interests without a change in control - 249 - (160) 1.788 1.877 5.691 7.568 Balances at 31 December 2016 2.578.184 39.737 (724.098) 3.711.960 16.188.483 21.794.266 213.158 22.007.424 Balances at 1 January 2017 2.578.184 39.737 (724.098) 3.711.960 16.188.483 21.794.266 213.158 22.007.424 Total comprehensive income for the year Net profit of the period - - - - 4.172.937 4.172.937 12.485 4.185.422 Other comprehensive income, net of tax Re-measurement of employee termination benefits - - - - 11.258 11.258 - 11.258 Fair value reserve (available-for-sale financial assets): Net change in fair value - - 149.731 115.265 - 264.996 (1.275) 263.721 Net amount transferred to profit or loss - - (38.564) - - (38.564) - (38.564) Revaluation differences of property and equipment - - - 146.368 - 146.368 - 146.368 Foreign currency translation differences - - - (4.896) - (4.896) 585 (4.311) Total other comprehensive income - - 111.167 256.737 11.258 379.162 (690) 378.472 Total comprehensive income for the year - - 111.167 256.737 4.184.195 4.552.099 11.795 4.563.894 Transactions with the owners, recorded directly in equity Transfers to other reserves 31 - - - 198.610 (213.604) (14.994) - (14.994) Dividends to equity holders 31 - - - - (255.827) (255.827) (757) (256.584) Changes in ownership interests in subsidiaries Change in non-controlling interests without a change in control - - - (1.182) 28.063 26.881 (8.139) 18.742 Other - - - - - - (5.933) (5.933) Balances at 31 December 2017 2.578.184 39.737 (612.931) 4.166.125 19.931.310 26.102.425 210.124 26.312.549 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 4 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Consolidated Statement of Cash Flows For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 1 January - 1 January - Notes 31 December 2017 31 December 2016 Cash flows from operating activities Profit for the year 4.185.422 3.018.258 Adjustments for: Depreciation and amortisation 35 178.943 224.184 Net impairment loss on loans and advances 12 1.731.696 1.657.460 Net interest income (8.362.082) (7.350.430) Dividend income (11.639) (37.986) Provision for employee termination benefits 35 98.844 83.672 Impairment losses on property and equipment - 9.032 Net gain on sale of property and equipment 34 (112.134) (129.232) Share of profit of equity-accounted investees (21.511) (17.309) Income tax expense 25 1.065.528 708.350 (1.246.933) (1.834.001) Change in financial assets at fair value through profit or loss (31.389) (3.080) Change in due from banks 22.540 (26.657) Change in loans and advances (46.260.521) (32.478.568) Change in other assets (2.028.911) (3.414.582) Change in deposits from banks (3.603.141) 15.052.270 Change in deposits from customers 45.457.843 12.675.136 Change in loans and advances from banks (1.527.805) (554.361) Change in other liabilities 17.670.819 11.057.581 Interest received 21.730.125 16.611.483 Dividends received 11.639 37.986 Interest paid (14.302.974) (9.495.583) Income tax paid (541.969) (883.058) Employee termination benefits paid 26 (41.125) (49.769) Net cash provided from / (used in) operating activities 15.308.198 6.694.797 Cash flows from investing activities Acquisitions of subsidiaries (14.994) (3.213) Acquisitions of available-for-sale investment securities (9.672.067) (6.118.249) Proceeds from sale of available-for-sale investment securities 7.909.271 3.102.821 Acquisitions of held to maturity investment securities (4.893.951) (4.254.198) Proceeds from sale of held to maturity investment securities 11 2.476.081 2.712.189 Acquisition of property and equipment 16 (551.943) (269.671) Proceeds from the sale of property and equipment 199.879 51.558 Acquisition of intangible assets 17 (89.366) 2.608 Net cash provided from / (used in) investing activities (4.637.090) (4.776.155) Cash flows from financing activities Proceeds from issue of debt securities 9.216.726 10.667.444 Repayment of debt securities (8.936.020) (7.097.144) Dividends paid 31 (256.584) (238.603) Net cash provided from / (used in) financing activities 24.122 3.331.697 Net increase / (decrease) in cash and cash equivalents 10.695.230 5.250.339 Cash and cash equivalents at 1 January 15.530.597 8.855.902 Effect of change in currency rate fluctuations on cash held 897.165 1.424.356 Cash and cash equivalents at 31 December 37 27.122.992 15.530.597 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 5 Türkiye Halk Bankası Anonim Şirketi and its subsidiaries Notes to the consolidated financial statements: Note description Page: 1 Activities of the Bank and the Group 7 2 Statement of compliance 8 3 Basis of preparation 8 4 Significant accounting policies 10 5 Financial risk management 31 6 Classification of financial assets and financial liabilities 55 7 Operating segments 57 8 Cash on hand 60 9 Balances with Central Bank 60 10 Due from banks 61 11 Securities portfolio 61 12 Loans and advances 64 13 Insurance receivables and insurance contract liabilities 65 14 Equity accounted investees 66 15 Finance lease receivables 67 16 Property and equipment 68 17 Intangible assets 69 18 Non-current assets held for sale 69 19 Investment properties 69 20 Other assets 70 21 Deposits 70 22 Obligations under repurchase agreements 71 23 Loans and advances from banks 71 24 Interbank money market borrowings 73 25 Taxation 73 26 Other liabilities and provisions 77 27 Derivative financial instruments 80 28 Debt securities issued and subordinated liabilities 80 29 Collaterals of borrowed securities and borrowed securities 82 30 Share capital 82 31 Reserves and dividends paid and proposed 83 32 Earnings per share 83 33 Related parties 84 34 Other operating income 85 35 Other operating expense 85 36 Fees and commission income and expenses 85 37 Additional cash flow information 86 38 Commitments and contingencies 86 39 Other matters 87 40 Subsequent events 87 6 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 1. Activities of the Bank and the Group Türkiye Halk Bankası AŞ (the “Bank”) was incorporated in Turkey in 1933 as a state economic enterprise established under law no. 2284. As of 31 December 2017, the Bank operates with 969 branches, including 963 domestic branches and 6 foreign branches that are 5 in Cyprus and 1 in Bahrain. Domestic Branches include 29 satellite branches. There are three representative office in Iran, England and Singapure. The operations of Türkiye Halk Bankası AŞ and subsidiaries (the “Group”) consists of banking, securities, financial leasing, factoring services, brokerage and insurance services provided primarily to local customers. The consolidated financial statements of the Group include the accounts of the Bank, Halk Sigorta AŞ, Halk Hayat ve Emeklilik AŞ, Halk Yatırım Menkul Değerler AŞ, Halk Finansal Kiralama AŞ, Halk Portföy Yönetimi AŞ, Halk Banka AD, Skopje, Halk Gayrimenkul Yatırım Ortaklığı AŞ, Halk Faktoring AŞ, Halkbank A.D., Beograd, Bileşim Alternatif Dağıtım Kanalları ve Ödeme Sistemleri AŞ. and Halk Varlık Kiralama A.Ş. In 2000, the Turkish Parliament passed Statute 4603, pursuant to which state-owned banks were required to restructure its operations and prepare themselves to eventual privatization. According to the Decree number 2006/69, dated as 11 August 2006 issued by Privatization High Council, all outstanding shares of the Bank were transferred to the Privatization Administration and 99,9% of the Bank shares sold to general public. The first phase of the privatization process of the Bank corresponding to 24,98% of the shares was completed in the first week of May 2007 and the Bank’s shares have been traded on Borsa Istanbul AŞ (“Borsa Istanbul” or “BIST”) as of 10 May 2007. The second phase of the privatization process of the Bank corresponding to 23,92% of the shares that were previously held by the Privatization Administration was completed on 21 November 2012 and after the second public offering and privatization, the 48,90% of the Bank shares have been traded on BIST. The shares belonging to the T.C. Prime Ministry Privatization Administration were transferred to the Türkiye Varlık Fonu on 10 March 2017 pursuant to the Decree of the Higher Council for Privatization No. 2017/1 dated 3 February 2017. In November 2004, the Bank merged with Pamukbank Türk Anonim Şirketi (“Pamukbank”), integrated its operations and IT systems. In 2006, the Bank acquired a controlling share ownership in three companies - Halk Sigorta AŞ, a property, health and casualty insurance company, Halk Hayat ve Emeklilik AŞ, a life insurance company and Halk Yatırım Menkul Değerler AŞ, an equity brokerage services company. The Bank established Halk Gayrimenkul Yatırım Ortaklığı AŞ (“Halk GYO”) in 2010. Halk Gayrimenkul Yatırım Ortaklığı AŞ’s main line of business is, to form and improve real estate portfolios and to invest in real estate based capital market instruments. Its main operative target is, based on the Capital Markets Board’s (“CMB”) regulation regarding the real estate investment trusts, to invest in capital market instruments based on real estates, real estate projects and rights based on real estates. 28% shares of Halk GYO started to be traded on BIST at 22 February 2013. Halk Finansal Kiralama AŞ (“Halk Leasing”), was an associate of the Bank with 47,75% of the shares and accounted for according to the equity method until 27 May 2011. The Group obtained the control of Halk Leasing by acquiring 52,24% of the shares and voting interests in the company as of 27 May 2011. As a result, the Group’s equity interest in Halk Leasing has increased from 47,75% to 99,99%. Halk Leasing was established in September 1991 in Turkey and operates under the provisions of the Turkish financial leasing law number 3226. Halk Banka AD Skopje, formerly Export and Credit Bank AD Skopje is a subsidiary of the Bank. The Group obtained the control of Halk Banka AD, Skopje by acquiring 98,12% of the shares and voting interests of the company as of 8 April 2011 and 8 August 2011. Halk Banka AD Skopje has taken over Ziraat Banka AD Skopje which was a subsidiary of Turkish state bank that operating in Macedonia, through the merger as of 1 October 2012. As a result, the Group’s equity interest in Halk Banka AD, Skopje has increased from 98,12% to 98,78% and as at 31 December 2016 it is 99,03%. Halk Banka AD, Skopje is operating in the Republic of Macedonia. Its main activities include commercial lending, receiving of deposits, foreign exchange deals, and payment operation services in the country and abroad and retail banking services. 7 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 1. Activities of the Bank and the Group (continued) Halk Portföy Yönetimi AŞ (“Halk Portföy”), a subsidiary of the Bank established in 2011, was registered on 30 June 2011. Halk Portföy’s main line of business is to provide portfolio and fund management services. Halk Faktoring AŞ (“Halk Faktoring”), a subsidiary of the Bank established in 2012, was registered on 6 June 2012. Halk Faktoring’s main line of business is to provide factoring services that include legitimate commercial lending for all domestic and international trade operations. Halk Yatırım Menkul Değerler AŞ (“Halk Yatırım”), was set up in 1997 to carry out capital markets activities, to purchase and sell capital markets instruments, and to execute stock exchange transactions. The company became a subsidiary in early 2006 when Halkbank bought the shares of Türkiye Halk Bankası Personnel Provident Fund. The Bank obtained the control of Halkbank AD, Beograd by acquiring 76,76% of the shares and voting interests of the company as of 28 May 2015. Its main activities include commercial lending, accepting deposits, foreign exchange transactions, and payment operation services in the country and abroad and retail banking services. On the date of 24 November 2015 Bank’s share has increased into 82,47% by the increase of its capital. As of 31 December 2017, The Bank paid TL 14.894 for 17,42% shares of Halkbank A.D. Beograd and increased its shareholding 99,89%. Bileşim Alternatif Dağıtım Kanalları AŞ (“Bileşim AŞ”), a subsidiary of the Bank established in 1998. As of 22 July 2013, the Bank purchased 76% shares of Bileşim Alternatif Dağıtım Kanalları ve Ödeme Sistemleri A.Ş. which was the associate of the Bank, from Ziraat Group (the shares of T.C. Ziraat Bank A.Ş. was 61%, the shares of Ziraat Finansal Kiralama A.Ş. was 15%) and thus the company became the Bank’s subsidiary. Bileşim AŞ’s main line of business is to provide ATM operations, call center services, merchant operations and printing office operations to domestic and international customers. Halk Varlık Kiralama A.Ş. (“Halk Varlık”) was established on 3 October 2017 with the purpose of issuing “Lease Certificate” in accordance with the Capital Markets Board Law No. 6362, the CMB Communiqué and the related regulations of the CMB. 2. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The consolidated financial statements were authorised for issue by the Board of Directors on 30 April 2018. 3. Basis of preparation These consolidated financial statements are presented in Turkish Lira (“TL”), which is the Bank’s functional currency. Except as otherwise indicated, financial information presented in TL has been rounded to the nearest thousand. The consolidated financial statements are prepared on the historical cost basis as adjusted for the effects of inflation that lasted until 31 December 2005, except for the items presented on a fair value basis that are financial assets at fair value through profit or loss, derivative financial assets and liabilities held for trading purpose, available-for-sale investment securities whose fair value can reliably be measured and buildings whose fair value can reliably be measured by an independent appraiser. 3.1. Use of judgement and estimates The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the application of policies and in the measurement of income and expenses in the profit and loss statement and in the carrying value of assets and liabilities in the statement of financial position, and in the disclosure of information in the notes to the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. The actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised and in any future years affected. 8 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 3. Basis of preparation (continued) 3.1. Use of estimates and judgements (continued) Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year and about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements is disclosed below. These disclosures supplement the commentary on financial risk management. Impairment Assets accounted for at amortised cost are evaluated for impairment on a basis described in Note 4.8 – financial assets and financial liabilities. Investments in equity securities were evaluated for impairment on the basis described in Note 4.8 – financial assets and financial liabilities. An assessment as to whether an investment in sovereign debt is impaired may be complex. In making such an assessment, the Group considers the following factors:  The market’s assessment of creditworthiness as reflected in the bond yields;  The rating agencies’ assessments of the creditworthiness;  The ability of the country to access the capital markets for new debt issuance;  The probability of debt being restructured resulting in holders suffering losses through voluntary or mandatory debt forgiveness. Fair value The determination of fair value for financial assets and financial liabilities for which there is no observable market price requires the use of valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The Group’s accounting policy on fair value measurements is discussed in Note 4.8 – financial assets and financial liabilities. The Group measures fair values using the fair value hierarchy which is disclosed in Note 5 – financial risk management. Financial asset and liability classification The Group’s accounting policies provide scope for assets and liabilities to be designated at inception into different accounting categories in certain circumstances:  In classifying financial assets or liabilities as ‘trading’, the Group has determined that it meets the description of trading assets and liabilities set out in Note 4.10.  In classifying financial assets as held-to-maturity, the Group has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by Note 4.12. 3.2. Functional and presentation currency Functional currency of the Bank and its subsidiaries, which operate in Turkey, is Turkish Lira (TL). The functional currency of the Bank’s foreign subsidiaries is the respective local currency. Until 31 December 2005, the date at which the Group considers that the qualitative and quantitative characteristics necessitating restatement pursuant to IAS 29 (“Financial Reporting in Hyperinflationary Economies”) were no longer applicable, the financial statements of these companies were restated for the changes in the general purchasing power of TL based on IAS 29, which 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 the corresponding figures for previous periods be restated in the same terms. 9 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by the Group entities. Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year. 4.1. Basis of consolidation Subsidiaries The consolidated financial statements include the accounts of the Parent Bank and the subsidiaries. Subsidiaries are the entities controlled by the Parent Bank. The control exists if and only if; 1) when the Bank has the power over an affiliate which that power, directly or indirectly, give rights to govern the financial and operating policies of the entity so as to obtain benefits from its activities, 2) exposure, or rights, to variable returns from its involvement with the affiliate, 3) the ability to use its power over the affiliate to affect the amount of its returns. The Parent Bank reassess its control power over its subsidiaries if there is an indication that there are changes to any of the three elements of control. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Companies where the Bank exercises significant influence, but do not have operating and financial control are accounted for using the equity method. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Losses applicable to the non-controlling interest in a subsidiary are allocated to the non-controlling interest even if doing so causes the non-controlling interest to have a deficit balance. Intra-group balances, and income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. 10 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.1. Basis of consolidation (continued) Subsidiaries (continued) The subsidiaries included in consolidation and effective shareholding percentages of the Group as of 31 December 2017 and 31 December 2016 are as follows: Place of incorporation Direct ownership Indirect ownership 31 31 31 31 December December December December 2017 2016 2017 2016 Halk Sigorta AŞ Istanbul 89,18% 89,18% 94,33% 93,59% Halk Hayat ve Emeklilik AŞ Istanbul 100,00% 100,00% 100,00% 100,00% Halk Yatırım Menkul Değerler AŞ Istanbul 99,96% 99,96% 99,96% 99,96% Halk Gayrimenkul Yatırım Ortaklığı AŞ Istanbul 79,33% 79,33% 79,36% 79,36% Halk Finansal Kiralama AŞ Istanbul 100,00% 100,00% 100,00% 100,00% Halk Banka AD, Skopje Skopje 99,03% 99,03% 99,03% 99,03% Halk Portföy Yönetimi AŞ Istanbul 75,00% 75,00% 99,99% 99,99% Halk Faktoring AŞ Istanbul 97,50% 97,50% 100,00% 99,99% Halk Banka A.D. Beograd Beograd 99,89% 82,47% 99,89% 82,47% Bileşim Alternatif Dağıtım Kanalları AŞ Istanbul 100,00% 100,00% 100,00% 100,00% Halk Varlık Kiralama A.Ş.(*) Istanbul 100,00% - 100,00% - (*) Established with TL 100.000 (full TL) capital as a subsidiary of the Parent Bank, Halk Varlık Kiralama A.Ş. was registered with the Turkish Trade Registry on 3 October 2017. Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The Group measures goodwill at the acquisition date as the total of:  the fair value of the consideration transferred; plus  the recognised amount of any non-controlling interests in the acquire; plus if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquire; less  the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Acquisitions of non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. Investments in associates (equity-accounted investees) Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Investments in associates are accounted for using the equity method (equity-accounted investees) and are recognised initially at cost. The cost of the investment includes transaction costs. The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income, after adjustments to align the accounting policies with those of the Group, from the date that significant influence until the date that significant influence ceases. 11 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.1 Basis of consolidation (continued) Investments in associates (equity-accounted investees) (continued) The equity-accounted associates of the Group as of 31 December 2017 and 31 December 2016 are as follows: Place of incorporation Shareholding interest 31 December 2017 31 December 2016 Demir-Halk Bank NV Rotterdam 30,00% 30,00% Kobi Girişim Sermayesi Yatırım Ortaklığı AŞ Ankara 31,47% 31,47% Türk P ve I Sigorta AŞ Istanbul 16,67% 16,67% The reporting dates of the associates and the Group are identical and the associates’ accounting policies conform to those by the Group for similar transactions and events. 4.2 Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Non- monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments, which are recognised directly in equity. Non-monetary items 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 Group started to apply fair value hedge accounting as at 1 July 2015 by designating the exchange rate risk of Halkbank AD, Beograd, Demirhalkbank NV and Halkbank AD, Skobje are foreign investments that are recognized under fair value accounting as hedged item, in compliance with “IAS 39 Financial Instruments: Recognition and Measurement”. Accordingly, the effective portion of the foreign exchange differences is recorded under equity in the current period. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to TL at foreign exchange rates ruling at the reporting date. The income and expenses of foreign operations are translated to TL at exchange rates approximating to the exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. However, if the operation is a non-wholly- owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non- controlling interest. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interest. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. 12 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.2 Foreign currency (continued) Foreign exchange gains and losses arising from a monetary item receivable from or payables to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity in the foreign currency translation reserve. As at 31 December 2017 and 31 December 2016, foreign currency assets and liabilities of the Group are mainly in US Dollar (“USD”) and EUR. The TL/USD and TL/EUR exchange rates as at 31 December 2017 and 31 December 2016 are as follows: 31 December 2017 31 December 2016 Period end Average Period end Average TL / USD 3,7900 3,6261 3,5100 3,4766 TL / EUR 4,5465 4,0942 3,6974 3,6637 4.3 Interest Interest income and expenses are recognised in the profit or loss using the effective interest method except for the interest income on overdue loans. 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. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instruments, but not future credit losses. The calculation of the effective interest rate includes all fees and commissions paid or received transaction costs, and discounts or premiums that are integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial assets or liabilities. Interest income and expenses presented in the consolidated statement of income include:  interest on financial assets and liabilities at amortised cost calculated on an effective interest rate basis,  interest on available-for-sale investment securities calculated on an effective interest rate basis,  interest earned till the disposal of financial assets at fair value through profit or loss. 4.4 Fees and commission Commissions received from financial assets are recognised on an effective rate basis over the contractual period and unearned part is presented in other liabilities. Commissions given for financial liabilities are recognised on a straight-line basis over the contractual period and prepaid part is presented in other assets. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, commissions for insurance business are recognised as the related services are performed. 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. Other fees and commission expenses relate mainly to transaction and service fees, which are expensed as the services are received. 4.5 Net trading income Net trading income includes gains and losses arising from disposals of financial assets at fair value through profit or loss, the disposal of available-for-sale financial assets, gains and losses on derivative financial instruments held for trading purpose and foreign exchange differences. 13 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.6 Dividends Dividend income is recognised when the right to receive the income is established. 4.7 Income tax charge Income tax charge comprises current and deferred tax. Current and deferred taxes are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The Turkish tax legislation does not permit a parent company and its subsidiaries to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis. 4.8 Financial assets and financial liabilities Recognition The Group initially recognises loans and advances, deposits, obligations under repurchase agreements, loans and advances from banks and interbank money market borrowings on the date which they are originated. Regular way purchases and sales of financial assets are recognised on the settlement date on which the Group commits to purchase or sell the asset. Changes in fair value of assets to be received during the period between the trade date and the settlement date are accounted for in the same way as the acquired assets i.e. for assets carried at cost or amortized cost; change in value is not recognized. A financial asset or liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue. Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. On derecognition of a financial asset, the difference between the carrying amount of the asset or the carrying amount allocated to the portion of the asset transferred), and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss. The Group derecognises financial liabilities when its contractual obligations are discharged or cancelled or expired. 14 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.8 Financial assets and financial liabilities (continued) Offsetting Financial assets and liabilities are offset and the net amount presented in the separate statement of financial position when, and only when, the Group has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. Amortised cost measurement Amortised cost is calculated by taking into account all fees 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. For investments carried at amortised cost, gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process. Fair value measurement Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non- performance risk. When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Group uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, then the Group measures assets and long positions at a bid price and liabilities and short positions at an ask price. Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Group on the basis of the net exposure to either market or credit risk are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. 15 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.8 Financial assets and financial liabilities (continued) Identification and measurement of impairment The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. Assets carried at amortised cost In determining whether an impairment loss should be recorded profit or loss, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated amounts recoverable from a portfolio of loans and individual loans. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events:  significant financial difficulty of the issuer or obligor;  a breach of contract, such as a default or delinquency in interest or principal payments by more than 90 days;  the Bank granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a concession that the lender would not otherwise consider;  becoming probable that the borrower will enter bankruptcy or other financial reorganisation;  the disappearance of an active market for that financial asset because of financial difficulties; or  observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: (i) adverse changes in the payment status of borrowers; or (ii) national or local economic conditions that correlate with defaults on the assets in the group.  All loans with principal and/or interest overdue for more than 90 days are considered as impaired and individually assessed. 16 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.8 Financial assets and financial liabilities (continued) Identification and measurement of impairment (continued) Assets carried at amortised cost (continued) All loans except leasing receivables with principal and/or interest overdue for more than 90 days are considered as impaired and individually assessed. If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured based on the difference between the asset’s carrying amount and the estimated recoverable amount, determined by the net present value of the expected future cash flows discounted at the loan’s original effective interest rate. The estimated recoverable amount of a collateralized financial asset is measured based on the amount that is expected to be realised from foreclosure less costs for obtaining and selling the collateral, whether or not the foreclosure is probable. The carrying amount of the asset is reduced through the use of an allowance account. The amount of the loss is recognised in profit or loss. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for Group of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. 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 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 previously written off are included in profit or loss. Assets carried at fair value Available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. 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 equity to profit or loss. Impairment losses recognised in profit or loss on equity instruments classified as available for sale are not reversed through statement of 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. 17 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.9 Cash and cash equivalents Cash and cash equivalents comprise cash on hand, unrestricted balances held with central banks and highly liquid financial original maturities of less than three months, which are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Cash and cash equivalents are carried at amortised cost in the consolidated statement of financial position. 4.10 Trading assets and liabilities Trading assets and liabilities are those assets and liabilities that the Group 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. Derivatives are also classified as held-for-trading unless they are designated as effective hedging instruments. 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. The Group did not reclassify any trading assets and liabilities subsequent to their initial recognition. 4.11 Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and the Group does not intend to sell immediately or in the near term. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Such assets are carried at amortised cost using the effective interest method less any impairment in value. Gains and losses are recognised in income when the loans and receivables are derecognised or impaired, as well as through the amortisation process. Interest earned on such loans and receivables is reported as interest income. 4.12 Investment securities Investment securities are initially measured at fair value plus incremental direct transaction costs and subsequently accounted for depending on their classification as either held-to-maturity or available-for- sale. Held to maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investments intended to be held for an undefined period are not included in this classification. Any sale or reclassification of a more than insignificant amount of held-to-maturity investments not close to their maturity would result in the reclassification of all held-to-maturity investments as available-for-sale, and put restrictions on the Group for classifying investment securities as held-to-maturity for the current and the following two financial years. There has been no tainting in the held-to-maturity portfolio during 2017 and 2016. Held to maturity investments are subsequently measured at amortised cost using the effective interest method, less any impairment in value. Interest earned whilst holding held to maturity securities is reported as interest income. When financial assets are transferred to held-to-maturity category from available-for-sale portfolio, as a result of a change in intention, the fair value carrying amount of the related financial assets becomes the new amortised cost. Any previous gain or losses on those assets that have been recognised in equity are amortised over the remaining life of the held-to-maturity investments using the effective interest method. 18 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.12 Investment securities (continued) Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as another category of financial assets. After initial recognition, available for sale financial assets are measured at fair value. Quoted equity securities and quoted certain debt securities held by the Group that are traded in an active market are classified as being available-for-sale financial assets and are stated at fair value. Unquoted equity securities whose fair value cannot reliably be measured are carried at cost. Dividends on available-for-sale equity instruments are recognised in profit or loss when the Group’s right to receive payments is established. The fair value of available for sale monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the reporting date. The change in fair value attributable to translation differences that result from a change in amortised cost of the asset is recognised in profit or loss, and other changes are recognised in equity. Gains or losses on re-measurement to fair value are recognised as a separate component of equity until the instrument is derecognised, or until the instrument is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in profit or loss, however interest calculated on available-for-sale financial assets using effective interest method is reported as interest income. 4.13 Repurchase transactions The Group enters into purchases/sales of investments under agreements to resell/repurchase substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognised. The amounts paid are recognised as receivables from reverse repurchase agreements in the accompanying consolidated financial statements. The receivables are shown as collateralized by the underlying security. Investments sold under repurchase agreements continue to be recognised in the consolidated statement of financial position and are measured in accordance with the accounting policy for either assets held for trading, held to maturity or available- for-sale as appropriate. The proceeds from the sale of the investments are reported as obligations under repurchase agreements. Income and expenses arising from the repurchase and resale agreements over investments are recognised on an accruals basis over the period of the transaction and are included in “interest income” or “interest expenses”. 4.14 Property and equipment Recognition and measurement Items of property, plant and equipment except for lands and buildings which are measured at fair value, are measured at cost less accumulated depreciation and any accumulated impairment losses. Beginning from the second quarter of 2015, the Group, has changed its accounting policy for lands and buildings from historical cost method to revaluation method for the lands and buildings. Buildings are stated at fair value as of revaluation date less subsequent accumulated depreciation and subsequent accumulated impairment loss. Cost includes expenditures that are directly attributable to the acquisition of the asset. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and are recognised net within the other operating income or other operating expenses in profit or loss. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets of cash generating units are written down to their recoverable amount. The recoverable amount is defined as the amount that is the higher of the asset’s fair value less costs to sell and value in use. Impairment losses are recognised in profit or loss. 19 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.14 Property and equipment (continued) Subsequent costs The cost of replacing a 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 Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. 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 since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance leases are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Useful life Buildings 50 years Other movable tangible assets 3 – 25 years Leasehold improvements 4 – 5 years Safe-deposit boxes 50 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Derecognition An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognizing of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised. 4.15 Investment property Properties held for long term rental yields or value increase or both, rather than administrative purposes or for the sale in the ordinary course of business are classified as “Investment property” which are measured at fair value. Beginning from the third quarter of 2015, accounting policy has changed to fair value method in accordance with “IAS 40 Investment Property”. In subsequent periods, profit or loss due to the revaluation of fair value of investment property are accounted for under current period’s profit or loss. Any gain or loss on disposal of an investment property (calculated as the difference between the net proceeds from disposal and the carrying amount of an item) is recognized in profit or loss. When the use of a property changes such that it is reclassified as property, plant and equipment, its fair value at the date of reclassification becomes its cost for subsequent accounting. 4.16 Intangible assets Intangible assets acquired Intangible assets acquired separately before 1 January 2006 are carried at restated cost for the effects of inflation in TL units current at 31 December 2005 less accumulated amortisation and impairment losses, and items of intangible assets acquired after 1 January 2006 are carried at acquisition cost less accumulated amortisation and impairment losses. Amortisation is charged on a straight-line basis over their estimated useful lives. Estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in the estimate being accounted for on a prospective basis. The related costs are amortised at between 3 and 5 years based on their economic lives. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. 20 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.17 Non-current assets held for sale Certain non-current assets primarily related to the collateral collected on non-performing loans are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets classified as held for sale are measured at the lower of carrying value and fair value less costs to sell. 4.18 Impairment of non-financial assets The carrying amounts of the Group’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. For goodwill and intangible assets that have indefinite lives or that one not yet available for use, the recoverable amount is estimated each year at the same time. 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. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. 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. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 4.19 Leases The Group as the lessee Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight-line basis over the period of the lease. Finance leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. 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 on the remaining balance of the liability. Capitalised leased assets are depreciated over the estimated useful life of the asset. 21 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.19 Leases (continued) The Group as the lessor Operating leases Assets leased out under operating leases are included in investment property in the consolidated financial statements. They are depreciated over their expected useful lives on a basis consistent with similar owned property and equipment. Rental income is recognised in the consolidated statement of income on a straight- line basis over the lease term. Finance leases When the Group is the lessor in a lease agreement that transfers substantially all of the risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified as a finance lease and a receivable equal to the net investment in the lease is recognised. 4.20 Financial liabilities Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Financial liabilities are classified as either equity instruments or other financial liabilities. Equity instruments Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Other financial liabilities Other financial liabilities, including borrowings and deposits are the Group’s sources of debt funding. Borrowings and deposits are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset in the period in which the asset is prepared for its intended use or sale. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. 4.21 Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Group 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. 22 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.22 Employee benefits Defined benefit plans In accordance with existing social legislation in Turkey, the Bank and its subsidiaries in Turkey are required to make lump-sum termination indemnities to each employee who has completed over one year of service with the Group and whose employment is terminated due to retirement or for reasons other than resignation or misconduct. Such defined benefit plan is unfunded since there is no funding requirement in Turkey. The cost of providing benefits under the defined benefit plan is determined by independent actuaries annually using the projected unit credit method. All actuarial gains and losses are recognized in other comprehensive income. In calculating the related liability to be recorded in the financial statements for these defined benefit plans, the Group uses independent actuaries and also makes assumptions and estimation relating to the discount rate to be used, turnover of employees, future change in salaries/limits, etc. These estimations which are disclosed in Note 26 are reviewed regularly. The carrying value of employee termination benefit provisions as of 31 December 2017 is TL 497.405 (31 December 2016: TL 421.497). Defined contribution plans The foundations, Türkiye Halk Bankası AŞ Employee Pension Fund and T.C. Ziraat Bankası and T. Halk Bankası Employee Pension Fund, that the employees of the Bank are a member, were founded in accordance with the provisional article 20 of the Social Security Law numbered 506 (“Law”). Provisional article 23 of the Banking Act No: 5411 requires the Bank’s pension funds founded in the scope of Law to be transferred to the Social Security Foundation (“SSF”) within 3 years subsequent to the publishing date of the act. The procedure and essentials for the transfer were determined by the Council of Ministers’ decision dated 30 November 2006 and numbered 2006/11345. However, with the decree of the Constitutional Court numbered E.2005/139, K.2007/13 and K.2007/33 published in the Official Gazette dated 31 March 2007 and numbered 26479, the first paragraph of the temporary first article of the provisional article 23 of the Banking Act No: 5411 is cancelled and the execution has been ceased starting from the date the decree is published. After the justified decree related to cancelling the provisional article 23 of the Banking Law was announced by the Constitutional Court on the Official Gazette dated 15 December 2007 and numbered 26731, Grand National Assembly of Turkey (“GNA”) started to work on establishing new legal regulations; and after, the “Law Regarding the Amendments to the Social Security and General Health Insurance Act and Certain Laws and Decree Laws” numbered 5754 which was published on the Official Gazette dated 8 May 2008 and numbered 26870 approved at the General Assembly of the GNA and came into effect. The new law decrees that the contributors of the bank pension funds, the ones who receive salaries or income from these funds and their rightful beneficiaries will be transferred to the SSF and will be subject to this Law within 3 years after the release date of the related article, without any need for further operation. The three-year transfer period can be prolonged for maximum 2 years by the Council of Ministers’ decision. Related transfer period has been prolonged for 2 years by the Council of Ministers’ decision dated 14 March 2011, which was published on the Official Gazette dated 9 April 2011 and numbered 27900. In addition, by the Law numbered 6283 “Emendating Social Security and General Health Insurance Act”, which was published on the Official Gazette dated 8 March 2012 and numbered 28227, this period of 2 years has been raised to 4 years. The statement “The Council of Ministers have entitled to determine transfer period” has taken place in the scope of the Article 51 of the Law No: 6645 which was published on the Gazette on 23 April 2015 and numbered 29335. 23 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.22 Employee benefits (continued) Defined contribution plans (continued) The members of the plan receive pension benefits on retirement, dependent on several factors such as age, years of service and compensation. The Group recognized the liability in the statement of financial position in respect to these plans equal to the present value of the defined benefit obligation at the balance sheet less the fair value of the assets. The defined benefit obligation is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using the expected interest rates for Turkish Lira. The methodology included the calculation of the defined benefit obligation using 9,8% as a discount rate and inclusion of the present value of future employee contributions in plan assets. Based on the results of the actuarial report prepared as of 31 December 2017 and 31 December 2016, no technical deficit has been reported. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A provision is recognised for the amount expected to be paid under short-term cash bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. 4.23 Insurance businesses Through its insurance subsidiaries, the Group enters into contracts that contain insurance risk. An insurance contract is a contract under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance risk covers all risks except for financial risks. Investment contracts are those contracts which transfer financial risk without significant insurance risk. Financial risk is the risk of a possible future change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided, that it is not specific to a party to the contract, in the case of a non-financial variable. Insurance and investment contracts issued/signed by the insurance subsidiaries are accounted for as follows: Earned premiums: For short-term insurance contracts, premiums are recognised as revenue, net of premiums ceded to reinsurance firms, proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at reporting date is recognised as the reserve for unearned premiums that are calculated on a daily pro-rata basis. Premiums are shown before deduction of commissions given or received and deferred acquisitions costs, and are gross of any taxes and duties levied on premiums. For long-term insurance contracts, premiums are recognised as revenue when the premiums are due from the policyholders. Earned premiums, net of amounts ceded for reinsurance are recorded under income from insurance operations in the accompanying consolidated statement of profit or loss. Premium received for an investment contract, is not recognised as revenue. Premiums for such contracts are recognised directly as liabilities. Reserve for unearned premiums: The reserve for unearned premiums represents the proportions of the premiums written in a period that relate to the period of risk subsequent to the reporting date, without deductions of commission or any other expense. Reserve for unearned premiums is calculated for all contracts except for the insurance contracts for which the Group provides actuarial provisions. The reserve for unearned premiums is also calculated for the annual premiums of the annually renewed long-term insurance contracts. The reserve for unearned premiums is presented under insurance contract liabilities in the accompanying consolidated statement of financial position. 24 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.23 Insurance businesses (continued) Reserve for outstanding claims: The reserve for outstanding claims represents the estimate of the total reported costs of notified claims on an individual case basis at the reporting date as well as the corresponding handling costs. A provision for claims incurred but not reported (“IBNR”) is also established as described below. In the accompanying consolidated financial statements, reserve for outstanding claims is presented by netting off amounts recoverable from reinsurers under insurance contract liabilities. Estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of IBNR claims at the reporting date. It can take a significant period of time before the ultimate claims cost can be established with certainty. The primary technique adopted by management in estimating the cost of IBNR claims, is that of using past claim settlement trends to predict future claims settlement trends. At each reporting date, prior year claims estimates are reassessed for adequacy and changes are made to the provision. In addition to that, the Group also reassesses its notified claims provision at each reporting date on an ‘each claim-file’ basis. The reserve for outstanding claims is not discounted for the time value of money. The reserve for outstanding claims is presented under insurance contract liabilities in the accompanying consolidated statement of financial position. Long term insurance contracts: Long term insurance contracts are the provisions recorded against the liabilities of the Group to the beneficiaries of long-term life, health and individual accident policies based on actuarial assumptions. Long term insurance contracts are calculated as the difference between the net present values of premiums written in return of the risk covered by the Group and the liabilities to policyholders for long-term insurance contracts based on the basis of actuarial mortality assumptions as approved by the Republic of Turkey Prime Ministry Undersecretariat of Treasury, which are applicable for all Turkish insurance companies. Long term insurance contracts are presented under insurance contract liabilities in the accompanying consolidated financial statements. Investment contracts: Premiums received for such contracts are recognised directly as liabilities under investment contract liabilities. These liabilities are increased by bonus rate calculated by the Group and are decreased by policy administration fees, mortality and surrender charges and any withdrawals. Profit sharing reserves are the reserves provided against income obtained from asset backing investment contracts. These contracts entitle the beneficiaries of those contracts to a minimum guaranteed crediting rate per annum or, when higher, a bonus rate declared by the Group from the eligible surplus available to date. Deferred acquisition cost and deferred commission income: Commissions and other acquisition costs given to the intermediaries that vary with and are related to securing new contracts and renewing existing insurance contracts are capitalized as deferred acquisition cost. Deferred acquisition costs are amortised on a straight-line basis over the life of the contracts. Deferred acquisition costs are presented under other assets in the accompanying consolidated financial statements. Commission income obtained against premiums ceded to reinsurance firms are also deferred and amortised on a straight-line basis over the life of the contracts. Deferred commission income is presented under other liabilities and provisions in the accompanying consolidated financial statements. Liability adequacy test: At each reporting date, a liability adequacy test is performed, to ensure the adequacy of unearned premiums net of related deferred acquisition costs. In performing the test, current best estimates of future contractual cash flows, claims handling and policy administration expenses are taken into consideration. Any deficiency is immediately charged to the consolidated statement of comprehensive income. 25 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.23 Insurance businesses (continued) If the result of the test is that a loss is required to be recognised, the first step is to reduce any intangible item arising from business combinations related to insurance. If there is still a loss remaining, then the deferred acquisition cost is reduced to the extent that expense loadings are considered not recoverable. Finally, if there is a still remaining amount of loss, this should be booked as an addition to the reserve for premium deficiency. Income generated from pension business: Revenue arising from asset management and other related services offered by the insurance affiliate of the Bank are recognised in the accounting period in which the service is rendered. Fees consist primarily of investment management fees arising from services rendered in conjunction with the issue and management of investment contracts where the company actively manages the consideration received from its customers to fund a return that is based on the investment profile that the customer selected on origination of the instrument. These services comprise the activity of trading financial assets in order to reproduce the contractual services. In all cases, these services comprise an indeterminate number of acts over the life of the individual contracts. 4.24 Earnings per share Earnings per share from continuing operations disclosed in the accompanying consolidated statement of income is determined by dividing the net profit for the year by the weighted average number of shares outstanding during the year attributable to the shareholders of the Bank. 4.25 Events after the reporting period Events after the reporting period that provide additional information about the Group’s position at the reporting dates (adjusting events) are reflected in the consolidated financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes when material. 4.26 Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Board of Directors (being chief operating decision maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available. 26 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.27 New standards and interpretations not yet adopted Standards, interpretations and amendments to existing standards that are issued but not yet effective up to the date of issuance of the consolidated financial statements are as follows. The Group will make the necessary changes if not indicated otherwise, which will be affecting the consolidated financial statements and disclosures, after the new standards and interpretations become in effect. IFRS 9 Financial Instruments IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets / liabilities and for derecognition and for general hedge accounting. IFRS 9 will replace IAS 39 Financial Instruments: recognition and measurement, related to the classification and measurement of financial instruments. All recognized financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortized cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at FVTOCI. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading nor contingent consideration recognized by an acquirer in a business combination) in other comprehensive income, with only dividend income generally recognized in profit or loss. The Group will apply the classification, measurement and impairment requirements retrospectively by adjusting the opening balance sheet and opening equity at 1 January 2018, with no restatement of comparative periods. As compared to the classification under IAS 39, the combined application of the contractual cash flows characteristics and business models of the financial instruments as at 1 January 2018 will have a negative effect on the Bank’s equity amounting to TL 161.870. Classification and measurement of financial assets: According to IFRS 9 requirements, classification and measurement of financial assets will depend on the business model within which financial assets are managed and their contractual cash flow characteristics whether the cash flows represent “solely payments of principal and interest (SPPI). Upon initial recognition each financial asset will be classified as either fair value through profit or loss (“FVTPL”), amortized cost or fair value through other comprehensive income (“FVOCI”). As the requirements under IFRS 9 are different than the assessments under the existing IAS 39 rules, the classification and measurement of financial liabilities remain largely unchanged under IAS 39. Impairment of financial assets: As of 1 January 2018, the Group will recognize provisions for impairment in accordance with the IFRS 9 requirements. In this framework, as of 31 December 2017, method of provisions for impairment as set out in accordance with the related standard as mentioned in the Note 4.8 of Significant Accounting Policies will be changed by applying the expected credit loss model under IFRS 9. The expected credit loss estimates are required to be unbiased, probability-weighted and should include supportable information about past events, current conditions, and forecasts of future economic conditions. These financial assets will be divided into three categories depending on the gradual increase in credit risk observed since their initial recognition: 27 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.27 New standards and interpretations not yet adopted (continued) Stage 1: Includes financial assets not having significant increase in their credit risk from initial recognition till the following reporting date or financial assets having low credit risk at the reporting date. It is recognized 12-month expected credit losses for such financial assets. Stage 2: Includes financial assets having significant increase in their credit risk subsequent to the initial recognition, but not having objective evidence about impairment. It is recognized life time expected credit losses for such financial assets. Stage 3: Includes financial assets having objective evidence about impairment at the reporting date. It is recognized life time expected credit losses for such financial assets. IFRS 15 Revenue from Contracts with customers The standard replaces existing IFRS guidance and introduces a new control-based revenue recognition model for contracts with customers. In the new standard, total consideration measured will be the amount to which the Company expects to be entitled, rather than fair value and new guidance have been introduced on separating goods and services in a contract and recognising revenue over time. The standard is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted under IFRS. The Group is in the process of assessing the impact of the standard on the consolidated financial position or performance of the Group. IFRS 16 Leases On 13 January 2016, IASB published 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 change 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. The standard 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 Group is in the process of assessing the impact of the amendment on consolidated financial position or performance of the Group. IFRIC 22 – Foreign Currency Transactions and Advance Consideration The amendments clarify the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The Interpretation covers foreign currency transactions when an entity recognizes a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognizes the related asset, expense or income. The date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt. The amendment is effective for annual reporting periods beginning on or after 1 January 2018 with earlier application is permitted. The Group is in the process of assessing the impact of the amendment on consolidated financial position or performance of the Group. 28 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.27 New standards and interpretations not yet adopted (continued) Amendments to IFRS 2 – Classification and Measurement of Share-based Payment Transactions IFRS 2 Share-Based Payment has been amended by IASB to improving consistency and resolve some long- standing ambiguities in share-based payment accounting. The amendments cover three accounting areas: i) measurement of cash-settled share-based payments, ii) classification of share-based payments settled net of tax withholdings; and iii) accounting for modification of a share-based payment from cash-settled to equity- settled. Also, same approach has been adopted for the measurement of cash-settled share-based payments as equity-settled share-based payments. If certain conditions are met, share-based payments settled net of tax withholdings are accounted for as equity-settled share-based payments. The amendments are effective for periods beginning on or after 1 January 2018, with earlier application permitted. The Group is in the process of assessing the impact of the amendment on consolidated financial position or performance of the Group. Annual Improvements to IFRSs 2014-2016 Cycle IFRS 1 “First Time Adoption of International Financial Reporting Standards” IFRS 1 is amended to clarify that the deletion of short-term exemptions for first-time adopters within the context of ‘Annual Improvements to IFRSs 2012-2014 Cycle’ related to disclosures for financial instruments, employee benefits and consolidation of investment entities. IFRS 12 “Disclosure of Interests in Other Entities” The amendments clarify that the entity is not required to disclose summarized financial information for that subsidiary, joint venture or associate under the requirements of IFRS 12, when an entity’s interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) is classified (or included in a disposal group that is classified) as held for sale in accordance with IFRS 5. Amendments to IAS 40 Transfers of Investment Property The amendments clarify that a transfer to, or from, investment property necessitates an assessment of whether a property meets, or has ceased to meet, the definition of investment property, supported by observable evidence that a change in use has occurred. The amendments further clarify that the situations listed in IAS 40 are not exhaustive and that a change in use is possible for properties under construction (i.e. a change in use is not limited to completed properties). The amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. Entities can apply the amendments either retrospectively (if this is possible without the use of hindsight) or prospectively. Specific transition provisions apply. The directors of the Group anticipate that the application of these amendments may have an impact on the Group’s consolidated financial statements in future periods should there be a change in use of any of its properties. IFRS 17 Insurance Contracts This new standard requires insurance liabilities to be measured at a current fulfillment value and provides a more uniform measurement and presentation approach for all insurance contracts. These requirements are designed to achieve the goal of a consistent, principle-based accounting for insurance contracts. IFRS 17 supersedes IFRS 4 Insurance Contracts as of 1 January 2021. 29 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 4. Significant accounting policies (continued) 4.27 New standards and interpretations not yet adopted (continued) IFRIC 23 Uncertainty over Income Tax Treatments This interpretation addresses the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. It specifically considers: •Whether tax treatments should be considered collectively •Assumptions for taxation authorities' examinations •The determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates •The effect of changes in facts and circumstances. The directors of the Group do not anticipate that the application of the amendments in the future will have an impact on the Group’s consolidated financial statements. Amendments to IFRS 9 Prepayment Features with Negative Compensation This amendment amends the existing requirements in IFRS 9 regarding termination rights in order to allow measurement at amortized cost (or, depending on the business model, at fair value through other comprehensive income) even in the case of negative compensation payments. Annual Improvements to IFRS Standards 2015–2017 Cycle •IFRS 3 and IFRS 11 - The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business. •IAS 12 - The amendments clarify that all income tax consequences of dividends (i.e. distribution of profits) should be recognized in profit or loss, regardless of how the tax arises. •IAS 23 - The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings. The Group evaluates the effects of these standards, amendments and improvements on the consolidated financial statements. 30 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management Organization of the Risk Management Function The Group’s activities involve some degree of risk or combination of risks. Therefore, procedures and operations throughout the Group are designed towards contributing to effective addressing of this matter reflecting the disciplined and prudent risk management culture of the Group. The Bank Risk Management supervises the risk management process of the Group. The mission of Group Risk Management function is to ensure together with executive management that risks taken by the Group align with its policies and are compatible with its profitability and credit-rating objectives. The Group Risk Management reports to the Board of Directors through the Audit Committee and is responsible for identifying, measuring, monitoring and reporting Market, Credit and Operational Risk. Market Risk includes interest rate, foreign exchange and price risk. These risks are continually monitored and controlled according to the policies and limits set by the Board of Directors by using tools and software for monitoring and controlling. The risk management process consists of the stages of defining and measuring the risks; establishing the risk policies and procedures and their implementation; and the analysis, review, reporting, research, recognition and assessment of risks within the framework of the basis set by the Board and the Audit Committee. 31 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk The Group manages its credit risk by limiting its risk. Under the risk management the Bank rates each of its loans given to customers (legal or real) and requires additional guarantees from its customers with high risk ratings, or does not provide loans to such customers, or applies strategies in order to decrease the level risk of such loan. The Group’s credit risk is focused in Turkey where its main operations take place. During the loan application process, limits for product and customers are taken into consideration and these limits are controlled regularly. The related loan units within the Bank are responsible for defining limits for sectors and geographical regions. The risks and limits attributable to banks and transactions with correspondent banks are followed up on a daily basis. Off balance sheet risk concentration on individual customers and banks are also followed up daily in cooperation with the Treasury Department. Those loans which are renewed or restructured are traced not only according to their relevant regulations, but are also traced by the risk management process where they are re-considered for their credit group and weight. With these methods, new precautions are taken and loans that have longer maturities have greater credit risks than the short-term loans. The credibility of the debtors of the Bank is assessed periodically in accordance with the Communiqué on “Methods and Principles for the Determination of Loans and Other Receivables to be Reserved for and Allocation of Reserves.” Financial statements obtained for loans to be granted are audited as required by the related legislation. Loan limits are updated by the initiative of the Bank’s Credit Committee and top management, as deemed necessary and in accordance with the changes in economic conditions. The Bank obtains adequate collateral for loans given and other receivables. Such collateral comprises of suretyships, mortgages on property, cash blockages and cheques. Indemnified non-cash loans are weighted in the same risk group with the non-performing loans and recorded in the follow up accounts according to their collaterals. The percentage of the top 100 cash loan clients of the Bank to the total loan portfolio is 24% (31 December 2016: 24,52%). The percentage of the top 100 non-cash loan clients of the Bank to the total non-cash loan portfolio is 44,37% (31 December 2016: 46,43%). The percentage of the total cash and non-cash loan balances of the top 100 clients to the total of assets and off-balance sheet items is 16,92% (31 December 2016: 17,58%). Derivatives: The Group maintains strict control limits on net open derivative positions (i.e., the difference between purchase and sale contracts), by both amount and term. At any one time, the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e., assets where their fair value is positive), which in relation to derivatives is only a small fraction of the contract, or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments, except where the Group requires margin deposits from counterparties. 32 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk (continued) Master netting arrangements The Group further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis. However, the credit risk associated with favourable contracts is reduced by a master netting arrangement to the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement. Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit – which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit – which are written undertakings by the Group on behalf of a customer authorizing a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions – are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. 33 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk (continued) Sectoral breakdown of cash and non-cash loans is as follows: 31 December 2017 Cash Non-cash(*) Agricultural 1.008.169 94.689 Farming and raising livestock 901.319 41.547 Forestry 5.573 183 Fishing 101.277 52.959 Manufacturing 47.991.754 21.228.408 Mining 2.006.223 153.717 Production 37.597.392 17.724.175 Electric, gas and water 8.388.139 3.350.516 Construction 16.245.943 16.776.444 Services 103.848.370 20.195.172 Wholesale and retail trade 33.486.824 9.394.163 Hotel, food and beverage services 9.818.315 899.076 Transportation and telecommunication 13.227.196 2.051.476 Financial institutions 2.224.299 3.523.177 Real estate and renting services 41.328.358 3.947.795 Self-employment services 5.659 20.972 Education services 1.494.057 138.504 Health and social services 2.263.662 220.009 Other 36.259.966 492.945 Total loans 205.354.202 58.787.658 Non-performing loans 6.296.406 - Less: allowance for losses on loans and advances (6.618.235) - Total 205.032.373 58.787.658 (*) As of 31 December 2017, allowance for losses on non-cash loans are TL 131.448. 34 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk (continued) Sectoral breakdown of cash and non-cash loans is as follows: (continued) 31 December 2016 Cash Non-cash(*) Agricultural 737.384 65.096 Farming and raising livestock 637.680 58.619 Forestry 4.171 199 Fishing 95.533 6.278 Manufacturing 42.719.281 19.023.762 Mining 1.623.897 206.722 Production 34.422.154 15.023.632 Electric, gas and water 6.673.230 3.793.408 Construction 5.212.363 13.132.718 Services 55.234.527 15.175.175 Wholesale and retail trade 25.130.879 7.201.479 Hotel, food and beverage services 7.912.879 261.998 Transportation and telecommunication 13.514.295 691.611 Financial Institutions 2.715.073 3.758.185 Real estate and renting services 3.010.773 3.023.650 Self-employment services 807.281 18.151 Education services 980.348 71.969 Health and social services 1.162.999 148.132 Other 55.289.008 480.968 Total loans 159.192.563 47.877.719 Non-performing loans 5.320.512 - Less: allowance for losses on loans and advances (5.614.702) - Total 158.898.373 47.877.719 (*) As of 31 December 2016, allowance for losses on non-cash loans are TL 139.279. 35 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk (continued) Credit risk types according to sectors and geographical concentration: Credit risk of the Group as of 31 December 2017 and 31 December 2016 is calculated and credit risk types according to sectors and geographical concentration are presented in accordance with the “Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks” published in Official Gazette no. 29111 dated 6 September 2014 which is complaint to Basel III. Sectoral breakdown of risk weighted assets is as follows: 31 December 2017 31 December 2016 Agricultural 1.580.507 954.445 Farming and raising livestock 955.084 769.653 Forestry 450.725 80.054 Fishing 174.698 104.738 Manufacturing 73.774.993 58.082.221 Mining 2.259.993 1.573.801 Production 61.112.745 47.834.950 Electric, gas and water 10.402.255 8.673.470 Construction 17.741.804 12.843.361 Services 100.489.446 72.601.139 Wholesale and retail trade 40.689.445 30.747.778 Hotel, food and beverage services 11.583.010 8.343.227 Transportation and telecommunication 14.954.621 14.146.495 Financial institutions 22.757.960 12.546.255 Real estate and renting services 5.444.398 3.418.541 Self-employment services 876.371 854.103 Education services 1.626.733 1.024.768 Health and social services 2.556.908 1.519.972 Other 142.880.125 127.802.070 Total risk weighted assets 336.466.875 272.283.236 Information according to geographical concentration: 31 December 2017 31 December 2016 Domestic 332.248.072 269.569.699 EU Countries 1.950.278 1.066.030 OECD Countries(*) 123.830 41.884 USA, Canada 582.612 230.788 Other countries 1.561.561 1.374.812 Investment and associates, subsidiaries and joint ventures - - Off-shore banking regions 522 23 Total risk weighted assets 336.466.875 272.283.236 (*) OECD Countries other than the EU Countries, USA and Canada. 36 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk (continued) Credit quality per class of financial assets: Due from banks, financial assets at fair value through profit or loss, available-for-sale investment securities and held-to-maturity investment securities do not include overdue and individually impaired assets, as of 31 December 2017 and 31 December 2016. Aging analysis of past due but not impaired financial assets per classes of financial instruments: Between Between 31 December 2017 30 and 60 days 61 and 90 days Total Loans and advances 1.721.522 768.857 2.490.379 Total 1.721.522 768.857 2.490.379 Between Between 31 December 2016 30 and 60 days 61 and 90 days Total Loans and advances 1.154.749 672.781 1.827.530 Total 1.154.749 672.781 1.827.530 31 December 2017 31 December 2016 Loans and advances Agriculture 12.915 14.055 Manufacturing 784.706 569.819 Construction 119.290 118.552 Services 1.178.444 911.304 Others 395.024 213.800 Total 2.490.379 1.827.530 37 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk (continued) As of 31 December 2017, the fair value of collaterals held against the past due but not yet impaired loans amounts to TL 5.128.482. The net value and type of the collaterals is as follows: Collateral type (1) 31 December 2017 31 December 2016 Real estate mortgage 3.127.124 3.286.676 Suretyships 808.779 881.394 Salary pledge, vehicle pledge and pledge of commercial undertaking 139.087 107.555 Cheque /bills 11.068 38.123 Financial collaterals (Cash, securities pledge, etc.) 1.671 2.418 Other 1.040.753 275.646 Total 5.128.482 4.591.812 (1)The collaterals are considered through comparison of the net value of collateral on appraisal reports less the third party receivables having priority with the collateral. Lower of the collateral amount or the loan amount is considered in the table above. Income accruals are not included in the table. Carrying amount per class of financial assets whose terms have been renegotiated: 31 December 2017 31 December 2016 Loans and advances (1) (2) Corporate loans 2.513.301 2.568.586 SME loans 84 116 Consumer loans 28.070 8.924 Total 2.541.455 2.577.626 (1) Accruals are not included to the table above. (2) Presents loans accounted for under restructured or rescheduled loan accounts. Corporate and Internal/External Entrepreneur Internal/External Commercial loans valuation grade Total firms valuation grade Total Risk rating group 1 AAA 246.127 High Risk rating group 2 AA 1.388.254 Risk rating group 1 1 5.625.813 Risk rating group 3 A 6.222.082 Risk rating group 2 2 2.868.099 Risk rating group 4 BBB 13.294.661 Standard Risk rating group 5 BB 17.443.491 Risk rating group 3 3 3.024.723 Risk rating group 6 B 23.169.181 Risk rating group 4 4 3.784.141 Risk rating group 7 CCC 22.945.704 Risk rating group 5 5 5.046.065 Risk rating group 8 CC 1.289.684 Below the standard Risk rating group 9 C 75.754 Risk rating group 6 6 9.107.562 Risk rating group 7 7 7.968.677 Total 86.074.938 Total 37.425.080 38 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk (continued) Risk grade Risk Risk (1-4) Group Definition of risk group grade (%) The firm is an extremely positive firm with its financial and non-financial criteria and it can pursue its 1,00 - 1,40 AAA high credibility in the long run. 100 -86 The firm is a positive firm with its financial and non-financial criteria and it can pursue its high 1,41 - 1,80 AA credibility in the long run. 85 -73 The firm that has performed its optimization and has a high credibility in the short run and is a credible 1,81 - 2,00 A firm in the medium run. 72 - 67 The firm is a credible firm despite the fact that it cannot perform the optimization certain aspects of its 2,01 - 2,20 BBB financial and non-financial criteria. 66 - 60 The firm cannot retain optimization in the major parts of its financials and non-financial criteria. It has 2,21 - 2,40 BB speculative attributes but it’s a credible firm in the short run. 59 - 53 Some of the financial and non-financial criteria are negative. It carries highly speculative attributes. In 2,41 - 2,60 B the short run it is a credible firm dependent on the positive conjecture. 52 - 47 The major part of its financial and non-financial criteria is negative and the firm is having difficulties in meetings its commitments. But it has guaranteed short run credibility dependent on the positive 2,61 - 2,80 CCC conjecture. 46 - 40 The firm force acceptable risk limits when it’s financial and non-financial criteria considered together, 2,81 - 3,20 CC and have poor credibility. 39 - 27 3,21 - 3,60 C The firm has no credibility when its financial and non-financial criteria considered together 26 - 13 3,61 - 4,00 D The firm has no credibility under any condition. 12 - 0 Entrepreneur Loans Decision Module (“ELDM”) is the rating module which is used for assessment of loan applications of companies which are classified by the Bank as a small and medium sized enterprises (SME) Customers within the SME in ELDM are evaluated by both qualitative and quantitative characteristics of firm, the size of endorsement and requested amount of loan before bank creates score card forms for each customers. Score card which categorize firms according to their risk, includes 1 to 7 rating group and 1 has the lowest risk. Guarantees for companies that can be assessed by ELDM, converted into cash during the time it takes to prevent probable loss of value and the conversion process is divided into two main groups according to the criteria. The conversion of cash collateral to compensate for any losses in a margin, “Liquid Collateral Value” is referred to as the facility where the customer the amount of collateral to be determined by risk group, and the collateral value of the liquid. Offsetting financial assets and financial liabilities The disclosures set out in the tables below include financial assets and financial liabilities that: • are offset in the Group’s statement of financial position; or • are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. The similar agreements include derivative clearing agreements. Similar financial instruments include derivatives. Financial instruments such as loans and deposits are not disclosed in the tables below unless they are offset in the statement of financial position. Such collateral is subject to each agreement terms. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral. 39 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Credit risk (continued) Offsetting financial assets and financial liabilities (continued) The Group receives and gives collateral in the form of cash in respect of the derivative transactions. Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements Related amounts not offset in the statement of financial position Gross amounts Net amounts of recognized of financial financial assets Financial Gross liabilities presented instruments amounts of offset in the in the (including recognized statement statement non- Cash Types of financial financial of financial of financial cash collateral Net assets assets position position collateral) received amount Derivatives - trading 31 December 2017 assets 362.931 - 362.931 - 66.553 296.378 Derivatives - trading 31 December 2016 assets 360.109 - 360.109 - 41.172 318.937 Related amounts not offset in the statement of financial position Gross amounts Net amounts of recognized of financial financial assets Financial Gross liabilities presented instruments amounts of offset in the in the (including recognized statement statement non- Cash Types of financial financial of financial of financial cash collateral Net liabilities assets position position collateral) pledged amount Derivatives - trading 31 December 2017 liabilities 150.673 - 150.673 - 104.613 46.060 Derivatives - trading 31 December 2016 liabilities 224.593 - 224.593 - 53.980 170.613 40 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Liquidity risk Liquidity risk occurs when there is not sufficient amount of cash or cash flows to meet the cash outflow needs completely and on time. Liquidity risk may also occur when the market penetration is not enough and when the open positions cannot be closed timely at competitive prices due to barriers and break-ups at the markets. The Group uses domestic and foreign markets for its liquidity needs. Low level of liquidity needs enables an easy way of loan borrowing from the corresponding markets (CBRT, ISE, Interbank money market, Settlement and Custody Bank and other markets). The Group has a lower ratio of the deposits compared to other banks with similar-sized positions; this indicates that larger loans can be obtained from the markets when needed. The potential cash resources are: money market debts which can be obtained from the domestic banks and repurchase transactions in foreign markets with Eurobonds in the portfolio. The Group’s fund resources consist mainly of deposits. The investments portfolio consists mainly of the held to maturity investment securities and available for sale investment securities. Analysis of non-derivative financial liabilities by remaining contractual maturities: Up to 1 1-3 3-12 1-5 Over 5 Gross nominal Carrying 31 December 2017 month months months years years outflow amount Liabilities Deposits 138.695.766 38.658.365 14.982.260 931.101 18.141 193.285.633 193.252.779 Obligations under repurchase agreements 2.957.220 1.410.455 - - - 4.367.675 4.348.200 Loans and advances from banks 1.668.691 2.928.997 8.502.495 5.507.339 4.867.961 23.475.483 22.783.118 Interbank money market borrowings - 30.655.122 - - - 30.655.122 30.655.122 Debt securities issued 829.636 2.347.213 340.952 9.247.008 - 12.764.809 12.008.923 Total 144.151.313 76.000.152 23.825.707 15.685.448 4.886.102 264.548.722 263.048.142 Up to 1 1-3 3-12 1-5 Over 5 Gross nominal Carrying 31 December 2016 month months months years years outflow amount Liabilities Deposits 114.023.770 25.757.529 10.529.290 614.505 11.011 150.936.105 150.390.068 Obligations under repurchase agreements 16.660.819 1.479.146 - - - 18.139.965 10.844.612 Loans and advances from banks 1.981.170 2.232.783 11.055.802 5.378.348 3.844.917 24.493.020 23.928.919 Interbank money market borrowings - 8.177.524 - - - 8.177.524 8.177.524 Debt securities issued 333.042 1.090.794 3.801.556 8.920.337 - 14.145.729 12.744.316 Total 132.998.801 38.737.776 25.386.648 14.913.190 3.855.928 215.892.343 206.085.439 41 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Liquidity risk (continued) Analysis of the Group’s derivative financial instruments according to their remaining maturities : Up to one 1-3 3-12 1-5 Over 5 31 December 2017 month months months years years Total Forwards contracts – buy 3.341.667 1.451.710 1.521.700 - - 6.315.077 Forward contracts – sell 1.501.366 663.002 1.518.340 - - 3.682.708 Swaps – buy 2.063.721 - 387.590 859.442 - 3.310.753 Swaps – sell 2.061.605 - 379.000 605.440 - 3.046.045 Credit default swap – buy - - - - - - Credit default swap – sell - - - - - - Forward precious metal – buy 24.982 - - - - 24.982 Forward precious metal – sell 1.896.450 808.986 - - - 2.705.436 Money buy options 239.927 2.822 697.462 - - 940.211 Money sell options 239.926 2.822 697.462 - - 940.210 Interest rate swap-buy - - - 1.638.724 3.804.657 5.443.381 Interest rate swap-sell - - - 1.638.724 3.804.657 5.443.381 Total 11.369.644 2.929.342 5.201.554 4.742.330 7.609.314 31.852.184 Up to one 1-3 3-12 1-5 Over 5 31 December 2016 month months months years years Total Forwards contracts – buy 1.118.830 2.504.618 875.467 232.448 - 4.731.363 Forward contracts – sell 1.118.179 467.553 874.715 230.950 - 2.691.397 Swaps – buy 1.775.843 264.926 159.192 656.768 - 2.856.729 Swaps – sell 1.781.941 263.813 158.953 560.998 - 2.765.705 Credit default swap – buy - - - - - - Credit default swap – sell - - - - - - Forward precious metal – buy - 59.714 - - - 59.714 Forward precious metal – sell - 2.121.975 - - - 2.121.975 Money buy options 307.574 32.550 - - - 340.124 Money sell options 307.584 32.545 - - - 340.129 Interest rate swap-buy - - - - 4.872.265 4.872.265 Interest rate swap-sell - - - - 4.872.265 4.872.265 Total 6.409.951 5.747.694 2.068.327 1.681.164 9.744.530 25.651.666 42 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Liquidity risk (continued) Presentation according to remaining maturities at the date of statement of financial position: 3-12 1 year to Over 5 Demand Up to 1 month 1-3 months months 5 years years Undistributed Total 31 December 2017 Assets Cash on hand 2.208.138 - - - - - - 2.208.138 Balances with and reserve deposits at Central Bank 146.881 34.253.174 - 73.185 - - - 34.473.240 Due from banks 1.455.160 6.049.714 78.154 19.107 - - - 7.602.135 Financial assets at fair value through profit or loss 7.035 202.848 110.736 10.152.858 8.764 27 1.655 10.483.923 Loans and advances(1) 550.645 12.823.844 14.033.807 60.612.055 90.269.846 27.064.005 - 205.354.202 Investments securities 534 588.077 257.639 3.339.115 14.875.079 20.546.734 82.172 39.689.350 Other assets 1.594.337 71.415 489.343 768.962 1.493.736 418.697 6.706.556 11.543.046 Total assets 5.962.730 53.989.072 14.969.679 74.965.282 106.647.425 48.029.463 6.790.383 311.354.034 Liabilities and equity Deposits from banks 3.813.689 13.102.252 2.084.086 213.579 1.092 - - 19.214.698 Deposits from customers 25.499.905 99.176.766 34.202.985 14.315.698 821.461 18.123 3.143 174.038.081 Obligations under repurchase agreements - 3.121.902 1.219.757 2.938 3.603 - - 4.348.200 Loans and advances from banks 2.548 1.557.086 2.912.245 8.197.962 4.690.232 5.423.045 - 22.783.118 Interbank money market borrowings - 30.655.122 - - - - - 30.655.122 Debt securities issued - 808.898 2.584.804 104.683 8.510.538 - - 12.008.923 Other liabilities(2) 584.063 3.555.226 71.604 15.749.576 1.999.448 523.813 25.822.162 48.305.892 Total liabilities and equity 29.900.205 151.977.252 43.075.481 38.584.436 16.026.374 5.964.981 25.825.305 311.354.034 Liquidity gap (23.937.475) (97.988.180) (28.105.802) 36.380.846 90.621.051 42.064.482 (19.034.922) - (1) Non performing loans (net) are presented in other assets. (2) Shareholders’ equity is presented in the “undistributed” column. 43 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Liquidity risk (continued) Presentation according to remaining maturities at the date of statement of financial position (continued): 3-12 1 year to Over 5 Demand Up to 1 month 1-3 months months 5 years years Undistributed Total 31 December 2016 Assets Cash on hand 1.543.129 - - - - - - 1.543.129 Balances with and reserve deposits at Central Bank 3.386.645 25.176.361 - 50.714 - - 55.118 28.668.838 Due from banks 1.018.395 1.858.032 134.163 12.343 - - 14.314 3.037.247 Financial assets at fair value through profit or loss 2.751 172.808 70.385 170.324 29.069 792 3.095 449.224 Loans and advances (1) 2.485.967 11.694.182 10.466.532 48.738.850 66.096.047 19.710.985 - 159.192.563 Investments securities - 882.001 1.695.180 2.805.678 11.078.101 17.304.673 61.222 33.826.855 Other assets 2.488.847 56.917 281.685 673.459 1.413.677 310.387 4.710.771 9.935.743 Total assets 10.925.734 39.840.301 12.647.945 52.451.368 78.616.894 37.326.837 4.844.520 236.653.599 Liabilities and equity Deposits from banks 7.867.130 12.234.408 2.374.878 383.795 - - - 22.860.211 Deposits from customers 21.570.217 72.711.721 23.202.394 9.445.077 589.593 10.855 - 127.529.857 Obligations under repurchase agreements - 8.475.046 1.478.502 891.064 - - - 10.844.612 Loan and advances from banks 53 1.956.010 2.126.774 10.921.602 5.214.856 3.709.624 - 23.928.919 Interbank money market borrowings - - 8.177.524 - - - - 8.177.524 Debt securities issued - 323.378 1.052.183 3.493.383 7.875.372 - - 12.744.316 Other liabilities (2) 505.203 3.099.970 127.192 1.998.219 1.240.359 1.802.951 21.794.266 30.568.160 Total liabilities and equity 29.942.603 98.800.533 38.539.447 27.133.140 14.920.180 5.523.430 21.794.266 236.653.599 Liquidity gap (19.016.869) (58.960.232) (25.891.502) 25.318.228 63.696.714 31.803.407 (16.949.746) - (1) Non performing loans (net) are presented in other assets. (2) Shareholders’ equity is presented in the “undistributed” column. 44 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Liquidity risk (continued) Net liquidity gap The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types. 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 Group and its exposure to changes in interest rates and exchange rates. Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Group 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, as many of these commitments will expire or terminate without being funded. Market risk In accordance with the Group’s risk management policy framework to avoid the effect of market risk, the Bank has determined the management activities and has taken necessary precautions within the framework of “Regulation on Measurement and Evaluation of Capital Adequacy of the Banks” published in Official Gazette numbered 29111 on 6 September 2014. The Bank’s Board of Directors set the risk limits by taking into account the Group’s main risk factors and those limits are periodically revised in accordance with the market conditions and the Group’s strategies. Furthermore, the Board of Directors ensure that, the necessary measures to be taken by risk management department and all other executives in respect of defining, measuring, monitoring and managing the risks exposed by the Group. The Value at Risk (“VaR”) based limits t hat are determined by the Board of Directors and the denominated interest rate risk of the Group is limited to certain percentage of the shareholders’ equity. In accordance with “Regulation on Measurement and Evaluation of Capital Adequacy of the Banks”, t he Group’s possibility of loss that may cause due to the general market risk, currency risk, specific risk, commodity risk, clearing risk and counterparty credit risk is calculated by using the standard method. The Value at Risk (VaR) that is calculated by using internal model methods besides standard method is validated by scenario analysis and stress tests. The VaR is calculated daily by using historical simulation and parametric approach and the results are reported the executives of the Bank. The Group’s average market risk calculated as of the end of months in the related periods is as follows: 31 December 2017 31 December 2016 Average Maximum Minimum Average Maximum Minimum Interest rate risk 160.610 222.004 102.924 345.492 405.698 76.003 Share risk 9.464 17.056 7.976 18.128 26.456 11.998 Currency risk 126.586 274.400 94.233 39.465 66.239 25.500 Commodity risk - - - - - - Settlement risk - - - - - - Options risk 7.741 24.445 925 2.747 5.036 462 Amount subject to total risk 304.401 537.905 206.058 405.832 503.429 113.963 Currency risk Foreign currency risk indicates the possibilities of potential losses that banks are subject to due to the exchange rate movements in the market. While calculating the share capital requirement, all foreign currency assets, liabilities and forward transactions of the Group are taken into account. Net short and long position of the Turkish Lira equivalent to each foreign currency is calculated. 45 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Currency risk (continued) The Group’s exposure to foreign currency risk is limited. However, possible foreign currency risks are calculated in foreign currency risk table in the frame of the standard method weekly and monthly as to follow up the foreign currency risk periodically. When deemed necessary, foreign currency swap transactions are made with the banks. Foreign currency sensitivity: The Group is mainly exposed to EUR and USD currency risk. The following table details the Group’s sensitivity to a 10% increase and decrease in the TL against USD, EUR and other foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the possible change in foreign exchange rates. Change in currency rate Effect on profit / loss 2017 2016 USD 10% increase (13.617) 8.980 EUR 10% increase (36.471) (30.035) Other 10% increase 57.344 26.592 The concentrations of assets, liabilities and off balance sheet items in various currencies are: EUR USD Other FC Total 31 December 2017 Assets Cash on hand 316.152 505.839 231.108 1.053.099 Balances with Central Bank 909.300 5.101.219 - 6.010.519 Reserve deposits at Central Bank 2.713.498 9.387.319 4.599.452 16.700.269 Due from banks 1.041.824 4.099.624 494.359 5.635.807 Financial assets at fair value through profit or loss 39.374 315.250 8.874 363.498 Loans and advances 35.807.644 30.447.276 1.741.937 67.996.857 Investment securities 462.634 7.709.118 610.468 8.782.220 Investment in equity- accounted investees 330.548 - - 330.548 Property and equipment - - 92.638 92.638 Other assets 1.650.635 899.494 60.675 2.610.804 Total assets 43.271.609 58.465.139 7.839.511 109.576.259 Liabilities Deposits from banks 5.958.637 4.898.648 1.099.335 11.956.620 Deposits from customers 29.110.566 31.623.066 4.020.404 64.754.036 Obligations under repurchase agreements - 5.387.762 - 5.387.762 Loan and advances from banks 8.332.951 10.256.357 32.315 18.621.623 Debt securities issued - 8.640.905 - 8.640.905 Other liabilities 457.363 329.517 118.917 905.797 Total liabilities 43.859.517 61.136.255 5.270.971 110.266.743 Net on balance sheet position (587.908) (2.671.116) 2.568.540 (690.484) Net off balance sheet position 223.198 2.534.947 (1.995.069) 763.076 Derivative financial assets 1.065.746 5.996.311 1.250.482 8.312.539 Derivative financial liabilities 842.548 3.461.364 3.245.551 7.549.463 46 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Currency risk (continued) The concentrations of assets, liabilities and off balance sheet items in various currencies are (continued): EUR USD Other FC Total 31 December 2016 Assets Cash on hand 160.639 286.967 181.245 628.851 Balances with Central Bank 1.848.902 6.855.660 - 8.704.562 Reserve deposits at Central Bank 4.811.638 8.891.589 3.640.938 17.344.165 Due from banks 414.994 800.901 386.429 1.602.324 Financial assets at fair value through profit or loss 91.242 138.476 2.489 232.207 Loans and advances 25.426.776 31.447.815 1.194.940 58.069.531 Investment securities 839.904 5.773.053 421.872 7.034.829 Investment in equity- accounted investees 270.028 - - 270.028 Property and equipment - - 74.533 74.533 Other assets 1.389.608 1.348.417 47.243 2.785.268 Total assets 35.253.731 55.542.878 5.949.689 96.746.298 Liabilities Deposits from banks 8.454.425 3.160.761 1.461.712 13.076.898 Deposits from customers 17.324.616 30.582.332 2.865.858 50.772.806 Obligations under repurchase agreements - 1.373.871 - 1.373.871 Loan and advances from banks 9.166.425 11.216.600 34.322 20.417.347 Debt securities issued - 10.684.708 - 10.684.708 Other liabilities 322.787 360.704 181.169 864.660 Total liabilities 35.268.253 57.378.976 4.543.061 97.190.290 Net on balance sheet position (14.522) (1.836.098) 1.406.628 (443.992) Net off balance sheet position (285.828) 1.925.895 (1.140.708) 499.359 Derivative financial assets 1.387.874 4.185.717 1.571.243 7.144.834 Derivative financial liabilities 1.673.702 2.259.822 2.711.951 6.645.475 47 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Interest rate risk The Group’s standard interest rate shock methods are being used on a daily basis in respect of measuring the risk arising from repricing mismatch of asset and liability items. The duration within the limits set by Banking Regulation and Supervision Agency that obtained from the calculation intended for demand deposits by using core deposit and duration analysis is taken into account. The interest rate risk of the banking book items is calculated by taking into account the worst ratio for the Group among the calculated ratios by dividing the total of the differences in terms of maturities and currencies with the shareholders’ equity. The mentioned difference is the difference between the net position amounts which are derived from the cash flows of the on-balance and off-balance sheet positions included in the interest sensitive banking book items discounted by the ratios derived from the application of positive and negative shocks, and the net position amounts which are discounted by the ratios without applying the shocks. The maximum limit regarding the economic value change is 20% of shareholders’ equity. During the maturity distribution of the related cash flows, remaining maturities are taken into account for fixed rate instruments and repricing dates are taken into account for flexible interest instruments. The net amounts of non-performing loans are placed to the relevant maturity periods longer than six months and except demand time interval under other receivables with considering their estimated collection durations. Foreign currency indexed asset and liabilities are placed to related forms by taking into accounts their indexed currency types. In defining the maturity of demand deposits, average durations which are calculated by statistical analysis are being used. Interest rate sensitivity: The impact on financial statements as of 31 December 2017 regarding interest rate instabilities stated below as presented in different currencies: Applied shock Gains/shareholders’ equity – Currency (+/- x basis points) Gains/ losses losses/ shareholders’ equity 1 TL 500 (4.233.277) (14,86%) (400) 4.242.774 14,89% 2 EURO 200 508.529 1,78% (200) (410.052) (1,44%) 3 USD 200 (652.368) (2,29%) (200) 1.060.994 3,72% Total (For negative shocks) 4.893.716 17,17% Total (For positive shocks) (4.377.116) (15,37%) The impact on financial statements as of 31 December 2016 regarding interest rate instabilities stated below as presented in different currencies: Applied shock Gains/shareholders’ equity – Currency (+/- x basis points) Gains/ losses losses/ shareholders’ equity 1 TL 500 (3.295.737) (14,32%) (400) 3.353.847 14,57% 2 EURO 200 510.345 2,22% (200) (553.459) (2,40%) 3 USD 200 (86.661) (0,38%) (200) 301.068 1,31% Total (For negative shocks) 3.101.456 13,48% Total (For positive shocks) (2.872.053) (12,48%) 48 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Interest rate risk Average interest rates applied to financial instruments: Current period EURO USD JPY TL Assets Cash (cash in vault, foreign currency cash, money in transit, cheques purchased) and balances with the Central Bank of Turkey (5) - 1,25 - 4,00 Due from other banks and financial institutions(1) 0,08 1,41 - 13,32 Financial assets at fair value through profit and loss 1,10 1,86 - 9,86 Money market placements - - - 12,78 Available-for-sale financial assets 4,60 5,46 - 15,00 Loans(2) 4,78 6,42 0,84 13,12 Held-to-maturity investments 2,50 5,89 - 18,33 Liabilities Bank deposits 1,59 4,24 0,10 10,67 Other deposits (4) 1,68 3,50 0,25 12,02 Money market borrowings - 2,43 - 12,75 Sundry creditors(3) - - - 4,75 Bonds issued - 4,46 - 13,10 Funds provided from other financial institutions(4) 1,14 3,03 0,84 12,22 Prior Period EURO USD JPY TL Assets Cash (cash in vault, foreign currency cash, money in transit, cheques purchased) and balances with the Central Bank of Turkey(5) - 0,49 - 3,30 Due from other banks and financial institutions(1) 0,03 1,34 - 9,63 Financial assets at fair value through profit and loss - - - 9,56 Money market placements - - - - Available-for-sale financial assets 5,08 5,46 - 11,61 Loans(2) 4,40 5,59 - 12,80 Held-to-maturity investments - 5,89 - 14,03 Liabilities Bank deposits 0,44 3,17 - 7,82 Other deposits(4) 1,37 3,09 0,25 9,46 Money market borrowings - 1,84 - 7,52 Sundry creditors(3) - - - 4,75 Bonds issued - 4,61 - 9,35 Funds provided from other financial institutions(4) 0,66 2,37 - 7,55 (1) Interest rates are calculated using weighted average method for money placement amounts as of balance sheet date. (2) Interest rates are calculated using weighted average method for loans given as of balance sheet date. (3) Declared maximum deposits interest rate with a maturity of twelve months as of 31 December 2017. (4) Customer based calculated interest rates are applied to TL and FC deposits as of 31 December 2017. (5) Required reserve ratio of the Central Bank of TRNC and Central Bank of Macedonia. 49 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Interest rate risk (continued) Interest rate sensitivity based on repricing dates: 1 year to Over Non-interest Up to 1 month 1 to 3 months 3 to 12 months 5 years 5 years bearing Total 31 December 2017 Assets Cash on hand - - - - - 2.208.138 2.208.138 Balances with and reserve deposits at Central Bank 26.154.546 - - - - 8.318.694 34.473.240 Due from banks 6.248.569 78.154 4.019 - - 1.271.393 7.602.135 Financial assets at fair value through profit or loss 70.098 20.154 20.268 253 27 10.373.123 10.483.923 Loans and advances (1) 93.198.317 23.410.774 46.976.522 31.070.822 7.744.943 2.952.824 205.354.202 Investment securities 588.077 11.978.198 3.339.115 9.138.159 14.559.452 86.349 39.689.350 Other assets 74.029 489.418 768.962 1.493.736 418.697 8.298.204 11.543.046 Total assets 126.333.636 35.976.698 51.108.886 41.702.970 22.723.119 33.508.725 311.354.034 Liabilities and equity Deposits from banks 13.061.761 2.079.237 212.098 1.094 - 3.860.508 19.214.698 Deposits from customers 98.554.760 33.932.876 14.099.653 785.744 9.584 26.655.464 174.038.081 Obligations under repurchase agreements 3.121.902 1.219.757 2.938 3.603 - - 4.348.200 Loans and advances from banks 1.696.625 6.003.694 8.775.415 2.366.544 3.812.917 127.923 22.783.118 Interbank money market borrowings 30.655.122 - - - - - 30.655.122 Debt securities issued 808.898 2.584.804 104.683 8.510.538 - - 12.008.923 Other liabilities (2) 3.141.657 2.413.529 11.426.014 123.013 - 31.201.679 48.305.892 Total liabilities and equity 151.040.725 48.233.897 34.620.801 11.790.536 3.822.501 61.845.574 311.354.034 On balance sheet interest sensitivity gap-Long - - 16.488.085 29.912.434 18.900.618 - 65.301.137 On balance sheet interest sensitivity gap-Short (24.707.089) (12.257.199) - - - (28.336.849) (65.301.137) Off balance sheet interest sensitivity gap-Long 379.000 568.500 2.919.781 819.361 1.902.329 8.939.672 15.528.643 Off balance sheet interest sensitivity gap-Short - (568.500) (2.532.191) (1.424.801) (1.902.329) (8.985.269) (15.413.090) Total position (24.328.089) (12.257.199) 16.875.675 29.306.994 18.900.618 (28.382.446) 115.553 (1) Non performing loans (net) are presented in other assets. (2) Shareholders’ equity is presented in the “non-interest bearing” column. 50 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements For the year ended 31 December 2017 (Currency-In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Interest rate risk (continued) Interest rate sensitivity based on repricing dates (continued): 1 year to Over Non-interest Up to 1 month 1 to 3 months 3 to 12 months 5 years 5 years bearing Total 31 December 2016 Assets Cash on hand - - - - - 1.543.129 1.543.129 Balances with and reserve deposits at Central Bank 20.210.851 - - - - 8.457.987 28.668.838 Due from banks 789.110 1.217.399 12.343 - - 1.018.395 3.037.247 Financial assets at fair value through profit or loss 419.809 10.683 10.204 210 107 8.211 449.224 Loans and advances(1) 58.808.334 20.957.655 42.095.743 29.171.482 5.547.844 2.611.505 159.192.563 Investment securities 1.169.476 10.626.126 4.511.177 5.875.453 11.580.398 64.225 33.826.855 Other assets 5.200.663 281.671 673.280 1.400.468 287.219 2.092.442 9.935.743 Total assets 86.598.243 33.093.534 47.302.747 36.447.613 17.415.568 15.795.894 236.653.599 Liabilities and equity Deposits from banks 12.234.540 2.374.878 383.750 - - 7.867.043 22.860.211 Deposits from customers 72.774.027 23.195.563 9.436.652 572.900 8.534 21.542.181 127.529.857 Obligations under repurchase agreements 8.475.046 1.478.502 891.064 - - - 10.844.612 Loans and advances from banks 4.403.510 5.073.578 9.066.456 2.950.380 2.415.829 19.166 23.928.919 Interbank money market borrowings - 8.177.524 - - - - 8.177.524 Debt securities issued 323.378 1.052.183 3.493.383 7.875.372 - - 12.744.316 Other liabilities(2) 1.462.375 2.145.974 1.490.415 877.669 29 24.591.698 30.568.160 Total liabilities and equity 99.672.876 43.498.202 24.761.720 12.276.321 2.424.392 54.020.088 236.653.599 On balance sheet interest sensitivity gap-Long - - 22.541.027 24.171.292 14.991.176 - 61.703.495 On balance sheet interest sensitivity gap-Short (13.074.633) (10.404.668) - - - (38.224.194) (61.703.495) Off balance sheet interest sensitivity gap-Long 351.000 287.040 2.324.592 712.029 - - 3.674.661 Off balance sheet interest sensitivity gap-Short - (111.540) (2.324.592) (1.141.329) - - (3.577.461) Total position (12.723.633) (10.229.168) 22.541.027 23.741.992 14.991.176 (38.224.194) 97.200 (1) Non performing loans (net) are presented in other assets. (2) Shareholders’ equity is presented in the “non-interest bearing” column. 51 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency - In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Capital adequacy To monitor the adequacy of its capital, the Group uses ratios established by Banking Regulation and Supervision Agency (BRSA). The minimum ratio is 8% (12% if a bank operates in offshore markets). These ratios measure capital adequacy by comparing the Group’s eligible capital with its balance sheet assets, off- balance sheet commitments and market and other risk positions at weighted amounts to reflect their relative risk. The bank operates in offshore markets. As of 31 December 2017 and 31 December 2016, its capital adequacy ratio is above 12%. The Bank’s consolidated regulatory capital position at 31 December 2017 and 31 December 2016 was as follows: 31 December 2017 31 December 2016 Tier 1 capital 25.112.196 20.984.586 Tier 2 capital 3.317.157 2.049.136 Deductions from capital (14.057) (176.365) Total regulatory capital 28.415.296 22.857.357 Risk-weighted assets 187.858.563 166.783.094 Value at market risk 3.629.588 2.225.538 Operational risk 14.724.338 12.718.488 Counterparty credit risk and the amount of the discount threshold under the equity (subject to a 250% risk weight) 2.815.793 1.095.370 Capital ratios Total regulatory capital expressed as a percentage of total risk- weighted assets, value at market risk and operational risk 13,59% 12,50% Total tier 1 capital expressed as a percentage of total risk- weighted assets, value at market risk and operational risk 12,01% 11,48% Fair value of financial instruments The carrying amounts and fair values of financial assets and financial liabilities are as follows: Carrying amount Fair value 31 December 31 December 31 December 31 December 2017 2016 2017 2016 Financial assets Cash on hand 2.208.138 1.543.129 2.208.138 1.543.129 Balances with Central Bank 17.658.013 11.268.177 17.658.013 11.268.177 Reserve deposits at Central Bank 16.815.227 17.400.661 16.815.227 17.400.661 Due from banks 7.602.135 3.037.247 7.602.135 3.037.247 Loans and advances 205.032.373 158.898.373 218.514.906 149.215.496 Investment securities -Held-to-maturity investment securities 21.987.099 18.344.626 21.483.366 18.302.970 Finance lease receivables 2.514.554 2.144.498 2.514.554 2.144.498 273.817.539 212.636.711 286.796.339 202.912.178 Financial liabilities Deposits from banks 19.214.698 22.860.211 19.244.166 22.860.211 Deposits from customers 174.038.081 127.529.857 174.304.987 127.669.890 Obligations under repurchase agreements 4.348.200 10.844.612 4.343.675 10.844.612 Loans and advances from banks 22.783.118 23.928.919 21.126.639 25.926.472 Interbank money market borrowings 30.655.122 8.177.524 30.623.219 8.177.524 Debt securities issued 12.008.923 12.744.316 10.798.742 12.180.887 263.048.142 206.085.439 260.441.428 207.659.596 52 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency - In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Fair value of financial instruments (continued) Fair values of financial assets such as financial assets at fair value through profit or loss, available-for-sale investment securities and held-to-maturity investment securities that are traded in active markets are based on quoted market prices or dealer price quotations. The Bank management has estimated that the fair value of certain financial assets and liabilities recorded at amortised cost are not materially different than their recorded values except for those of loans and advances, investment securities, deposits from customers, loans and advances from banks and debt securities issued. These financial assets and liabilities include due from banks, cash on hand, balances wish Central Bank, reserve deposits at Central Bank, finance lease receivables, deposits from banks, obligations under repurchase agreements and interbank money market borrowings. The Bank management believes that the carrying amount of these particular financial assets and liabilities approximates their fair values, partially due to the fact that it is practice to renegotiate interest rates to reflect current market conditions. For the financial assets and liabilities such as loans and advances, loans and advances from banks, finance lease receivables, deposits and derivative financial instruments; valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates used in estimating discount rates and foreign currency exchange rates. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date that would have been determined by market participants acting at arm’s length. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets. As of 31 December 2017 and 31 December 2016, the Group’s fair value classification of financial assets held to the maturity is Level 1. Classification of fair value measurement The classification of fair value measurements into a fair value hierarchy by reference to the observability and significance of the inputs used in measuring fair value of financial instruments measured at fair value are disclosed. This classification basically relies on whether the relevant inputs are observable or not. Observable inputs refer to the use of market data obtained from independent sources, whereas unobservable inputs refer to the use of predictions and assumptions about the market made by the Group. This distinction brings about a fair value measurement classification generally as follows: •Level 1: The fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; •Level 2: The fair value of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions; and •Level 3: The fair value of derivative instruments, are calculated using quoted prices. Where such prices are not available use is made of discounted cash flow analysis using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. 53 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency - In thousands of Turkish Lira (“TL”)) 5. Financial risk management (continued) Classification of fair value measurement (continued) Classification requires using observable market data if possible. Carrying 31 December 2017 amount Level 1 Level 2 Level 3 Total Financial assets at fair value through profit/loss: Financial assets at fair value through profit or loss 472.916 109.985 362.931 - 472.916 Debt securities 94.898 94.898 - - 94.898 Derivative financial assets held for trading purpose 362.931 - 362.931 - 362.931 Share certificates 1.240 1.240 - - 1.240 Other securities(1) 13.847 13.847 - - 13.847 Available-for-sale financial assets (2) 17.623.152 17.623.152 - - 17.623.152 Debt securities 17.623.152 17.623.152 - - 17.623.152 Other securities - - - - - Total financial assets 18.096.068 17.733.137 362.931 - 18.096.068 Financial liabilities at fair value through profit/loss: Derivative financial liabilities held for trading purpose 150.673 - 150.673 - 150.673 Total financial liabilities 150.673 - 150.673 - 150.673 (1) As of 31 December 2017, marketable securities amounting to TL 10.578 that are measured at amortised cost, are not included in financial assets at fair value through profit or loss. (2) As of 31 December 2017, share certificates amounting to TL 79.099 in available for sale financial assets are not included in the above table, which are measured at cost. Carrying 31 December 2016 amount Level 1 Level 2 Level 3 Total Financial assets at fair value through profit/loss: Financial assets at fair value through profit or loss 441.114 81.005 360.109 - 441.114 Debt securities 65.538 65.538 - - 65.538 Derivative financial assets held for trading purpose 360.109 - 360.109 - 360.109 Share certificates 3.095 3.095 - - 3.095 Other securities(1) 12.372 12.372 - - 12.372 Available-for-sale financial assets (2) 15.421.388 15.421.388 - - 15.421.388 Debt securities 15.419.448 15.419.448 - - 15.419.448 Other securities 1.940 1.940 - - 1.940 Total financial assets 15.862.502 15.502.393 360.109 - 15.862.502 Financial liabilities at fair value through profit/loss: Derivative financial liabilities held for trading purpose 224.593 - 224.593 - 224.593 Total financial liabilities 224.593 - 224.593 - 224.593 (1) As of 31 December 2016, marketable securities amounting to TL 8.110 that are measured at amortised cost, are not included in financial assets at fair value through profit or loss. (2) As of 31 December 2016, share certificates amounting to TL 60.841 in available for sale financial assets are not included in the above table, which are measured at cost. 54 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency - In thousands of Turkish Lira (“TL”)) 6. Classification of financial assets and financial liabilities The table below provides reconciliation between line items in the statement of financial position and categories of financial instruments. Designated at Held-to Loans and Available Other Total carrying Trading fair value maturity receivables for-sale amortised cost amount 31 December 2017 Cash on hand - - - 2.208.138 - - 2.208.138 Balances with Central Bank - - - 17.658.013 - - 17.658.013 Reserve deposits at Central Bank - - - 16.815.227 - - 16.815.227 Due from banks - - - 7.602.135 - - 7.602.135 Financial assets at fair value through profit or loss - Trading securities 120.563 - - - - - 120.563 - Derivative financial instruments 362.931 - - - - - 362.931 Loans and advances - - - 205.032.373 - - 205.032.373 Insurance premium receivables - - - 731.825 - - 731.825 Investment securities: -Measured at fair value - - - - 17.702.251 - 17.702.251 -Measured at amortised cost - - 21.987.099 - - - 21.987.099 Finance lease receivables - - - 2.514.554 - - 2.514.554 Total assets 483.494 - 21.987.099 252.562.265 17.702.251 - 292.735.109 Deposits from banks - - - - - 19.214.698 19.214.698 Deposits from customers - - - - - 174.038.081 174.038.081 Obligations under repurchase agreements - - - - - 4.348.200 4.348.200 Loans and advances from banks - - - - - 22.783.118 22.783.118 Interbank money market borrowings - - - - - 30.655.122 30.655.122 Derivative financial instruments 150.673 - - - - - 150.673 Debt securities issued - - - - - 12.008.923 12.008.923 Subordinated liabilities - - - - - 1.004.385 1.004.385 Insurance contract liabilities - - - - - 2.479.385 2.479.385 Total liabilities 150.673 - - - - 266.531.912 266.682.585 55 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 6. Classification of financial assets and financial liabilities (continued) Designated at Held-to Loans and Available Other Total carrying Trading fair value maturity receivables for-sale amortised cost amount 31 December 2016 Cash on hand - - - 1.543.129 - - 1.543.129 Balances with Central Bank - - - 11.268.177 - - 11.268.177 Reserve deposits at Central Bank - - 17.400.661 - - 17.400.661 Due from banks - - - 3.037.247 - - 3.037.247 Financial assets at fair value through profit or loss - Trading securities 89.115 - - - - - 89.115 - Derivative financial instruments 360.109 - - - - - 360.109 Loans and advances - - - 158.898.373 - - 158.898.373 Insurance premium receivables - - - 391.236 - - 391.236 Investment securities: -Measured at fair value - - - - 15.482.229 - 15.482.229 -Measured at amortised cost - - 18.344.626 - - - 18.344.626 Finance lease receivables - - - 2.144.498 - - 2.144.498 Total assets 449.224 - 18.344.626 195.683.321 15.482.229 - 228.959.400 Deposits from banks - - - - - 22.860.211 22.860.211 Deposits from customers - - - - - 127.529.857 127.529.857 Obligations under repurchase agreements - - - - - 10.844.612 10.844.612 Loans and advances from banks - - - - - 23.928.919 23.928.919 Interbank money market borrowings - - - - - 8.177.524 8.177.524 Derivative financial instruments 224.593 - - - - - 224.593 Debt securities issued - - - - - 12.744.316 12.744.316 Subordinated liabilities - - - - - - - Insurance contract liabilities - - - - - 1.666.823 1.666.823 Total liabilities 224.593 - - - - 207.752.262 207.976.855 56 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 7. Operating segments The Group has five reportable segments, corporate, commercial, entrepreneur, treasury/investment and other which are the Group’s strategic business units. The strategic business units offer different products and services, and are managed separately based on the Group’s management and internal reporting structure. For each of the strategic business units, the Board of Directors reviews internal management reports on at least a quarterly basis. Treasury 31 December 2017 Corporate Commercial Entrepreneur /Investment(2) Other(1) Eliminations Group Interest income 2.140.662 3.272.456 13.414.498 4.430.253 410.095 - 23.667.964 Interest expense (1.448.879) (726.547) (8.274.963) (4.680.531) (174.962) - (15.305.882) Net interest income 691.783 2.545.909 5.139.535 (250.278) 235.133 - 8.362.082 Net fee and commission income 245.201 431.532 1.089.806 351.066 (196.471) - 1.921.134 Net trading income from securities - - - 35.077 - - 35.077 Net trading income / (loss) from derivative transactions - - - (186.756) (8.962) - (195.718) Foreign exchange gain/(losses), net - - - 202.013 37.253 - 239.266 Net impairment losses on loans and advances (13.309) (328.435) (430.632) (342.738) - - (1.115.114) Income from insurance operations - - - - 1.469.041 - 1.469.041 Cost of insurance operations - - - - (1.167.182) - (1.167.182) Dividend income - - - 11.317 322 - 11.639 Other income 42.811 12.593 60.560 46.108 241.134 - 403.206 Other expenses (24.297) (55.881) (1.461.338) (2.235.644) (935.321) - (4.712.481) Profit before income tax 942.189 2.605.718 4.397.931 (2.369.835) (325.053) - 5.250.950 Income tax expense - - - (996.443) (69.085) - (1.065.528) Profit for the year 942.189 2.605.718 4.397.931 (3.366.278) (394.138) - 4.185.422 (1) Halk Hayat ve Emeklilik AŞ, Halk Sigorta AŞ, Halk Finansal Kiralama AŞ, Halk Portföy Yönetimi AŞ, Halk Faktoring AŞ, Halk Varlık A.Ş. and Bileşim AŞ transactions are shown in other column. (2) Halk Yatırım Menkul Değerler AŞ, Halk Gayrimenkul Yatırım Ortaklığı AŞ, Halk Banka AD, Skopje, Halkbank AD., Beograd transactions are shown in “treasury/investment” column. 57 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 7. Operating segments (continued) Treasury 31 December 2016 Corporate Commercial Entrepreneur /Investment (2) Other (1) Eliminations Group Interest income 1.474.585 2.138.386 10.406.769 3.026.965 316.502 - 17.363.207 Interest expense (879.936) (420.987) (6.006.409) (2.589.050) (116.395) - (10.012.777) Net interest income 594.649 1.717.399 4.400.360 437.915 200.107 - 7.350.430 Net fee and commission income 194.413 221.663 754.129 257.443 (189.545) - 1.238.103 Net trading income from securities - - - 20.281 - - 20.281 Net trading loss from derivative transactions - - - 16.657 (5.499) - 11.158 Foreign exchange gain/(losses), net - - - 113.898 37.617 - 151.515 Net impairment losses on loans and advances (182.336) (430.861) (603.701) (366.081) (62.013) - (1.644.992) Income from insurance operations - - - - 1.293.068 - 1.293.068 Cost of insurance operations - - - - (1.170.476) - (1.170.476) Dividend income - - - 37.873 113 - 37.986 Other income 8.744 26.552 254.916 83.104 66.267 - 439.583 Other expenses (17.159) (64.826) (1.696.112) (2.213.724) (8.227) - (4.000.048) Profit before income tax 598.311 1.469.927 3.109.592 (1.612.634) 161.412 - 3.726.608 Income tax expense - - - (698.317) (10.033) - (708.350) Profit for the year 598.311 1.469.927 3.109.592 (2.310.951) 151.379 - 3.018.258 (1)Halk Hayat ve Emeklilik AŞ, Halk Sigorta AŞ, Halk Finansal Kiralama AŞ, Halk Portföy Yönetimi AŞ, Halk Faktoring AŞ, Halk Varlık A.Ş. and Bileşim AŞ transactions are shown in other column. (2)Halk Yatırım Menkul Değerler AŞ, Halk Gayrimenkul Yatırım Ortaklığı AŞ and Halk Banka AD, Skopje transactions are shown in “treasury/investment” column. 58 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 7. Operating segments (continued) The segment assets and liabilities as at 31 December 2017 are as follows: Treasury Assets and liabilities Corporate Commercial Entrepreneur /Investment Other(1) Group Segment assets 29.828.946 41.531.752 134.732.676 100.168.803 4.734.102 310.996.279 Investment in equity- accounted investees - - - 357.755 - 357.755 Total assets 29.828.946 41.531.752 134.732.676 100.526.558 4.734.102 311.354.034 Segment liabilities 28.203.697 19.278.142 151.864.060 79.597.703 6.097.883 285.041.485 Total liabilities 28.203.697 19.278.142 151.864.060 79.597.703 6.097.883 285.041.485 (1) Property and equipment, intangible assets, non-current assets held for sale and deferred tax assets of the Group are presented under “Other” column. The segment assets and liabilities as at 31 December 2016 are as follows: Treasury Assets and liabilities Corporate Commercial Entrepreneur /Investment Other(1) Group Segment assets 24.362.657 32.567.740 102.022.698 73.238.885 4.175.516 236.367.496 Investment in equity- accounted investees - - - 286.103 - 286.103 Total assets 24.362.657 32.567.740 102.022.698 73.524.988 4.175.516 236.653.599 Segment liabilities 24.699.116 10.479.003 111.370.600 63.422.194 4.675.262 214.646.175 Total liabilities 24.699.116 10.479.003 111.370.600 63.422.194 4.675.262 214.646.175 (1) Property and equipment, intangible assets, non-current assets held for sale and deferred tax assets of the Group are presented under “Other” column. Geographical segments The Group’s geographical segments are based on the location of Group’s assets. The Group’s activities are conducted predominantly in Turkey and Turkey is the home country of the Bank. The areas of operation include all the primary business segments. Total assets and total liabilities are based on the country in which the branch or subsidiary is located. Segment revenue from external customers included in operating income is based on the geographical location of customers or counterparties. The Group conducts majority of its business activities with local customers in Turkey. Accordingly, geographical segment revenue from customers outside of Turkey does not exceed 10% of total entity revenue. The Group’s acquisition of properties and equipment, intangible assets and investment properties as of 31 December 2017 is mainly occurred in Turkey. 59 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 8. Cash on hand At 31 December 2017 and 31 December 2016, cash on hand comprised the following: 31 December 2017 31 December 2016 Cash on hand - Turkish Lira 1.155.032 914.278 - Foreign currency 1.043.368 599.249 Precious metals (gold) 9.731 29.570 Other liquid assets 7 32 Total cash on hand 2.208.138 1.543.129 9. Balances with Central Bank 31 December 2017 31 December 2016 Unrestricted balances with Central Bank Demand deposits – Turkish Lira 11.647.494 2.563.615 Demand deposits – Foreign currency 6.010.519 8.704.562 17.658.013 11.268.177 Reserve deposits Reserve deposits – Turkish Lira 114.965 56.496 Reserve deposits – Foreign currency 16.700.262 17.344.165 16.815.227 17.400.661 Total balances with Central Bank 34.473.240 28.668.838 As per the Communiqué no. 2013/15 “Reserve Deposits” of the Central Bank of Turkey (“CBRT”), banks keep reserve deposits at the CBRT for their TL and FC liabilities mentioned in the communiqué. The reserve deposit rates vary according to their maturity compositions; the reserve deposit rates are realized between 4%-10,5% for TL deposits and other liabilities, between 4%-24% for FC deposits for other FC liabilities. In accordance with the related communiqué, Central Bank of Turkey pays interests to TL and FC reserves. With the amendment on 21 October 2014 the banks meeting certain conditions receive interests on Turkish Lira reserve requirements at 300 or 500 basis points less than the weighted average funding cost (WAFC) rate announced on the Central Bank website. The interest related to the reserve requirements set as TL is paid at a rate of 400 basis points less than the 1 week repo rate of the CBRT as of 1 January 2017. With the change dated 23 January 2015, it has been decided to apply a charge on daily account balances and two days notice account denominated in Euro, and collected on a monthly basis, on reserve requirements held by banks commencing on 1 February 2015. As of 27 July 2015 commission ratios have been announced on the CBRT website as zero percent. With the change on 2 May 2015 made by the CBRT, interest is paid on US Dollars denominated reserve requirements, reserve options and free reserves held at Central Bank of the Republic of Turkey. The interest rate is set on daily basis by taking global and local financial markets conditions into account. The applicable interest rate is 1,5% for the reporting period (announced at 18 December 2017).With the decision No.872 dated 30 January 2014 of the Central Bank of TRNC, reserve requirement ratio is between 5% and 8% for TL liabilities and for foreign currency liabilities. With the Board of Directors decision No. 129 dated 2006 of the Central Bank of Macedonia, reserve requirement ratio is 8% for MKD currency liabilities and 15% for foreign currency liabilities. According to the Official Gazette of Serbia No. 102/2015 of the Central Bank of Serbia, banks maintain reserve requirement of 5% for short term liabilities with maturities less than two years and 0% for long term liabilities with maturities more than two years, 20% for short term foreign currency liabilities with maturities less than two years and 13% for long term foreign liabilities with maturities more than two years. 60 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 10. Due from banks 31 December 2017 31 December 2016 Domestic banks Demand deposits – Turkish Lira 36.756 35.775 Demand deposits – Foreign currency 117.672 41.217 Time deposits – Turkish Lira 565.848 74.529 Time deposits – Foreign currency 4.009.197 68.037 4.729.473 219.558 Foreign banks Demand deposits – Turkish Lira 70.399 188.533 Demand deposits – Foreign currency 1.230.333 874.658 Time deposits – Turkish Lira 5.157 63.689 Time deposits – Foreign currency 278.605 618.412 1.584.494 1.745.292 Money market placements 1.288.168 1.072.397 Total due from banks 7.602.135 3.037.247 For cash flow purposes, bank balances and money market placements having original maturity of less than 3 months were classified as cash and cash equivalents. These balances are amounting to TL 7.583.028 as at 31 December 2017 (31 December 2016: TL 3.009.371). 11. Securities portfolio Financial assets at fair value through profit or loss At 31 December 2017 and 31 December 2016, financial assets at fair value through profit or loss comprised the following: 31 December 2017 31 December 2016 Turkish Government bonds and Eurobonds issued by the Turkish Government 94.898 65.538 Bonds issued by financial institutions 24.425 20.482 Share certificates 1.240 3.095 Total of financial assets at fair value through profit or loss 120.563 89.115 61 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 11. Securities portfolio (continued) At 31 December 2017 and 31 December 2016, available for sale securities portfolio comprised the following: 31 December 2017 31 December 2016 Treasury bills and government bonds 17.613.370 15.201.823 Equity shares 88.881 280.406 Share certificates not quoted on a stock exchange 106.162 350.479 Allowance for impairment on equity shares (17.281) (70.073) Total of available for sale securities 17.702.251 15.482.229 Available-for-sale securities include securities given as collateral amounting to TL 12.097.899 (31 December 2016: TL 488.507). As of 31 December 2017, available-for-sale investment securities include securities pledged under repurchase agreements amounting to TL 4.463.109 (31 December 2016: TL 5.517.748). The equity shares in available for sale portfolio are unquoted and detailed as follows: 31 December 2017 31 December 2016 Macar-Halk Bank Magysrorszagi VolksBank RT 19.344 19.344 IMKB Takas ve Saklama Bankası AŞ 8.501 8.501 Bankalararası Kart Merkezi AŞ 3.804 3.804 Kredi Kayıt Bürosu AŞ 2.516 2.516 Kredi Garanti Fonu İşletme ve Araştırma AŞ 4.749 4.749 Uluslararası Garagum Ortaklar Bankası - 1.864 Other 67.248 309.701 Allowance for impairment on equity securities (17.281) (70.073) Total equity shares in available for sale investments 88.881 280.406 The details of allowance for impairment are as follows: 31 December 2017 31 December 2016 Macar-Halk Bank Magysrorszagi VolksBank RT 17.281 17.281 Uluslararası Garagum Ortaklar Bankası - 1.626 Halk Gayrimenkul Yatırım Ortaklığı A.Ş. - 51.166 Allowance for impairment on equity securities 17.281 70.073 62 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 11. Securities portfolio (continued) Held to maturity investment securities comprised the following items: 31 December 2017 31 December 2016 Government bonds 21.943.704 18.311.223 Other securities 43.395 33.403 Total 21.987.099 18.344.626 Held to maturity investment securities include securities pledged under repurchase agreements and given as collateral amounting to TL 1.204.712 and TL 20.522.556 (31 December 2016: TL 6.013.373 and TL 5.519.372) respectively. 31 December 2017 31 December 2016 Held to maturities portfolio: Quoted on a stock exchange 21.834.674 18.231.719 Not quoted 152.425 112.907 Total 21.987.099 18.344.626 The movements of held to maturity investment securities for the years ended 31 December 2017 and 31 December 2016 are as follows: 1 January- 1 January – 31 December 2017 31 December 2016 Beginning balance 18.344.626 16.904.877 Foreign currency differences 234.386 404.431 Purchases during the year (1) 5.884.168 3.731.489 Disposals through sales and redemptions (2.476.081) (2.696.171) Balance at the end of the period 21.987.099 18.344.626 (1) Interest income accrual difference between 31 December 2017 amounting to TL 2.902.185 and 31 December 2016 amounting to TL 1.911.968 has been included in purchases row. 63 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 12. Loans and advances 31 December 2017 31 December 2016 Short term loans Guaranteed export loans 3.374.344 4.218.876 Other guaranteed loans 25.745.054 20.524.495 Other non-guaranteed loans 8.684.930 6.776.657 Loans provided to financial sector 34.572 461.068 Loans provided to foreign institutions 260.582 187.523 Non-guaranteed export loans 436.829 440.540 Factoring receivables 1.211.932 1.134.528 Interest accruals 574.126 452.069 40.322.369 34.195.756 Medium and long term loans Guaranteed other investment and operating loans 113.329.933 80.208.711 Other non-guaranteed loans 47.122.229 40.826.558 Loans given to foreign institutions 1.347.533 1.251.799 Loans given to financial sector 795.649 958.956 Interest accruals 2.436.489 1.750.783 165.031.833 124.996.807 Total performing loans and advances 205.354.202 159.192.563 Non-performing loans and advances and allowance for impairment Gross non-performing loans 6.296.406 5.320.512 Specific allowance for impairment on loans (4.887.415) (4.475.519) Portfolio allowance for impairment on loans (1.730.820) (1.139.183) Loans and advances, net 205.032.373 158.898.373 The movement in the allowance for impairment on loans for the year ended 31 December 2017 and 31 December 2016 are as follows: 1 January – 1 January – 31 December 2017 31 December 2016 Balance on 1 January (5.614.702) (4.235.313) Net impairment loss for the year: (1.003.533) (1.379.389) - Charge for the year (1.731.696) (1.657.460) - Recoveries and reversals 728.163 278.071 Balance at 31 December (6.618.235) (5.614.702) 64 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 13. Insurance receivables and insurance contract liabilities Insurance receivables At 31 December 2017 and 31 December 2016, insurance receivables comprised the following: 31 December 2017 31 December 2016 Receivables from reinsurance and insurance companies 559.933 232.212 Receivables from agencies, brokers and intermediaries 179.072 165.840 Cash deposited to insurance and reinsurance companies 30.661 21.230 Total insurance receivables 769.666 419.282 Allowance for non-performing insurance receivables (37.841) (28.046) Insurance receivables, net 731.825 391.236 The details of guarantees for the Group’s insurance receivables are presented below: 31 December 2017 31 December 2016 Mortgage notes 9.737 11.018 Letters of guarantees 5.863 5.407 Treasury bills and government bonds 1.235 1.034 Other guarantees 243 242 Total 17.078 17.701 The movement in the allowance for impairment in respect of insurance receivables for the year ended 31 December 2017 and 31 December 2016 are as follows: 1 January – 1 January – 31 December 2017 31 December 2016 Balance at 1 January 28.046 24.580 Impairment loss recognised 12.890 4.975 Collections during the period (3.095) (1.509) Balance at 31 December 37.841 28.046 65 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 13. Insurance receivables and insurance contract liabilities (continued) Insurance contract liabilities Insurance technical reserves as of 31 December 2017 and 31 December 2016 are detailed in the tables below: 31 December 2017 31 December 2016 Life mathematical reserve 330.550 256.070 Unearned premiums reserve 918.924 510.838 Claims provision 1.206.061 813.416 Unexpired risk reserve 8.739 44.737 Other technical reserves 12.651 168 Total technical reserve 2.476.925 1.625.229 Other insurance liabilities 2.460 41.594 Total insurance contract liabilities 2.479.385 1.666.823 14. Equity accounted investees Carrying amount of equity accounted investees is summarized below: 31 December 2017 31 December 2016 Demir-Halk Bank NV 341.485 270.028 Kobi Girişim Sermayesi Yatırım Ortaklığı AŞ 15.232 14.854 Türk P ve I Sigorta AŞ 1.038 1.221 Equity accounted investees 357.755 286.103 Summary financial information for equity accounted investees, not adjusted for the percentage ownership held by the Group is as follows: Total Profit / (loss) Ownership assets Equity for the year 2017 Demir-Halk Bank NV 30,00% 8.309.515 1.101.826 71.048 Kobi Girişim Sermayesi Yatırım Ortaklığı AŞ 31,47% 48.955 48.402 1.208 Türk P ve I Sigorta AŞ 16,67% 24.113 6.225 1.684 2016 Demir-Halk Bank NV 30,00% 6.533.210 900.095 56.364 Kobi Girişim Sermayesi Yatırım Ortaklığı AŞ 31,47% 47.722 47.193 323 Türk P ve I Sigorta AŞ 16,67% 17.478 5.044 1.379 66 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 15. Finance lease receivables Maturity structure of investments on financial lease: 31 December 2017 31 December 2016 Gross Net Gross Net Less than 1 year 958.715 798.268 648.399 521.243 Between 1-4 years 1.599.672 1.289.512 1.426.002 1.220.074 More than 4 years 452.146 426.774 476.994 403.181 Total 3.010.533 2.514.554 2.551.395 2.144.498 Information on gross investments of financial lease: 31 December 2017 31 December 2016 Gross financial lease investment 3.010.533 2.551.395 Unearned revenues from financial lease (495.979) (406.897) Net finance lease receivable 2.514.554 2.144.498 Information on receivables from non-performing loans of financial lease: 31 December 2017 31 December 2016 Non-performing financial lease receivables 303.328 286.729 Specific provisions (226.693) (214.397) Total 76.635 72.332 The movement in the allowance for impairment on finance lease receivables for the year ended 31 December 2017 and 31 December 2016 are as follows: 1 January – 1 January – 31 December 2017 31 December 2016 Balance on 1 January (214.397) (163.884) Net impairment loss for the year: (12.296) (50.513) - Charge for the year (17.832) (79.953) - Recoveries and reversals 5.536 29.440 Total (226.693) (214.397) 67 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 16. Property and equipment Tangible assets Other Land obtained for movable and Lease hold non-performing tangible buildings improvements loans assets Total Cost Balance at 1 January 2016 2.413.004 140.697 543.680 812.458 3.909.839 Additions 16.759 16.151 174.456 62.305 269.671 Disposals (3.302) (3.443) (96.513) (19.870) (123.128) Revaluation surplus 216.993 - - - 216.993 Transfers (163.588) (257) - (3.305) (167.150) Balance at 31 December 2016 2.479.866 153.148 621.623 851.588 4.106.225 Balance at 1 January 2017 2.479.866 153.148 621.623 851.588 4.106.225 Additions 89.452 25.965 239.184 197.342 551.943 Disposals (54.016) (26.132) (144.126) (35.537) (259.811) Revaluation surplus 288.145 - - - 288.145 Transfers - - - (2.029) (2.029) Balance at 31 December 2017 2.803.447 152.981 716.681 1.011.364 4.684.473 Depreciation and impairment losses Balance at 1 January 2016 (160.189) (70.423) (18.449) (522.196) (771.257) Depreciation for the year (10.533) (14.886) (6.527) (92.692) (124.638) Disposals 19.378 3.828 2.372 45.401 70.979 Revaluation surplus (9.154) - - - (9.154) Transfers 615 - - - 615 Balance at 31 December 2016 (159.883) (81.481) (22.604) (569.487) (833.455) Balance at 1 January 2017 (159.883) (81.481) (22.604) (569.487) (833.455) Depreciation for the year (14.993) (29.431) (6.180) (94.056) (144.660) Disposals 11.557 21.646 7.364 15.363 55.930 Revaluation surplus (6.392) - - - (6.392) Transfers - - - - - Balance at 31 December 2017 (169.711) (89.266) (21.420) (648.180) (928.577) Provision for impairment at 1 January 2016 (1.215) - (7.134) - (8.349) Additions - - (4.476) - (4.476) Disposals 6 - 585 - 591 Transfers - - - - - Total provision for impairment at (1.209) - (11.025) - (12.234) 31 December 2016 Provision for impairment at 1 January 2017 (1.209) - (11.025) - (12.234) Additions (397) - (988) - (1.385) Disposals 1.606 - 2.396 - 4.002 Transfers - - - - - Total provision for impairment at - - (9.617) - (9.617) 31 December 2017 Carrying amounts At 1 January 2016 2.251.600 70.274 518.097 290.262 3.130.233 At 31 December 2016 2.318.774 71.667 587.994 282.101 3.260.536 At 31 December 2017 2.633.736 63.715 685.644 363.184 3.746.279 The fair values of land and buildings were determined from market-based evidence by appraisals which are undertaken by qualified external appraisers. The Group renews the revaluations every year and recognizes impairment loss when the recoverable amounts of such assets become less than their carrying amounts. The fair value of the lands and buildings which are held for use are determined with equivalence value and that measurement is classified as Level 2. 68 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 17. Intangible assets Intangible assets Total Cost Balance at 1 January 2016 163.631 163.631 Additions 54.071 54.071 Disposals (2.608) (2.608) Balance at 31 December 2016 215.094 215.094 Balance at 1 January 2017 215.094 215.094 Additions 89.366 89.366 Disposals (7.102) (7.102) Balance at 31 December 2017 297.358 297.358 Amortisation Balance at 1 January 2016 (60.625) (60.625) Amortisation for the year (38.994) (38.994) Disposals 73 73 Balance at 31 December 2016 (99.546) (99.546) Opening balance, 1 January 2017 (99.546) (99.546) Amortisation for the year (52.873) (52.873) Disposals 227 227 Balance at 31 December 2017 (152.192) (152.192) Carrying amounts At 1 January 2016 103.006 103.006 At 31 December 2016 115.548 115.548 At 31 December 2017 145.166 145.166 18. Non-current assets held for sale Certain non-current assets primarily related to the collateral collected on non-performing loans are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. The non-current assets held for sale of the Group as of 31 December 2017 is TL 533 (31 December 2016: TL 1.280). 19. Investment properties 1 January – 1 January – 31 December 2017 31 December 2016 Balance at 1 January 864.116 485.594 Acquisitions 55.273 7.118 Transfer 61.600 435.903 Disposals (669) - Depreciation (69.942) (64.499) Balance at 31 December 910.378 864.116 The Group’s investment property appraisal reports are prepared by independent professional valuation specialists authorized by Capital Markets Board of Turkey and renews the revaluations every year. TL 22.458 of rent income is generated from investment properties in the current year (31 December 2016: TL 32.105). The fair values of investment properties are determined by equivalence value method and are reclassified as Level 2. 69 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 20. Other assets At 31 December 2017 and 31 December 2016, other assets comprised the following: 31 December 2017 31 December 2016 Prepaid expenses 1.113.978 607.879 Receivables from credit card payments 304.354 346.496 Cash guarantees given 88.934 340.073 Clearing house account 99.333 324.692 Advances given for lease transactions 129.271 133.621 Receivables from asset sale on credit terms 56.914 79.650 Guarantees given for derivative financial instruments 104.783 53.980 Receivables from financial sector activities 100.810 - Other assets 994.603 839.685 Total other assets 2.992.980 2.726.076 21. Deposits At 31 December 2017 and 31 December 2016, deposits from banks comprised the following: 31 December 2017 31 December 2016 Demand deposits 3.813.689 7.867.130 Time deposits 15.401.009 14.993.081 Deposits from banks 19.214.698 22.860.211 As at 31 December 2017, deposits from banks include TL accounts amounting to TL 7.229.440 (31 December 2016: TL 10.054.872) and foreign currency accounts amounting to TL 11.985.258 (31 December 2016: TL 12.805.339) in total. At 31 December 2017 and 31 December 2016, deposits from customers comprised the following: 31 December 2017 31 December 2016 Demand Time Demand Time Saving deposits 6.767.610 43.569.737 6.158.114 34.424.834 Foreign currency deposits 10.843.568 53.910.468 8.347.244 42.425.562 Commercial deposits 5.235.492 30.100.209 4.294.379 19.754.717 Public institutions and other deposits 2.671.077 20.939.920 2.770.421 9.354.586 Deposits from customers 25.517.747 148.520.334 21.570.158 105.959.699 70 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 22. Obligations under repurchase agreements The Group raises funds by selling financial instruments under agreements to repay the funds by repurchasing the instruments at future dates at the same price plus interest at a predetermined rate. Repurchase agreements are commonly used as a tool for short-term financing of interest-earning assets, depending on the prevailing interest rates. The securities sold under repurchase agreements and corresponding obligations are as follows: 31 December 2017 31 December 2016 Obligations under repurchase agreements 4.348.200 10.844.612 Total 4.348.200 10.844.612 The proceeds from the sale of securities under repurchase agreements are treated as liabilities and recorded as obligations under repurchase agreements. As at 31 December 2017, the maturities of the obligations varied from one day to 1 year (31 December 2016: one day to 1 year). 23. Loans and advances from banks At 31 December 2017 and 31 December 2016, loans and advances from banks comprised the following: 31 December 2017 31 December 2016 Borrowings 20.058.484 21.589.111 Funds 2.724.634 2.339.808 Total 22.783.118 23.928.919 At 31 December 2017 and 31 December 2016, borrowings comprised the following: 31 December 2017 31 December 2016 Short term Long term Short term Long term Loans and advances from domestic banks and institutions 1.262.731 2.898.764 968.495 770.323 Loans and advances from foreign banks and institutions 5.789.308 12.832.315 4.927.580 14.922.713 Borrowings 7.052.039 15.731.079 5.896.075 15.693.036 Borrowings are unsecured. As of 31 December 2017, The Group has no floating rate borrowings (31 December 2016: Floating rate borrowings bear interest at rates fixed in advance for periods of 6 to 12 months.). The Group has not had any defaults of principal, interest or redemption amounts or other breaches of loan covenants as of 31 December 2017 (31 December 2016: None). Funds borrowed include funds obtained that are granted as loans as specified in the agreements signed between the Bank and the ministries or the institutions that the funds belong to. 71 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 23. Loan and advances from banks (continued) As at 31 December 2017 and 31 December 2016, interest rates and maturities of bank borrowings are as follows: Fixed rates 31 December 2017 Amount Interest rate Maturity USD borrowings 10.256.357 0,75% - 3,98% January 2018 - March 2043 EUR borrowings 8.332.951 0% - 2,33% January 2018 - September 2038 TL borrowings 1.436.861 6,34% - 7,79% January 2018 - December 2018 Other borrowings 32.315 0% - 1,78% January 2018 - May 2019 Total 20.058.484 Fixed rates 31 December 2016 Amount Interest rate Maturity USD borrowings 10.602.350 0% - 5,69% January 2017 - September 2038 EUR borrowings 7.404.614 0% - 0,03% January 2017 - September 2038 TL borrowings 1.171.764 5,00% - 10,03% January 2017 - December 2018 Other borrowings 34.322 2,21% February 2017 Total 19.213.050 As of 31 December 2017, The Group has no floating rate borrowings. Floating rates 31 December 2016 Amount Interest rate Maturity USD borrowings 614.250 Libor+0,55 July 2017 EUR borrowings 1.761.811 Euribor+0,45 July 2017 Total 2.376.061 72 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 24. Interbank money market borrowings 31 December 2017 31 December 2016 Payables to stock exchange money market 30.307.004 1.032.372 On behalf of customers 348.118 7.145.152 Total 30.655.122 8.177.524 Payables to stock exchange money markets have a maturity of 31 days (31 December 2016: 31 days) 14,50% (31 December 2016: 15,24%) of interest rates. 25. Taxation The Bank and its subsidiaries located in Turkey are subject to taxation in accordance with the tax procedures and the legislation effective in Turkey. Corporate income tax is 20% on the statutory corporate income tax base, which is determined by modifying accounting income for certain exclusions and allowances for tax purposes as at 31 December 2017 (31 December 2016: 20%). Provision is made in the accompanying consolidated financial statements for the estimated charge based on the Group’s results for the year. The corporate tax rate which has been applied at the rate of 20% in accordance with the Article 32 – paragraph 1 of the Corporate Tax Law No: 5520, was set as 22% for the tax bases of the years 2018, 2019, and 2020 (applicable as of the beginning of the accounting periods in the related year for institutions designated a special accounting period) as per the provisional article 10 incorporated by the Article 91 of the Amendment on Certain Tax Laws and Other Laws no. 7061. Furthermore, the Council of Ministers has been authorized to reduce the rate of 22% down up to 20%. The Law numbered 7061 on Amendment of Certain Taxes and Laws and Other Acts was published on the Official Gazette dated December 5, 2017 and numbered 30261. Article 5 entitled "Exceptions" of the Corporate Tax Law has been amended in Article 89 of the Law. In accordance with (a) clause in the first paragraph of the Article, the exemption of 75% applied to gains from the sales of lands and buildings held by the entities for two full years has been reduced to rate of 50%. This regulation has been effective from 5 December 2017 (31 December 2016: According to the Corporate Tax Law, 75% of the capital gains arising from the sale of tangible assets and investments owned for at least two years are exempted from corporate tax on the condition that such gains are reflected in the equity from the date of the sale. The remaining 25% of such capital gains are subject to corporate tax.). Turkish tax legislation does not permit a parent company and its subsidiary to file a consolidated tax return. Therefore, provisions for taxes, as reflected in the accompanying consolidated financial statements, have been calculated on a separate-entity basis. In Turkey, advance tax returns are filed on a quarterly basis. Advance corporate income tax rate applied in 2017 is 20% (31 December 2016: 20%). Losses can be carried forward for offset against future taxable income for up to 5 years. However, losses cannot be carried back for offset against profits from previous periods. There is no procedure for a final and definitive agreement on tax assessments. Companies file their tax returns between 1-25 April following the close of the accounting year to which they relate. Tax authorities may, however, examine such returns and the underlying accounting records and may revise assessments within five years. 73 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 25. Taxation (continued) Income withholding tax In addition to corporate taxes, companies should also calculate income withholding taxes and funds surcharge on any dividends distributed, except for companies receiving dividends who are resident companies in Turkey and Turkish branches of foreign companies. The rate of income withholding tax was 10% starting from 24 April 2003. This rate was changed to 15% in accordance with Article 15 of the Law No: 5520 commencing 23 July 2006. Dividends paid to the resident institutions and the institutions working through local offices or representatives in Turkey are not subject to withholding tax. As per the decisions no.2009/14593 and 2009/14594 of the Council of Ministers published in the Official Gazette no.27130 dated 3 February 2009, certain duty rates included in the articles no.15 and 30 of the new Corporate Tax Law no.5520 are revised. Accordingly, the withholding tax rate on the dividend payments other than the ones paid to the non-resident institutions generating income in Turkey through their operations or permanent representatives and the resident institutions is 15%. In applying the withholding tax rates on dividend payments to the non-resident institutions and the individuals, the withholding tax rates covered in the related Double Tax Treaty Agreements are taken into account. Appropriation of the retained earnings to capital is not considered as profit distribution and therefore is not subject to withholding tax. Investment incentives As per the provisional Article no. 69, effective from 1 January 2006, added to the Income Tax Law no. 193 by Law no. 5479 dated 8 April 2006 and published in Official Gazette no. 26133, tax payers could deduct investment incentives which were calculated according to the legislative provisions (including tax rate related provisions) in force on 31 December 2005, only from the taxable income for the years 2006, 2007, and 2008. The rights of tax payers who could not deduct investment incentives fully or partially due to insufficient taxable income during those years, were lost as at 31 December 2008. In accordance with the decision taken by the Turkish Constitutional Court on 15 October 2009, the “2006, 2007 and 2008” clause of the provisional Article no. 69 of the Income Tax Law mentioned above, is repealed and the time limitation for the use of the investment incentive is removed. The repeal related to the investment incentive was enacted and issued in the 8 January 2010 Official Gazette number 27456. Accordingly, the Group’s subsidiary operating in finance leasing business will be able to deduct its remaining investment incentives from taxable income in the future without any time limitation. As per “Law regarding amendments to the Income Tax Law and Some Other Certain Laws and Decree Laws” accepted on 23 July 2010 at the Grand National Assembly of Turkey, the expression of “can be deducted from the earnings again in the context of this legislation (including the legislation regarding the tax rate) valid at this date” has been amended as “can be deducted from the earnings again in the context of this legislation (including the legislation regarding the tax rate as explained in the second clause of the temporary article no 61 of the Law) valid at this date” and the following expression of “ Investment incentive amount used in determination of the tax base shall not exceed 25% of the associated taxable income. Tax is computed on the remaining income per the enacted tax rate” has been added. This Law has been published in the Official Gazette on 1 August 2010. The clause “The amount which to be deducted as investment incentive to estimate tax base cannot exceed 25% of related income” which has been added to first clause of the temporary 69th article of Law No: 193 with the 5th article of Law No: 6009 on Amendments to Income Tax Law and Some Other Laws and Decree Laws has been abrogated with the 9 February 2012 dated decisions no: E.2010/93 and K.2012/20. 74 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 25. Taxation (continued) Transfer pricing In Turkey, the transfer pricing provisions have been stated under the Article 13 of Corporate Tax Law with the heading of “disguised profit distribution via transfer pricing”. The General Communiqué on disguised profit distribution via Transfer Pricing sets details about implementation. If a taxpayer enters into transactions regarding sale or purchase of goods and services with related parties, where the prices are not set in accordance with arm’s length principle, then related profits are considered to be distributed in a disguised manner through transfer pricing. Such disguised profit distributions through transfer pricing are not accepted as tax deductible for corporate income tax purposes. Tax applications for foreign branches and foreign operations The principal tax rates (%) of the tax authorities in each country as of 31 December 2017 and 31 December 2016 are as follows: 31 December 2017 31 December 2016 TRNC 10% 10% Bahrain - - Serbia 15% 15% Republic of Macedonia 10% 10% As of 31 December 2017 and 31 December 2016 advance income taxes are netted off with the current income tax liability as stated below: 31 December 2017 31 December 2016 Income tax liability 799.366 625.363 Income tax paid in advance (603.728) (560.753) Income tax payables 195.638 64.610 Deferred taxes Taxes on income for the year also comprise deferred taxes. Deferred income tax is provided, using the liability method, on all taxable temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liability and asset are recognised when it is probable that the future economic benefits resulting from the reversal of temporary differences will flow to or from the Bank. Deferred tax asset is recognised to the extent that it is probable that future taxable profit will be available against which the deferred tax asset can be utilised. Currently enacted or substantively enacted tax rates are used to determine deferred taxes on income. These differences usually result in the recognition of revenue and expenses in different reporting periods for IFRS and tax purposes. Tax rate used in the calculation of deferred tax assets and liabilities was 22% over temporary timing differences expected to be reversed in 2018, 2019 and 2020, and 20% over temporary timing differences expected to be reversed in 2021 and the following years (31 December 2016: 20%). Individual consolidated subsidiaries offset deferred tax asset and deferred tax liability if the deferred tax asset and deferred tax liability relate to income taxes levied by the same taxation authority. Subsidiaries that have deferred tax assets position are not netted off against subsidiaries that have deferred tax liabilities position and disclosed separately. 75 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 25. Taxation (continued) Deferred taxes (continued) As of 31 December 2017, net deferred tax represents TL 108.765 net deferred tax liability, consisting of deferred tax assets and deferred liabilities amounting to TL 465.405 and TL 574.170, respectively. (31 December 2016: TL 440.540 and TL 288.974, respectively). Deferred tax assets and liabilities are attributable to the following: Deferred tax asset / (liability) 31 December 2017 31 December 2016 Valuation differences on financial assets and liabilities (600.353) (375.878) Provisions 301.129 277.574 Portfolio and specific provision for impairment on loans and advances 378.224 336.098 Other (187.765) (86.228) Deferred tax liability, net (108.765) 151.566 Movement of net deferred tax can be presented as follows: 1 January – 1 January – 31 December 2017 31 December 2016 Deferred tax, net at 1 January 151.566 216.701 Deferred income tax recognised in other comprehensive income 50.209 18.034 Deferred tax recognised in the profit or loss (310.540) (83.169) Deferred tax, net (108.765) 151.566 An analysis of the Group’s income tax expense for the year ended 31 December 2017 and 31 December 2016 are as follows: 31 December 2017 31 December 2016 Current tax charge Current period 1.376.068 791.519 Deferred tax charge / (benefit) Origination and reversal of temporary differences (310.540) (83.169) Total income tax charge 1.065.528 708.350 76 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 25. Taxation (continued) Reconciliation of effective tax rate The reported taxation charge for the year ended 31 December 2017 and 31 December 2016 are different than the amounts computed by applying statutory tax rate to profit before tax as shown in the following reconciliation: 31 December 2017 31 December 2016 Amount % Amount % Profit before income tax 5.250.950 3.726.608 Income tax using the Bank’s domestic tax rate 1.050.190 20% 745.322 20,00% Tax exempt income (9.703) (0,18%) (72.851) (1,95%) Non-deductible expenses 25.041 0,48% 35.879 0,96% Income tax charge 1.065.528 20,3% 708.350 19,01% 26. Other liabilities and provisions 31 December 2017 31 December 2016 Other liabilities Cooperative deposit blockages 1.718.727 1.350.126 Credit card members restricted account 1.568.922 1.166.562 Unearned revenue 1.163.889 772.757 Cheques clearance account 234.204 746.603 Taxes and dues payable 502.121 292.151 Banking transactions 182.019 111.887 Payment orders 109.280 31.545 Resource utilization support fund 36.350 31.253 Import transfer orders 17.600 30.394 Collaterals received for derivative instruments 15.590 14.134 Other liabilities 687.430 515.568 Total 6.236.132 5.062.980 Provisions Employee termination benefits 497.405 421.497 Unused vacation accruals 162.485 139.874 Provision on non-cash loans 131.448 139.279 Provision on lawsuits 110.968 37.481 Provisions for credit card bonuses 18.149 12.680 Other 432.076 501.945 Total 1.352.531 1.252.756 77 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 26. Other liabilities and provisions (continued) Employee termination benefits In accordance with existing social legislation, the Bank and its subsidiaries incorporated in Turkey are required to make lump-sum payments to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. Such payments are calculated on the basis of 30 days’ pay (limited to a maximum of full TL 4.732,48 and full TL 4.297,21 at 31 December 2017 and 31 December 2016 respectively) per year of employment at the rate of pay applicable at the date of retirement or termination. In the financial statements the Group reflected a liability calculated using the Actuarial Method and based upon factors derived using their experience of personnel terminating their services and being eligible to receive retirement pay and discounted by using the current market yield on government bonds at the balance sheet date. The annual ceiling has been increased to full TL 5.001,76 effective 1 January 2018. The principal actuarial assumptions used in the calculation of the total liability at the reporting date are as follows: 31 December 2017 31 December 2016 Discount rate for pension plan liabilities 8,90% 7,80% Expected rates of salary increase 12,30% 11,20% Inflation 9,10% 8,00% Movements in the present value of the defined benefit obligation were as follows: 1 January – 1 January – 31 December 2017 31 December 2016 Defined benefit obligation at 1 January 421.497 409.923 Current service cost 50.039 39.704 Interest cost 44.640 42.955 Actuarial losses/(gains) 14.073 (21.783) Previous year service cost charged for the period 52 877 Payment/ limitation of benefits/ loss (gain) because of discharge 8.229 136 Benefits paid (41.125) (50.315) Defined benefit obligation at 31 December 497.405 421.497 Amounts recognized in profit and loss in respect of defined benefit plan are as follows: 31 December 2017 31 December 2016 Current service cost 50.039 39.704 Interest cost 44.640 42.955 Previous Charge for the last financial period 52 877 Payment/ limitation of benefits/ loss (gain) because of discharge 8.229 136 102.960 83.672 78 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 26. Other liabilities and provisions (continued) Post-employment benefits (pension) Based on the results of the actuarial reports prepared as of 31 December 2017, it was determined that there is no technical deficit for Türkiye Halk Bankası AŞ Emekli Sandığı and T.C. Ziraat Bankası ve Türkiye Halk Bankası Çalışanları Emekli Sandığı Vakfı. The above mentioned actuarial review, which was made in accordance with the principles of the related law, measures the present value of the liability as of 31 December 2017, in other words; it measures the amount to be paid to the Social Security Foundation by the Bank. Actuarial assumptions used in the calculation are given below. Assumptions 31 December 2017 31 December 2016 Discount Rate 9,8% 9,8% Mortality Rate CSO 1980 woman/man CSO 1980 woman/man Some of the Bank’s personnel are the members of T. Halk Bankası Çalışanları Emekli Sandığı Vakfı, (“Fund”) which was established by 20th provisional article of Social Security Law numbered 506. As of 31 December 2017, the number of personnel who benefit from the Fund is 34.631 (31 December 2016: 33.079). Below table shows the present values of premiums and salary payments as of 31 December 2017, by taking into account the health expenses within the Social Security Foundation limits. 31 December 31 December Transferable pension and medical benefits: 2017 2016 Net present value of total liabilities other than health (1.938.100) (1.601.730) Net present value of long term insurance line premiums 2.167.717 1.781.839 Net present value of total liabilities other than health 229.617 180.109 Net present value of health liabilities (435.970) (392.002) Net present value of health premiums 1.354.206 1.113.143 Net present value of health liabilities 918.236 721.141 Pension fund assets 1.911.745 1.525.471 General administration expenses (1%) (23.741) (19.937) Amount of actuarial and technical (deficit) / surplus 3.035.857 2.406.784 Plan assets are comprised as follows: Total assets 31 December 2017 31 December 2016 Banks 1.104.186 1.220.100 Marketable securities 644.310 151.300 Property and equipment 126.403 129.800 Other 36.846 24.271 Total 1.911.745 1.525.471 On the other hand, after the transfer, the currently paid health benefits will be revised within the framework of the Social Security Foundation legislation and related regulations. 79 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 26. Other liabilities and provisions (continued) Post-employment benefits (pension) (continued) The sensitivity analysis of defined benefit obligation of excess liabilities and retirement indemnities are as follows: Change in assumptions (%) Medical Assumptions Pension benefits Death benefits benefits Total Discount rate +1% (0,1%) (19,6%) (19,0%) (19,0%) Discount rate -1% 0,1% 27,0% 26,1% 26,0% Inflation rate +1% 0,1% 27,1% 32,4% 32,30% Inflation rate -1% (0,1%) (19,9%) (22,6%) (22,50%) Based on the results of the actuarial report prepared as of 31 December 2017, no technical deficit has been reported for Türkiye Halk Bankası AŞ Emekli Sandığı Vakfı and T.C. Ziraat Bankası ve T. Halk Bankası Çalışanları Emekli Sandığı Vakfı. 27. Derivative financial instruments In the ordinary course of business, the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instruments, reference rates or indices. The table below shows the fair values of derivative financial instruments. The notional amount is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year-end and are neither indicative of the market risk nor credit risk. 31 December 2017 31 December 2016 Notional Fair amount in Fair Notional amount Fair value value Turkish Lira Fair value value in Turkish Lira assets liabilities equivalent assets liabilities equivalent Currency swap contracts 114.410 58.002 6.358.831 128.468 17.465 5.622.434 Other swap contracts 203.836 3.403 10.886.762 110.992 - 9.804.244 Other 44.685 89.268 14.606.591 120.649 207.128 10.224.988 Total 362.931 150.673 31.852.184 360.109 224.593 25.651.666 The majority of outstanding transactions in derivative financial instruments were with the banks and other financial institutions. 28. Debt securities issued and subordinated liabilities 31 December 2017 31 December 2016 Debt securities issued at amortized cost 12.008.923 12.744.316 Total of debt securities issued 12.008.923 12.744.316 80 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 28. Debt securities issued and subordinated liabilities (continued) Debt securities issued comprise of the following: 31 December 2017 Debt securities issued Maturity Interest rate % Amount Debt securities of TL January 2018 - May 2018 11,21% - 14,4% 3.368.018 Debt securities of USD June 2019 - July 2021 3,88% - 4,75% 8.640.905 12.008.923 31 December 2016 Debt securities issued Maturity Interest rate % Amount Debt securities of TL January 2017 - May 2017 9,5% - 11,08% 2.059.608 Debt securities of USD July 2017 - July 2021 1,94% - 2,44% 10.684.708 12.744.316 As of 14 August 2017, the treasury bills amounting to TL 750.000.000 with maturity of 175 days and as of 26 September 2017, the treasury bills amounting to TL 38.500.000 with maturity of 112 days and as of 5 October 2017, the treasury bills amounting to TL 200.000.000 with maturity of 80 days and as of 5 October 2017, the treasury bills amounting to TL 180.000.000 with maturity of 150 days and as of 12 October 2017, the treasury bills amounting to TL 220.000.000 with maturity of 94 days and as of 20 October 2017, the treasury bills amounting to TL 300.000.000 with maturity of 93 days and as of 31 October 2017, the treasury bills amounting to TL 120.000.000 with maturity of 96 days and as of 3 November 2017, the treasury bills amounting to TL 75.000.000 with maturity of 105 days and as of 7 November 2017, the treasury bills amounting to TL 165.000.000 with maturity of 103 days and as of 10 November 2017, the treasury bills amounting to TL 130.000.000 with maturity of 131 days and as of 10 November 2017, the treasury bills amounting to TL 75.000.000 with maturity of 98 days and as of 17 November 2017, the treasury bills amounting to TL 150.000.000 with maturity of 98 days and as of 27 November 2017, the treasury bills amounting to TL 185.000.000 with maturity of 90 days and as of 11 December 2017, the treasury bills amounting to TL 320.000.000 with maturity of 106 days and as of 26 December 2017, the treasury bills amounting to TL 200.000.000 with maturity of 87 days and as of 26 December 2017, the treasury bills amounting to TL 105.000.000 with maturity of 150 days are issued by the Bank. The Bank intends to continue to diversify its funding base with international financings and debt capital market instruments. (31 December 2016: As of 27 November 2015, the treasury bills amounting to TL 1.000.000 with maturity of 175 days are issued by the Bank. Also, as of 11 September 2015, the Bank issued treasury bills amounting to TL 750.000 with maturity of 175 days. As of 19 July 2012, the bonds amounting to USD 750.000.000 with maturity of 5 years and as of 5 February 2013, the bonds amounting to USD 750.000.000 with maturity of 7 years and as of 4 June, 2014, the bonds amounting to USD 500.000.000 with maturity of 5 years and 11 February 2015, the bonds amounting to USD 500.000.000 with maturity of 5 years are issued by the Bank. In July 2016, the Bank issued its fifth Eurobond of USD 500.000.000 with 5 years maturity.) 81 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 28. Debt securities issued and subordinated liabilities (continued) 31 December 2017 31 December 2016 Subordinated liabilities at amortized cost 1.004.385 - Total of subordinated liabilities 1.004.385 - Issuance of subordinated liabilities was completed on 20 October 2017 amounting to TL 1 million with a call option on 20 October 2022 (At the end of the fifth year, the Bank has an early redemption option.) and due 20 October 2027 with a coupon rate Government Debt Security for 5 years+350 basis points. 29. Collaterals of borrowed securities and borrowed securities Collaterals of borrowed securities are recognized in the statement of financial position and are measured in accordance with the accounting policy for the related assets as appropriate. Borrowed securities are recognized as liabilities. Collaterals of borrowed securities and borrowed securities are recognized in the statement of financial position as the related risks and rewards of such securities are retained. Collaterals of borrowed securities and borrowed securities are not recorded under commitments and contingencies. 31 December 2017 31 December 2016 Collaterals of borrowed securities 10.000.429 - Total of collaterals of borrowed securities 10.000.429 - 31 December 2017 31 December 2016 Borrowed securities 10.000.429 - Total of borrowed securities 10.000.429 - 30. Share capital As at 31 December 2017, the authorized nominal share capital of the Bank amounts to TL 1.250.000 (31 December 2016: TL 1.250.000). The Bank’s paid-in capital is divided into 1.250.000.000 shares, each with a nominal value of full TL 1. 31 December 2017 31 December 2016 Paid-in capital 1.250.000 1.250.000 Inflation restatement effect 1.328.184 1.328.184 Shared capital issued 2.578.184 2.578.184 82 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 31. Reserves and dividends paid and proposed Fair value reserve The fair value reserve includes the cumulative net change in the fair value of available-for-sale investments, excluding impairment losses, until the investment is derecognised. Fair value reserve amount is TL (612.931) for the current period (31 December 2016: TL (724.098)). Other reserves Other reserves consist of legal reserves kept within the Group and translation reserves. The legal reserves consist of first and second legal reserves in accordance with the Turkish Commercial Code. The first legal reserve is appropriated out of the statutory profits at the rate of 5%, until the total reserve reaches a maximum of 20% of the entity’s share capital. The second legal reserve is appropriated at the rate of 10% of all distributions in excess of 5% of the entity’s share capital. The first and second legal reserves are not available for distribution unless they exceed 50% of the share capital, but may be used to absorb losses in the event that the general reserve is exhausted. The legal reserves as at 31 December 2017 are TL 1.758.941 (31 December 2016: TL 1.562.172). The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. The translation reserve amount is TL (4.311) for the current period (31 December 2016: TL 43.912). As of 1 April 2015, the Group adopted the revaluation method for land and buildings in tangible assets in accordance with International Accounting Standard No: 16 “Property, Plant and Equipment” (IAS 16) . Expertise values determined by an independent expert companies are reflected to the financial statements. Revaluation differences are recorded in “Revaluation differences of property and equipment” under the shareholders’ equity. The revaluation differences of property and equipment is TL 146.368 for the current period (31 December 2016: TL 434.347). Total of the other reserves amount is TL 4.166.125 (31 December 2016: TL 3.711.960). Dividends paid and proposed As of the reporting date, the Bank has paid a dividend of TL 0,2053 per share (total TL 256.584) out of 2016 profit (31 December 2016: 0,1909 per share (total TL 238.603)). 32. Earnings per share Basic earnings per share (EPS) are calculated by dividing the net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. There is no dilution of shares as of 31 December 2017 and 31 December 2016. The following reflects the comprehensive income and share data used in the basic earnings per share computations: 31 December 2017 31 December 2016 Net profit attributable to ordinary shareholders for basic earnings per share 4.172.937 3.012.408 Weighted average number of ordinary shares for basic earnings per share 1.250.000.000 1.250.000.000 Basic earnings per share (full TL per share) 3,3383 2,4099 There have been no other transactions involving ordinary shares or potential ordinary shares since the reporting date and before the completion of these financial statements. 83 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 33. Related parties A party is related to an entity if: the party controls, is controlled by, or is under common control with, the entity (this includes parents, subsidiaries and fellow subsidiaries); has an interest in the entity that gives it significant influence over the entity or has joint control over the entity. For the purpose of these consolidated financial statements, unconsolidated subsidiaries, associates, shareholders are referred to as related parties. Related parties also include individuals that are principal owners, management and members of the Group’s Board of Directors and their families and also post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity. The immediate parent and ultimate controlling party respectively of the Group is Türkiye Varlık Fonu Yönetimi A.Ş. (“TVF”). The shares belonging to the T.C. Prime Ministry Privatization Administration were transferred to the TVF on 10 March 2017 pursuant to the Decree of the Higher Council for Privatization No. 2017/1 dated 3 February 2017. Transactions between the Bank and its subsidiaries, which are related parties of the Bank, have been eliminated on consolidation and are not disclosed in this note. Transactions with key management personnel Key management personnel comprise of the Group’s directors and key management executive officers. As of 31 December 2017 and 31 December 2016 the Group’s directors and executive officers have no outstanding personnel loans from the Bank. In addition to their salaries, the Group also provides non-cash benefits to directors. Total compensation provided to key management personnel is: 1 January – 1 January – 31 December 2017 31 December 2016 Salaries and short-term benefits 25.695 21.020 The Bank has agreements or protocols with several of its shareholders, consolidated subsidiaries and affiliates of the shareholders. The Bank's management believes that all such agreements or protocols are on terms that are at least as advantageous to the Bank as would be available in transactions with third parties and the transactions are consummated at their fair values. None of these balances is secured. Related party balances and transactions Non-cash Cash loans loans Interest Interest Commission 31 December 2017 receivable receivable Deposits income expense income KOBİ Girişim Sermayesi Yatırım Ortaklığı AŞ - 1.075 19.480 5 2.474 - Kredi Kayıt Bürosu AŞ - - 20.001 - 149 - Bankalararası Kart Merkezi AŞ - - - - 323 - Total - 1.075 39.481 5 2.946 - Non-cash Cash loans loans Interest Interest Commission 31 December 2016 receivable receivable Deposits income expense income KOBİ Girişim Sermayesi Yatırım Ortaklığı AŞ - 1.926 20.576 - 2.529 - Kredi Kayıt Bürosu AŞ - - - - - - Bankalararası Kart Merkezi AŞ - - - - - - Total - 1.926 20.576 - 2.529 - 84 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 34. Other operating income 1 January – 1 January – 31 December 2017 31 December 2016 Reversal from prior years' provisions 136.410 178.936 Gains on sale of property and equipment 112.134 129.232 Rent income 49.417 51.930 Other 83.734 62.176 Total 381.695 422.274 35. Other operating expenses 1 January – 1 January – 31 December 2017 31 December 2016 Staff costs: Personnel expenses 2.174.853 1.895.986 Retirement pay provision 98.844 83.672 Administrative expenses 1.138.555 1.305.467 Depreciation and amortization charges 178.943 228.131 Saving deposit insurance fund contributions 193.700 185.561 Taxes, duties, charges and premium expenses 189.618 173.476 Provision expense for lawsuits 3.027 6.027 Other 734.941 121.728 Total 4.712.481 4.000.048 36. Fees and commission income and expenses 1 January – 1 January – 31 December 2017 31 December 2016 Fees and commission income Banking 2.459.088 1.713.431 Brokerage 47.712 26.708 Total 2.506.800 1.740.139 Fees and commission expenses Banking (583.428) (501.024) Brokerage (2.238) (1.012) Total (585.666) (502.036) 85 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 37. Additional cash flow information 31 December 2017 31 December 2016 Cash on hand 2.208.138 1.543.097 Due from banks (with original maturity of less than 3 months) 6.291.230 1.936.974 Money market placements 1.285.499 1.072.397 Blocked balances with banks (1) (314.564) (290.080) Unrestricted balances with Central Bank 17.652.682 11.268.177 Other liquid assets 7 32 Cash and cash equivalents in the statement of cash flows 27.122.992 15.530.597 (1) Blocked accounts for technical reserves of Halk Hayat ve Emeklilik AŞ amounting to TL 182.179 (31 December 2016: TL 248.138) and of Halk Sigorta AŞ amounting to TL 132.385 (31 December 2016: TL 41.942), which are given as collateral to under secretariat of Treasury of Republic of Turkey. The reserve deposits with Central Bank are not available to finance the Bank’s day -to-day operations and therefore are not part of cash and cash equivalents. 38. Commitments and contingencies In the normal course of business activities, the Group undertakes various commitments and incurs certain contingent liabilities that are not presented in the financial statements including: 31 December 2017 31 December 2016 Letters of guarantee issued 49.660.108 40.118.905 Letters of credit 4.148.121 4.019.100 Acceptance credits 3.693.507 2.825.466 Other 1.285.922 914.248 Total non-cash loans 58.787.658 47.877.719 Credit card limit commitments 11.599.896 10.824.073 Other commitments 11.678.758 12.921.296 Total 82.066.312 71.623.088 Fiduciary activities The Group provides custody, investment management and advisory services to third parties. Those assets that are held in a fiduciary capacity are not included in the accompanying financial statements. The Group transferred all investment funds to Halk Portföy Yönetimi AŞ, which were established under the regulations of the Capital Markets Board of Turkey. Halk Portföy Yönetimi AŞ is en gaging in fund management of 12 funds. 86 TÜRKİYE HALK BANKASI ANONİM ŞİRKETİ AND ITS SUBSIDIARIES Notes to the Consolidated Financial Statements As at and For the Year Ended 31 December 2017 (Currency – In thousands of Turkish lira (“TL”)) 38. Commitments and contingencies (continued) Letters of guarantee given to BIST and Borsa Istanbul Precious Metals and Diamond Market As of 31 December 2017, according to the general requirements of the BIST, letters of guarantee amounting to USD 2.000 (31 December 2016: USD 50 and EUR 5.000) was obtained from various local banks and were provided to BIST for bond and stock market transactions by the Group. Litigation In the normal course of its operations, the Group can constantly be faced with legal disputes, claims and complaints, which in most cases stem from normal insurance operations. The necessary provision, if any, for those cases are provided based on management estimates and professional advice. Other 650 branch premises of the Bank are lease holder under operational leases. The lease periods vary between 1 and 10 years. There are no restrictions placed upon the lessee by entering into these leases. The Group is contingently liable with respect to reinsurance, which would become an actual liability to the extent that any reinsuring company fails to meet its obligations to the Group. In the opinion of management no provision is necessary for this remote contingency. 39. Other matters One of the Bank’s directors has been convicted for some of the charges in the first phase of the trial by the jury in the United States of America of the violation of the USA sanctions involving Iran. The subsequent legal process is not yet completed but ongoing for the defendant director of the Bank such as appeal and other legal rights following the first phase of the trial. The Bank is not a trialist or defendant in this case. The respective court in this trial has not issued any administrative or monetary decision against the Bank. The Bank is always sensitive in complying with national and international regulations and puts considerable efforts in improving such compliance policies in line with international standards. In providing the banking transactions, the Bank is not following the foreign trade applications, mechanisms, methods and systems, other than prevailing banking practices and those adopted by other banks. The foreign trade transactions and Money transfers are open and transparent, and easily be monitored by authorities. The Bank will continue to adopt the same policies of transparency and compliance with international regulations. The Bank placed a high importance on this matter and established a separate “Compliance Department”. The Bank is receiving advisory services from an international expert firm in forming effectiveness of this department’s policies and control procedures and processes. 40. Subsequent events None. 87