Türkiye Finans Katılım Bankası Anonim Şirketi

Transcription

1 Türkiye Finans Katılım Bankası Anonim Şirketi Financial Statements As At and For The Year Ended 31 December 2015 With Independent Auditors Report Thereon 12 February 2016 This report contains the Independent Auditors Report on Financial Statements comprising 2 pages and; the Financial statements and their explanatory notes comprising 64 pages.

2 Türkiye Finans Katılım Bankası Anonim Şirketi TABLE OF CONTENTS Page Independent auditors report Consolidated statement of financial position 1 Consolidated statement of profit or loss and other comprehensive income 2 Consolidated statement of changes in equity 3 Consolidated statement of cash flows 4 Notes to the consolidated financial statements 5-64

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5 Consolidated Statement of Financial Position As at 31 December 2015 Notes 31 December December 2014 Assets Cash and balances with Central Bank 13 1,648,923 2,393,440 Loans and advances to banks , ,606 Loans, lease receivables and advances to customers 15 28,622,572 24,212,363 Derivative assets held for trading 16 44,249 26,110 Derivative financial assets for hedging purposes 16 48, Available-for-sale investment securities 17 1,897,407 1,870,381 Held-to-maturity investment securities , ,400 Property and equipment , ,984 Intangible assets 18 54,371 49,165 Deferred tax assets ,817 55,740 Other assets 19 4,273,083 3,162,687 Total assets 38,293,035 33,328,876 Liabilities Deposits from banks , ,767 Deposits from customers 21 21,704,901 18,740,259 Funds borrowed 22 5,495,826 6,292,726 Subordinated liabilities , Debt securities issued 22 4,102,988 3,071,863 Derivative liabilities held for trading 16 34,352 10,068 Derivative financial liabilities for hedging purposes ,543 51,547 Provisions , ,848 Current tax liabilities 12 34,051 36,231 Other liabilities 25 1,886,701 1,411,412 Total liabilities 34,912,300 30,144,721 Equity Share capital 26 2,600,000 2,600,000 Reserves 159, ,470 Retained earnings 621, ,685 Total shareholders equity 3,380,735 3,184,155 Total liabilities and shareholders equity 38,293,035 33,328,876 The notes on pages 5 to 64 are an integral part of these consolidated financial statements. 1

6 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the Year Ended 31 December 2015 Notes Profit share income: Income on loans 2,427,537 1,952,043 Income on investment securities 217, ,986 Income on deposits at banks Income on financial leases 123,584 82,597 Other 10, ,779,999 2,172,475 Profit share expense: Expense on deposits (840,172) (738,800) Expense on borrowings (270,840) (206,732) Expense on securities issued (216,623) (111,818) Other (34,380) -- (1,362,015) (1,057,350) Net profit share income 1,417,984 1,115,125 Fee and commission income 7 259, ,092 Fee and commission expense 7 (117,413) (84,495) Net fee and commission income 142, ,597 Net trading income/(loss) 8 (29,468) (37,779) Other operating income 9 53,663 55,107 Foreign exchange gain, net 50,809 63,436 Other operating income 75,004 80,764 Total operating income 1,635,457 1,344,486 Personnel expenses 10 (435,001) (383,070) Administrative expenses (199,513) (191,242) Net impairment loss on financial assets 15, 24 (502,150) (228,797) Depreciation and amortisation 18, 19 (66,427) (54,138) Taxes and duties other than on income (34,149) (27,841) Other operating expenses 11 (74,598) (68,412) Total operating expenses (1,311,838) (953,500) Profit before tax 323, ,986 Income tax expense 12 (63,349) (77,586) Profit 260, ,400 Other comprehensive income Items that will never be reclassified to profit or loss Cash flow hedges Effective portion of changes in fair value (46,516) (5,463) Net change in fair values of available-for-sale financial assets (38,563) 65,947 Net change in remeasurements of defined benefit liability 6,225 (3,052) Net change in revaluation of tangible assets -- 27,713 Net amount transferred to profit or loss (183) (5,741) Related tax 15,105 (11,021) Other Other comprehensive income for the period, net of tax (63,690) 68,475 Total comprehensive income 196, ,875 The notes on pages 5 to 64 are an integral part of these consolidated financial statements. 2

7 Consolidated Statement of Changes in Equity For the Year Ended 31 December 2015 Notes Share capital Fair value reserve Revaluation reserve Other reserves Hedging reserves Retained earnings Total Balances at 1 January ,775,000 (36,795) 89,615 72, ,224 2,577,280 Total comprehensive income for the period Net profit of the period , ,400 Other comprehensive income Net change in fair value of available-for-sale financial assets, net of tax , ,906 Net change in actuarial gain/(loss) related to employee benefits, net of tax (2,441) (2,441) Hedging funds effective portion (3,668) -- (3,668) Net amount transferred to profit or loss (5,741) (5,741) Net change in revaluation of tangible assets, net of tax , ,327 Other Total other comprehensive income ,165 26, (3,668) 311, ,875 Total comprehensive income for the period 1,775,000 11, ,942 72,236 (3,668) 988,275 2,959,155 Transfers to other reserves , (16,590) -- Transactions with the owners, recorded directly in equity 600, (600,000) -- Share capital increase by cash 1 225, ,000 Balances at 31 December ,600,000 11, ,942 88,826 (3,668) 371,685 3,184,155 Balances at 1 January ,600,000 11, ,942 88,826 (3,668) 371,685 3,184,155 Total comprehensive income for the period Net profit of the period , ,270 Other comprehensive income Net change in fair value of available-for-sale financial assets, net of tax (30,814) (30,814) Net change in actuarial gain/(loss) related to employee benefits, net of tax ,980 4,980 Effective portion of changes in fair value (37,915) -- (37,915) Net amount transferred to profit or loss (183) (183) Other Total other comprehensive income -- (30,997) (37,915) 265, ,580 Total comprehensive income for the period 2,600,000 (19,627) 115,942 88,826 (41,583) 637,177 3,380,735 Transfers to other reserves , (15,672) -- Balances at 31 December ,600,000 (19,627) 115, ,498 (41,583) 621,505 3,380,735 The notes on pages 5 to 64 are an integral part of these consolidated financial statements. 3

8 Consolidated Statement of Cash Flows For the Year Ended 31 December 2015 Notes 31 December December 2014 Cash flows from operating activities: Profit for the period 260, ,400 Adjustments for: Depreciation and amortisation 66,427 54,138 Net impairment loss on financial assets 15, , ,797 Net change in fair value of derivative instruments held for trading 16 25,939 23,571 Provision for employee benefits 24 33,209 34,580 Provision for litigation and claims 24 2,472 3,903 Other provision expenses 24 (572) 163 Net profit share income (1,417,984) (1,115,125) Income tax expense 12 63,349 77,586 (464,740) (378,987) Change in loans, leasing receivables and advances to customers (4,821,485) (6,106,062) Proceeds from funds borrowed 8,872,062 5,800,637 Repayment of funds borrowed (9,986,379) (4,251,899) Change in other assets (1,735,056) (752,199) Change in deposits from banks 89,904 34,286 Change in deposits from customers 2,973,306 3,927,360 Change in other liabilities 750, ,405 (4,321,626) (1,615,459) Profit share income received 2,702,100 2,096,973 Profit share expense paid (1,360,771) (1,045,418) Income tax paid 12 (109,226) (88,697) Net cash used in operating activities (3,089,523) (652,601) Cash flows from investing activities: Acquisition of available-for-sale investment securities (743,887) (805,205) Proceeds from sale of available-for-sale investment securities 895, ,712 Acquisition of property and equipment 18 (108,687) (211,675) Proceeds from the sale of property and equipment 17,096 1,626 Acquisition of intangible assets 18 (35,786) (33,674) Net cash provided from / (used) in investing activities 24,601 (575,216) Cash flows from financing activities: Proceeds from issue of ordinary shares ,000 Proceeds from issue of debt securities 1,159,431 1,887,730 Net cash provided from financing activities 1,159,431 2,112,730 Net (decrease) / increase in cash and cash equivalents (1,905,491) 884,913 Cash and cash equivalents at 1 January 13 2,965,655 1,878,601 Effect of exchange rate fluctuations on cash held 809, ,141 Cash and cash equivalents at 31 December 13 1,869,326 2,965,655 The notes on pages 5 to 64 are an integral part of these consolidated financial statements. 4

9 Notes to the consolidated financial statements Page Note 1 Overview of the Participation Bank 6 Note 2 Basis of preparation 7 Note 3 Significant accounting policies 9 Note 4 Financial risk management 23 Note 5 Use of estimates and judgements 39 Note 6 Operating segment 42 Note 7 Net fee and commission income 44 Note 8 Net trading income 44 Note 9 Other operating income 44 Note 10 Personnel expenses 45 Note 11 Other operating expenses 45 Note 12 Income taxes 45 Note 13 Cash and cash equivalents 47 Note 14 Loans and advances to banks 47 Note 15 Loans, lease receivables and advances to customers 48 Note 16 Derivative financial instruments held for trading and hedging purposes 50 Note 17 Investment securities 53 Note 18 Property and equipment and intangible assets 54 Note 19 Other assets 56 Note 20 Deposits from banks 56 Note 21 Deposits from customers 56 Note 22 Funds borrowed and debt securities issued 57 Note 23 Subordinated liabilities 58 Note 24 Provisions 58 Note 25 Other liabilities 60 Note 26 Capital and reserves 60 Note 27 Related party transactions 62 Note 28 Commitments and contingencies 63 Note 29 Group subsidiaries 63 Note 30 Operating leases 63 Note 31 Events after the reporting period 64 5

10 1. Overview of the Participation Bank 1.1. Brief history Türkiye Finans Katılım Bankası AŞ (the Participation Bank ) was established in accordance with the Provision on Establishment of Participation Banks of Decree No. 83/7506 dated 16 December The Participation Bank (formerly; Anadolu Finans Kurumu AŞ) obtained permission from the Central Bank of Turkey on 24 October 1991 and commenced operations on 4 November In accordance with the resolution in the board meeting of Anadolu Finans Kurumu AŞ numbered 1047, on 31 May 2005 a merger between the Participation Bank and Family Finans Kurumu AŞ was decided. All the assets, liabilities and also off-balance sheet liabilities of Family Finans Kurumu AŞ were transferred to Anadolu Finans Kurumu AŞ during the merger. With the resolution dated 20 October 2005 and numbered 1726 by Banking Regulation and Supervision Agency ( BRSA ), the transfer agreement, signed by the boards of directors of Anadolu Finans Kurumu AŞ and Family Finans Kurumu AŞ and modified draft of main contract of Anadolu Finans Kurumu AŞ were approved. The registry on the decision regarding the merger which was concluded in the general assemblies of both participation banks on 23 December 2005 was approved by BRSA s resolution dated 28 December 2005, and numbered In accordance with BRSA s resolution dated 30 November 2005, and numbered 1747 related to the merger of both participation banks, the title was changed into Türkiye Finans Katılım Bankası AŞ providing that required permission be given by the Council of Ministers within the framework of the 48 th article of the Turkish Commercial Law. The new title was registered by the Turkish Trade Registry of Istanbul on 30 December 2005 in compliance with the Turkish Commercial Law numbered The Participation Bank operates in accordance with the principles of interest-free banking and Islamic rules as a participation bank, by collecting funds through current accounts and profit sharing accounts and lending such funds through 286 branches with 4,132 employees as at 31 December The Participation Bank s head office is located at Adnan Kahveci Caddesi No: Yakacık Kartal / Istanbul Ownership With the authorization of BRSA, numbered 2489 and dated 28 February 2008, 60% of the Participation Bank was acquired by the National Commercial Bank. The Participation Bank increased its capital from TL 292,047 to TL 800,000 with the capital increase in 2008 and from TL 800,000 to TL 1,775,000 with the capital increase in As per decision has taken by the Extraordinary General Assembly on 29 August 2014, the Participation Bank s share capital increased by TL 825,000 from TL 1,775,000 to TL 2,600,000. The part of this increase amounting to TL 600,000 was transferred from general reserve and the remaining part amounting to TL 225,000 was paid in cash. Cash commitment amounting to TL 100,000 recorded into capital accounts on 24 October 2014, and remaining part amounting to TL 125,000 recorded into capital accounts on 19 November 2014 with the approval of Banking Regulation and Supervision Agency. As of 31 December 2015, the shareholders are as follows; the National Commercial Bank holds 67.03%, Boydak Group holds 22.34%, Ülker Group holds 10.57%, and other shareholders hold 0.06%. The Participation Bank is controlled by the National Commercial Bank. 6

11 1. Overview of the Participation Bank (continued) 1.2. Ownership (continued) The National Commercial Bank (NCB) established as the first and the biggest bank of Saudi Arabia. The Bank is performing its banking operations through cross-border in Bahrain and Lebanon. The head quarter of the NCB is located in Jeddah. As at 31 December 2015, the Participation Bank s paid-in-capital consists of 2,600,000 shares of TL 1 nominal each. As at 31 December 2015 and 31 December 2014, the composition of shareholders and their respective percentage of ownership can be summarized as follows: 31 December December 2014 Amount % Amount % The National Commercial Bank JSC 1,742, ,742, Boydak Group 580, , Gözde Girişim Sermayesi Yatırım Ortaklığı AŞ (Ülker Group) 274, , Other shareholders 1, , Total 2,600, ,600, Basis of preparation 2.1. Statement of compliance The Participation Bank located in Turkey maintains its books of account and prepare its statutory financial statements in Turkish Lira ( TL ), the functional currency of the Participation Bank, in accordance with the accounting practices as promulgated by the Banking Regulation and Supervision Agency ( BRSA ). The accompanying financial statements of the Participation Bank have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The Participation Bank adopted all IFRSs, which were mandatory as at 31 December The accompanying financial statements are authorised for issue by the Participation Bank s Management on 12 February Basis of measurement The accompanying financial statements are prepared in accordance with 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 and buildings whose fair value can reliably be measured. 7

12 2. Basis of preparation (continued) 2.3. Functional and presentation currency These financial statements are presented in TL, which is the Participation Bank s functional currency. Except as otherwise indicated, financial information presented in TL has been rounded to the nearest thousand Accounting in hyperinflationary countries Financial statements of the entities located in Turkey have been restated for the changes in the general purchasing power of the Turkish Lira based on IAS 29 Financial Reporting in Hyperinflationary Economies as at 31 December IAS 29 requires that financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the reporting date, and that corresponding figures for previous years be restated in the same terms. One characteristic that necessitates the application of IAS 29 is a cumulative three-year inflation rate approaching or exceeding 100%. The cumulative three-year inflation rate in Turkey was 35.61% as at 31 December 2005, based on the Turkish nation-wide wholesale price indices announced by the Turkish Statistical Institute. This, together with the sustained positive trend in quantitative factors, such as the stabilisation in capital and money markets, decrease in profit share rates and the appreciation of TL against the US Dollar and other hard currencies have been taken into consideration to categorise Turkey as a non-hyperinflationary economy under IAS 29 effective from 1 January Use of estimates and judgments In preparing these consolidated financial statements, the Bank management has made judgements, estimates and assumptions that affect the application of the Group s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. Assumptions and estimation uncertainties Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the consolidated financial statements is set out below. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment as at 31 December 2015 is set out below in relation to the impairment of financial instruments and in the following notes: Note 5 determining fair values of financial instruments Note 12 recognition of deferred tax assets Note 24 recognition and measurement of provisions Note 24 measurement of defined benefit obligations: key actuarial assumptions Impairment of financial instruments The individual component of the total allowance for impairment applies to financial assets evaluated individually for impairment and is based on management s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgments about a debtor s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk function. 8

13 2. Basis of preparation (continued) 2.5. Use of estimates and judgments (continued) A collective component of the total allowance is established for: groups of homogeneous loans that are not considered individually significant; and groups of assets that are individually significant but that were not found to be individually impaired (loss incurred but not reported or IBNR). The collective allowance for groups of homogeneous loans is established using statistical methods such as roll rate methodology or, for small portfolios with insufficient information, a formula approach based on historical loss rate experience. The roll rate methodology uses statistical analysis of historical data on delinquency to estimate the amount of loss. Management applies judgement to ensure that the estimate of loss arrived at on the basis of historical information is appropriately adjusted to reflect the economic conditions and product mix at the reporting date. Roll rates and loss rates are regularly benchmarked against actual loss experience. The IBNR allowance covers credit losses inherent in portfolios of loans and advances, and held to maturity investment securities with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired items but the individual impaired items cannot yet be identified. In assessing the need for collective loss allowance, management considers factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions are made to define how inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowance depends on the model assumptions and parameters used in determining the collective allowance Changes in accounting policies The accounting policies adopted in the preparation of the consolidated financial statement as at 31 December 2015 are consistent with those followed in the preparation of the consolidated financial statement of the prior year, except for the new standards and amendments to standards, including any consequential amendments to other standards summarized in related notes. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements Basis of consolidation (i) Non-controlling interests ( NCI ) NCI are measured at their proportionate share of the acquiree s identifiable net assets at the acquisition date. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. 9

14 3. Significant accounting policies (continued) 3.1. Basis of consolidation (continued) (ii) Subsidiaries Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. The subsidiary is presented in Note 29. (iii) Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. (iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency, TL, of the Participation Bank at exchange rates on the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies on the reporting date are retranslated to the functional currency at the exchange rate on that date. Foreign currency differences arising on retranslation are recognised in profit or loss and other comprehensive income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The official TL exchange rates used by the Participation Bank for foreign currency translation are as follows: EUR / TL USD / TL 31 December December

15 3.3. Profit share Profit share income and expense are recognised in profit or loss using the effective rate method, except for the profit share income on overdue loans. The effective rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective rate, the Participation Bank estimates future cash flows considering all contractual terms of the financial instrument but not future credit losses. The calculation of the effective rate includes all fees and points paid or received transaction costs, and discounts or premiums that are an integral part of the effective rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial assets or liabilities. Profit share income and expense presented in the profit or loss and other comprehensive income include: profit share on financial assets and liabilities at amortised cost on an effective rate basis, profit share on available-for-sale investment securities on an effective rate basis, 3.4. Fees and commission Fees and commission income and expenses that are integral to the effective rate on a financial asset or liability are included in the measurement of the effective rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees are recognised as the related services are provided. 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. 11

16 3. Significant accounting policies (continued) 3.5. Net trading income Net trading income comprises gains less loss related to trading assets and liabilities, and includes all realised and unrealised fair value changes, except for the unrealised gains of available for sale securities Dividends Dividend income is recognised when the right to receive the income is established Lease payments made Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of profit share on the remaining balance of the liability Income tax expense Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that they relate to items recognised directly in equity or in profit or loss and other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income for the year, using tax rates enacted or substantively enacted on the balance sheet date, and any adjustment to tax payable in respect of prior 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. 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 against current tax 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. 12

17 3. Significant accounting policies (continued) 3.9. Financial assets and liabilities Recognition The Participation Bank initially recognises loans, lease receivables and advances, deposits, funds borrowed, and subordinated liabilities on the date that they are originated. Regular way purchases and sales of financial assets are recognised on the trade date on which the Participation Bank commits to purchase or sell the asset. All other financial assets and liabilities (including assets and liabilities designated at fair value profit or loss) are initially recognised on the trade date at which the Participation Bank becomes a party to the contractual provisions of the instrument. Classification See accounting policies 3.10, 3.11, 3.12, 3.13, 3.14 and Derecognition The Participation Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Participation Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any profit share in transferred financial assets that is created or retained by the Participation Bank is recognised as a separate asset or liability. On derecognition of a financial asset (or the carrying amount allocated to the portion of the asset transferred), and the sum of the consideration received (including the new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss. The Participation Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Available-for-sale assets and financial assets at fair value through profit or loss that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as at the date the Participation Bank commits to sell the assets. The specific identification method is used to determine the gain or loss on derecognition. Offsetting Financial assets and liabilities are set off and the net amount presented in the statement of financial position when, and only when, the Participation Bank has a legal right to set off the recognised amounts and it 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 Participation Bank s trading activity. Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective rate method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. 13

18 3. Significant accounting policies (continued) 3.9. Financial assets and liabilities (continued) Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction on the measurement date. When available, the Participation Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm s length basis. If a market for a financial instrument is not active, the Participation Bank establishes fair value using a valuation technique. Valuation techniques include using recent arm s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same and discounted cash flow analyses. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Participation Bank, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the riskreturn factors inherent in the financial instrument. The Participation Bank calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data. Identification and measurement of impairment At each reporting date, the Participation Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably. Loans and receivables are presented net of specific and portfolio basis allowances for uncollectibility. Specific allowances are made against the carrying amount of loans and receivables that are identified as being impaired based on regular reviews of outstanding balances to reduce these loans and receivable to their recoverable amounts. In assessing the recoverable amounts of the loans and receivables, the estimated future cash flows are discounted to their present value. Portfolio basis allowances are maintained to reduce the carrying amount of portfolios of similar loans and receivables to their estimated recoverable amounts at the reporting date. In order to determine allowance rate for portfolio basis, the Participation Bank uses historical allowance rates based on its own statistical data. Objective evidence that financial assets are impaired includes observable data that comes to the attention of the Participation Bank about the following loss events: significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in profit share, penalty or principal payments; the Participation 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; it becomes 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 14

19 3. Significant accounting policies (continued) 3.9. Financial assets and liabilities (continued) Identification and measurement of impairment (continued) 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 Participation Bank, including: - adverse changes in the payment status of borrowers; or - national or local economic conditions that correlate with defaults on the assets in the Participation Bank. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated cash flows discounted at the assets original effective rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and advances. Profit share on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of profit share income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in other comprehensive income. The Participation Bank writes off certain loans and advances when they are determined to be uncollectible. Designation at fair value through profit or loss Financial assets at fair value through profit or loss are trading financial assets, such as equity participations, acquired principally with the intention of disposal within a short period for the purpose of short-term profit making. These assets or liabilities are managed, evaluated and reported internally on a fair value basis. 15

20 3. Significant accounting policies (continued) Cash and cash equivalents Cash and cash equivalents include cash on hand, unrestricted balances held with Central Bank, cash on transit and loans and advances to banks. Cash and cash equivalents are carried at amortised cost in the statement of financial position Fair value through profit or loss The Participation Bank designates some financial assets at fair value, with fair value changes recognised immediately in profit or loss and other comprehensive income statement as described in accounting policy Loans, lease receivables and advances Loans, lease receivables and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Participation Bank does not intend to sell immediately or in the near term. When the Participation Bank 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 and presented within loans, lease receivables and advances. Loans, lease receivables and advances are initially measured at fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective rate method Available-for-sale investment securities Available-for-sale investments, which are initially measured at fair value plus incremental direct transaction costs, are non-derivative investments that are designated as available-for-sale or are not classified as another category of financial assets. All available-for-sale investments are carried at fair value. Profit share income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Bank becomes entitled to the dividend. Foreign exchange gains or losses on available-for-sale debt security investments are recognised in profit or loss. Impairment losses are recognised in profit or loss. Other fair value changes, other than impairment losses, are recognised in other comprehensive income and presented in the fair value reserve within equity. When the investment is sold, the gain or loss accumulated in equity is reclassified to profit or loss. A non-derivative financial asset may be reclassified from the available-for-sale category to the loans and receivables category if it otherwise would have met the definition of loans and receivables and if the Participation Bank has the intention and ability to hold that financial asset for the foreseeable future or until maturity. 16

21 3. Significant accounting policies (continued) 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. 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. All changes in fair value are recognised as part of net trading income in profit or loss. Trading assets and liabilities are not reclassified subsequent to their initial recognition, except that non-derivative trading assets, other than those designated at fair value through profit or loss on initial recognition, may be reclassified out of the fair value through profit or loss i.e. trading category if they are no longer held for the purpose of being sold or repurchased in the near term and the following conditions are met. If the financial asset would have met the definition of loans and receivables (if the financial asset had not been required to be classified as held-for-trading at initial recognition), then it may be reclassified if the Group has the intention and ability to hold the financial asset for the foreseeable future or until maturity. If the financial asset would not have met the definition of loans and receivables, then it may be reclassified out of the trading category only in rare circumstances Property and equipment Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and impairment losses except for buildings owned which are measured at fair value. Change in fair value is reflected into revaluation reserve account in other comprehensive income. 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 expense in profit or loss. 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 Participation Bank 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. 17

22 3. Significant accounting policies (continued) Property and equipment (continued) 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: Buildings 50 years Office equipment, furniture and fixtures 3-10 years Motor vehicles 5 years Leasehold improvements are amortised over the shorter of periods of the respective leases and their useful lives, also on a straight-line basis. Depreciation methods, useful lives and residual values are reassessed at the each financial period-ended and adjusted if appropriate Derivative financial instruments Derivatives are initially recorded in off-balance sheet accounts at their contract values. Subsequently, the derivative transactions are valued at their fair values and the changes in their fair values are recorded on balance sheet under derivative financial assets or derivative financial liabilities, respectively. Subsequent fair value changes for trading derivatives are recorded under profit or loss. The Participation Bank hedges its cash flow risk arising from foreign currency liabilities by using cross currency swap. The effective portion of the fair value changes of the hedging instruments are recorded in Hedging funds under shareholders equity. These funds are transferred to profit or loss from equity when the cash flows of the hedged items impact the income statement. In case the cash flow hedge accounting is discontinued due to the expiry, realization for sale of the hedging instrument, discontinuing or due to the results of the effectiveness test the amounts accounted under shareholders equity are transferred to the profit and loss accounts as these cash flows of the hedged item are realized Intangible assets Software acquired by the Participation Bank is stated at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for use since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life of software is three to five years. Amortisation methods, useful lives and residual values are reassessed at the each financial period-ended and adjusted if appropriate. 18

23 3. Significant accounting policies (continued) Leased assets lessee Leases in terms of which the Participation Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and, the leased assets are not recognised on the Participation Bank s statement of financial position Impairment of non-financial assets The carrying amounts of the Participation Bank s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss in respect of other assets, impairment losses recognised in prior periods is assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised Deposits, debt securities issued, funds borrowed, and subordinated liabilities Deposits are the Participation Bank s main source of debt funding. Deposits of the Participation Bank comprised of the customers current and profit sharing accounts. Customers current and profit sharing accounts are initially recognised at cost. Subsequent to the initial recognition, all profit share accounts are recognised considering the attribute profits or any losses incurred on the respective loan balances. In all cases, profit/loss sharing accounts receive a proportion of the profit or bear a share of loss based on the results of the respective loan balances. Debt securities issued, funds borrowed, and subordinated liabilities are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method, except where the Group designates liabilities at fair value through profit or loss. 19

24 3. Significant accounting policies (continued) Provisions A provision is recognised if, as a result of a past event, the Participation Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Participation Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Participation Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Participation Bank recognises any impairment loss on the assets associated with that contract Employee benefits Reserve for employee severance indemnity Reserve for employee severance indemnity represents the present value of the estimated future probable obligation of the Participation Bank arising from the retirement of the employees and calculated in accordance with the Turkish Labour Law. Employment termination benefit is not a funded liability and there is no requirement to fund it. Employment termination benefit is calculated based on the estimation of the present value of the employee s probable future liability arising from the retirement. IAS 19 ( Employee Benefits ) requires actuarial valuation methods to be developed to estimate the bank s obligation under defined employee plans. IAS 19 ( Employee Benefits ) has been revised effective from the annual period beginning after 1 January In accordance with the revised standard, actuarial gain / loss related to employee benefits shall be recognised in other comprehensive income. Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus if the Participation Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. The Participation Bank does not have any internally set defined contribution plan Segment reporting An operating segment is a component of the Participation Bank 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 Participation Bank s other components, whose operating results are reviewed regularly by the Participation Bank s Management Committee (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. Segment results that are reported to the Board of Directors include items directly attributable to that segment as well as those that can be allocated on a reasonable basis. 20

25 3. Significant accounting policies (continued) Events after the reporting period Events after the reporting period that provide additional information about the Participation Bank s position at the reporting dates (adjusting events) are reflected in the financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes when material Standards issued but not yet effective and not early adopted IFRS 9 Financial Instruments IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. The Group is in the process of assessing the impact of the standard on the consolidated financial position or performance of the Group. IFRS 15 Revenue from Contracts with customers The standard replaces existing IFRS and US GAAP 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 Group 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. Clarification of acceptable methods of depreciation and amortisation (Amendments to IAS 16 and IAS 38) The amendments to IAS 16 Property, Plant and Equipment explicitly state that revenue-based methods of depreciation cannot be used for property, plant and equipment. The amendments to IAS 38 Intangible Assets introduce a rebuttable presumption that the use of revenue-based amortisation methods for intangible assets is inappropriate. The amendments are effective for annual periods beginning on after 1 January 2016, and are to be applied prospectively. Early adoption is permitted. The Group does not expect that these amendments will have significant impact on the consolidated financial position or performance of the Group. Accounting for acquisition of interests in joint operations (Amendments to IFRS 11) The amendments clarify whether IFRS 3 Business Combinations applies when an entity acquires an income in a joint operation that meets that standard s definition of a business. The amendments require business combination accounting to be applied to acquisitions of interests in a joint operation that constitutes a business. The amendments apply prospectively for annual periods beginning on or after 1 January Early adoption is permitted. The Group does not expect that these amendments will have significant impact on the consolidated financial position or performance of the Group. 21

26 3. Significant accounting policies (continued) Standards issued but not yet effective and not early adopted (continued) IFRS 14 Regulatory Deferral Accounts IASB has started a comprehensive project for Rate Regulated Activities in As part of the project, IASB published an interim standard to ease the transition to IFRS for rate regulated entities. The standard permits first time adopters of IFRS to continue using previous GAAP to account for regulatory deferral account balances. The interim standard is effective for financial reporting periods beginning on or after 1 January 2016, although early adoption is permitted. The Group does not expect that these amendments will have significant impact on the consolidated financial position or performance of the Group. Sale or contribution of assets between an investor and its associate or joint venture (Amendments to IFRS 10 and IAS 28) The amendments address the conflict between the existing guidance on consolidation and equity accounting. The amendments require the full gain to be recognised when the assets transferred meet the definition of a business under IFRS 3 Business Combinations. The amendments apply prospectively for annual periods beginning on or after 1 January Early adoption is permitted. The Group does not expect that these amendments will have significant impact on the consolidated financial position or performance of the Group. Apart from these new or amended standards summarized above, the following new or amended standards are not expected to have a significant impact on the Group s consolidated financial position or performance. Disclosure Initiative (Amendments to IAS 1) The narrow-focus amendments to IAS 1 Presentation of Financial Statements clarify, rather than significantly change, existing IAS 1 requirements. In most cases the amendments respond to overly prescriptive interpretations of the wording in IAS 1. The amendments relate to the following: Materiality, order of the notes, subtotals, accounting policies and disaggregation. The amendments apply for annual periods beginning on or after 1 January Early adoption is permitted. The Group does not expect that these amendments will have significant impact on the consolidated financial position or performance of the Group. Improvements to IFRSs The IASB issued Annual Improvements to IFRSs Cycle. The amendments are effective as of 1 January Earlier application is permitted. The Group does not expect that these amendments will have significant impact on the consolidated financial position or performance of the Group. Annual Improvements to IFRSs Cycle IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 7 Financial Instruments: Disclosures IAS 19 Employee Benefits IAS 34 Interim Financial Reporting 22

27 4. Financial risk management Introduction and overview The Participation Bank has exposure to the following risks from its use of financial instruments: credit risk liquidity risk market risks operational risks This note presents information about the Participation Bank s exposure to each of the above risks, the Participation Bank s objectives, policies and processes for measuring and managing risk, and the Participation Bank s management of capital. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Participation Bank s risk management framework. The Board has established the Participation Bank s Asset and Liability ( ALCO ) committee, Credit committee and Risk Management Department, which are responsible for monitoring the Participation Bank risk management policies in their specified areas. All Board committees have both executive and non-executive members and report regularly to the Board of Directors on their activities. The Participation Bank s risk management policies are established to identify and analyse the risks faced by the Participation Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Participation Bank, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations. The Participation Bank s Audit Committee is responsible for monitoring compliance with the Participation Bank s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Participation Bank s. The Participation Bank s Audit Committee is assisted in these functions by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Participation Bank s Audit Committee. 23

28 4. Financial risk management (continued) Credit risk Credit risk is defined as the current or prospective threat to the Participation Bank s earnings and capital as a result of counterparty s failure to comply with a financial or other contractual obligation in respect of the institution, including the possibility of restrictions on or impediments to the transfer of payments from abroad and arises principally from the Participation Bank s loans and advances to customers and other banks and investment securities. For risk management reporting purposes, the Participation Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). Management of credit risk For credit risk management purposes the Risk Management Department is involved in the determination of credit risk policies in coordination with the Participation Bank s other units, the determination and monitoring of the distribution of concentration limits with respect to sector, geography and credit type, contribution to the formation of rating and scoring systems, submitting to the Board of Directors and the senior management not only credit risk management reports about the credit portfolio s distribution (borrower, sector, geographical region), credit quality (impaired loans, credit risk ratings) and credit concentration, but also scenario analysis reports, stress tests and other analyses, and studies regarding the formation of advanced credit risk measurement approaches. Regular audits of business units and Participation Bank s credit processes are undertaken by internal audit. 24

29 4. Financial risk management (continued) Credit risk (continued) Exposure to credit risk Note 31 December December 2014 Loans, lease receivables Loans, lease receivables and advances to and advances to customers customers Carrying amount 15 28,622,572 24,212,363 Assets at amortised cost Individually impaired Grade 3: Impaired 198, ,812 Grade 4: Impaired 406, ,601 Grade 5: Impaired 645, ,904 Gross amount 15 1,250, ,317 Allowance for impairment 15 (829,869) (431,187) Carrying amount 420, ,130 Neither past due nor individually impaired 26,949,388 23,197,641 Grade 1: Low-fair risk 26,949,388 23,197,641 Past due but not individually impaired 1,448, ,570 Grade 2: Watch List 1,448, ,570 Past due comprises: 1-30 days 767, , days 401, , days 279, ,482 Gross amount for collective impairment 28,398,196 24,168,211 Allowance for collective impairment 15 (196,597) (121,978) Carrying amount 28,201,599 24,046,233 Total carrying amount-amortised cost 28,622,572 24,212,363 Includes accounts with renegotiated terms 1,456 6,528 As at 31 December 2015 and 2014, the Participation Bank has not any allowance for loans and advances to banks and available-for-sale investment securities. Impaired loans, lease receivables and advances Impaired loans, lease receivables and advances are loans, lease receivables and advances for which the Participation Bank determines that it is probable that it will be unable to collect all principal and profit share due according to the contractual terms of the loan or leasing agreement. These loans, lease receivables and advances are graded 3 to 5 in the Participation Bank s internal credit risk grading system which is also in line with the regulations of BRSA. 25

30 4. Financial risk management (continued) Credit risk (continued) Past due but not impaired loans, lease receivables and advances Past due but not impaired loans are those for which contractual profit share or principal payments are past due but the Participation Bank believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collection of amounts owed to the Participation Bank. Loans and lease receivables with renegotiated terms Loans and lease receivables with renegotiated terms are loans and lease receivables that have been restructured due to temporary deterioration in the borrower s financial position and where the Participation Bank has made concessions that it would not otherwise consider. Allowances for impairment The Participation Bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. Write-off policy The Participation Bank writes off a loan balance (and any related allowances for impairment losses) when it is concluded that the loans are uncollectible after all the necessary legal procedures have been completed, and the final loss has been determined. This conclusion is reached after considering information such as the occurrence of significant changes in the borrower/issuer s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. Set out below is an analysis of the gross and net (of allowances for impairment) amounts of individually impaired assets by risk grade. Loans, lease receivables and advances to customers 31 December December 2014 Gross Net Gross Net Grade 3 198,696 71, ,812 52,366 Grade 4 406, , ,601 37,079 Grade 5 645, , ,904 76,685 Total 1,250, , , ,130 Collateral policy The Participation Bank holds collateral against loans, lease receivables and advances to customers in the form of mortgage profit shares over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to banks and available-for-sale investment securities, and no such collateral was held at 31 December 2015 and

31 4. Financial risk management (continued) Credit risk (continued) Collateral policy (continued) The breakdown of performing loans, lease receivables and advances to customers by type of collateral are as follows: Loans, lease receivables and advances to customers 31 December December 2014 Secured loans: Secured by mortgages 14,059,178 12,337,023 Secured by promissory notes 6,765,013 5,716,628 Secured by pledge on assets 1,318,874 1,274,401 Secured by cash collateral 938,184 1,096,767 Other collateral 3,765 4,190 Unsecured loans 5,313,182 3,739,202 Total performing loans, lease receivables and advances to customers 28,398,196 24,168,211 Sectorial analysis The Participation Bank monitors concentrations of credit risk by sector and by geographic location. An analysis of concentrations of credit risk at the reporting date is shown below: Sector 31 December December 2014 Carrying Carrying amount % amount % Trade and commerce 7,646, ,727, Manufacturing 6,714, ,733, Retail 5,334, ,389, Construction 4,252, ,197, Services 2,090, ,554,339 6 Electricity, water, gas and health services 1,031, ,743 3 Transportation and communication 839, ,652 3 Agriculture and fishing 556, ,550 2 Financial institutions 50, , Other 106, ,159 3 Total 28,622, ,212,

32 4. Financial risk management (continued) Credit risk (continued) Sectorial analysis (continued) Geographical concentration Note 31 December December 2014 Turkey 28,332,309 24,494,679 European Union countries 90,647 57,252 USA, Canada 14,672 51,269 Off-shore banking regions 2,792 4,412 OECD countries 7,414 3,958 Other countries 175, ,247 Total performing loans, lease receivables and advances to banks and customers 14, 15 28,623,565 24,740,817 Credit rating system The credit risk is assessed through the internal rating system of the Participation Bank. Credits listed from the best ratings (high) to the lowest degrees (below standard) presented below; also in the bottom of the table, nonperforming loans (impaired loans) is presented. 31 December 2015 Default rates % (2) Total (1) High 0.86% 22,160,533 Standard 0.73% 10,344,065 Below standard 0.48% 190,752 Non-performing loans -- 1,250,842 Not graded 2.89% 8,205,250 Total 42,151,442 (1) The amounts comprise of loans, leasing receivables and commitments and contingencies. (2) Default ratios are the rate of non-performing loans (impaired loans) in 2015 to loans given in The category High means that the borrower has a strong financial structure; the category Standard means that the borrower has a good and sufficient financial structure, and the category Below Standard means that the borrower s financial structure is under risk in the medium and short term. 28

33 4. Financial risk management (continued) 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. 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 Types of financial assets Gross amounts of recognised financial assets Gross amounts of recognised financial liabilities offset in the statement of financial position Net amounts of financial assets presented in the statement of financial position Related amounts not offset in the statement of financial position Financial instruments (including non-cash collateral) Cash collateral received Net amount 31 December 2015 Derivatives - trading assets 44, , , December 2014 Derivatives - trading assets 26, , , Types of financial liabilities Gross amounts of recognised financial assets Gross amounts of recognised financial liabilities offset in the statement of financial position Net amounts of financial assets presented in the statement of financial position Related amounts not offset in the statement of financial position Financial instruments (including non-cash collateral) Cash collateral received Net amount 31 December 2015 Derivatives - trading liabilities 34, , , December 2014 Derivatives - trading liabilities 10, , ,

34 4. Financial risk management (continued) Liquidity risk Liquidity risk is the possibility of failing of partly or completely cover to participation bank s liquid assets and receivables via liquid liabilities. Liquidity risk is one of the main risk which is undertaken by Participation Bank to fulfill its primary banking services. To manage the mentioned risk in a conservative manner, indicators related to liquidity risk are determined in structure of Participation Bank s risk appetite. Existing risk appetite structure includes Benchmark Deposits Rate and Total Liquidity Coverage Ratio. Participation Bank s risk appetite is approved by Board of Directors, monitored by Risk Management Division and reported to senior management. In case of overdraft of limits, the mentioned matters are informed to Audit Committee. In addition, on monthly basis, measurement and assessment is performed related to target and stimulant indicator has been determined by Active Passive Management Committee. Target, alert, and trigger levels related to indicators of liquidity is determined in order to limit liquidity risk are determined and monitored by Active Passive Management Committee. Participation Bank implements strategies aimed at diversification of fund sources, procuring of fund sources with longer maturities, and conformance on maturity between assets and liability in order to avoid liquidity risk. All balance sheet items which have an impact on liquidity, are decomposed on the basis of maturity and analyzed the liquidity situation. The Liquidity Coverage Ratio and Net Stable Funding Ratio reports are prepared according to Basel III principles. The liquidity coverage ratio report is presented to BRSA according to the regulations, and Net Stable Funding Ratio report is prepared at present for information purposes. In the case of liquidity squeeze which is sourced by Participation Bank or Market, the actions to be implemented with order of priority and where the precautions to be taken is formed as Liquidity Risk Management-Emergency Action Plan; the roles and responsibilities are established according to this action plan. The liquidity contingency funding plan is a part of Participation Bank s Liquidity Risk Management Policy is approved by Board of Directors and in the case of liquidity problem, BOD identify the precaution and actions to be taken. Participation Bank apply stress testing within the scope of liquidity risk, as well as the other significant risk types. In stress testings related to liquidity risk, power of resistance to determinated scenarios is tested with regard to liquidity structure. In other words, the capability of Participation Bank for completely fullings its liabilities in time under stress circumstances. To measure the capital requirement to cover imposed or possible risk and sustain its activities with adequate capital, Participation Bank s Risk Management Group prepare ICAAP report at least once a year by analysing Participation Bank s current and future capital requirements along with strategical goals and macroeconomic variables and the report is transmitted to BRSA. Under the ICAAP report, Participation Bank s possible losses and the capital adequacy level which will cover the losses are estimated with the help of stress test and scenario analysis which identify possible changes in market conditions and possible events can affect negatively the Participation Bank. the evaluations about the Participation Bank s liquidity adequacy and planning with stress test and scenario analysis and with these evaluations, the liquidity level the Participation Bank needs to fulfill its obligations is identified. Other than scenario analysis and stress tests realized by ICAAP additional stress tests are performed in monthly and quarterly periods. Market and counterparty credit risk and the Participation Bank s total liquidity risk are performed monthly within the Framework of Internal Systems of Banks and Internal Capital Adequacy Assessment Proces s. 30

35 4. Financial risk management (continued) Liquidity risk (continued) The liquidity coverage ratios of the year 2015 are as follows: Total Unweighted Value (average) Total Weighted Value (average) (*) Current Period TL+FC FC TL+FC FC HIGH QUALITY LIQUIDITY ASSETS 1 High Quality Liquidity Assets 5,283,150 4,437,851 CASH OUTFLOWS Retail and Small Business Customers 2 Deposits 12,358,397 5,234,434 1,034, ,463 3 Stable Deposits 4,030,467 1,219, ,523 60,980 4 Less Stable Deposits 8,327,930 4,014, , ,483 5 Unsecured Fundings besides retail and small business customers deposits 8,342,686 3,826,642 4,663,791 2,037,497 6 Operational Deposits Non-Operational Deposits 6,481,348 3,305,692 2,802,453 1,516,547 8 Other unsecured fundings 1,861, ,950 1,861, ,950 9 Secured Fundings Other Cash Outflows 15,352,280 8,629,942 9,542,936 6,021, Derivatives cash outflows and collateral outflows 6,257,324 4,562,373 6,257,324 4,562, Obligation related to structured financial products Commitments related to debts to financial markets and other off-balance sheet obligations 9,094,956 4,067,569 3,285,612 1,458, Other revocable off-balance sheet commitments and contractual obligations Other irrevocable or conditionally revocable off-balance sheet obligations 1,741, , TOTAL CASH OUTFLOWS 15,328,109 8,521,056 CASH INFLOWS 17 Secured Lending Unsecured Lending 2,438, ,488 2,438, , Other Cash Inflows 6,297,803 5,454,254 6,297,803 5,454, TOTAL CASH INFLOWS 8,735,869 6,076,742 8,735,869 6,076,742 Total Adjusted Value 21 TOTAL HQLA STOCK 5,283,150 4,437, TOTAL NET CASH OUTFLOW 6,592,240 2,492, LIQUIDITY COVERAGE RATIO (%) (*) The average of consolidated liquidity coverage ratio calculated by monthly simple arithmetic average. The average of three months is the average of the last three months averages, separately. The most important affect on liquidity coverage ratio result, cash assets, assets in Central Bank and high quality liquid assets size occured by received debt instruments (Sukuk). High quality liquid assets are increased only 4% from 2014 to the end of 2015, there is not any important change. Another factor cash outflows, consist of funds collected and unsecured other debt instruments and off-balance sheet transactions. The share of deposits in cash outflows is 35%, unsecured other debt instruments share is 6%. There is an increase more than 100% at both cash outflows and cash inflows at the end of 2015 compared on Because the purchases and sales of derivative transactions are in balance, it has almost no impact on ratio. 31

36 4. Financial risk management (continued) Liquidity risk (continued) The liquidity coverage ratios of the year 2014 are as follows: Total Unweighted Value (*) (average) Total Weighted Value (*) (average) (*) Prior Period TL+FC FC TL+FC FC HIGH QUALITY LIQUIDITY ASSETS 1 High Quality Liquidity Assets 5,261,171 4,110,037 CASH OUTFLOWS 2 Retail and Small Business Customers Deposits 10,709,297 3,866, , ,903 3 Stable Deposits 3,977,107 1,074, ,855 53,707 4 Less Stable Deposits 6,732,190 2,791, , ,196 5 Unsecured fundings besides retail and small business customers deposits 5,764,258 2,449,921 3,344,815 1,460,632 6 Operational Deposits Non-Operational Deposits 4,858,233 1,985,177 2,418, ,888 8 Other unsecured fundings 906, , , ,744 9 Secured Fundings Other Cash Outflows 7,232,503 2,774,496 2,629,356 1,018, Derivatives cash outflows and collateral outflows 2, , Obligation related to structured financial products Commitments related to debts to financial markets and other off-balance sheet obligations 7,230,305 2,774,496 2,627,158 1,018, Other revocable off-balance sheet commitments and contractual obligations Other irrevocable or conditionally revocable offbalance sheet obligations 1,297, , TOTAL CASH OUTFLOWS 6,911,140 2,811,926 CASH INFLOWS 17 Secured Lending Unsecured Lending 1,985, ,395 1,985, , Other Cash Inflows 5, ,917 5, , TOTAL CASH INFLOWS 1,990,611 1,218,312 1,990,611 1,218,312 Total Adjusted Value 21 TOTAL HQLA STOCK 5,261,171 4,110, TOTAL NET CASH OUTFLOW 4,920,529 1,593, LIQUIDITY COVERAGE RATIO (%)

37 4. Financial risk management (continued) Liquidity risk (continued) Maturity analysis of monetary assets and liabilities according to their remaining maturities: Less than one month 1-3 months 3-12 months Over 5 years Unallocated Total 31 December 2015 Demand 1-5 years Cash and balances with Central Bank 1,648, ,648,923 Loans and advances to banks 225, ,369 Loans, lease receivables and advances to customers -- 2,985,166 4,059,693 10,007,468 10,405, , ,376 28,622,572 Available-for-sale investment securities 4, , ,052 1,156, , ,897,407 Investment Held to Maturity , , , ,893 Other assets (1) 4,251, ,330 4,273,083 Total assets 6,130,942 2,985,166 4,506,737 10,492,520 11,874,006 1,321, ,706 37,556,247 Deposits from banks 3, ,266 46, ,590 Deposits from customers 5,427,830 12,312,617 3,342, ,890 12, ,704,901 Funds borrowed -- 1,285, , ,070 2,930, ,495,826 Debt securities issued -- 72, , ,246 3,688, ,102,988 Subordinated liabilities , , ,023 Current tax liabilities , ,051 Other liabilities 1,650, , ,886,701 Total liabilities 7,081,992 14,331,761 3,876,764 1,783,329 6,632, , ,433,080 Net (951,050) (11,346,595) 629,973 8,709,191 5,241, , ,706 3,123,167 Less than one month 1-3 months 3-12 months Over 5 years Unallocated Total 31 December 2014 Demand 1-5 years Cash and balances with Central Bank 2,393, ,393,440 Loans and advances to banks 572, ,606 Loans, lease receivables and advances to customers - 2,697,304 3,919,395 8,781,711 8,043, ,641 44,152 24,212,363 Available-for-sale investment securities 4, , , , ,428 1,870,381 Investment Held to Maturity , , ,400 Other assets (1) 3,149, ,288 3,162,687 Total assets 6,119,815 2,697,304 4,441,755 9,080,355 9,503, ,069 57,440 32,779,877 Deposits from banks 7, ,460 7,585 1, ,767 Deposits from customers 4,289,822 11,238,185 2,220, ,706 23, ,740,259 Funds borrowed - 909, ,442 2,543,840 1,938, ,292,726 Debt securities issued ,543 80,410 2,848, ,071,863 Current tax liabilities , ,231 Other liabilities 1,239, , ,411,412 Total liabilities 5,537,191 12,687,792 3,306,839 3,594,225 4,811, ,937,258 Net 582,624 (9,990,488) 1,134,916 5,486,130 4,691, ,065 57,440 2,842,619 (1) Reserve deposits at Central Bank of Turkey amounting to TL 3,702,250 (31 December 2014: TL 2,749,896) are presented under Demand column. 33

38 4. Financial risk management (continued) Liquidity risk (continued) Residual contractual maturities of the financial liabilities 31 December 2015 Carrying amount Gross nominal outflow Demand Less than one month 1-3 months 3-12 months 1-5 years Over 5 years Deposits from banks 475, ,590 3, ,266 46, Deposits from customers 21,704,901 21,704,901 5,427,830 12,312,617 3,342, ,890 12,395 3 Fund borrowed 5,495,826 5,778,941 1,286, ,804 1,041,853 3,087, Debt securities issued 4,102,988 4,685, , , ,930 4,086, Subordinated liabilities 733,023 1,257, ,686 45, , ,268 Total 32,512,328 33,902,299 5,431,586 14,089,988 3,871,118 2,121,762 7,409, ,271 Non-cash loans (1) 12,502,404 12,502,404 3,478,788 1,607, ,511 3,790,618 2,477, ,689 (1) Commitments balance amount to TL 2,246,965 is not included in this table. 31 December 2014 Carrying amount Gross nominal outflow Demand Less than one month 1-3 months 3-12 months 1-5 years Over 5 years Deposits from banks 384, ,767 7, ,460 7,585 1, Deposits from customers 18,740,259 18,740,259 4,289,822 11,238,185 2,220, ,706 23,504 4 Funds borrowed 6,292,726 6,575, , ,343 2,639,750 2,097, Debt securities issued 3,071,863 3,647, , ,859 3,279, Total 28,489,615 29,347,959 4,297,275 12,516,842 3,300,553 3,833,584 5,399,701 4 Non-cash loans (1) 10,648,417 10,648,417 3,039,910 1,457,397 1,029,830 3,393,231 1,552, ,074 (1) Commitments balance amount to TL 2,126,549 is not included in this table. The above table shows the undiscounted cash flows of the Participation Bank s financial liabilities on the basis of their earliest possible contractual maturity. Customers current and profit sharing accounts are initially recognised at cost. Subsequent to the initial recognition, all profit share accounts are recognised considering the attribute profits or any losses incurred on the respective loan balances. In all cases, profit/loss sharing accounts receive a proportion of the profit or bear a share of loss based on the results of the respective loan balances. Profit rate risk Profit rate risk arises from the possibility that changes in the conventional profit share rate will affect the future profitability or the fair value of financial instruments. The Participation Bank is exposed to profit rate risk as a result of mismatches or gaps in the amount of assets and liabilities and off-balance sheet instruments that mature or re-price during a given period. The impact of possible changes in the profit rates in measured and the profit rate gaps are reviewed to initiate corrective action in the Participation Bank s funding profile to ensure that the overall profit rate risk remains within acceptable tolerances. The principal objective of the Participation Bank s management activities for profit share rate risk is to enhance profitability by limiting the effect of adverse profit share rate movements in the sector and increasing profit share income by managing profit share rate exposure. The Participation Bank s monitors profit share sensitivity by analysing the composition of its assets and liabilities and off-balance sheet financial instruments. 34

39 4. Financial risk management (continued) Profit rate risk (continued) The major portion of the customers current and profit sharing accounts are short term. Accordingly, profit share rates are in line with the prevailing profit share rates in the market. Therefore, the management believes that the fair value of such financing activities do not materially differ from their respective book values. Market risk Market risk is the risk that changes in market prices, such as equity prices, foreign exchange rates and credit spreads will affect the Participation Bank s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. Management of market risk The Participation Bank separates its exposure to market risk between trading and non-trading portfolios. Trading portfolios are mainly held by the Treasury Department, and include positions arising from proprietary position taking, together with financial assets and liabilities that is managed on a fair value basis. Overall authority for market risk is vested in Risk Management Department and ALCO. Exposure to market risk The market risk arising from the trading portfolio is monitored, measured and reported using Standardised Approach according to the legal legislation. The monthly market risk report prepared using Standardised Approach are reported to BRSA. Value at Risk ( VaR ) is also used to measure and control market risk exposure within the Participation Bank s trading and available-for-sale portfolios. The VaR of these portfolios is the estimated loss that will arise on the portfolios over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). Average, highest and lowest values of market risks as at 31 December 2015 and 2014 calculated and reported with using the Standardised Approach as per the statutory financial statements prepared for BRSA reporting purposes within the scope of Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks published in Official Gazette no dated 6 September 2014 which is complaint to Basel II. Average, highest and lowest values of market risks as at 31 December 2015 and 2014 are as follows: 31 December December 2014 Average Highest Lowest Average Highest Lowest Interest rate risk (1) 2,359 6, , Common share risk Currency risk 17,760 32,791 6,375 3,424 4,890 2,492 Commodity risk 1,900 2,407 1,243 2,244 3,242 1,543 Counterparty credit risk 4,130 5,583 2,738 1,772 3,725 1,024 Total value at risk 326, , , , ,029 78,852 (1) Includes the market effect of forward transactions and income indexed bonds. 35

40 4. Financial risk management (continued) Market risk (continued) Currency risk The Participation Bank is exposed to currency risk through transactions in foreign currencies. Management of currency risk Risk policy of the Participation Bank is based on keeping the transactions within defined limits and keeping the currency position well-balanced. The Participation Bank has established a foreign currency risk management policy that enables the Participation Bank to take a position between lower and upper limits which are determined. Euro USD Other Total 31 December 2015 Cash and balances with Central Bank 156, ,441 22,991 1,025,634 Loans and advances to banks 56,297 94,382 27, ,779 Loans, lease receivables and advances to customers 4,765,037 6,671, ,436,339 Available-for-sale investment securities 163 1,233, ,233,861 Other assets 10,641 2,962, ,188 3,762,169 Deposits from banks (410,681) (3,580) (39,892) (454,153) Deposits from customers (2,767,965) (6,440,701) (454,298) (9,662,964) Funds borrowed (256,735) (2,503,454) (1,011,732) (3,771,921) Subordinated liabilities -- (733,023) -- (733,023) Debt securities issued -- (3,707,326) -- (3,707,326) Other liabilities (119,681) (307,237) (6,952) (433,870) Net on balance sheet position 1,433,278 (1,887,158) (673,595) (1,127,475) Net off balance sheet position (derivatives) (1,430,884) 1,854, ,749 1,114,455 Net position 2,394 (32,568) 17,154 (13,020) 36 Euro USD Other Total 31 December 2014 Cash and balances with Central Bank 34,860 1,472,059 14,385 1,521,304 Loans and advances to banks 49, ,053 40, ,115 Loans, lease receivables and advances to customers 2,909,645 5,620, ,530,400 Available-for-sale investment securities , ,560 Other assets 153,846 1,872, ,986 2,778,275 Deposits from banks (231,835) (39,651) (300) (271,786) Deposits from customers (1,945,729) (3,906,134) (545,183) (6,397,046) Funds borrowed (540,340) (3,556,417) (1,052,941) (5,149,698) Debt securities issued -- (2,868,914) -- (2,868,914) Other liabilities (45,667) (168,562) (4,916) (219,145) Net on balance sheet position 384,475 (345,953) (796,457) (757,935) Net off balance sheet position (derivatives) (379,749) 344, , ,220 Net position 4,726 (1,528) 2,087 5,285

41 4. Financial risk management (continued) Market risk (continued) Exposure to currency risk A 10 percent devaluation of the TL against the following currencies as at 31 December 2015 and 2014 would change the profit or loss and other comprehensive income (without tax effects) by the amounts shown below. Time 31 December December 2014 Profit or Total comprehensive Total Profit or comprehensive (loss) income (loss) income USD (1,551) (3,257) (645) (153) Euro Other currencies 1,715 1, Total, net 403 (1,303) This analysis assumes that all other variables remain constant. Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Participation Bank s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks, such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Participation Bank s operations and are faced by all business entities. The data of operational losses may be exposed to during the Participation Bank s activities is collected and analysed regularly by Risk Management Department and reported to Board of Directors, Audit Committee and senior management. 37

42 4. Financial risk management (continued) Operational risk (continued) The Participation Bank adopts a risk terminology which is in accordance with Basel II in order to create an international approach on Operational Risk Management. This common risk language provides a consistent view and communication about operational risk throughout the Participation Bank. Software is used in order to support the standard framework for the management of operational risk by creating the data house for risk losses and reporting of the mentioned data. The Risk Control Evaluation ( RCE ) is performed periodically in the Participation Bank as a basic principle of the Basel II Operational Risk implementations. It is aimed with RCE to restrict the operational risk effects by investigating the business processes subject to operational risk and performing controls by the process owners. In the departments where RCC study is implemented, Key Risk Indicators and the threshold value for the mentioned risk points are determined. Besides, within the Capital Adequacy Measurement and Reporting Project, the software solutions are started to be used since June 2012 in order to build a flexible parametric model to create a reporting system that is complaint with Basel II, to apply stress tests to the capital adequacy related risks and to be in compliance with the legal framework changes. The Participation Bank calculated the value of operational risk in accordance with Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks published in Official Gazette no dated 6 September 2014 which is complaint to Basel II, using the basic indicator approach with the data of last three years 2014, 2013 and The amount, calculated as TL 170,189 (31 December 2014: TL 142,326) represents the operational risk that the Participation Bank may be exposed to and the amount of minimum capital requirement to eliminate this risk. Capital management regulatory capital The BRSA sets and monitors capital requirements for the Bank as a whole. The Bank is directly supervised by local regulators. In implementing current capital requirements, the BRSA requires the banks to maintain a prescribed ratio of minimum 8% of total capital to total value at credit, market and operational risks. The Bank regulatory capital is analysed into two tiers: -Tier 1 capital, which includes paid-in capital, share premium, legal reserves, retained earnings, other comprehensive income, translation reserve and non-controlling interests after deductions for goodwill and certain cost items. -Tier 2 capital, which includes qualifying subordinated liabilities and general provisions. The BRSA also requires the banks to maintain prescribed ratios of minimum 6% and 4.5% of Tier 1 and Tier 2 capital, respectively, to total value at credit, market and operational risks starting from 1 January Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. The Bank s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. 38

43 4. Financial risk management (continued) Capital management regulatory capital (continued) The Participation Bank s regulatory capital position as at 31 December 2015 and 2014 was as follows: 31 December December 2014 Tier 1 capital 3,227,708 3,040,809 Tier 2 capital 870, ,008 Deductions from capital (5,277) (2,610) Total regulatory capital 4,092,881 3,165,207 Amount subject to credit risk 27,784,788 23,480,440 Amount subject to market risk 402, ,604 Amount subject to operational risk 2,127,363 1,779,076 Capital adequacy ratios (%) Use of estimates and judgements Determining fair values The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other 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. Valuation models 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, lease receivables and advances to customers, funds borrowed and debt securities issued. These financial assets and liabilities include cash and balances with Central Bank, loans and advances to banks, deposits and other short-term assets and liabilities that are of a contractual nature. Management believes that the carrying amount of these particular financial assets and liabilities approximates their fair values. 39

44 5. Use of estimates and judgements (continued) For the financial assets and liabilities such as loan, lease receivables and advances to customers, funds borrowed, debt securities issued; 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 benchmark market rates used in estimating discount 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. Fair values of the performing loans, leasing receivables and advances to customers are determined as Level 2 and calculated by using valuation techniques including net present value and discounted cash flow models. Fair values of held-to-maturity investments are determined as Level 2 and derived from prices which are announced by CBRT. The fair values of certain financial assets carried at cost or amortised cost, including cash and balances with Central Bank and loans and advances to banks are considered to approximate their respective carrying values due to their short-term nature. The fair value of other financial assets is also considered to approximate their respective carrying values due to their nature. Carrying value of the deposits from banks and deposits from customers equal to their fair values as they are revalued with the year-end unit value. The estimated fair values of financial assets and financial liabilities are as follows: Carrying amount Fair value 31 December 31 December 31 December 31 December Financial assets Performing loans, leasing receivables and advances to customers 28,398,196 24,168,211 27,990,189 23,998,220 Held to maturity investment securities 888, , , ,221 Total 29,287,089 24,736,611 28,869,135 24,582,441 Financial liabilities Funds borrowed 5,495,826 6,292,726 5,826,151 6,137,297 Subordinated liabilities 733, , Debt securities issued 4,102,988 3,071,863 4,478,704 3,055,435 Total 10,331,837 9,364,589 11,032,377 9,192,732 40

45 5. Use of estimates and judgements (continued) Classification of fair value measurement IFRS 7 Financial Instruments: Disclosures requires the measurements of fair value of financial instruments to be classified in a hierarchy that reflects the significance of the valuation inputs used. This classification prioritises observable data, using market data obtained from independent sources, in preference to unobservable data that relies, for example on the use of predictions and assumptions about market prices by the Participation Bank. This sort of categorisation generally results in the classifications below: Level 1: Fair value measurements using quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: Fair value measurements using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 3: Fair value measurements using inputs for the assets or liability that are not based on observable market data (i.e. unobservable inputs). The classification of fair value measurements of financial assets and liabilities measured at fair value is as follows: 31 December 2015 Level 1 Level 2 Level 3 Total Available-for-sale investment securities (1) -- 1,892, ,892,510 Derivative financial assets held for trading -- 44, ,249 Financial assets at fair value -- 1,936, ,936,759 Derivative liabilities held for trading -- 34, ,352 Derivative financial liabilities held for risk management , ,543 Financial liabilities at fair value , , December 2014 Level 1 Level 2 Level 3 Total Available-for-sale investment securities (1) -- 1,866, ,866,011 Derivative assets held for trading -- 26, ,110 Financial assets at fair value - 1,892, ,892,121 Derivative liabilities held for trading -- 10, ,068 Derivative financial liabilities held for risk management 51,547 51,547 Financial liabilities at fair value -- 61, ,615 (1) Not quoted share certificates amount to TL 4,897 are excluded from the table above (31 December 2014: TL 4,370). Observable market prices such as the marketable security prices which are announced by CBRT and the prices obtained from foreign capital markets are used for fair value determination of financial assets and liabilities measured at fair value except derivative assets and derivative liabilities held for trading. The similar ratios announced in the capital markets are used for discounting the contractual prices of derivative financial assets and derivative financial liabilities for fair value determination. 41

46 6. Operating segments The Participation Bank has three reportable segments, as described below, which are the Participation Bank s strategic business units. These strategic business units offer different products and services, and are managed separately based on the Participation Bank s management and internal reporting structure. For each of the strategic business units, the Board of Directors, as the chief operating decision maker reviews internal management reports on at least a quarterly basis. The following summary describes the operations in each of the Participation Bank s reportable segments: Consumer banking This segment includes consumer lending, current accounts and consumer products which are in accordance with Islamic rules for individuals and small sized businesses. Corporate banking This segment provides banking services including all conventional credit-related products and financing products in compliance with Islamic rules for medium and large establishments and companies. It also includes international banking services. Treasury This segment provides a different range of treasury products and services, including money market and foreign exchange, to the Participation Bank s customers, in addition to carrying out investment and trading activities (local and international) and managing liquidity and market risk. Others Others are comprised of head office accounts, particularly management of a portfolio of equity holdings, other real estate and the bank premises. 42

47 6. Operating segments (continued) Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Board of Directors. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm s length basis. Measurement of segment assets and liabilities and operating segment results is based on the accounting policies set out in the accounting policy notes. Since a segment can use the deposits of the other segment, there is a fund transfer between the segments. Those kinds of income and expenses generated from fund transfers are recalculated based on the average rates and average amounts. Consumer banking Corporate banking Treasury Others Total Current period 31 December 2015 Operating income (1) 482,345 1,247,516 (94,404) -- 1,635,457 Net profit of segment (2) 50, ,844 (3,679) ,619 Profit before tax 50, ,844 (3,679) ,619 Tax provision (63,349) (63,349) Net period profit after tax 50, ,844 (3,679) (63,349) 260,270 Assets of the segment 4,382,185 23,909,257 8,836,670 1,164,923 38,293,035 Total assets 4,382,185 23,909,257 8,836,670 1,164,923 38,293,035 Liabilities of segment 10,749,242 12,789,599 10,638, ,266 34,912,300 Shareholders equity ,380,735 3,380,735 Total liabilities and equity 10,749,242 12,789,599 10,638,193 4,116,001 38,293,035 Other segment information ,548 67,548 Depreciation ,427 66,427 Net impairment loss on non-financial assets ,121 1,121 (1) Operating income includes net profit share income, net fee and commission income. (2) Personnel and operational expenses are allocated based on the asset amount of the each segment. Prior period Consumer banking Corporate banking Treasury Others Total 31 December 2014 Operating income (1) 380, ,585 (7,857) -- 1,344,486 Net profit of segment (2) 30, ,845 (3,299) ,986 Profit before tax 30, ,845 (3,299) ,986 Tax provision (77,586) (77,586) Net period profit after tax 30, ,845 (3,299) (77,586) 313,400 Assets of the segment 4,051,192 20,393,354 7,301,272 1,583,058 33,328,876 Total assets 4,051,192 20,393,354 7,301,272 1,583,058 33,328,876 Liabilities of segment 9,054,039 11,169,259 9,166, ,189 30,144,721 Shareholders equity ,184,155 3,184,155 Total liabilities and equity 9,054,039 11,169,259 9,166,234 3,939,344 33,328,876 Other segment information ,949 54,949 Depreciation ,138 54,138 Net impairment loss on non-financial assets (1) Operating income includes net profit share income, net fee and commission income and other operating income. (2) Personnel and operational expenses are allocated based on the asset amount of the each segment. 43

48 7. Net fee and commission income Fee and commission income Commissions from non-cash loans 105,981 93,576 Credit card fees and commissions 33,776 30,837 POS commissions from members 30,431 19,022 Insurance commissions 23,338 17,952 Expert Fees 20,594 21,464 Commissions on remittance 8,985 9,471 Others 36,777 40,770 Total fee and commission income 259, ,092 Fee and commission expense POS transactions commission expenses 57,048 38,536 Expert Fees 19,616 17,144 Credit card service and usage expenses 6,222 4,886 Mortgage expenses 2,957 3,141 Commissions and fees given for remittance 2,187 1,039 7/24 Card domestic ATM commission given 1,665 1,376 Others 27,718 18,373 Total fee and commission expense 117,413 84,495 Net fee and commission income 142, ,597 Net fee and commission income above excludes amounts included in determining the profit share rate on financial assets and liabilities that are not at fair value through profit or loss. 8. Net trading (loss) (Loss) from derivative financial instruments (30,383) (38,626) Other Total (29,468) (37,779) 9. Other operating income Gain on sale of assets held for resale and property and equipment 12,891 11,239 Income from cheque book 8,782 9,502 Communication expenses charged to customers 6,934 7,237 Others 25,056 27,129 Total 53,663 55,107 44

49 10. Personnel expenses Wages and salaries 310, ,213 Compulsory social security obligations 39,275 34,335 Short-term employee benefits 24,268 26,638 Provision expense for employee severance indemnity 8,941 7,942 Termination payments 13,139 6,553 Health expenses of personnel 11,319 10,884 Social assistance payments 5,349 5,555 Others 22,186 24,950 Total 435, , Other operating expenses Premium expenses paid for saving deposit insurance fund 39,735 34,067 Audit and advisory expenses 8,998 14,509 Impairment loss on asset held for resale 1,121 2,018 Provision expense for ongoing suits 2,472 3,903 Others 22,272 13,915 Total 74,598 68, Income taxes Components of income tax expense in the statement of profit or loss and other comprehensive income are as follows: Income tax recognised in profit for the period Current income tax related to income from operations (107,046) (111,885) Deferred income tax related to income from operations 43,697 34,299 (63,349) (77,586) Income tax recognised in other comprehensive income Deferred income tax recognised in other comprehensive income 15,105 (11,021) Total income tax (48,244) (88,607) The movement of current tax liabilities is as follows: At the beginning of the period 36,231 13,043 Current income tax charge 107, ,885 Taxes paid during the period (109,226) (88,697) Current tax liabilities 34,051 36,231

50 12. Income taxes (continued) A reconciliation of income tax expense applicable to profit from operating activities before income tax at the statutory income tax rate, to income tax expense at the Participation Bank s effective income tax rate as at and for the years ended 31 December 2015 and 2014 are as follows: 2015 Tax rate (%) 2014 Tax rate (%) Profit from ordinary activities before income tax 323, ,986 Taxes on income per statutory tax rate 64, , Disallowable expenses 65, , Tax exempt income (67,204) (20.77) (62,101) (15.88) Income tax expense 63, , Deferred tax assets and liabilities as at 31 December 2015 and 2014 are attributable to the items below: 31 December December 2014 Fair value differences of derivative financial instruments 34,897 6,025 Portfolio basis allowance for loans leasing receivables and advances 28,651 17,005 Commission accruals 25,013 25,598 Hedging funds 10,396 1,093 Reserve for employee severance indemnity 8,209 8,623 Valuation differences of precious metals 6,557 1,367 Specific provision of loans, leasing receivables and advances 3,137 6,279 Provision expense for law suits 2,808 2,313 Short-term employee benefits 2,243 2,127 Credit card promotion provision Loan accrual differences (20) (82) Fair value valuation differences (89) (17) Revaluation surplus on tangible assets (6,102) (6,102) Property and equipment depreciation difference (12,124) (11,637) Other 10,947 2,740 Net deferred tax liabilities / assets 114,817 55,740 46

51 13. Cash and cash equivalents As at 31 December 2015 and 2014, cash and cash equivalents as presented in the statement of financial position and cash flows are as follows: 31 December December 2014 Cash on hand 297, ,091 Balances with the Central Bank excluding reserve deposits 1,218,585 2,180,166 Cash in transit 133, Cash and balances with Central Bank 1,648,923 2,393,440 Loans and advances to banks (Note 14) 225, ,606 Accrued income (4,966) (391) Total cash and cash equivalents in the statement of cash flows 1,869,326 2,965, Loans and advances to banks As at 31 December 2015 and 2014, loans and advances to banks comprise the followings: 31 December December 2014 TL FC Total TL FC Total Loans and advances to banks demand: Domestic banks 47,558 84, ,453 85, , ,731 Foreign banks 32 92,884 92, ,871 89,875 Total loans and advances to banks 47, , ,369 85, , ,606 47

52 15. Loans, lease receivables and advances to customers As at 31 December 2015 and 2014, all the loans, lease receivables and advances to customers are at amortised cost. 31 December December 2014 Performing loans 26,616,185 22,827,952 Performing lease receivables 1,782,011 1,340,259 Non-performing loans and lease receivables 1,250, ,317 Gross amount 29,649,038 24,765,528 Allowance for individually impaired loans and lease receivables (829,869) (431,187) Allowance for collectively impaired loans and lease receivables (196,597) (121,978) Carrying amount 28,622,572 24,212,363 Details on performing loans in terms of types are as follows; 31 December December 2014 Corporate loans 19,082,873 17,179,652 Consumer loans and credit cards 5,320,815 4,373,203 Export loans 2,172,975 1,249,747 Loans granted to foreign institutions 17,478 14,104 Other 22,044 11,246 Total performing loans 26,616,185 22,827,952 48

53 15. Loans, lease receivables and advances to customers (continued) Allowance for impairment including the portfolio basis allowances 31 December December 2014 Balance on 1 January 553, ,079 Impairment loss for the period: -Charge for the period 638, ,890 -Recoveries and reversals (153,222) (71,918) -Write-offs and loans sold (1) (30,599) (121,878) -Foreign exchange differences 18,929 18,992 Balance at end of the period 1,026, ,165 (1) In the current period The Participation Bank sold its loans amount to TL 22,410 (31 December 2014: TL 116,604) and write off loans amount to TL 8,189 (31 December 2014: TL 5,274). The provision for possible losses is comprised of amounts for specifically identified as being impaired and nonperforming loans, leasing receivables and advances and a further portfolio-basis amount considered adequate to cover the residual inherent risk of loss present in the lending relationships presently performing in accordance with agreements made with borrowers. The amount of the portfolio basis allowance is TL 196,597 (31 December 2014: TL 121,978). Loans, lease receivables and advances to customers include the following finance lease receivables for leases of certain property and equipment where the Participation Bank is the lessor: 31 December December 2014 Gross investment in finance leases, receivable: Less than one year 807, ,564 Between one and four years 1,211, ,243 More than four years 110,958 73,260 Total 2,129,893 1,589,067 Unearned finance income (347,882) (248,808) Net investment in finance leases 1,782,011 1,340,259 The net investment in finance leases comprises: 31 December December 2014 Less than one year 675, ,637 Between one and four years 1,013, ,833 More than four years 92,835 61,789 Net investment in finance leases 1,782,011 1,340,259 49

54 16. Derivative financial instruments held for trading and hedging purposes A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying, such as financial instrument prices, reference rates, commodity prices or indices. In the ordinary course of business, the Participation Bank enters into various types of transactions that involve derivative financial instruments. Derivative financial instruments used include currency forwards and cross currency swaps. The tables below show the contractual amounts of derivative instruments analysed by the term to maturity. The contractual 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 contractual amounts indicate the volume of transactions outstanding at the period- end and are neither indicative of the market risk nor credit risk. The fair value of derivative financial instruments is calculated by using forward exchange rates at the reporting date. In the absence of reliable forward rate estimations in a volatile market, current market rate is considered to be the best estimate of the present value of the forward exchange rates. 31 December December 2014 Fair value Fair value Notional Fair value Fair value Notional assets liabilities amount assets liabilities amount Forward contracts 15,523 8,162 4,807,654 5,998 8,340 3,179,362 Currency swap contracts 28,726 26,190 7,813,634 20,112 1,728 4,525,943 Derivatives Held for Trading 44,249 34,352 12,621,288 26,110 10,068 7,705,305 Derivatives for Hedging Purposes 48, ,543 2,258, ,547 1,107,747 Total 92, ,895 14,879,558 26,110 61,615 8,813,052 Up to 1 month 1 to 3 months 31 December to 12 months 1 to 5 years Over 5 years Total Forward contracts 4,269, , , ,807,654 Currency swap contracts 6,228,703 1,183, , ,813,634 Cross currency swaps ,258, ,258,270 Total of transactions 10,498,659 1,543, ,469 2,258, ,879,558 Up to 1 month 1 to 3 months 31 December to 12 months 1 to 5 years Over 5 years Total Forward contracts 2,741, , , ,179,362 Currency swap contracts 4,086, , , ,525,943 Cross currency swaps ,107, ,107,747 Total of transactions 6,827, , ,197 1,249, ,813,052 50

55 16. Derivative financial instruments held for trading and hedging purposes (continued) The Parent Participation Bank applies Cash Flow Hedge ( CFH ) and Fair Value Hedge ( FVH ) accounting models as of 31 December Cross currency swaps are used as hedging instrument in CFH and FVH accounting. Contractual amounts and the fair values as at 31 December 2015 and 31 December 2014 of these hedging instruments are presented in the table below: 31 December December 2014 Notional (1) Asset Liability Notional (1) Asset Liability Hedging instrument Cross Currency Swap (CFH) 1,017, , , ,547 Cross Currency Swap (FVH) 214,000 48, Total 1,231,439 48, , , ,547 (1) Only the sell legs of the related derivatives are presented with the addition of the buy legs of these derivatives amounting to TL 1,026,831 (31 December 2014: TL 530,008) the total notional of derivative financial assets amounting to TL 2,258,270 (31 December 2014: TL 1,107,747) is accounted for in off-balance sheet under Hedging Derivative Financial Instruments line item. Cash flow hedge accounting The Participation Bank, convert MYR 1,160,000 securities to USD loan with cross currency swap and this fund is evaluated in profit share-yielding assets in USD. In this context, the Bank has started to implement cash flow hedge accounting on 1 August 2014 to protect itself with cross currency swap against cash flow risks due to the changes in MYR/TL foreign exchange rates on marketable securities issued. The hedging instruments are cross currency swaps and the hedged item is the cash outflow due to the changes in exchange rates of marketable securities issued. Cash Flow Hedge Accounting s effect is summarized in below table; Type of hedging instrument Swap transactions (1) Includes deferred tax effect. Type of hedging instrument Swap transactions Hedged item (asset and liability) Marketable securities issued Hedged item (asset and liability) (1) Includes deferred tax effect. Marketable securities issued 31 December 2015 Net fair value of the Net gain/(loss) hedging instrument recognized in hedging Nature of hedged risks Asset Liability funds (1) Cash flow risk due to the changes in the foreign exchange rates ,543 (41,583) 31 December 2014 Net fair value of the Net gain/(loss) hedging instrument recognized in hedging Nature of hedged risks Asset Liability funds (1) Cash flow risk due to the changes in the foreign exchange rates -- 51,547 (3,668) 51

56 16. Derivative financial instruments held for trading and hedging purposes (continued) Cash flow hedge accounting (continued) At the inception date, the Participation Bank documents the relationship between the hedging instruments and hedged items required by the CHF accounting application in accordance with IAS 39 and its own risk management policies and principles. Every individual relationship is approved and documented in the same way. In accordance with the Bank s risk management policies. The effectiveness tests are performed on a monthly basis. If the underlying hedge does not conform to the CHF accounting requirements (out of 80%- 125% effectiveness range) or if the management voluntarily decides to discontinue the hedging relation or the hedging instrument is sold or closed before its maturity, the cumulative gain or loss on the hedging instrument that has been recognized in other comprehensive income from the period when the hedge was effective shall remain separately in equity until the forecast transaction occurs or is no longer expected to occur the net cumulative gain or loss is reclassified from other comprehensive income to profit or loss. Fair value hedge accounting The Participation Bank started fair value hedge accounting beginning from 1 January 2015 to hedge the profit share rate risk of the long term and fixed coupon private sector bond classified under available for sale portfolio which is amount to TL 214,000 thousands with fixed rate and TL denominated sale leg of the cross currency swap. Also the EUR/TL and USD/TL currency risk of the EUR and USD denominated funds have been hedged by the EUR and USD buy leg of the cross currency swap in accordance with the hedge accounting explained. The hedging instruments are cross currency swaps and the hedged item is the cash outflow due to the changes in exchange rates of marketable securities issued. Fair Value Hedge Accounting s effect is summarized in below table; 31 December 2015 Type of Hedged item Net fair value of the Net gain/(loss) hedging (asset and hedging instrument recognized in instrument liability) Nature of hedged risks Asset Liability hedging funds Securities Cash flow risk due to Swap Available the changes in the transactions For Sale foreign exchange rates -- 48, The Participation Bank documents the relationship between the hedging instruments and hedged items required by the FVH accounting application in accordance with IAS 39 and its own risk management policies and principles. Every individual relationship is approved and documented in the same way. Effectiveness tests were chosen among methods allowed within the context of IAS 39 in accordance with the Bank s risk management policies. Participation Bank s assumptions, which used for determining fair values of derivative instruments, were used while calculating fair value of hedged items on the effectiveness tests. The effectiveness tests are performed and effectiveness of risk relations are measured on a monthly basis. The effectiveness tests are performed rewardingly at the beginning of risk relations. If the underlying hedge does not conform to the FVH accounting requirements (out of 80%-125% effectiveness range) or if the management voluntarily decides to discontinue the hedging relation or the hedging instrument is sold or closed before its maturity, in the context of the fair value hedge, adjustments on the carrying value of the hedged item is reflected on the on Derivative Financial Transactions Gains/Losses accounts by using straight line method of amortization. 52

57 17. Investment securities Available-for-sale investment securities 31 December December 2014 Government bonds and sukuks 1,892,510 1,761,405 Rent certificate ,606 Unquoted equity securities at cost 4,897 4,370 Total 1,897,407 1,870,381 As of 31 December 2015, the Group s financial assets available-for-sale portfolio includes the rent certificate at a total face value of TL 1,889,843 (31 December 2014: TL 1,715,753), a total carrying value amounting to TL 1,892,510 (31 December 2014: TL 1,761,405) which is issued by Republic of Turkey Under secretariat of Treasury Unquoted equity securities at cost is mainly comprised of the equity participation to Kredi Garanti Fonu AŞ amounting to TL 4,719 (31 December 2014: TL 4,211). Held to maturity investment securities As at 31 December 2015, the Participation Bank acquired sukuks amounting to TL 350,000 thousands, TL 200,000, and TL 311,373 thousands are classified as Held to maturity investment securities (31 December 2014: TL 550,000) and a total carrying value amounting to TL 888,893 (31 December 2014: TL 568,400). The coupon payments of sukuks is semi-annually with annual coupon rates 10.60%, 9.68%, and 7.80% for TL with the maturity of 17 February 2016, 28 September 2016, and 15 February 2017 respectively. 53

58 18. Property and equipment and intangible assets Movements in property and equipment and intangible assets for the years ended 2015 and 2014 are as follows: Property and equipment 1 January 2015 Additions Disposals Value increase Transfers 31 December 2015 Cost: Land and buildings 304,845 82,673 (16,696) ,822 Leased tangible assets 5, ,782 Other tangible assets (1) 254,205 26,014 (3,036) -- (109) 277, , ,687 (19,732) ,678 Accumulated depreciation: Land and buildings (2,596) (854) (3,450) Leased tangible assets (5,775) (7) (5,782) Other tangible assets (1) (138,368) (34,289) 2, (169,722) Net book value 417, ,724 (1) Other tangible assets are mainly comprised of leasehold improvements and fixtures and furniture. Property and equipment 1 January 2014 Additions Disposals Value increase Transfers 31 December 2014 Cost: Land and buildings 115, , , ,845 Leased tangible assets 5, (109) 5,673 Other tangible assets (1) 217,370 49,766 (14,206) -- 1, , , ,675 (14,206) 27,786 1, ,723 Accumulated depreciation: Land and buildings (2,288) (308) (2,596) Leased tangible assets (5,782) (2) (5,775) Other tangible assets (1) (118,543) (32,069) 12, (172) (138,368) Net book value 211, ,984 (1) Other tangible assets are mainly comprised of leasehold improvements and fixtures and furniture. The Bank adopted a revaluation method in 2006 for its land and buildings in tangible assets. Expert values determined in December 2012 by an independent expert company by using precedent comparison method- are reflected to the financial statements. Such revaluation increase is net TL 115,942 after deferred tax as of balance sheet date (31 December 2014: TL 115,942). As of 31 December 2015, the fair value of tangible assets is amounting to TL 370,822 (31 December 2014: TL 304,845). The fair value measurement for land and buildings has been categorised as a level 2 fair value based on the inputs to the valuation techniques used. This category includes assets valued using: observable market prices in markets for similar assets; observable prices for identical or similar assets in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. 54

59 18. Property and equipment and intangible assets (continued) Intangible assets 1 January 2015 Additions Disposals Transfers 31 December 2015 Cost: Software programmes 110,184 35,786 (194) ,776 Accumulated amortisation: Software programmes (61,019) (30,288) 2 (100) (91,405) Net book value 49,165 54,371 Intangible assets 1 January 2014 Additions Disposals Transfers 31 December 2014 Cost: Software programmes 77,824 33,674 (148) (1,166) 110,184 Accumulated amortisation: Software programmes (40,675) (20,819) (61,019) Net book value 37,149 49,165 There were no capitalised borrowing costs related to the acquisition of plant and equipment and to the internal development of software during the period (31 December 2014: None). There are no restrictions such as pledges, mortgages or any other restriction on the property and equipment. During 2015 and 2014, the Participation Bank identified no events or circumstances that would indicate that the Participation Bank s intangible assets may be impaired. 55

60 19. Other assets 31 December December 2014 Reserve deposits at Central Bank of Turkey 3,702,250 2,749,896 Receivables from cheque clearing and credit card POS machines 316, ,032 Assets held for resale (net) 65,958 45,460 Others 188, ,299 Total other assets 4,273,083 3,162,687 At 31 December 2015, reserve deposits at the Central Bank of Turkey ( CBT ) were kept under the minimum reserve requirement. These funds are not available for the daily operations of the Participation Bank. As required by the regulation, these reserve deposits are calculated on the basis of liabilities of the Participation Bank after some deductions, at the rates determined by the CBT. In accordance with the current legislation, the reserve deposit rates for TL and foreign currency deposits vary between 5% and 20% according to the maturities (31 December 2014: between 5% and 13% for TL and foreign currency). These reserve deposit rates are applicable to deposits from banks and customers. As at 31 December 2015, TL 65,958 (31 December 2014: TL 45,460) of the other assets is comprised of foreclosed real estate acquired by the Participation Bank against its impaired receivables. Such assets are required to be disposed of within three years following their acquisitions per the Turkish Banking Law. This three year period can be extended by a legal permission from BRSA. The impairment losses of foreclosed real estate acquired as at 31 December 2015 is TL 1,121 (31 December 2014: TL 811). 20. Deposit from banks As at 31 December 2015 and 2014, deposits from banks comprise of current accounts amounting to TL 475,590 (TL 455,827 denominated in foreign currency) and TL 384,767 (TL 271,786 denominated in foreign currency), respectively. 21. Deposit from customers As at 31 December 2015 and 2014, deposits from customers comprise the following: 31 December December 2014 Profit Profit Current account sharing deposits Current account sharing deposits Saving deposits-tl 1,172,812 7,091,486 1,030,419 6,730,549 Saving deposits-fc 1,274,476 5,043, ,618 3,560,911 Public, commercial and other enterprises-tl 1,668,363 2,064,742 1,667,463 2,890,049 Public, commercial and other enterprises-fc 1,312,178 2,076, ,322 1,268,928 Total deposits from customers 5,427,829 16,277,072 4,289,822 14,450,437 56

61 22. Funds borrowed and debt securities issued As at 31 December 2015 and 2014, funds borrowed are all in foreign currency denominated and detailed as follows: Funds borrowed 31 December December 2014 Short-term 1,665,163 2,409,789 Long-term 3,830,663 3,882,937 Total 5,495,826 6,292,726 As of 31 December 2015, the Participation Bank did not borrow syndication loans (31 December 2014:four syndication loans amounting to USD 593,500 thousand and EUR 85,500 thousand which will mature in On 2 May 2013, the Bank issued the rent certificates through its subsidiary amounting to USD 500,000 thousand with 5 years maturity and with a semi-annually coupon payment at a profit rate of 3.95%. In second quarter of 2014, the Bank issued the rent certificates amounting to USD 500,000 thousand on 24 April 2014 and MYR 800,000 thousand on 23 June 2014 with 5 years maturities. In first quarter of 2015, the bank issued rent certificates amounting to MYR 150,000 thousand with 5 years maturity on 11 February In second quarter of 2015, the Bank issued the rent certificates amounting to MYR 210,000 with 5 years maturity on 21 May 2015, amounting to TRY 80,000 thousand with 179 days maturity on 24 July 2015, and amounting to TRY 100,000 thousand with 178 days maturity on 21 August As of 31 March 2015, The Participation Bank, convert MYR 150,000 thousand securities, which issued in terms of a 5.9% profit share rate and Feb 2020 maturity date, to USD loan with cross currency swap and this fund is evaluated in profit share-yielding assets in USD. Debt securities issued 31 December December 2014 TL FC TL FC Rent certificate 395,662 3,707, ,949 2,868,914 Total 395,662 3,707, ,949 2,868,914 57

62 23. Subordinated liabilities As at 31 December 2015 and 2014, subordinated liabilities are all in foreign currency denominated and detailed as follows: Interest rate Years of maturity 31 December December 2014 March USD 100 million coupon fixed interest rate 7.23% , USD 150 million coupon fixed interest rate 7.78% June , Total 733, On 31 March 2015, the Bank has borrowed 10-year-term loan with a nominal value of USD 100 million, as a subordinated loan. The loan has fixed interest rate with maturity of 31 March 2025 and 7.23% interest rate. On 30 June 2015, the Bank has borrowed 10-year-term loan with a nominal value of USD 150 million, as a subordinated loan. The loan has variable interest rate with maturity of 30 June 2025 and 7.78% interest rate. 24. Provisions 31 December December 2014 Provision for non-cash loans and cheques 70,853 53,674 Reserve for employee severance indemnity 41,044 43,117 Short-term employee benefits 32,046 35,448 Provision for law suits against the Participation Bank 14,038 11,566 Provision for credit card promotions 1,471 2,043 Other Total 160, ,848 Under the Turkish Labour Law, the Group entities are required to pay termination benefits to each employee who has completed one year of service and whose employment is terminated without due cause, is called up for military service, dies or who retires. Reserve for retirement pay is computed and reflected in the financial statements on a current basis. The reserve has been calculated by estimating the present value of future probable obligation of the Participation Bank arising from the retirement of the employees. IAS 19 ( Employee Benefits ) requires actuarial valuation methods to be developed to estimate the bank s obligation under defined employee plans. IAS 19 ( Employee Benefits ) has been revised effective from the annual period beginning after 1 January In accordance with the revised standard, actuarial gain / loss related to employee benefits shall be recognised in other comprehensive income. The average discount rate is 6.50% and share rate is 10.80% at the respective balance sheet date (31 December 2014: 6.00% and 8.80%). 58

63 24. Provisions (continued) The calculation was based upon the retirement pay ceiling announced by the Government. Movement in the reserve for employee severance indemnity is as follows: 31 December December 2014 Balance on 1 January 43,117 34,060 Current service cost 5,532 4,958 Profit share cost 3,409 2,984 Actuarial profit/loss (1) (6,226) 3,052 Accounted profit/loss 2, Indemnity paid during the period (6,974) (2,270) Total 41,044 43,117 (1) Actuarial losses/gain, calculated as TL (6,226) in relation to the reserve for employee termination benefits, are shown as TL (4,980) under shareholders equity offsetting deferred tax of TL (1,246). (31 December 2014: Actuarial gains/losses, calculated as TL 3,052 in relation to the reserve for employee termination benefits, are shown as TL 2,441 under shareholders equity offsetting deferred tax of TL 611. The movements of the provisions including provision for non-cash loans and cheques, short-term employee benefits, law suits against the Participation Bank and credit card promotions as at and for the years ended 31 December 2015 and 2014 are as follows: Provision for non-cash loans and cheques Short-term employee benefits Provision for law suits Provision for credit card promotions Total Balance as at 1 January ,674 35,448 11,566 2, ,731 Provision for the period 26,876 24,268 2, ,616 Recoveries and reversals (9,697) (27,670) -- (572) (37,939) Balance as at 31 December ,853 32,046 14,038 1, ,408 Provision for non-cash loans and cheques Short-term employee benefits Provision for law suits Provision for credit card promotions Total Balance as at 1 January ,849 36,051 7,663 1, ,443 Provision for the year 20,989 26,638 3, ,693 Recoveries and reversals (35,164) (27,241) (62,405) Balance as at 31 December ,674 35,448 11,566 2, ,731 59

64 25. Other liabilities 31 December December 2014 Payable to cheque clearing account 610, ,702 Cash guarantees received 581, ,779 Blocked accounts 189, ,203 Unearned income 126, ,345 Blocked accounts against expenditures of credit card holders 188, ,635 Taxes payable other than income tax 46,401 39,287 Others 144,514 70,461 Total 1,886,701 1,411, Capital and reserves Share capital 31 December December 2014 Number of common shares, TL 1 (in full TL), par value Authorised, issued and outstanding as thousands 2,600,000,000 2,600,000,000 Total 2,600,000,000 2,600,000,000 The authorized nominal share capital of the Participation Bank is TL 2,600,000 as at 31 December 2015 (31 December 2014: TL 2,600,000). As of 31 December 2015 and 31 December 2014, the composition of shareholders and their respective percentage of ownership can be summarized as follows: 31 December December 2014 Amount % Amount % The National Commercial Bank JSC 1,742, ,742, Boydak Group 580, , Gözde Girişim Sermayesi Yatırım Ortaklığı AŞ (Ülker Group) 274, , Other shareholders 1, , Total 2,600, ,600,

65 26. Capital and reserves (continued) Fair value reserve available for sale financial assets Revaluation of available-for-sale financial assets is detailed as follows: Balance at the beginning of the year 11,370 (36,795) Net change in fair value of available-for-sale financial assets (38,518) 65,947 Related deferred income taxes 7,704 (12,041) Net amount transferred to profit or loss (183) (5,741) Balance at the end of the period/year (19,627) 11,370 Revaluation reserve buildings Revaluation of buildings is detailed as follows: Balance at the beginning of the year 115,942 89,615 Net change in revaluation of tangible assets -- 27,713 Related tax -- (1,386) Balance at the end of the period/year 115, ,942 Hedging reserves The hedging reserve comprises the effective portion of the cumulative net change in the fair value of hedging instruments used in cash flow hedges pending subsequent recognition in profit or loss as the hedged cash flows affect profit or loss. Other reserves Other reserves consist of legal reserves kept within the Participation Bank. The legal reserves consist of first and second reserves, appropriated in accordance with the Turkish Commercial Code ( TCC ). The TCC stipulates that the first legal reserve is appropriated out of statutory profits at the rate of 5%, until the total reserve reaches 20% of the Participation Bank s paid-in share capital. The second legal reserve is appropriated at the rate of 10% of all cash distributions in excess of 5% of the paid-in share capital. Under the TCC, the legal reserves can only be used to offset losses and are not available for any other usage unless they exceed 50% of paid-in share capital. 61

66 27. Related party transactions Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making the financial and operating decisions. The shareholders of the Participation Bank namely the National Commercial Bank, Boydak Group and Ülker Group and all their subsidiaries, and their ultimate owners, directors and executive officers are referred to as related parties. During the course of the business, the Participation Bank has granted loans, advances and lease receivables to related parties and also received deposits from these related parties at various terms. These are all commercial transactions and realised on an arms-length basis. Related party transactions are as follow: 31 December December 2014 Balances with the related parties: Loans and advances to customers 165,863 90,485 Lease receivables 3,348 8,760 Funds borrowed 1,321,788 1,205,341 Deposits 466, ,460 Non-cash loans 100, , Transactions with the related parties: Profit share income 32,327 35,715 Profit share expense on deposits (19,449) (11,617) Profit share expense on borrowings (72,661) (44,715) In addition to the transactions and balances explained in the note above, the total remuneration of directors and other key members of key management as at for the year ended 31 December 2015 and 2014 are as follow: Short-term compensation of key management personnel 15,543 11,932 Other benefits 974 1,024 Total 16,517 12,956 No impairment losses have been recorded against balances outstanding during the year with related parties and no specific allowance has been made for impairment losses on balances with the related parties as at 31 December 2015 and

67 28. Commitments and contingencies 31 December December 2014 Letters of guarantee 11,006,206 9,230,089 Commitments 2,246,965 2,126,549 Letters of credit 918, ,206 Acceptances 575, ,122 Other guarantees 1, Total 14,749,369 12,774,966 Litigations The Participation Bank set TL 14,038 provision for ongoing suits filed against to the Participation Bank for which cash outflow is probable and measurable (31 December 2014: TL 11,565). 29. Group subsidiaries The table below provides details of the significant subsidiaries of the Group. Ownership interest Principal place of business 31 December December 2014 TF Varlık Kiralama AŞ Istanbul/Turkey 100% 100% TFKB Varlık Kiralama AŞ Istanbul/Turkey 100% 100% TF Varlık Kiralama AŞ, which was established on 11 February 2013 and the subsidiary of the Parent Participation Bank with 100% ownership is fully consolidated in the consolidated financial statements of the Participation Bank starting from 30 June TFKB Varlık Kiralama AŞ, which was established on 08 July 2014 and the subsidiary of the Parent Participation Bank with 100% ownership is fully consolidated in the consolidated financial statements of the Participation Bank from 31 December TF Varlık Kiralama AŞ and TFKB Varlık Kiralama AŞ which are wholly owned by the Parent Participation Bank were established to generate (leasing/rental) income by leasing assets back to the originating company which were taken over from the originating company; by issuing leasing certificate related to aforementioned leasing (rental) income and then transferring the related assets back to the originating company. 30. Operating leases As at 31 December 2015 and 2014, the future minimum lease payments under cancellable operating leases were payable as follows: 31 December December 2014 Less than one year 3,076 3,164 Between one and five years 70,232 80,550 More than five years 250, ,410 Total 323, ,124 63

68 31. Events after the reporting period None. 64