Turkiye Is Bankasi AS

Primary Credit Analyst: Goeksenin Karagoez, Paris (33) 1-4420-6724; goeksenin_karagoez@standardandpoors.com Secondary Contact: Magar Kouyoumdjian, London (44) 20-7176-7217; magar_kouyoumdjian@standardandpoors.com Table Of Contents Major Rating Factors Outlook Rationale Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 1

SACP bbb- + Support 0 + Additional Factors 0 Anchor Business Position bbb- Adequate 0 GRE Support 0 Issuer Credit Rating Capital and Earnings Adequate 0 Risk Position Adequate 0 Group Support 0 BB/Stable/B Funding Liquidity Average Adequate 0 Sovereign Support 0 Major Rating Factors Strengths: Solid business franchise in Turkey. Good earnings capacity. Granular loan book well-diversified by industry. Weaknesses: Geographic concentration in a relatively high risk operating environment. High asset-liability mismatches. Asset quality that is vulnerable to economic cycles owing to rapid growth. Outlook: Stable Standard & Poor's Ratings Services' outlook on Turkey-based Turkiye Is Bankasi (Isbank) is stable, reflecting that on the sovereign. Bank-specific factors leading to a revision of the ratings appear very limited. Accordingly, the ratings on the bank will be mainly driven by future rating actions on Turkey, if any. A positive rating action on the foreign currency rating on the sovereign would trigger a positive rating action on the ratings on the bank. Conversely, any negative rating action on the foreign currency sovereign would trigger a similar rating action on Isbank. Rationale The starting point for our ratings on Isbank is its 'bbb-' anchor, which is based on our view of the banking system in Turkey. We adjust the anchor by bank-specific factors as defined in our criteria to derive its stand-alone credit profile (SACP). We consider Isbank's business position to be "adequate" reflecting its solid commercial position as the largest WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 2

bank in Turkey and adequate management and strategy, while taking into account its lack of geographic diversification. We assess the bank's capital and earnings as "adequate" mainly based on our anticipation that its risk adjusted capital (RAC) ratio before adjustments will remain close to 7.5% over the medium term. Our assessment of the bank's risk position as "adequate" balances its adequate risk management and acceptable loss experience against its recent ambitious loan growth. Isbank's large, granular, stable and diversified customer deposit base supports our assessment of its funding as "average". Our assessment of the bank's liquidity as "adequate" is based on its adequate liquid assets. Anchor:'bbb-' Under our bank criteria, we use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating (ICR). Our anchor for a commercial bank operating in Turkey is 'bbb-'. The BICRA score is based on our evaluation of economic risk, which in our view is shaped by Turkey's economic volatility and structural imbalances, in particular its high current account deficit and net external debt. In our view, these factors expose the financial system and export-oriented industries to external shocks. With regard to industry risk, we view Turkey's overall institutional framework as positive, as evidenced by the authorities' increasingly proactive and prudent stance toward the industry. We also believe that the industry has largely stabilized and benefits from adequate pricing power without any market distortions. Nevertheless, banks' increased risk appetite adds to their funding risks that stem from a granular but short-term customer deposit base. The anchor is two notches above our foreign currency rating on Turkey because our BICRA methodology excludes a sovereign default scenario, which is incorporated into the ICR. The long-term rating on the bank is two notches lower than its SACP and mirrors the foreign currency rating on Turkey. This reflects our view that Isbank would likely not withstand a sovereign default. We view Isbank as having "high systemic importance" and classify the Turkish government as "supportive" toward the country's banking sector, as our criteria define these terms. However, this does not result in any uplift above the SACP because of the level of the foreign currency ratings on the sovereign. Table 1 Turkiye Is Bankasi AS Key Figures --Year-ended Dec. 31-- (Mil. TRY) 2012* 2011 2010 2009 2008 Adjusted assets 165,541.6 161,604.8 131,763.9 113,190.6 97,429.9 Customer loans (gross) 100,161.3 93,604.6 66,639.2 51,103.0 50,369.5 Adjusted common equity 17,299.9 16,377.2 14,466.0 12,826.9 9,928.2 Operating revenues 4,775.0 7,088.2 6,936.1 7,279.5 5,607.1 Noninterest expenses 1,881.0 3,481.2 3,203.1 2,694.7 2,928.3 Core earnings 1,661.1 2,667.5 2,982.2 2,372.4 1,461.5 *Data as of June 30. TRY--Turkish lira. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 3

Business position: The largest bank in Turkey in terms of assets Our assessment of Isbank's business position as "adequate" balances its solid competitive position and adequate management against its geographic concentration in Turkey. With a 14% market share in deposits and in loans on June 30, 2012, Isbank is the largest commercial bank in Turkey, with 1,197 domestic and 17 foreign branches (see table 3). It is a leading player in asset management with about Turkish lira (TRY) 51 billion of assets under management. Isbank's loan mix exhibits good diversity, well spread between retail, small and midsize enterprises (SMEs), and corporates. In our view, these features provide the bank with adequate business stability. However, at about 24% of its assets, Isbank has a high proportion of domestic government bills and bonds in its asset mix. Although we acknowledge the significant decrease in the share of securities in the last three years, Isbank remains vulnerable to interest rate volatility, as well as potential sovereign stress. We view the bank's management and strategy as adequate, reflecting its ownership structure and good track record of profitability. Among the large private Turkish banks, Isbank is the only one not linked to or controlled by an industrial group or family. Isbank's major shareholder is the pension fund of its own employees, with a 41% stake. A further 28% is held by the Republican People's Party. About 31% of its shares are publicly listed. In our view, the management has proven skills, capacity, and expertise to run the bank in line with its well-defined strategy. Table 2 Turkiye Is Bankasi AS Business Position --Year-ended Dec. 31-- (Mil. TRY) 2012* 2011 2010 2009 2008 Total revenues from business line (currency in millions) 4,775 7,088 6,936 7,279 5,607 Return on equity 18 15 20 21 16 *Data as of June 30. TRY--Turkish lira. N/A--Not applicable. Table 3 Five-Largest Turkish Banks Market Shares Turkiye Is Bankasi AS Türkiye Cumhuriyeti Ziraat Bankasi A.S. Turkiye Garanti Bankasi A.S. Akbank T.A.S. Yapi ve Kredi Bankasi A.S. Loans (mil TRY.) 98,222 69,506 87,444 79,773 71,611 Loans market share (%) 13.8 9.7 12.2 11.2 10.0 Deposits (mil. TRY) 99,433 106,592 87,421 82,677 66,279 Deposits market share (%) TRY--Turkish lyra. 13.7 14.7 12.1 11.4 9.2 Capital and earnings:capital build up is expected to support the budgeted growth Our assessment of Isbank's capital and earnings as "adequate" reflects our assessment that the bank's RAC ratio before adjustments will remain at about 7.5% over the next 12-18 months. It is also based on our view that Isbank will maintain its strong earnings, achieving adequate internal capital generation and a buffer for its expected losses. Isbank's consolidated regulatory capital ratio, at 14.4% on June 30, 2012, was comfortably above the regulatory minimum. The gap between the Tier 1 ratio and the RAC ratio primarily reflects our higher risk weighting for almost all asset classes and large nonfinancial equity participations. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 4

Our projections for Isbank's RAC ratio assume annual loan growth of about 15% in 2012 and 2013. We also expect the bank's net interest margin to remain close to 3.7% and its cost of risk (specific plus general) to remain close to 1.0% over the forecast period. We assume a 20% dividend payout ratio. We consider Isbank's earnings quality as "adequate", reflecting the bank's well diversified income mix and good profitability in the recent global downturn. Isbank also has a stable dividend stream from its nonfinancial equity participations, which represented 6% of operating revenues on average from 2009 to 2011. Isbank's core earnings to average assets stood at an average 1.9% between 2008 and 2011, in line with its peer group. Table 4 Turkiye Is Bankasi AS Capital And Earnings --Year-ended Dec. 31-- (%) 2012* 2011 2010 2009 2008 Tier 1 capital ratio 12.6 13.0 15.7 17.0 15.4 S&P RAC ratio before diversification N.M. 6.8 N.M. 7.4 N.M. S&P RAC ratio after diversification N.M. 6.4 N.M. 7.1 N.M. Net interest income/operating revenues 61.8 63.2 66.1 66.9 61.5 Fee income/operating revenues 18.0 19.8 17.8 17.2 21.9 Market-sensitive income/operating revenues 6.2 4.2 1.9 5.6 10.1 Noninterest expenses/operating revenues 39.4 49.1 46.2 37.0 52.2 Preprovision operating income/average assets 3.5 2.5 3.0 4.4 3.0 Core earnings/average managed assets 2.0 1.8 2.4 2.3 1.6 *Data as of June 30. N.M.--Not meaningful. Table 5 Turkiye Is Bankasi A.S. Risk-Adjusted Capital Framework Data (Mil. TRY) Exposure* Basel II RWA Average Basel II RW (%) Standard & Poor's RWA Average Standard & Poor's RW (%) Credit risk Government and central banks 56,135 0 0 32,267 57 Institutions 2,298 0 0 1,092 47 Corporate 65,799 0 0 87,372 133 Retail 40,581 0 0 45,921 113 Of which mortgage 7,712 0 0 4,164 54 Securitization 0 0 0 0 0 Other assets 3,984 0 0 7,214 181 Total credit risk 168,797 0 0 173,866 103 Market risk Equity in the banking book 4,704 0 0 51,769 1,101 Trading book market risk -- 0 -- 0 -- Total market risk -- 0 -- 51,769 -- Insurance risk Total insurance risk -- -- -- 0 -- WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 5

Table 5 Turkiye Is Bankasi A.S. Risk-Adjusted Capital Framework Data (cont.) Operational risk Total operational risk -- 0 -- 13,649 -- (Mil. TRY) Basel II RWA Standard & Poor's RWA % of Standard & Poor's RWA Diversification adjustments RWA before diversification 0 239,284 100 Total adjustments to RWA -- 16,430 7 RWA after diversification 0 255,714 107 (Mil. TRY) Tier 1 capital Tier 1 ratio (%) Total adjusted capital Standard & Poor's RAC ratio (%) Capital ratio Capital ratio before adjustments Capital ratio after adjustments 17,183 0.0 16,377 6.8 17,183 0.0 16,377 6.4 *Exposure at default. Securitisation Exposure includes the securitisation tranches deducted from capital in the regulatory framework. Exposure and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). RWA--Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital.try--turkish Lira. Sources: Company data as of Dec. 31, 2011, Standard & Poor's. Risk position: Loss experience after the recent downturn is a supportive factor We assess Isbank's risk position as "adequate." This balances increased credit risks owing to what we view as an ambitious lending strategy in the recent past with its loss experience in the recent downturn, which compares adequately with the bank's peers. Isbank's loan book grew by a high 30.4% in 2010 and a further 40% in 2011. The pace of growth, especially in 2011, was above that of the bank's domestic and foreign peers, even taking into account still-high inflation rates in Turkey. Isbank's current asset quality metrics are good as shown by its 1.9% nonperforming loan ratio and 100% provisioning coverage as at June 30, 2012. However, the performance of its unseasoned loans remains untested. We take comfort from the bank's loss experience following the contraction of the Turkish economy in 2009: Isbank saw its cost of risk peaking at 3.2% in 2009 but recovered most of its losses in 2010 and 2011. The bank's granular loan book and its adequate diversification by industry are mitigating factors (see chart 1). At year-end 2011, the share of the bank's 100 largest cash loans stood at a moderate 25% of its gross loans. Isbank has no significant open foreign currency position but high duration gaps between assets and liabilities leave the bank with interest rate risk. This risk factor is not captured by the RAC ratio. We take a positive view of a slowdown in lending in 2012, even though this was largely attributable to regulatory measures to curb systemwide credit growth. In our view, the bank will limit its annual lending growth to about 15% over the near term. Resumption of the lending strategy pursued in 2011 could lead us to revise our risk position assessment to "moderate", all other things being equal. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 6

Table 6 Turkiye Is Bankasi AS Risk Position --Year-ended Dec. 31-- (%) 2012* 2011 2010 2009 2008 Growth in customer loans 14.0 40.5 30.4 2.6 40.2 Total diversification adjustment/s&p RWA before diversification N.M. 6.9 N.M. 4.9 N.M. Total managed assets/adjusted common equity (x) 9.6 9.9 9.1 8.8 9.8 New loan loss provisions/average customer loans 1.8 0.4 0.3 3.2 2.2 Gross nonperforming assets/customer loans + other real estate owned 1.9 2.1 3.6 5.4 4.5 Loan loss reserves/gross nonperforming assets 100.0 100.0 100.0 100.0 100.0 *Data as of June 30. N.M.--Not meaningful. Chart 1 Funding and liquidity: Stable and granular but a short-term deposit base Isbank's funding is "average" and its liquidity is "adequate", in our view. The bank has a large, granular, stable deposit base that is well diversified between retail, SMEs, private banking, and corporates, and which in total makes up about two-thirds of its funding base. Isbank has historically enjoyed adequate access to funding from abroad. At about 11% of total liabilities, its reliance on such funds is moderate. Its loan-to-deposit ratio stood at 99% on June 30, 2012, in line WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 7

with that of the domestic industry (97%). The composition of Isbank's funding has changed significantly in the past two years and has become increasingly skewed towards shorter term sources, including repos. As at June 30, 2012, repos- mostly from the Central Bank of Turkey--accounted for 12.5% of the bank's liabilities. Although a similar trend was observable in the wider banking system, Isbank compares unfavorably with other large Turkish banks in terms of recourse to repos. We view this overreliance negatively, as it could limit the bank's ability to raise contingent funding in times of stress. Owing to the rapid growth of Isbank's loan book since 2009, the share of liquid assets (cash, central bank, interbank, and assets available for sale) decreased to 26% of total assets as at June 30, 2012 from 38% at year-end 2009. Even so, the bank's liquidity is adequate and its broad liquid assets covered its short-term wholesale funding by 2.2x on June 30, 2012. As with its peers, the short-term nature of the bank's funding results in large asset-liability mismatches. On June 30, 2012, about two-thirds of its liabilities had contractual maturities shorter than one month, whereas this was the case for only 25% for its assets. We note, however, that Isbank's deposit base proved stable in the most recent downturn and during the systemic crisis of 2001. Although we view the current level of liquidity as "adequate", increased reliance on short-term funding on a sustained basis could result in a revision of our assessment to "moderate". Table 7 Turkiye Is Bankasi AS Funding And Liquidity --Year-ended Dec. 31-- (%) 2012* 2011 2010 2009 2008 Core deposits/funding base 74.1 74.1 82.9 77.7 77.8 Customer loans (net)/customer deposits 98.8 93.2 72.8 67.0 75.7 Long-term funding ratio 84.2 80.9 88.2 85.7 80.2 Broad liquid assets/short-term wholesale funding (x) 2.2 1.9 2.6 2.0 0.9 Net broad liquid assets/short-term customer deposits 29.5 26.5 33.7 28.9 (1.7) Narrow liquid assets/3-month wholesale funding (x) 2.5 3.0 5.9 4.2 N/A Net short-term interbank funding/total wholesale funding 26.8 42.5 36.8 18.0 44.7 Short-term wholesale funding/total wholesale funding 69.8 83.6 100.0 99.9 99.7 *Data as of June 30. N.A.--Not available. N/A--Not applicable. N.M.--Not meaningful. External support: No notches of uplift to the SACP The long-term rating on the bank is two notches below its SACP at the same level as the foreign currency rating on Turkey. This reflects our view that Isbank would not withstand a sovereign default. We view Isbank as having "high systemic importance" and classify the Turkish government as "supportive" toward the country's banking sector, as our criteria define these terms. Additional rating factors: None No additional factors affect this rating. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 8

Significant accounting considerations Owing to its industrial equity participations, the analysis presented in this report is based on the unconsolidated accounts of Isbank which were prepared in accordance with Turkish Accounting Standards (TAS). In our view, this facilitates a better comparison with its peers. We acknowledge still prevailing differences between International Financial Reporting Standards (IFRS) and TAS. Yet, in the last decade, TAS have significantly converged towards IFRS owing to the efforts of the Turkish financial authorities. Today, the differences between the two standards are minimal and do not impede comparability or the quality and transparency of disclosure. Related Criteria And Research Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment: Turkey, May 1, 2012 Group Rating Methodology And Assumptions, Nov. 9, 2011 Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011 Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Anchor Matrix Industry Risk Economic Risk 1 2 3 4 5 6 7 8 9 10 1 a a a- bbb+ bbb+ bbb - - - - 2 a a- a- bbb+ bbb bbb bbb- - - - 3 a- a- bbb+ bbb+ bbb bbb- bbb- bb+ - - 4 bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b+ 8 - - bb+ bb bb bb bb- bb- b+ b 9 - - - bb bb- bb- b+ b+ b+ b 10 - - - - b+ b+ b+ b b b- Ratings Detail (As Of November 26, 2012) Turkiye Is Bankasi AS Counterparty Credit Rating Turkish National Scale Counterparty Credit Ratings History 04-May-2012 22-Feb-2010 23-Sep-2009 17-Nov-2008 01-Aug-2008 BB/Stable/B traa/--/tra-1 BB/Stable/B BB/Positive/B BB-/Stable/B BB-/Negative/B BB-/Stable/B WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 9

Ratings Detail (As Of November 26, 2012) (cont.) 04-Apr-2008 BB-/Negative/B 22-Feb-2010 Turkish National Scale traa/--/tra-1 23-Sep-2009 17-Nov-2008 Sovereign Rating Turkey (Republic of) Foreign Currency Local Currency Turkish National Scale Related Entities Milli Reasurans T.A.S. Issuer Credit Rating Turkish National Scale tra+/--/tra-1 tra/--/tra-1 BB/Stable/B BBB-/Stable/A-3 traa+/--/tra-1 traa/--/-- *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT NOVEMBER 26, 2012 10

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