Credit Opinion: Turk Ekonomi Bankasi AS Global Credit Research - 25 Mar 2015 Istanbul, Turkey

Ratings Category

Moody's Rating

Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment

Negative(m) Baa3/P-3 ba2 baa3

Contacts Analyst

Simone Zampa/London Irakli Pipia/London Yves Lemay/London Firat Bayraktar/London

Phone

44.20.7772.5454

Key Indicators Turk Ekonomi Bankasi AS (Consolidated Financials)[1]

Total Assets (TRY million) Total Assets (USD million) Tangible Common Equity (TRY million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Total Deposits (%) Source: Moody's

[2]12-14 [3]12-13 [3]12-12 [4]12-11 [4]12-10 Avg. 65,691.9 55,809.0 45,547.4 40,184.9 21,069.6 -28,100.5 25,975.8 25,521.0 21,277.6 13,690.4 -5,702.2 5,409.8 4,721.9 4,165.7 1,884.0 -2,439.2 2,517.9 2,645.8 2,205.7 1,224.2 -2.5 2.4 2.3 2.7 2.8 [5]2.5 9.5 10.1 10.7 10.3 8.8 [6]9.5 18.5 14.7 13.1 15.3 16.7 [5]18.5 4.5 2.4 1.0 59.3 23.4 22.9 120.3

4.1 2.4 1.2 58.3 21.6 25.9 111.3

4.5 2.2 1.3 59.7 17.5 29.0 103.4

4.3 1.3 0.7 75.1 25.8 28.6 115.0

4.2 [5]4.5 2.6 [6]2.4 1.7 [5]1.0 62.8 [5]59.3 29.5 [5]23.4 35.0 [5]22.9 100.9 [5]120.3

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP [3] Basel II; IFRS [4] Basel I; IFRS [5] LOCAL GAAP reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & LOCAL GAAP reporting periods have been used for average calculation

Opinion SUMMARY RATING RATIONALE Turk Ekonomi Bankasi AS's (TEB) Baa3/Prime-3 ratings are based on the bank's ba2 baseline credit assessment

(BCA) and our assumption of a high probability of parental support from BNP Paribas group which indirectly owns 72.3% of TEB. We assign a BCA of ba2 to TEB, which reflects the bank's (1) strengthened and broader retail and commercial banking franchise following its merger with Fortis Turkey some years ago; (2) improving deposit funding base, with modest reliance on wholesale funds; and (3) good asset quality. However, the bank's BCA is constrained by (1) its leaner (but adequate) Tier 1 capital level; (2) moderate operational efficiency and market share; (3) pressure on bottom-line profitability, and (4) considerable asset-liability maturity mismatches, notwithstanding large liquidity buffers. TEB'S RATINGS ARE SUPPORTED BY ITS MODERATE MACRO PROFILE As a domestic bank, TEB's operating environment is heavily influenced by domestic trends and the bank's Macro Profile is thus aligned with that of Turkey at Moderate. Turkish economic growth is expected to remain subdued at below 3%, reflecting the country's significant external financing needs, political uncertainty and volatile capital flows towards emerging markets, which is also reflected by the negative outlook on Turkey's Baa3 rating. The outlook on the banking system is also negative, reflecting challenges in the operating environment, although these challenges are partly mitigated by the banks' good risk - absorption capacity.

Rating Drivers - A challenging operating environment presents future risks for profitability - Sound liquidity with modest reliance on wholesale funds - Leaner core capitalisation compared to the system - Asset quality compares favourably to peers, albeit risks remain - Mid-sized commercial banking franchise with improving commercial leverage

Rating Outlook The stable outlook on Turk Ekonomi Bankasi's ratings reflects our view of resilient financials of the bank as well as high probability of parental support. The negative outlook on the FC deposit rating reflects the negative outlook on Turkish government bond rating.

What Could Change the Rating - Up Upward rating pressure could materialize over medium term following: (1) strengthening of core capitalisation supporting franchise expansion and asset growth; (2) improvements in efficiency translating into higher profitability; (3) sustained improvement in the domestic operating environment. Furthermore, any upgrade of BNPP's BCA could result in the upgrade of TEB's global local currency (GLC) deposit rating.

What Could Change the Rating - Down Downward pressure could be exerted on TEB's BCA in case of (1) the bank's profitability and efficiency indicators weaken; (2) material deterioration in asset quality or significant increase in risk appetite; (3) its capital growth fails to align with asset growth; and (4) its core deposit base growth fails to align with loan growth, resulting in higher reliance on market funding. Downward pressure would be exerted on the GLC deposit ratings in the event of (1) a weakening in TEB's BCA; or (2) any adverse changes in the parental support assumptions; or (3) a significant weakening of BNPP's creditworthiness. A lower ceiling for foreign currency deposit rating, as well as a significant downgrade of TEB's ratings, would exert downward pressures for the foreign currency deposit rating.

DETAILED RATING CONSIDERATIONS A CHALLENGING OPERATING ENVIRONMENT PRESENTS FUTURE RISKS FOR PROFITABILITY As at end-2014, TEB's net income increased by 13%, compared to last year. We compute TEB's NIM to be 4.5%

up from 4.1% at end 2013. The bank recorded pre-provision income over adjusted risk-weighted assets (RWA) of 2.4% and net-income over adjusted RWA of 1.1%, in line with 2.3% and 1.1% respectively in 2013. TEB's efficiency metrics, with the cost-to-income ratio at 59.3% at end-2014, is still weaker than its peers and the system average, where the larger banks are benefiting from economies of scale. While we believe that TEB has further franchise improvement potential, and its commercial leverage is likely to improve only moderately due to headwinds from (1) a slowdown in real GDP growth, (2) higher cost of funding; and (3) rising consumer-protection pressures which could affect pricing power. However, TEB's established track record in SME banking should enable the bank to adapt to the evolving regulatory environments and increasing competition. SOUND LIQUIDITY WITH MODEST RELIANCE ON WHOLESALE FUNDS We consider TEB's liquidity as adequate, although the system's typically short-term deposit profile represents an inherent systemic risk - in general they have a high roll over rate. As at end-2014, the bank has a gross total loan to deposit ratio (LTD) of 120%, in line with its local peer group and the system average. Retail deposits fund 60% of TEB's balance sheet whereby 85% matures within three months. The bank mitigates these risks by holding an adequate portfolio of liquid assets that account for around 24% of its total assets, of which about one third are in Turkish government securities. While their liquidity during times of stress is untested, these securities are freely traded and repo eligible with the central bank. TEB's balance sheet is funded by 37% in foreign-currency, including of the deposits where 31% are in foreign currency. Due to lower foreign currency assets at 26%, TEB hedges its on balance sheet short position against FX volatility. The bank's market funding base is relatively diversified and parental funding, in the forms of subordinated debt and borrowings, represents 36% of total market funding as at end-2014. LEANER CORE CAPITALISATION COMPARED TO THE SYSTEM As at end-2014, TEB's consolidated Basel III total capital adequacy ratio (CAR) was 14%, while its Tier 1 capital ratio was 10.3%, comparing unfavourably with its local peer group, and also with the system averages of 16.3% and 14% respectively. While the bank comfortably meets the minimum target regulatory CAR of 12% (for banks targeting expansion via new branch openings), we note that TEB's capital is of comparatively lower quality, since it benefits from the FX-subordinated capital instruments; (3% of balance sheet) with maturities between 2015-2024. We believe that the bank's future internal capital generation will be key in keeping pace with the continued strong growth in the system. That said, we acknowledge the shareholders' commitment to supporting the bank's adequate capitalisation and growth prospects. ASSET QUALITY COMPARES FAVOURABLY TO PEERS, ALBEIT RISKS REMAIN As at end-2014, TEB reported a gross non-performing loan (NPL) ratio of 2.5% which compares favourably to the 2.8% system average. In addition, we note that about 2% of TEB's loans were fewer than 90 days delinquent and/or whose payment terms had been modified and were not captured by the NPL ratios, indicating the potential for further asset-quality deterioration as they season. The bank's NPL coverage ratio is 64%, versus the system average of 74%. We also note that in the first nine months of 2014, TEB sold TRY175 million of non-performing loans, amounting to less than 1% of its total loans. We expect that asset quality will decline marginally and provisioning requirements will increase as the high growth and comparatively higher-risk loan book seasons further. To reflect this, we adjust the asset risk score down to ba1. MID-SIZED COMMERCIAL BANKING FRANCHISE WITH IMPROVING COMMERCIAL LEVERAGE TEB belongs to the second tier of Turkish commercial banks, with loans and deposits market shares at around 4%. The bank has always focused on corporate and commercial banking and is particularly strong in SME lending. The merger of TEB with Fortis-Turkey has allowed the bank to expand into retail banking. As at end-2014, SME loans represent 47% of the performing loan book, while retail and corporate segments represents 31% and 22% respectively. We note that housing and consumer loans represent 49% and 34% of total retail loans, respectively, while credit cards represent 13%.

Notching Considerations AFFILIATE SUPPORT We assign a global local-currency deposit rating of Baa3/Prime-3 to TEB. The rating is supported by (1) TEB's BCA of ba2; and (2) a high likelihood of parental support on the back of BNPP's BCA of baa1. Our high parental support assumptions from BNPP in the event of need are based on the latter's 68.5% ownership of TEB and on the significant brand association of TEB with BNPP (jointly controlled by Colakoglu Group 27.5% ownership). TEB's foreign-currency deposit ratings are at Baa3/Prime-3, at the same level as its GLC deposit rating and the country's foreign-currency deposit ceiling. The outlook on the bank's foreign currency deposit rating is negative, reflecting the negative outlook on Turkish government bond rating. About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity.

Rating Factors Turk Ekonomi Bankasi AS

Macro Factors Weighted Macro Profile Financial Profile Factor

Moderate

Historic Ratio

Macro Adjusted Score

Credit Trend

Assigned Score

Key driver #1

2.5%

baa2

↓

ba1

Loan growth

9.5%

ba3

←→

ba3

Nominal leverage

1.0%

ba1

←→

ba1

Expected trend

Solvency Asset Risk

Problem Loans / Gross Loans Capital

TCE / RWA Profitability

Net Income / Tangible Assets Combined Solvency Score Liquidity Funding Structure

Market Funds / Tangible Banking Assets

ba1

ba2

23.4%

ba1

←→

ba1

Extent of market funding reliance

22.9%

ba1

←→

ba1

Expected trend

Liquid Resources

Liquid Banking Assets / Tangible Banking Assets Combined Liquidity Score

ba1

ba1

Key driver #2

Financial Profile

ba2

Qualitative Adjustments

Adjustment

Business Diversification Opacity and Complexity Corporate Behavior

0 0 0

Total Qualitative Adjustments

0

Sovereign or Affiliate constraint

Baa3

Scorecard Calculated BCA range

ba1 - ba3

Assigned BCA

ba2 2

Affiliate Support notching Adjusted BCA Instrument Class

Deposits

baa3 Loss Given Additional Failure notching notching

0

0

Preliminary Rating Assessment

Government Support notching

Local Currency rating

Foreign Currency rating

baa3

0

Baa3

Baa3

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on http://www.moodys.com for the most updated credit rating action information and rating history.

© 2015 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S PUBLICATIONS”) MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH

THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s Publications. To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S. To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.” For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are

continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for “retail clients” to make any investment decision based on MOODY’S credit rating. If in doubt you should contact your financial or other professional adviser. For Japan only: MOODY'S Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of MOODY'S Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.