Is Yatirim Menkul Degerler

Corporate outlook

Regulatory changes to create opportunities

Investment companies

Is Yatirim Menkul Degerler’s (ISY) consolidated net profits for the first nine

4 December 2014

months of 2014 were 14% lower than those for the comparable period of the previous year, due to weak brokerage results, lack of equity IPOs and Is Private Equity realisations, which had buoyed 2013 results. Q4 trading

Price

TRY1.2

has started well, with market volatility returning, and an equity IPO and three M&A deals have completed. As one of the leading Turkish investment banks, ISY is well positioned to benefit from the changing regulatory environment in Turkey and any recovery in sentiment towards emerging markets. Its valuation remains undemanding, with a P/E ratio for 2014 of 6.1x (peer average 13.1x) and P/BV of 0.7x for 2014 (peer average 0.8x).

Equity (30 September 2014)

Market cap

TRY398m TRY519m

Shares in issue

332m

Free float

28%

Code

ISMEN

Primary exchange

BIST

Secondary exchange Year end

Revenue Attributable (TRYm) profit* (TRYm)

EPS* (Kr)

DPS (Kr)

P/E (x)

Yield (%)

12/12

311.9

64.5

19.4

6.3

6.2

5.3

12/13

344.7

70.8

21.3

6.9

5.6

5.8

12/14e

315.0

65.0

19.6

6.9

6.1

5.8

12/15e

338.0

77.4

23.3

7.5

5.1

6.3

N/A

Share price performance

Note: *Attributable profit and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Nine-month net profits fall 14% ISY’s consolidated net profit for the first nine months of 2014 fell 14% compared

%

with the comparable period of the previous year, with weak brokerage on the back of local and geopolitical uncertainty, lack of equity IPOs and less private equity gains being the main culprits for the decline. Q414 activity started well thanks to volatility-induced trading after market concerns over the ending of US quantitative easing.

Abs

New regulation likely to benefit ISY By 1 July 2015 new capital market regulations should be fully implemented in Turkey, which is expected to lead to the smaller and less well-capitalised participants leaving the industry or being taken over by the larger players. The market expects up to 50% of Turkey’s 90 brokers will leave, which should enable ISY to win market share and increase size and profits. ISY expects that H115 will see many market participants decide on their course of action, which should focus attention on the sector and its long-term prospects.

Valuation: Estimates largely unchanged and valuation attractive Our net profit forecasts for 2015 remain largely the same as those we made after Q2 results, when we increased our 2014 net profit figure by 13%. While Q3 was disappointing, Q4 has started well; an IPO and three M&A deals have completed recently, which should boost income. On conventional P/E ratio and P/BV considerations and cost of equity calculations, the shares are less highly rated than international peers, even after allowing for the greater risks in the Turkish economy.

Rel (local) 52-week high/low

1m

3m

5.3

(4.0)

(5.7)

(0.8)

(8.1)

(18.8)

TRY1.42

12m

TRY1.12

Business description Is Yatirim Menkul Degerler (also known as Is Investment) offers brokerage, corporate finance, investment advisory services and portfolio management services. It also advises on IPOs.

Next events FY14 results

February 2015

Analysts Peter Thorne

+44 (0)20 3077 5765

Martyn King

+44 (0)20 3077 5745

[email protected] Edison profile page

Is Yatirim Menkul Degerler is a research client of Edison Investment Research Limited

Investment summary Turkey’s leading investment bank ISY (also known as Is Investment) is Turkey’s leading investment bank. It was established in 1996 as the investment banking arm of Isbank Group, the largest private bank in Turkey by assets, loans, deposits and profits in 2014. ISY offers a wide variety of investment services, such as brokerage, investment advisory, asset management, corporate finance and research, and has grown to become the market leader in equity and corporate bond IPOs and equity, derivatives, equity margin trading, FX margin trading, fund management and securities lending and borrowing.

Current trading conditions are challenging Turkish capital markets face challenging times, like those in most other emerging markets, with the prospect that rising US interest rates after the end of QE will lead to investor flight from riskier assets in emerging markets such as the Turkish capital markets. The country has also suffered from concerns over geopolitical risks, thanks to its proximity to conflicts in Russia and Ukraine as well as Syria and Iraq, while the prospect of lower growth in its major trading partner in Europe has added additional headwinds. All these concerns have harmed activity in the financial markets, although in the global October market sell-off there was a notable uptick in activity.

Regulatory change to give expansion opportunities The deadline to comply with the regulatory changes is July 2015. They will require higher capital standards for companies working in the Turkish capital markets. This is expected to reduce the number of participants significantly and so give ISY the opportunity to expand its already leading position in many of the markets in which it operates.

Valuation: Undemanding There are no similar pure investment banks quoted on the Turkish market, which makes valuation estimations based on peer analysis somewhat problematic. Using European banks with large investment bank operations, such as the big Swiss banks and Deutsche Bank, it does appear that ISY is less highly rated than the European peers, especially after allowing for its likely greater longterm growth prospects. Using a variant of the Gordon's growth model for banks, it is possible to calculate that the market is applying a cost of equity of 18% for ISY but just 9% for these European banks. The 9% differential is greater than the 6% point difference between Turkish and US government bond yields, implying that the market is more than allowing for Turkish risks in evaluating ISY shares.

Is Yatirim Menkul Degerler | 4 December 2014

2

Company description Main business segments ISY is the investment banking subsidiary of Isbank, the largest bank in Turkey, which owns 65.7%, with another 5% of its shares owned by companies connected to Isbank. The free float is around 29.3%. From the outset, ISY has benefited from Isbank’s widespread sales and distribution network and has been the leading Turkish investment bank for many years. It currently employs around 400 people, has 11 branches in Turkey and had equity capital at the end of September 2014 of TRY916m (US$407m), including TRY375m (US$167m) of minority interests. Exhibit 1: ISY market share and ranking for nine months ended 30 September 2014 Market share 7.6% 10.9% 19.7% 21% 12.4% 19% 23%

Equity trading Derivatives trading Securities lending & borrowing Debt offerings FX margin trading Pension funds Mutual funds

Position 1 1 N/A 1 1 1 1

Source: ISY

ISY earns revenue from its balance sheet in the form of interest income and trading, and from commissions. In the last two years commission income has averaged around 40% of total revenue. Exhibit 2: ISY revenue sources for the first nine months of 2014 Other Commissions Interest income from Asset Management 1% fixed income securities 8% 12% Corporate Finance NPL Management 4% Revenues 8% Brokerage 27%

Equity margin trading 13%

Derivative income and arbitrage 18% Prop book trading 9%

Source: ISY

One feature of ISY is its use of specialist subsidiaries to undertake specific activities other than the more normal brokerage and corporate finance activities. Some of these are partially owned and enjoy their own quotes on the Istanbul stock exchange. The following table shows details on these subsidiaries and their activities as well as details of the parent company. The sector name quoted in the table is the one used in the 2013 annual report and in most cases is indicative of the activities carried out by the segment, but it should be noted that “portfolio management” refers to the management of pension and mutual fund assets for investors while “asset management” refers to the management of bank non-performing loans acquired from Turkish banks on behalf of shareholders. ISY consolidates the assets and liabilities and revenues and expenses of these group companies, including those less than 50% owned, on the basis that it has significant control over all of them and deducts the minority interests from net assets and net profits to give the resulting figures for net asset and profits attributable to ordinary shareholders.

Is Yatirim Menkul Degerler | 4 December 2014

3

Exhibit 3: ISY group companies 2013 Sector name

Securities Brokerage Investment Trust Portfolio Management Private Equity Asset Management Total Elimination

Company name

Is Yatirim Menkul Degerler Is Yatirim Ortakligi Anonim Sirketi Is Asset Management Is Girisim Efes NPL Asset Management

Bloomberg Ownership code ISMEN:TI ISYAT:TI ISGSY:TI

100.0% 27.9% 70.0% 29.1% 74.0%

Net profit 59.0 4.4 10.5 66.9 1.6 142.5 -17.1 125.3

2013 (TRY) Minority Profit for ordinary interests shareholders 0.0 59.0 3.1 1.3 3.1 7.3 47.0 20.0 0.3 1.4 53.4 89.0 1.1 -18.2 54.5 70.8

% 66% 1% 8% 22% 2% 100% -20% 80%

Source: ISY. Note: Ownership percentages at end 2013.

Is Investment Trust (ISYAT) – ISYAT was first established in 1995 before listing on the Istanbul Stock Exchange in 1996. Since then, its portfolio has grown to become the largest investment trust in Turkey (FY13 portfolio size: TRY261m), representing c 53% of the Turkish investment trust market. ISYAT invests in capital market instruments such as equities, fixed income securities, gold and other precious metals. It was previously required to invest at least 25% of its portfolio in equities, but following restructuring in early 2013 this restriction was removed and there is now no minimum required investment in equities and at 31 December 2013 some 78% of its portfolio was in debt securities. In 2013, the trust contributed TRY1.3m to ISY’s consolidated net profit. Is Private Equity (Is Girisim, ISGSY) – ISGSY is a listed private equity fund, of which ISY owns 29.1%. It invests directly in Turkey’s growing mid-cap private companies. At 31 December 2013 shareholders’ equity was TRY268.7m. Since its inception in 2004, the trust has completed 11 exits at an average IRR of 26.5% and a cash exit multiple of 2.3x in US dollar terms. On 30 July 2013, the company undertook a large realisation when it sold its 20% stake in Aras Kargo for TRY100m, having acquired it on 15 November 2011 for TRY17.5m. Is Asset Management – this subsidiary is 70% owned by ISY and was founded in October 2000 to provide discretionary and non-discretionary asset management services to investors. In 2013, the company generated revenues of TRY22.2m (2012: TRY17.5m) and contributed TRY7.3m (2012: TRY6.7m) to ISY’s consolidated net profit. Total assets under management (AUM) increased 15% to TRY14.4bn in 2013 (2012: TRY13.1bn). The company has a 23.4% share in the market for mutual funds and a 19% share of that for pension funds. Asset Management: Efes NPL (non-performing loans) – the subsidiary was established in early 2011 with the purpose of buying and selling receivables and other assets from other financial institutions, participation banks and deposit banks. In 2013, the company generated TRY1.4m of net profit to ISY shareholders (2012: loss of TRY3.6m). Is Yatirim Menkul Degerler (ISY) ISY is the parent entity and undertakes the vast majority of the equity and bond brokerage and corporate finance activities of the group. It has broadly maintained its market share in equities, derivative and bills and bonds over the last six years, as we show in the following chart. In 2013 there was a leap in equity trading on the Turkish exchange, from which ISY benefited. With regard to bills and bonds, ISY’s market share is lower than peers, because it does not act as intermediary for its parent bank’s (Isbank) transactions. Unlike its competitors, ISY’s business model is to operate as a separate entity from its parent company.

Is Yatirim Menkul Degerler | 4 December 2014

4

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

Exhibit 5: ISY’s market share 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2007

ISY market share

Trading volume (TYR' bn)

Exhibit 4: Trading volumes in Turkey

2007

2008

Equity

2009

2010

2011

Derivatives

2012

2013

2008

2009

Equity

Bills & bonds

Source: Company data, ISE

2010

2011

Derivatives

2012

2013

Bills & bonds

Source: Company data, ISE. Note: Bills & bonds market share refers to total market (including banks). Market share among brokerage houses is around 6% to 7%.

In addition to brokerage, ISY earns revenues from equity and debt issuance. The market for equity IPOs remains relatively subdued in Turkey, with 19 issues in 2013 compared with 30 in 2012, as shown in the chart below, but the average size was higher so the amount raised was twice that of 2012. ISY participated in two of these. The market for debt issues has been somewhat more buoyant following regulatory changes in 2010 to revive the market and recent growth has been strong. ISY has participated significantly in this market growth and in 2013 was responsible for 23% of total offerings, including 28% of IPOs. Exhibit 7: Turkish debt instrument IPO market 60

30

4

25

50

25

40

20

30

15

20

10

10

5

20

3

15

2

10

1

5

0

0

2006

2007

2008

2009

Amount raised

2010

2011

2012

2013

Number of equity IPOs

Source: Company data, ISE

TRYbn

30

0

2010

2011

Amount raised

2012

2013

Deals completed

5

Deals completed

TRYbn

Exhibit 6: Turkish equity IPO market

0

Number of debt offerings

Source: Company data, ISE

ISY completed the IPO of Pegasus Airlines in April 2013, which was the largest private-sector IPO in recent years. The equity IPO market in 2014 continues to be challenging for ISY as a number of deals were put on hold during the year. Nevertheless, ISY has recently completed the IPO of Ulusoy Elektrick and three M&A deals in the last quarter of 2014. ISY expects two further M&A deals will be completed by year end.

New regulation driving sector consolidation Recent market conditions have continued to create a number of challenges for Turkey’s investment banks. Concerns around the European sovereign debt crisis and slowing global GDP growth have led to reduced risk appetite and client activity, while increasing regulation has led to higher funding costs for banks. Together, these factors have squeezed margins and profitability and led to a sizeable consolidation of the investment banking sector throughout Europe.

Is Yatirim Menkul Degerler | 4 December 2014

5

While Turkey’s markets have rallied strongly, trading volumes have remained subdued and many IPOs are still being held back from the market. As with other emerging markets, Turkey has suffered from concerns that when global interest rates do finally begin to rise investors will sell what they consider to be riskier assets such as those in emerging markets. Sentiment towards Turkey has also suffered from geopolitical concerns in some of its neighbours, including Russia, Ukraine, Iraq and Syria. Slowing growth in China and its trading partners in Europe is also cause for concerns. Together, all these factors have resulted in subdued financial markets in Turkey, although occasionally there are bursts of market activity such as that experienced in October 2014 ahead of the projected ending of quantitative easing in the US. The Capital Markets Board of Turkey (CMB) has introduced three new capital requirements levels to regulate the Turkish investment banking market, which are as follows:  Full licence: minimum equity requirement of TRY25m. Direct counterparty, broad custody service and IPO underwriting.  Partial licence: minimum equity requirement of TRY10m. Execution of orders on behalf of clients, only best effort for IPOs, limited custody service and portfolio management.  Limited licence: minimum equity requirement of TRY2m. Reception and only transmission of orders, investment advisory. Exhibit 8: Proposed new regulatory capital requirements Full licence Partial licence Limited licence

Number of existing brokers 29 25 42

Equity market share 67% 19% 14%

Derivatives market share 55% 25% 7%

Fixed income market share 97% 2% 1%

Source: Company data. Note: Data as at 31 December 2012.

Faced with this lower profitability and pending new regulation, it is expected that Turkey’s investment banking sector is likely to undergo a similar level of consolidation to that seen in Europe. There are currently around 90 brokers operating in Turkey, but the market expects this could fall by up to 50% if the new regulations are imposed. The new requirements are due to come into force in H215. ISY believes that it will naturally win market share as the smaller players exit the market. It has said that it is prepared to acquire a business, but only when it brings the company business that it would not win naturally.

Is Yatirim Menkul Degerler | 4 December 2014

6

Nine-month 2014 trading and outlook Key market indices Turkish bond and equity capital markets were comparatively subdued in Q3, although the quarter did witness some more strength in the US dollar vs the Turkish lira, as we show in the following charts. Exhibit 9: Istanbul Stock Exchange 100 Index flat in Q314 (TRY) 95,000 90,000 85,000 80,000 75,000 70,000 65,000 60,000 31/12/2012

31/03/2013

30/06/2013

30/09/2013

31/12/2013

31/03/2014

30/06/2014

30/09/2014

Source: Bloomberg

Exhibit 10: Turkish two-year government bond yields flat in Q314 (%) 13.7 11.7 9.7 7.7 5.7 3.7 1.7 31/12/2012

31/03/2013

30/06/2013

30/09/2013

31/12/2013

31/03/2014

30/06/2014

30/09/2014

30/06/2014

30/09/2014

Source: Bloomberg

Exhibit 11: The Turkish lira weakened vs the US dollar in Q314 2.40 2.30 2.20 2.10 2.00 1.90 1.80 1.70 31/12/2012

31/03/2013

30/06/2013

30/09/2013

31/12/2013

31/03/2014

Source: Bloomberg

In the first nine months of 2014, ISY’s attributable profits declined by 14% and its operating results by 10%, as we show in the following table.

Is Yatirim Menkul Degerler | 4 December 2014

7

Exhibit 12: ISY nine-month results TRY m Trading revenues Interest and derivative income Trading revenues and interest and derivative income Commissions Equities Derivatives Corporate finance Portfolio management Other commissions Commissions received Commissions paid Net commission income Other operating income Revenue Operating expenses Other expenses Operating profit Net profits accounted under equity method Non-operating income Pre-tax profit Taxation Profit after tax Minority interests Attributable profit Is Investment Only Is Investment Trust (28.9%) Is Private Equity (29.1%) Is Asset Management (70.0%) Efes NPL Asset Management (74%) Elimination Adjustments Profit attributable to shareholders

9m13 74.0 43.1 117.0

9m14 22.2 105.3 127.5

9m14 on 9m13 -70% 144% 9%

30.7 25.8 20.7 21.9 2.7 101.8 -2.2 99.6 18.5 235.2 134.8 1.0 99.4 4.3 23.9 127.6 (11.8) 115.8 (67.6) 48.2 42.7 2.4 22.0 5.3 -2.4 -21.8 48.2

26.0 22.5 8.7 19.4 2.9 79.5 -3.2 76.3 31.7 235.4 146.1 (0.3) 89.6

-15% -13% -58% -12%

(16.5) 73.1 (6.7) 66.4 (25.0) 41.4 36.2 4.4 3.6 5.0 6.5 -14.3 41.4

-22% 49% -23% 71% 0% 8% -10% -43% -43% -14% -15% 84% -84% -6% -370% -34% -14%

Source: ISY, Edison Investment Research

Income from interest income and trading rose 9% year-on-year, but commission income overall fell 23% year-on-year as a result of a decline in activity brought about by worries over emerging markets, geopolitical uncertainties and the political situation in Turkey. The 2013 results also benefited from a large private equity gain, but it should be noted that ISY only owns around 29% of this gain so the effect at the attributable profit level is less than it is in the trading revenues line, which includes 100% of the gain. There is a large divergence in non-operating income/(expense) between 9m13 and 9m14. There are two reasons for this:  In 9m13 the currency translation gains were accounted as a non-operating item, whereas in 9m14 they were placed in arbitrage income, which is part of interest and trading income). This is a more accurate way to display the gains and reflects the arbitrage nature of the gain.  There were more corporate bill offerings in 2014, which are increased finance costs and are included in non-operating income. Looking forward to the full year, we expect a slight pick-up in activity levels in Q4, with the quarter having started well following a flurry of activity on concerns over the end of quantitative easing in the US. Equity markets have shaken off some of these worries but still remain fragile. ISY has completed the IPO of Ulusoy Elektrik (issue size TRY168m) in November as a sole book runner for both domestic and international investors. ISY has also completed three M&A deals in Q4 and expects two further deals to be completed by the year end. Even so, we have conservatively taken down our forecasts for 2014 by around 8% at the attributable profit level, but have left our 2015 forecasts largely unchanged, as we show in the table below.

Is Yatirim Menkul Degerler | 4 December 2014

8

Exhibit 13: ISY earnings revisions

12/14e 12/15e

Revenue (TRYm) Old New 314.0 315.0 336.9 338.0

% Chg 0% 0%

Attributable profit (TRYm) Old New % Chg 70.4 65.0 -8% 76.9 77.4 1%

Old 21.2 23.2

EPS (kr) New 19.6 23.3

% Chg -8% 0%

Source: Edison Investment Research

Experienced management team ISY’s management team brings many years’ experience in Isbank, with many working at ISY since its inception. The executive board consists of seven assistant general managers, each with a specific area of responsibility. In February 2013, İlhami Koç stepped down as the general manager of ISY, following his appointment as the new chairman of ISY and the deputy CEO of Isbank. He was replaced by A Erdal Aral. Mr Aral graduated from the Economics Department of Marmara University in 1989 and received his master’s degree in international banking from Loughborough University of Technology. Since starting his career at Isbank in 1989, he has served in various units and branches, before being appointed head of treasury in 2002. He was later promoted to corporate branch manager of Isbank–Kozyatağı corporate branch in 2008 and deputy chief executive at Isbank in 2011.

Sensitivities Emerging markets association Turkey is an emerging market and investors are attracted to it for the long-term growth prospects that such a market brings. ISY is a well-connected investment bank operating at the heart of the Turkish financial markets and so is a geared way of exploiting that long-term potential, as the longterm growth in financial markets would normally outperform growth in the economy. However, in the immediate future Turkey’s status as an emerging market has a negative connotation with investors. There are concerns that when developed world interest rates rise investors based in such countries may withdraw money from emerging markets, including Turkey, because they were only attracted by the higher potential returns on offer there. This would be negative for ISY, whose fortunes depend, as do those of investment banks elsewhere in the world, on active financial markets and ones in which asset prices are generally rising. Moreover, the Turkish economy could also suffer from an exit of foreign investment, which would put further pressure on Turkish financial markets, especially equities in which ISY is heavily involved. Turkey has been described as one of the “fragile five” emerging markets, which are countries with large current account deficits and so they rely heavily on external financing, so Turkey has been particularly vulnerable to this sentiment.

Geopolitical risks Turkey is surrounded by countries in political conflict, including Russia and Ukraine to the north and Iraq and Syria to the south. These are potential markets for Turkey and the ongoing negative political situation in these conflict zones is not good for the Turkish economy or its financial markets.

Financial market activity As primarily an investment bank, ISY depends crucially on the level of activity in financial markets as it earns revenues from its clients trading in equities, bonds and currencies, as well as fees from initial and secondary offering in shares and bonds. In the long term this is attractive to ISY as

Is Yatirim Menkul Degerler | 4 December 2014

9

activity should rise as the economy expands, but activity levels can dip and ISY revenues and profits will suffer as a result. ISY does have some diversification from its trading activities in its asset management and private equity operations, with the former earning fees from its assets under management irrespective of the level of activity and the latter investment gains. However, both of these are related to activity levels, with falling asset prices frequently associated with declining activity levels and private equity capital gains easier to earn when markets are rising. ISY does have some diversification away from trading activities, but even these are related to the same underlying factors.

Competitive and regulatory environment With a population of 76 million, the 17th largest economy in the world and a capitalist economy the Turkish market has inevitably attracted the attentions of global investment banks, which will compete with ISY for the particularly lucrative aspects of investment banking business, especially global issues of equities and bonds. However, as a local with strong political connections, ISY is well placed to compete with these firms. Forthcoming regulatory changes should result in some of the smaller, less well capitalised brokers leaving the markets and this presents an opportunity for ISY to grow by the acquisition of firms or their market shares.

Risk management Exposure to credit, operational and counterparty risk arises through brokerage activities, while market risk arises through its prop book. ISY monitors intra-day, overnight and stop-loss limits to control the market risk on its prop book. The proprietary trading nominal limit is 50% of equity in the Turkish lira fixed income portfolio and 15% of equity in the Turkish lira equity portfolio. Nominal limits are monitored, although the primary limit indicating risk exposure is value at risk (VaR). The board of members has limited the aggregated VaR for its prop book to TRY3m, which is less than 1% of ISY’s shareholders’ equity, with further limits placed on individual traders and desks. ISY’s VaR is calculated using historical simulation and was between TRY0.6-1m (99% confidence level) in 2013.

Valuation As the only listed investment house on the Turkish national index, ISY lacks a clear comparator peer group. All Turkish retail banks have investment banking divisions, but do not report with sufficient granularity to be used as valuation comparators, and the retail banks themselves are subject to different dynamics based on loan growth and provisions. Consequently, we use a European banking peer group, noting the differences in Turkish capital markets. ISY is currently trading on a FY14e P/E of 6.1x (peer group: 13.1x) and dividend yield of 5.7% (3.0%). This is a notable discount to its European banking peer group. Exhibit 14: Ratings P/E ratio

Is YATIRIM MENKUL DEGERLER A Average BNP PARIBAS UBS AG-REG CREDIT SUISSE GROUP AG-REG SOCIETE GENERALE BARCLAYS PLC DEUTSCHE BANK AG-

Price to book value 2014e 2015e 0.7 0.6

Dividend yield % 2014e 2015e 5.8 6.3

Return on equity % 2014e 2015e 11.8 12.5

Return on assets % 2014e 2015e 1.3 1.5

2014e 6.1

2015e 5.1

13.1 10.3 16.2 15.5

9.8 9.1 13.3 9.5

0.8 0.8 1.3 1.0

0.8 0.8 1.3 0.9

3.0 2.9 3.3 2.5

4.3 4.6 4.8 4.0

5.1 2.4 7.9 5.9

7.9 8.2 9.4 9.7

0.2 0.1 0.4 0.3

0.4 0.4 0.6 0.5

9.9 12.0 14.8

8.4 9.5 9.0

0.7 0.7 0.6

0.6 0.7 0.6

3.6 2.8 2.7

5.4 3.7 3.4

6.3 5.0 3.1

7.5 6.9 6.0

0.3 0.2 0.1

0.3 0.3 0.3

Source: Bloomberg, Edison Investment Research. Note: Priced as at 3/12/2014.

Is Yatirim Menkul Degerler | 4 December 2014

10

Another way to look at the valuation of ISY is to estimate the cost of equity that investors are using in their valuation of ISY and compare it with other banks. This can be determined by using a variant of the Gordon’s growth model for banks, in which the cost of equity is calculated as follows: Cost of equity =

ROE − growth rate P/BV

+ growth rate

Taking 2015 estimates, if we assume a 5% long-term growth rate, the COE for the broader bank group in the table above, which is implied by a forecast ROE of 8% and P/BV of 0.8x, is c 9%. For ISY, using the same assumed 5% growth rate, the 0.6x P/BV and 12.5% ROE imply a COE of c 18%. This c 9% premium risk weighting, attached to a leading participant in a long-term growth market, is significant and is higher than the 6% premium of Turkish 10-year government bond yields over their US counterparts. Exhibit 15: Financial summary Year end 31 December PROFIT & LOSS Revenue Operating expenses Gross Profit Other operating Income Other operating Expenses Operating profit Other income Net financials Exceptionals Profit Before Tax (norm) Profit Before Tax (FRS) Tax Profit After Tax (norm) Profit After Tax (FRS) Minority interest Net income (norm) Net income (FRS) Average Number of Shares Outstanding (m) EPS - normalised fully diluted (kr) EPS - IFRS (kr) Dividend per share (kr) BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Investments Trade receivables Cash and equivalents Other Total Assets Current Liabilities Short term borrowings Trade payables Other financial liabilities Other Long Term Liabilities Long term borrowings Other long term liabilities Total Liabilities Equity attributable to ordinary shareholders Minority interest Total shareholders' equity Number of shares at year end (m) NAV per share ROE ROA

TRYm

2012 IFRS

2013 IFRS

2014e IFRS

2015e IFRS

311.9 (193.5) 118.4 10.1 (4.8) 123.7 5.4 20.5 4.2 149.6 153.8 (16.5) 133.2 137.4 68.6 64.5 68.7 332 19.4 20.7 6.3

344.7 (247.2) 97.5 5.7 (10.0) 93.2 4.3 39.7 0.0 137.2 137.2 (11.8) 125.3 125.3 54.5 70.8 70.8 332 21.3 21.3 6.9

315.0 (195.1) 119.9 0.0 0.3 120.20 (16.5) 0.0 0.0 103.7 103.7 (8.7) 95.0 95.0 30.0 65.0 65.0 332 19.6 19.6 6.9

338.0 (209.6) 128.4 0.0 0.0 128.4 0.0 0.0 0.0 128.4 128.4 (11.0) 117.4 117.4 40.0 77.4 77.4 332 23.3 23.3 7.5

148.8 72.4 53.1 23.3 4,017.7 658.6 1,004.4 2,218.5 136.2 4,166.5

150.7 66.2 29.2 25.9 4,784.6 588.2 1,296.0 2,665.6 234.8 4,935.3

150.0 2.7 32.3 115.0 4,931.1 900.0 1,200.0 2,700.0 131.1 5,081.1

150.0 2.7 32.3 115.0 5,096 900.0 1,200.0 2,800.0 196.0 5,246.0

(3,240.5) (2,319.6) (829.3) (52.8) (38.8) (72.2) (58.3) (13.9) (3,312.7)

(3,907.8) (2,753.8) (979.4) (1.7) (172.9) (110.1) (95.0) (15.1) (4,017.9)

(4,050.0) (3,060.0) (900.0) (6.0) (84.0) (21.0) (16.0) (5.0) (4,071.0)

(4,100.0) (3,100.0) (900.0) (6.0) (94.0) (21.0) (16.0) (5.0) (4,121.0)

460.0 393.8 853.8 332 1.4 14.0% 1.5%

518.5 398.9 917.4 332 1.6 14.5% 1.6%

581.3 428.9 1,010.1 332 1.8 11.8% 1.3%

656.1 468.9 1,125.0 332 2.0 12.5% 1.5%

Source: ISY, Edison Investment Research

Is Yatirim Menkul Degerler | 4 December 2014

11

Contact details Is Kuleleri, Kule-2 Kat 12 34330 4. Levent, Istanbul, Turkey +90 212 350 2000 www.isinvestment.com/ CAGR metrics EPS 12-15e EPS 13-15e EBITDA 09-13e EBITDA 11-13e Sales 12-15e Sales 13-15e

Revenue by geography N/A

4% 3% N/A N/A 3% -1%

Profitability metrics ROCE 13 Avg ROCE 09-13e ROE 13 Gross margin 13 Operating margin 12 Gr mgn / Op mgn 13

N/A N/A 14.5% N/A 27% N/A

Balance sheet metrics Gearing 13 Interest cover 13 CA/CL 13 Stock days 13 Debtor days 13 Creditor days

N/A N/A N/A N/A N/A N/A

Sensitivities evaluation Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices

     

Management team Chairman: İlhami Koç Having previously served as the general manager of ISY, Mr Koç was appointed as the chairman of ISY in February 2013. In 1997, he moved from Isbank to Is Investment, where he has been a manager in the Asset Management, Corporate Finance, Research and International Capital Markets, and Private Equity divisions. In 2002, he became the general manager of Is Investment.

CEO: Alirdal Aral In February 2013, Mr Aral was appointed as the general manager of ISY. Since starting his career at Isbank in 1989, he has served in various units and branches before being appointed head of treasury in 2002. He was later promoted to corporate branch manager of Isbank–Kozyatağı corporate branch in 2008 and deputy chief executive at Isbank in 2011.

Principal shareholders Is Bank Is Factoring Is Leasing Camis Investment Holdings

(%) 66.0 2.4 2.4 0.2

Companies named in this report Is Bank, Is Investment; Is Private Equity; Is Investment Trust; Is Asset Management; Anadolu Hayat

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER Copyright 2014 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Is Yatirim Menkul Degerler and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2014. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. Frankfurt +49 (0)69 78 8076 960 London +44 (0)20 3077 5700 Schumannstrasse 34b Holborn Is Yatirim Menkul Degerler280| High 4 December 2014 60325 Frankfurt London, WC1V 7EE Germany United Kingdom

New York +1 646 653 7026 245 Park Avenue, 39th Floor 10167, New York US

Sydney +61 (0)2 9258 1161 Level 25, Aurora Place, 88 Phillip Street, Sydney NSW 2000, Australia

Wellington +64 (0)4 8948 555 Level 15, 171 Featherston St Wellington 6011 New Zealand

12