2011 ANNUAL REPORT Contents INTRODUCTION 2 Halkbank in Brief 3 Capital Structure 3 Amendments to the Articles of Association in 2011 6 Key Indicators and Ratios 8 Halkbank’s Position in the Sector 10 Overview of Halkbank 12 A Story of Solid Growth 16 Chairman’s Assessment 18 General Manager’s Assessment 22 Innovative Products 26 Assessment of Operations in 2011 48 Halkbank’s Subsidiaries and Affiliates 51 Annual Report Compliance Statement MANAGEMENT AND CORPORATE GOVERNANCE 54 Board of Directors and the Audit Board 56 Senior Management 58 Organizational Structure 60 Committees 66 Executives of the Internal Systems Units 67 Report of the Board of Directors 68 Human Resources Practices 69 Transactions with the Risk Group 69 Companies from Which Support Services are Procured 70 Report of the Audit Board 72 Corporate Governance Principles Compliance Report FINANCIAL INFORMATION AND ASSESSMENT ON RISK MANAGEMENT 82 Assessment of the Audit Committee of Türkiye Halk Bankası on the operation of the Internal Control, Internal Audit and Risk Management Systems and Information about Activities in 2011 85 Financial Standing, Profitability and Debt-Servicing Capability 87 Risk Management Policies by Risk Types 88 Summary Financial Information on the Five-Year Period 89 Unconsolidated Independent Auditor’s Report 185 Consolidated Independent Auditor’s Report CONTACTS Halkbank supports one out of every four SMEs in Turkey We are the Bank of producers and value- creators. For us, our clients are the most important players in the real economy. They are the drivers behind the growth momentum, increasing national income and elevated social welfare that Turkey has achieved in recent years. We stand by our clients and continue to support them at all times and under all circumstances. The best proof of this is our increased lending and the new branches we opened even during the crises. We know our customers, as well as their businesses, their difficulties and their needs intimately. As a result, we are able to offer them the most suitable loans and best banking services quickly and easily. One out of every four SMEs in Turkey is producing and growing with the support of Halkbank and looking to the future with hope. Their success is our success... It is the growing and developing Turkey’s success. HALKBANK 2011 ANNUAL REPORT HALKBANK IN BRIEF A steadily growing leading and a well-respected 73-year-old brand of the emerging Turkey… Halkbank was founded in 1938 to support artisans and tradesmen and to accelerate permanent economic development. The Bank’s core business strategy has never changed in 73 years. It considers every artisan, farmer and small, medium or large size business owner that produces and creates employment as a business partner and strongly believes its existential duty is to support them via its entire financing capability in good days and bad. Halkbank today supports one out of every four SMEs in Turkey and extends 36% of its total loans to the real economy. Serving with a global vision through an extensive and diverse service network, Halkbank has 766 domestic and 5 overseas branches. It also has an overseas representative office, 2,157 ATMs, telephone and internet banking, mobile banking applications, as well as innovative products and services that provide an unprecedented banking experience to its clients. Halkbank has 25.4% of its outstanding shares publicly held and boasts the highest return on equity (ROE) among its publicly-traded peers thanks to its efficient use of capital. Halkbank is a steadily-growing, 73-year-old pioneer among the most respected in emerging Turkey… 2 CAPITAL STRUCTURE The paid-in capital of Türkiye Halk Bankası A.Ş. is TRY 1,250,000,000. 99.999996207% of which originally was held by the Undersecretariat of Treasury of the Prime Ministry of the Republic of Turkey. Based on the decision of the Privatization Administration dated February 5, 2007 and numbered 2007/08, the decision of the Capitals Market Board of Turkey dated April 26, 2007, numbered 16/471 and the resolution of the Bank’s General Assembly dated April 19, 2007, 24.98 % of the shares were listed on May 10, 2007. The Bank’s controlling shareholder is the Privatization Administration, with a share percentage of 75.02604% (Ziya Gökalp Cad. No: 80 Kurtuluş/ Ankara). The members of the Board of Directors, the Chairman of the Board of Directors and the General Manager do not hold shares in the Bank. Number of Paid-in Percentage of Name of Shareholder Shareholder Capital (TRY) Share (%) 1-Privatization Administration ** 1 937,825,500 75.02604000 2-Banks 4 14,105 0.00112840 3-Cooperatives 143 17,244 0.00137952 4-Municipalities 980 186,854 0.01494832 5-Special Provincial Administrations 65 92,084 0.00736672 6-Chambers of Commerce 12 2,086 0.00016688 7-Individuals and Companies 13,525 149,292 0.01194336 8-Publicly Held** 1 311,712,835 24.93702680 Total 14,731 1,250,000,000 100.00000000 Minority Shareholders Percentage (%) 0.03693320 Privatization Administration Percentage (%) 75.02604000 Publicly Held Portion (Traded) % 24.93702680 Total (%) 100.00000000 * Shareholders listed in the Stock Register. ** Privatization Administration within its share of TRY 937,825,500 has TRY 549,932 share in the free float. Together with these shares total amount of shares in the free float is TRY 312,262,767 with a share ratio of 24.98%. AMENDMENTS TO THE ARTICLES OF ASSOCIATION IN 2011 No amendments were made to the Bank’s Articles of Association in 2011. 3 HALKBANK 2011 ANNUAL REPORT Gözde Erkmen, 43 - Bakery Owner, Antalya Ms. Erkmen opened her bakery shop in 2009 and managed it for a year through her own efforts. However, she was not able to produce the variety of breads she wanted with her existing investments. In 2010, she came to Halkbank and applied for an “Entrepreneur Support Loan.” We approved Ms. Erkmen’s loan right away and she was able to increase both her production capacity and variety. To this day, we are enjoying the delicious bread and cookies she bakes. 4 5 HALKBANK 2011 ANNUAL REPORT KEY INDICATORS AND RATIOS Halkbank was the sixth best performing bank in the world based on return on capital from among the “Top 1,000 World Banks” ranking of The Banker magazine. RETURN ON EQUIty (ROE) SECTOR 14.2 HALKBANK 25.4 25.4% FINANCIAL INDICATORS (TRY millions) 2011 2010 Change (%) Total Assets 91,124 72,942 24.9 Liquid Assets 8,747 5,759 51.9 Loans 56,216 44,296 26.9 Securities 23,346 20,207 15.5 Total Deposits 66,247 54,782 20.9 Shareholders’ Equity 8,640 7,445 16.1 Net Interest Income 3,473 3,191 8.8 Net Fee and Commission Income 728 526 38.5 Gross Profit 2,637 2,509 5.1 Net Profit 2,045 2,010 1.7 Key Ratios (%) Interest Bearing Assets/Total Assets 87.5 88.3 Loans/Total Assets 61.7 60.7 Non-Performing Loans/Total Loans (Gross) 2.9 3.8 Demand Deposits/Total Deposits 20.1 15.9 Loans/Deposits 84.9 80.9 Average Return on Assets 2.5 3.0 Average Return on Equity 25.4 30.5 Capital Adequacy Ratio 14.3 15.9 6 TOTAL ASSETS (TRY MILLIONS) 20072008 40,234 2008 51,096 20092010 60,650 GROWTH IN ASSETS 2010 72,942 2011 91,124 24.9% SECURITIES (TRY MILLIONS) 20072008 15,945 2008 18,334 20092010 21,373 SECURITIES 2010 20,207 2011 23,346 15.5% LOANS (TRY MILLIONS) 20072008 18,121 2008 25,836 20092010 32,458 GROWTH IN LOANS 2010 44,296 2011 56,216 26.9% TOTAL DEPOSITS (TRY MILLIONS) 20072008 30,841 2008 40,271 20092010 43,950 GROWTH IN DEPOSITS 2010 54,782 2011 66,247 20.9% NET PROFIT (TRY MILLIONS) 2007 1,131 2008 1,018 20092010 1,631 PROFIT GROWTH 2010 2,010 2011 2,045 1.7% 7 HALKBANK 2011 ANNUAL REPORT HALKBANK’S POSITION IN THE SECTOR Continuing its profitability and efficiency- oriented growth, Halkbank further strengthened its sound, pioneering market position in terms of core banking indicators. HALKBANK’S MARKET Position Market Share (%) 2011 2010 Total Assets 7.5 7.3 Loans 8.1 8.3 Securities 7.9 6.7 Deposits 9.5 8.9 Shareholders’ Equity 6.0 5.5 Profit 10.3 9.1 DEPOSITS MARKET SHARE (%) LOANS MARKET SHARE (%) 2007 8.6 2007 6.2 2008 8.8 2008 6.8 2009 8.5 2009 8.1 2010 8.9 2010 8.3 2011 9.5 2011 8.1 8 Halkbank is striving to expand its successful domestic performance to overseas markets and become a powerful regional bank in Turkey’s surrounding geography. CREDIT RATINGS Fitch Ratings Moody’s Foreign Currency Long-Term BB+ Financial Strength Rating D+ Outlook Stable Outlook Stable Foreign Currency Short-Term B Long-Term Local Currency Local Currency Long-Term BB+ Deposit Rating Baa3 Outlook Stable Outlook Stable Local Currency Short-Term B Short-Term Local Currency National Long-Term AA+ (tur) Deposit Rating Prime-3 Outlook Stable Outlook Stable Individual C/D Long-Term Foreign Currency Support 3 Deposit Rating Ba3 Support Rating Floor BB+ Outlook Positive Viability Rating BB+ Short-Term Foreign Currency Deposit Rating Not Prime Outlook Stable Baseline Credit Assessment Baa3 Outlook Stable Probability of Government Support Very High 9 HALKBANK 2011 ANNUAL REPORT OVERVIEW OF HALKBANK Following the foundation of the republic, Halkbank was established to generate solutions to meet the funding needs of artisans, tradesmen and small business owners. Our Vision Our Mission To be the region’s leading To continuously create SME bank able to execute added value for customers, all the requirements of shareholders and employees universal banking while by effectively carrying asserting a strong presence out all banking services in retail services.