Banks Universal Commercial Germany

Akbank AG Ratings Foreign Currency Long-Term IDR B+ Short-Term IDR B

Support Rating 4

Sovereign Risk Key Rating Drivers Long-Term Foreign-Currency AAA IDR Institutional Support Drives Ratings: Akbank AG’s (AAG) Issuer Default Ratings (IDRs) are Long-Term Local-Currency IDR AAA equalised with those of its Turkish parent, AKBANK T.A.S. (Akbank, B+/Negative), reflecting Country Ceiling potential shareholder support given it is a core subsidiary of Akbank. Our view of support also considers the ’s common branding, full ownership, integration with its parent and shared Outlooks management/board members. AAG operates in three main business segments – corporate Long-Term Foreign-Currency Negative banking, ( services) and treasury operations. IDR Sovereign Long-Term Foreign- Stable No Viability Rating Assigned: Fitch Ratings has not assigned a Viability Rating to AAG as it does Currency IDR not believe it can be analysed on a standalone basis. This is because AAG leverages off its Sovereign Long-Term Local- Stable parent’s franchise in Turkey, generating a large portion of its business through parent referrals. Currency IDR Nevertheless, the bank’s funding is mainly sourced locally from online deposits. AAG accounted Applicable Criteria for 7% of Akbank’s assets at end-3Q20 and 6% of its net income. Bank Rating Criteria (February 2020)

Mainly Turkish Risk, Corporate Focus: AAG’s credit risk was split 51% to Turkey-based borrowers at end-3Q20 (primarily blue-chip companies, but with exposure to Turkish risk) with Related Research the rest to borrowers in Germany and Europe. About 80% of are to companies that also Fitch Ratings 2021 Outlook: Turkish Banks have exposure on its parent’s books. Loans are mainly in euros and US dollars, heightening the (December 2020) credit risk in the case of Turkish corporates, given the potential impact of depreciation of the Turkish Banks Datawatch 3Q20 Turkish lira on their ability to repay their debt. (December 2020) Turkish Banks' External Debt and FC Strong Asset Quality: AAG has not recorded a non-performing to date. However, its loan Liquidity: End-3Q20 (November 2020) book is highly concentrated. The top 25 loans comprised 76% of total loans at end-3Q20, Policy Settings Are Key to Assessing Turkey although a moderate share of loans (about a quarter of total loans) was cash-collateralised. Central Bank Change (November 2020) Operating environment challenges in the markets in which the bank operates may heighten Fitch Revises Outlook on Turkey to Negative; risks to asset quality. Affirms at 'BB-' (August 2020) Fitch Affirms 6 Large Turkish Banks at 'B+'; Largely Deposit Funded: AAG is almost entirely funded by deposits (9M20: 96% of total Downgrades Halk to 'B' (May 2020) funding). Retail deposits make up about 38% of total deposits and have increased significantly in recent years. Concentration risk is high, due to significant deposits from German corporates. The maturity profile of the deposit base is adequate, with 60% at end-3Q20 having contractual Financial Data maturities of over one year. Of those, 16% were sight deposits, which constitute a cheap funding Akbank AG source. 30 Sep 2020 31 Dec 2019 Solid Capitalisation: AAG’s capital base consists entirely of core Tier 1 capital. At end-3Q20, its Total assets 3,190.8 4,947.8 total capital ratio (21.7%) was comfortably above its 13% regulatory minimum. AAG’s (USDm) capitalisation is adequate given its solid record of asset quality, fairly low growth due to the Total assets 3,735.8 4,404.3 (EURm) bank’s cautious approach on the back of heightened risks in Turkish operating environment and zero dividend policy. Consequently, no capital increases are budgeted in the near term. Total equity 761.7 723.6 (EURm) Reasonable Profitability: AAG reported a solid 6.9% return-on-equity (annualised) at end- 3Q20 supported by its low cost/income ratio (16% in 9M20), due to its lean organisational structure. Analysts Markus Glabach Rating Sensitivities +49 69 768076 195 [email protected] Parent Support: AAG’s ratings are sensitive to a change in Akbank’s IDRs or a reduction in its parent’s propensity to provide support, for example due to a change of strategy that results in a Cem Bilgin diminution of AAG’s strategic importance to the group. +44 20 3530 1230 [email protected]

Rating Report │ 17 December 2020 fitchratings.com 1

Banks Universal Commercial Banks Germany

Institutional Support Assessment

Bar Chart Legend Vertical bars – VR range of Rating Factor Bar Colors – Influence on final VR Higher influence Moderate influence

Lower influence Bar Arrows – Rating Factor Outlook  Positive  Negative  Evolving  Stable

Institutional Support Drives Ratings AAG’s ratings are equalised with those of Akbank, reflecting its strategic importance to its parent but also its ownership, integration and common branding, while the Negative Outlook on the Long-Term IDR mirrors that on its parent. The bank’s Deposit Ratings are also in line with its support-driven IDRs. In Fitch’s opinion, AAG's debt buffers do not afford any obvious incremental probability of default benefit over and above the support benefit factored into its IDRs. Significant Changes Weaker Economic Outlook AAG’s credit profile is correlated to the Turkish market, given that most of its business is concentrated there. Downside risks have been heightened by the coronavirus pandemic and lockdown measures in Turkey amid market volatility and lira depreciation (the lira fell by 24% against the US dollar in 11M20). Fitch has raised its 2020 forecast for Turkey’s GDP to growth of 0.2%, followed by a moderately weaker 3.5% in 2021.

Exposure to Germany is also significant at 32% of lending at end-3Q20. Fitch forecasts Germany’s GDP to contract by 5.6 % in 2020, followed by growth of 5.0% in 2021, which is a milder course than other European economies.

Germany has launched comprehensive fiscal measures in the form of large aid programmes to support companies and households affected by the crisis. These measures, together with regulatory forbearance relating to the classification of crisis-driven non-performing loans, have mitigated negative rating migration and risk-weighted asset inflation, limiting banks’ provisioning needs in 1H20. We expect this to also be the case at end-2020, but expect credit quality to deteriorate in 2021 as some vulnerable borrowers will not fully recover, and many corporates and SMEs are likely to emerge durably weaker from the crisis.

Akbank AG Rating Report │ 17 December 2020 fitchratings.com 2

Banks Universal Commercial Banks Germany

Brief Company Summary Niche Focus on Turkish Corporates AAG had just EUR3.7 billion in assets at end-3Q20 and specialises in European (largely German) and Turkish corporate lending. It focuses on providing medium-term working-capital and trade finance facilities to corporates typically with direct or indirect business links to the Turkish market. Accordingly, 51% of its credit risk was Turkey-related at end-3Q20, while its remaining exposure mainly related to Germany and other European countries. AAG has three main business segments – corporate banking and financial institutions, retail banking (deposits only, no retail lending) and treasury. The bank’s main focus in corporate banking is on large and medium-sized Turkish companies, subsidiaries of Turkish companies in Germany and central Europe or companies that have regular business dealings with Turkey (import/export), many of which also have a business relationship with Akbank. AAG does not have any branches and operates solely from its head office in Frankfurt, while collecting deposits via internet banking, supporting its low headcount of 52 employees at end- 2019 and low cost base. AAG is a member of the German voluntary private depositor protection scheme (Einlagensicherungsfonds des Bundesverband deutscher Banken), which ensures that liabilities to non-banks placed with the bank (including all customer deposits) are insured up to a level equal to 15% of AAG’s equity in the case of each depositor. This enables AAG to raise low-cost institutional deposits, which constitute its main funding source (end-3Q20: about 98% of customer deposits). Management and Strategy AAG and Akbank are closely integrated in terms of management. AAG has seven supervisory board members, all drawn from its parent. The chairman of the supervisory board is Akbank’s executive vice president for corporate and investment banking at the parent bank and a further six members hold executive positions at Akbank. AAG’s business strategy is fairly simple and the bank has an adequate record in meeting its strategic and financial objectives. Its strategy focuses on expanding its corporate and trade finance operations, while seeking to diversify away from Turkish-related business by increasing non-Turkish risk. However, the bank will continue to extend short-term and overnight lira loans to subsidiaries of blue-chip multinational companies in Turkey. It will be challenging for AAG to achieve diversification away from Turkish risk in the short term, considering the stagnation in the eurozone and ensuing low appetite for loans. AAG expects the structure of its balance sheet to remain stable. The bank will continue to fund itself mainly by means of corporate and retail deposits. Risk Appetite A significant portion of AAG’s loan operations are sourced through its parent. AAG’s risk limits are fully consolidated into those of the Akbank group and its risk management policies and procedures are integrated and supervised by Akbank. AAG's asset size contracted by 15% in euro terms in 9M20 following a 2% contraction in 2019 on the back of deterioration in the Turkish operating environment and AAG’s ensuing more selective approach to extending loans. Fitch believes AAG will maintain its cautious stance towards growth. The bank hedges its foreign-currency loans by using swaps against the euro, so that it runs limited open structural foreign-exchange positions.

Akbank AG Rating Report │ 17 December 2020 fitchratings.com 3

Banks Universal Commercial Banks Germany

Summary Financials and Key Ratios

30 Sep 2020 31 Dec 2019 31 Dec 2018 31 Dec 2017 9 Months - 3rd 9 Months - 3rd Quarter Quarter Year End Year End Year End USDm EURm EURm EURm EURm Audited - Unaudited Unaudited Audited - Unqualified Audited - Unqualified Unqualified Summary Income Statement Net interest and dividend income 49 57.7 87.5 80.0 84.0 Net fees and commissions 5 5.5 3.8 2.3 4.4 Other operating income n.a. n.a. 1.3 0.1 1.3 Total operating income 54 63.2 92.6 82.4 89.7 Operating costs 8 9.9 13.9 13.7 12.1 Pre-impairment operating profit 46 53.3 78.7 68.7 77.6 Loan and other impairment charges -2 -2.1 -1.7 12.9 -1.2 Operating profit 47 55.4 80.4 55.8 78.8 Tax 15 17.3 26.4 18.6 25.9 Net income 33 38.1 54.0 37.2 52.9 Fitch comprehensive income 33 38.1 54.0 37.2 52.9

Summary Balance Sheet Assets Gross loans 1,992 2,331.9 3,164.9 3,433.8 3,522.8 - of which impaired n.a. n.a. n.a. n.a. n.a. Loan loss allowances n.a. n.a. n.a. n.a. n.a. Net loans 1,992 2,331.9 3,164.9 3,433.8 3,522.8 Interbank 390 456.6 423.4 400.0 697.1 Other securities and earning assets 521 609.8 410.0 343.3 449.7 Total earning assets 2,903 3,398.3 3,998.3 4,177.1 4,669.6 Cash and due from banks 246 287.6 375.0 254.4 335.9 Other assets 43 49.9 31.0 45.5 53.7 Total assets 3,191 3,735.8 4,404.3 4,477.0 5,059.2

Liabilities Customer deposits 2,423 2,837.4 3,258.1 3,333.8 3,668.4 Interbank and other short-term funding 111 129.8 414.0 466.1 742.8 Total funding 2,534 2,967.2 3,672.1 3,799.9 4,411.2 Other liabilities 6 6.9 8.6 7.5 15.5 Total equity 651 761.7 723.6 669.6 632.5 Total liabilities and equity 3,191 3,735.8 4,404.3 4,477.0 5,059.2 Exchange rate USD1 = EUR1.1708 USD1 = EUR0.89015 USD1 = EUR0.873057 USD1 = EUR0.83382

Source: Fitch Ratings, Fitch Solutions, Akbank AG

Akbank AG Rating Report │ 17 December 2020 fitchratings.com 4

Banks Universal Commercial Banks Germany

Summary Financials and Key Ratios

30 Sep 2020 31 Dec 2019 31 Dec 2018 31 Dec 2017 Ratios (annualised as appropriate)

Profitability (%) Operating profit/risk-weighted assets n.a 2.4 1.5 1.9 Net interest income/average earning assets 2.1 2.1 1.8 1.7 Non-interest expense/gross revenue 15.7 15.0 16.6 13.5 Net income/average equity 6.9 7.8 5.7 8.7

Asset quality (%) Impaired loans ratio n.a. n.a. n.a. n.a. Growth in gross loans -26.3 -7.8 -2.5 -16.7 Loan loss allowances/impaired loans n.a. n.a. n.a. n.a. Loan impairment charges/average gross loans -0.1 0.0 0.4 0.0

Capitalisation (%) Common equity Tier 1 ratio 21.7 19.6 17.3 14.1 Fully loaded common equity Tier 1 ratio n.a. n.a. n.a. n.a. Tangible common equity/tangible assets 20.4 16.4 14.9 12.5 Basel leverage ratio n.a. n.a. n.a. n.a. Net impaired loans/common equity Tier 1 n.a. n.a. n.a. n.a.

Funding and liquidity (%) Loans/customer deposits 82.2 97.1 103.0 96.0 Liquidity coverage ratio n.a. 757.7 280.5 489.3 Customer deposits/funding 95.6 88.7 87.7 83.2 Net stable funding ratio n.a. n.a. n.a. n.a.

Source: Fitch Ratings, Fitch Solutions, Akbank AG

Akbank AG Rating Report │ 17 December 2020 fitchratings.com 5

Banks Universal Commercial Banks Germany

Key Financial Metrics – Latest Developments Solid Record of Asset Quality AAG’s Turkish exposure comprised 51% of the total loan book at end-3Q20. The remainder included loans to companies based in Germany (about 32%) and other EU countries. Loans are mainly in euros (end-3Q20: 61% of total loans) and US dollars (35%), heightening the credit risk in the case of Turkish corporates, given the potential impact of lira depreciation on their ability to repay their debt. However, the latter are primarily Turkish blue-chip companies with generally lower risk profiles, albeit they are not immune to the economic fallout of the pandemic. Loans in lira represent 3% of the total book and are mostly working capital loans to multinational companies in Turkey. AAG has not recorded any non-performing loan since its establishment. The bank creates general loan loss provisions under German GAAP, which mainly relate to country risk. In 2019, AAG increased its country risk adjustment for Turkey-related risk to 4.5% from 4% due to the country’s medium-term macroeconomic indicators.

The loan book was split 73%/27% between corporates and commercials (including SMEs) at end-3Q20. Its corporate focus results in high single-name borrower concentration, while credit risk is also heightened by the fact that the loans extended to Turkish corporates are typically long-term and in foreign currency. However, currency risk is mitigated by the fact that many borrowers have access to foreign-exchange revenues.

In terms of sector concentration, construction and real estate dominate the portfolio with 18%, followed by financial institutions (12%) automotive (11%), textile (6%) and energy sectors (6%). Reasaonable Profitability AAG’s profitability and cost efficiency are strong compared to developed market peers’ reflecting its very lean organisational structure and lack of a branch network – which have helped keep costs to a minimum (9M20: cost/income ratio of 16%) – and low loan impairment charges. The bank reported return on equity of 6.9% at end-3Q20 (end-2019: 7.8%). Leverage is low and its equity/assets ratio was 20.4% at end-3Q20. However, profitability is highly dependent on AAG’s ability to leverage its parent’s franchise and attract new business and clients. Net interest income from lending activities comprises AAG’s dominant income source (9M20: 91% of total operating income), while commission income (9%) results mainly from trade finance and private banking activities. AAG’s net interest margin remained flat at 2.1% at end-3Q20 (end-2019: 2.1%) as the bank continued to benefit from lower funding costs due to falling interest rates despite a decline in lending yields. Adequate Capitalisation Fitch considers AAG’s capital ratios to be adequate for its risk profile considering its reasonable internal capital generation, which benefits from a zero-dividend policy and the absence of non- performing loans. AAG is fully compliant with Basel III requirements. At end-3Q20, its total capital ratio of 21.7% was comfortably above its regulatory minimum of 13%. AAG has no plans to raise capital in the near term given its current level of capitalisation. The last capital injections made by Akbank, to support loan growth, were in 2013 (EUR50 million) and 2015 (EUR100 million). We believe Akbank would support its subsidiary if needed. Funding and Liquidity AAG is largely deposit funded (9M20: 96% of total funding). Concentration risk is high, due to significant deposits from German corporates. Retail deposits made up 38% of total deposits at end-3Q20 and have increased significantly in recent years in line with the bank’s funding strategy. The bank aims to increase its share of retail funding to increase granularity in the deposit base by using alternative distribution channels. AAG is typically a secondary bank for retail customers, attracting such deposits through competitive pricing. Unlike most of the Turkish market, AAG’s deposits are fairly long-term, with 60% of the total due in over a year at end-3Q20. About 16% of deposits were sight deposits, which constitute a cheap source of funding. AAG’s loans/deposits ratio declined to 82% at end-3Q20 reflecting loan book contraction.

Akbank AG Rating Report │ 17 December 2020 fitchratings.com 6

Banks Universal Commercial Banks Germany

AAG has limited market sensitive wholesale funding, amounting to 4% of total funding at end- 3Q20. Market funding mainly comprised bank deposits and bilateral repos. The bank has no outstanding bilateral, syndicated or club loans.

Environmental, Social and Governance Considerations Banks Akbank AG Ratings Navigator

Credit-Relevant ESG Derivation Overall ESG Scale Akbank AG has 5 ESG potential rating drivers key driver 0 issues 5 Akbank AG has exposure to compliance risks including fair lending practices, mis-selling, repossession/foreclosure practices, consumer data protection (data security) but this has very low  impact on the rating. driver 0 issues 4  Governance is minimally relevant to the rating and is not currently a driver.

 potential driver 5 issues 3   4 issues 2 not a rating driver  5 issues 1

Environmental (E) General Issues E Score Sector-Specific Issues Reference E Scale How to Read This Page GHG Emissions & Air Quality 1 n.a. n.a. 5 ESG scores range from 1 to 5 based on a 15-level color gradation. Red (5) is most relevant and green (1) is least relevant.

Energy Management 1 n.a. n.a. 4 The Environmental (E), Social (S) and Governance (G) tables break out the individual components of the scale. The right-hand box shows the aggregate E, S, or G score. General Issues are relevant across all markets with Sector- Water & Wastewater Management 1 n.a. n.a. 3 Specific Issues unique to a particular industry group. Scores are assigned to each sector-specific issue. These scores signify the credit-relevance of the Waste & Hazardous Materials sector-specific issues to the issuing entity's overall credit rating. The Reference 1 n.a. n.a. 2 Management; Ecological Impacts box highlights the factor(s) within which the corresponding ESG issues are Impact of extreme weather events on assets and/or operations and Company Profile; Management & captured in Fitch's credit analysis. Exposure to Environmental 2 corresponding risk appetite & management; catastrophe risk; credit Strategy; Risk Appetite; Asset 1 Impacts concentrations Quality The Credit-Relevant ESG Derivation table shows the overall ESG score. This score signifies the credit relevance of combined E, S and G issues to the Social (S) entity's credit rating. The three columns to the left of the overall ESG score summarize the issuing entity's sub-component ESG scores. The box on the far General Issues S Score Sector-Specific Issues Reference S Scale left identifies some of the main ESG issues that are drivers or potential drivers Human Rights, Community Services for underbanked and underserved communities: SME and Company Profile; Management & of the issuing entity's credit rating (corresponding with scores of 3, 4 or 5) and 2 5 Relations, Access & Affordability community development programs; financial literacy programs Strategy; Risk Appetite provides a brief explanation for the score.

Customer Welfare - Fair Compliance risks including fair lending practices, mis-selling, Operating Environment; Company Classification of ESG issues has been developed from Fitch's sector ratings Messaging, Privacy & Data 3 repossession/foreclosure practices, consumer data protection (data Profile; Management & Strategy; Risk 4 criteria. The General Issues and Sector-Specific Issues draw on the Security security) Appetite classification standards published by the United Nations Principles for Impact of labor negotiations, including board/employee compensation Company Profile; Management & Responsible Investing (PRI) and the Sustainability Accounting Standards Board Labor Relations & Practices 2 3 and composition Strategy (SASB).

Employee Wellbeing 1 n.a. n.a. 2 Sector references in the scale definitions below refer to Sector as displayed in the Sector Details box on page 1 of the navigator. Shift in social or consumer preferences as a result of an institution's Exposure to Social Impacts 2 social positions, or social and/or political disapproval of core banking Company Profile; Financial Profile 1 practices

Governance (G) CREDIT-RELEVANT ESG SCALE General Issues G Score Sector-Specific Issues Reference G Scale How relevant are E, S and G issues to the overall credit rating? Highly relevant, a key rating driver that has a significant impact on Management Strategy 3 Operational implementation of strategy Management & Strategy 5 5 the rating on an individual basis. Equivalent to "higher" relative importance within Navigator. Board independence and effectiveness; ownership concentration; Management & Strategy; Earnings & Relevant to rating, not a key rating driver but has an impact on the Governance Structure 3 protection of creditor/stakeholder rights; legal /compliance risks; Profitability; Capitalisation & 4 4 rating in combination with other factors. Equivalent to "moderate" business continuity; key person risk; related party transactions Leverage relative importance within Navigator. Minimally relevant to rating, either very low impact or actively Organizational structure; appropriateness relative to business model; Group Structure 3 Company Profile 3 3 managed in a way that results in no impact on the entity rating. opacity; intra-group dynamics; ownership Equivalent to "lower" relative importance within Navigator.

Financial Transparency 3 Quality and frequency of financial reporting and auditing processes Management & Strategy 2 2 Irrelevant to the entity rating but relevant to the sector.

1 1 Irrelevant to the entity rating and irrelevant to the sector.

The highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.

Akbank AG Rating Report │ 17 December 2020 fitchratings.com 7

Banks Universal Commercial Banks Germany

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Akbank AG Rating Report │ 17 December 2020 fitchratings.com 8