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Contents

Turkish banks 1

Investment summary 2

Sector risks post devaluation 6

Valuation summary 11

Share price performance 12

Forecast revisions 13

Operating outlook 15

Foreign banks in Turkey 17

YKB – a credit card powerhouse 18

Companies 21 Akbank ...... 23 Denizbank ...... 33 Finansbank...... 45 Garanti Bank ...... 55 Isbank...... 65 Sekerbank ...... 75 TEB ...... 77 TSKB ...... 87 Vakifbank...... 97 Yapi Kredi Bank...... 107

Turkish banks 2005 113 2005 results in context ...... 114

Disclosures Appendix 120

Haluk Akdogan London (44 20) 7767 6650 [email protected]

With thanks to Nika Guseva

Cover photograph courtesy of Getty Images

Pricing date 26/6/06 unless stated otherwise

Publication 29 June 2006 Turkish Banks June 2006

Turkey

Turkish banks Ain’t no sunshine?

Banks

Isbank share price performance Shares appear to be pricing in a much harder and longer devaluation impact than that implied by balance sheets, 14 12 in part explained by US inflation uncertainty. We see good 10 value emerging in the sector and recommend accumulating. 8 6

Slower US growth is good news… Shares have tumbled on increasing 4 02/05 06/05 10/05 02/06 06/06 risk aversion. True, Turkish rates remain aligned to the US but its growth is closely linked to Europe. Thus, we believe a slowdown in the US growth Share price Index rebased coupled with falling commodity prices is the ideal background for Turkish Source: Reuters equities unless there is a global recession. Akbank share price performance The risks boil down to three. US growth, which is proving strong and is exacerbating inflationary pressures, is the main risk. The second is Turkey’s 12 idiosyncratic inflation rising beyond devaluation. The third is election risk. 10 Continuation of the disinflation programme and fiscal discipline is paramount 8 to our investment thesis. Any deviation from the programme would alter our 6 model assumptions. We expect the government to remain committed to the programme in the run-up to the elections. 4 02/05 06/05 10/05 02/06 06/06 Sector risks are manageable. Unlike 2001, balance sheets are Share price Index rebased manageable. Short positions are either small or else hedged. Most banks have more fixed rate bearing liabilities than fixed rate earning assets and Source: Reuters duration gaps are not as bad as they were in 2001 (9 months on average Garanti share price performance versus 12 months in 2001).

Model assumptions revisited. We have revisited our model 8 assumptions on the back of the lira devaluation and rate hikes. We have 6 reduced volume forecasts in our coverage. We now foresee a more modest growth in loans and other assets. 4

Accumulate on weakness. We see value emerging and believe this is 2 the time to accumulate Turkish banks. The stocks are trading below 2x book, 02/05 06/05 10/05 02/06 06/06 on our assumptions. Our top picks are Vakifbank and Garanti. Share price Index rebased

Source: Reuters

1 Turkish Banks June 2006

Investment summary

Slower US growth and falling commodity prices are good for Turkey US growth is actually slowing down. A reversal in commodity trends along with slower growth in the US is the ideal scenario for Turkish equities in our view. First, Turkey is a net commodity importer and should benefit from falling gas and material prices. Second, Turkish growth is reasonably segmented from the US in that a US slowdown would not have a material impact on Turkey unless the Eurozone growth slows down. Thus, a potential slowdown in the domestic economy triggered by higher rates does not necessarily lead to a slowdown in corporates. A weaker currency would certainly help exports.

Sector risks are more manageable now than they were in 2001 Increasing supervision and regulation following the 2001 devaluation has actually improved the Turkish banks’ ability to manage their balance sheets during or after major currency moves. Unlike 2001, balance sheet risks are more manageable now. Net open positions are either small or else hedged. Most banks we cover have more fixed rate bearing liabilities than fixed rate earning assets. True, the funds tied up with longer dated consumer loans, which have grown by triple-digits between 2004 and 1Q06, cannot unwind quickly. Nevertheless, the duration gaps are usually small (six months on average versus 12 months in 2001). The 2006 profits will depend on how fast the banks can redeploy their capital which will depend on the duration gap and free capital.

Longer term industry demographics and fundamentals are positive The Turkish market for financial services is the most attractive in Europe in our view. With a population estimated at 75m and an average age of 26.5, Turkey’s demographics are comparable to larger emerging markets. Both consumer and corporate leverage are low. Longer term consumer loans such as mortgages are small relative to GDP. There is no market for corporate debt. Among the developments which should shape the industry’s future are further consolidation in financial intermediation, the introduction and successful implementation of a comprehensive mortgage law, emergence of a corporate bond market, decline in bond portfolios at the expense of corporate lending, increasing securitisation and reversal of currency substitution.

Mergers and acquisitions are active as ever The industry has attracted unprecedented foreign direct investment. With Finansbank and Denizbank acquisitions on track, and fresh interest emerging for Sekerbank, strategic demand for Turkish banks remains strong. We expect the activity to continue into 2007, albeit at a slower pace. There are now fewer banks up for grab so we may not see any major activity for a while. However, the lending market remains fragmented even after the acquisitions. The outlook for longer term margins is down and the existing industry structure should therefore change further. The next stage is a consolidation among the larger banks, in our view.

Risks are stronger US growth, Turkish inflation The risks are threefold: US growth proving and remaining strong, Turkish inflation rising beyond devaluation and the 2007 elections. The 400bp hike in response to devaluation confirms the central bank’s commitment to the disinflation programme.

2 Turkish Banks June 2006

However, the cut may not be sufficient to curb the near-term inflation, a major risk source. May’s inflation has shown us the immediate impact of devaluation on prices. June is likely to be as bad. From July onwards, inflationary pressures should ease. Lower food prices in the summer months should moderate the devaluation-led price hikes. With this, the currency should recover towards the end of the third quarter.

…and elections Parliament will elect the new president in May 2007. The general election to replace parliament itself will be held in November 2007. Given how poorly the appointment of the central bank governor was handled, we are sceptical about the prospects in the run-up to the presidential election. We see two potential problems arising. First, AKP will have to find a compromise mainstream candidate (1) to secure the vote and (2) not to alienate the electorate before the general elections. Second, there is speculation that the prime minister himself wishes to be the next president. Should this happen in May 2007, this could well be at the expense of his party weakening in the run-up to general elections in November 2007. Without Recep Tayyip Erdoğan leading the party to the polls, there is a danger of AKP losing control as more parties meet the 10% threshold. We are of the view that AKP will remain in power after the 2007 elections with or without Mr Erdoğan leading it.

Risks to forecasts The interest rate hikes will show in the balance sheets via, largely, a decline in the values of marketable securities. The static P&L impact on June statements should be less significant. However, in the event the rates remain high into the fourth quarter and 2007, we may have to revise further our forecasts, in particular 2007, beyond what we report here. If, as we expect, inflation weakens from August and rates then start falling again, we do not foresee any major revisions.

The sell-off appears overdone: good value emerging We see the share-price weakness as an opportunity to build portfolios which will perform longer term. We believe good value is emerging at the banks. The shares are trading within 5-9x on 2006 forecast earnings or 1.1-2.1x book. On our assumptions, five out of nine banks we cover now fall in the BUY range. Our top picks are Vakifbank (BUY maintained; TP: YTL6.99) and Garanti Bank (upgraded to BUY; TP: YTL6.33). Other Buy ratings are TSKB (BUY maintained; TP: YTL3.72), TEB (upgraded to BUY; TP: YTL21.15) and Isbank (BUY maintained; TP: YTL8.99). As for the acquisition trades, both Denizbank and Finansbank are below their respective (implied) tender prices. The trading upside is better with Denizbank.

Vakifbank: BUY maintained With high capital ratios, a relatively low short currency position and manageable duration gap, in our view Vakifbank has a better risk profile than most banks in Turkey. The bank has more fixed rate paying liabilities than fixed rate earning assets. We estimate the duration gap at 6.8 months, the lowest among the larger Turkish banks. The fixed rate consumer loans account for 25% of total loans. Above all, Vakifbank has free capital to benefit from rising rates. With growth now looking likely to slow down, loans will have to take a back seat. Vakif may have to revise down its investments in loans and increase exposure to higher yielding bonds or overnight lending instead. The shares trade at a significant 20% discount to the industry average. In our view, Vakifbank’s share price should rise to close the valuation gap. We reiterate our BUY rating on the shares.

3 Turkish Banks June 2006

Garanti Bank upgraded to BUY With 29% of its balance sheet invested, Garanti has a smaller marketable securities (available for sale) portfolio than Isbank. Even though the consumer business is significantly larger now, Garanti’s book remains tilted towards corporates (consumer and credit card loans together amount to 35% of total loans). The net open position should be between 6% and 8% of its equity. The bank’s free capital estimated at YTL1.8bn is much stronger now than it was last year. We expect a slight pick-up in net interest margin in 2H06. Trading below 2x our revised 2006 forecast book, Garanti is looking an attractive buy and we recommend investors to accumulate the stock during its weakness. Any hit on the balance sheet post devaluation should be contained. The presence of GE as a shareholder is reassuring. Its proven record in both retail and corporate banking in a market set to grow by double-digits for the foreseeable future should make Garanti a key stock in any EMEA financials portfolio, in our view. We upgrade the shares to BUY with a new 12-month target price of YTL6.33.

Isbank: BUY maintained Like Akbank, Isbank has a large exposure to fixed rate consumer loans. Isbank’s marketable securities portfolio is however larger (32% of its balance sheet versus 21% at Akbank). What is also different with Isbank is that it has a large equity portfolio whose value has eroded approximately 45% in US dollar terms since the devaluation. Thus, the static (marked-to-market) hit on Isbank’s book is the largest among all the other banks we cover.

Yapi Kredi Bank - upgraded to HOLD The exchange ratio between Yapi Kredi Bank and Kocbank is set at 0.53 pending CMB approval. Based on this, 100 Kocbank shares will buy 53 shares in the new company. Yapi Kredi Bank will first make a paid-in-capital increase to YTL3,138m from YTL1,897m. The new shares will then be distributed to Kocbank shareholders. Yapi Kredi’s existing minority shareholders will own 19.73% of the new company (new Yapi Kredi bank) versus its 32.69% stake in Yapi Kredi proper versus our (equity-method- based) estimate of 28.6%. We are disappointed but aware that this is an insider transaction and hence would now like to look forward.

The legal merger is expected in October. Post merger, Yapi Kredi will control 11% of loans, 9.7% deposits and 27% of credit card transactions in Turkey on a pro-forma basis. In loans and deposits, the merged bank would rank No.3 after Akbank and Isbank. Using the equity method, we find YKB’s contribution to post merger book is 87.6% based on which we estimate the minorities’ stake in the new company at 28.6%. The CMB has been generally more receptive to book value based valuation in which case the 28.6% should not be too far off. Yet, we cannot be certain as to what merger valuation methodology will be adopted. The post devaluation risks are relatively small at the bank which now has a smaller and more contained balance sheet. Going forward, the bank has a strong position in two important future growth areas: consumer and SME. We see the merged Yapi Kredi earning above-industry average returns on its equity in both the current year and 2007. The merged bank will benefit from a five- year tax break as accumulated losses up to five years at each merging company are tax exempt. Our Yapi Kredi model will be revised once the merger is approved and the merger financials are released. Improved visibility and the Kocbank addition warrant a better valuation in our view. We upgrade the share to HOLD.

4 Turkish Banks June 2006

Akbank – HOLD maintained Akbank has a better track record under rising rates. This time it is caught with a larger loan book, particularly in consumer, and a wide duration gap. The bank will take a hit on its consumer exposure via its duration gap estimated at 6.5 months. The good news is its Tier 1 capital remains high (free capital estimated at YTL5bn) and that its corporate loan book is relatively less risky. The bank should be able to tailor its balance sheet to benefit from the higher rates and partially offset the losses on its consumer loans or bond portfolio. With net interest margins now more likely to go up than down, we expect Akbank to improve its margins in 2H06 and ultimately report a better net interest margin for the full year.

Denizbank – better acquisition value A mandatory tender call to the minority shareholders of Denizbank (25% is free float) is expected. The specific timing of the call is unknown; the earliest would be September based on our experience with other M&A transactions in Turkey. We do not foresee any problems with regulatory approval in Turkey. The shares should trade at the US dollar tender price minus the execution risk (we reckon 5%).

TSKB – BUY reiterated TSKB shares have lagged the market since devaluation and are now attractively priced. The static hit on the balance sheet post devaluation does not appear to be significant. First of all, the net open position at TSKB is 11.9% of its equity as at 31 March 2006: a hypothetical 20% devaluation would wipe off 240bp in ROE everything else being constant, on our assumptions. Second, TSKB has a unique balance sheet mix in that the bulk of its funding is longer dated borrowings; indeed, the duration ‘gap’ is nearly ten years in favour of its liabilities. The valuation is compelling with shares trading at a 1.0x our estimated 2006 book value. We reiterate our BUY rating with a new 12-month target price of YTL3.72.

Finansbank – upgraded to HOLD The shares provide downside currency protection. Currently trading 11% below the tender price, we see upside in share price. NBG’s rights issue of €3bn to finance the Finansbank deal has been approved by the Capital Market Board in Greece, which removes one hurdle. Regulatory approval in Turkey remains incomplete. Management’s guidance is mid-July at the earliest. From then on, it will launch the tender call. The tender price, if approved by the Turkish CMB, is US$5.32 per share (YTL8.87 at the current exchange rate). Fiba Holding will keep 9.68% stake in the bank for at least two years.

5 Turkish Banks June 2006

Sector risks post devaluation

Devaluation The Turkish lira has depreciated approximately 20% against the US dollar between 8 May and 19 June 2006. There is no indication that the currency will return to its level of 8 May 2006. This section highlights the risks to balance sheets assuming the currency stabilises.

The currency has Fig 1 New Turkish lira versus US dollar moved to YTL1.60 at mid-June from YTL1.32 2.0 on 8 May 2006

1.5

1.0

0.5

0.0 1/01 1/02 1/03 1/04 1/05 1/06

Source: Bloomberg

_ Yield curve The yield curve has shifted north with devaluation. The short-end is now steeper, factoring higher near-term inflation. The curve is otherwise flat at the long end.

Yield curve has shifted Fig 2 Turkish lira yield curve before and after devaluation upwards 25

After 20

600bp 15 Before

10 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10

Source: Bloomberg

_ Net open positions are manageable Small or hedged The net open positions appear low or hedged as at 31 March 2006. We have shown in a previous research note (Turkish banks – Net open positions, 25 May 2006) that the

6 Turkish Banks June 2006

impact of a 20% devaluation on 2006F ROE is modest and varies from 0bp and 500bp everything else being constant, ie, assuming the net open positions have not changed since March.

Fig 3 Net open positions after hedge as percent of equity as at March 2006

-10

-20

-30

B k k B K nti n nk K TEB a a Y zbank TS ar b Isbank G ansban Average akifba Ak eni n V D Fi

Source: Company data, ING estimates

_ Duration gap is nine months on average Duration gap is Turkish banks have long had maturity mismatch because of almost chronically short estimated at six months maturities in deposits. Since 2005, money market based funding (overnight repos) has also increased, widening the maturity gap. Even though they reduced positions in the March quarter, many banks have still carried significant (short) repo books during the devaluation. We estimate the average duration gap within the industry is nine months, which means that the exposure is theoretically as large as 75% of the system’s net interest income.

Fig 4 Turkish banks – maturity mismatch (in months)

Avg excluding Akbank Denizbank Garanti Finansbank Fortis Isbank Sekerbank TEB TSKB Vakifbank YKB TSKB

Assets 17.5 11.5 17.8 14.8 16.0 22.1 17.5 14.7 32.4 17.7 19.0 16.85 Liabilities 7.8 9.7 8.5 10.7 2.0 9.9 1.7 5.6 81.0 10.9 4.2 7.11 Duration gap 9.7 1.7 9.2 4.2 14.0 12.1 15.8 9.0 -48.6 6.8 14.8 9.74

Source: Company data, ING estimates Fixed rate earning net assets negative Fixed interest rate earning assets as a percent of the total balance sheet vary between a low 38.1% (TEB) and a high 55.5% (Isbank). As for the fixed interest-bearing liabilities, the ratio to balance sheets is between 40.4% (Denizbank) and 55.3% (Isbank). The difference between fixed rate assets and fixed rate liabilities as a percent of balance sheet is between -8.1% (TEB) and +8.0% (Denizbank), where a negative number implies the presence of greater fixed rate liabilities. On this basis, TEB has the least risky fixed/floating rate mix in its balance sheet while Denizbank is the riskiest. Unfortunately, these are December 2005 numbers.

7 Turkish Banks June 2006

More fixed rate liabilities Fig 5 Fixed rate earning assets vs liabilities as % of balance sheet 2005 than assets Akbank Denizbank Garanti Finansbank Isbank TEB YKB

Fixed rate assets 47.7 48.4 49.8 42.4 55.5 38.1 55.1 Fixed rate liabilities 50.1 40.4 47.3 48.9 55.3 46.2 55.1 Difference -2.4 8.0 2.5 -6.5 0.2 -8.1 0.0

Source: Company data, ING estimates

Estimated cost of devaluation This section reports the estimated combined damage on balance sheets post devaluation. Figure 6 lists the estimated impact of devaluation on the valuation of fixed-rate Turkish lira and foreign currency bonds along with potential losses from short foreign currency positions. We caution investors that this table should not be used for accuracy purposes. These are only estimates and could vary significantly depending on the assumptions one makes. We have assumed an average 400bp hit on Turkish lira denominated fixed rate bonds and 100bp on the foreign currency bonds. We have measured the impact of an estimated 20% devaluation on 31 March 2006 book values. The May 2006 books listed in the table are also estimates.

Fig 6 Turkish banks – estimated loss post devaluation

Estimated YTL Estimated forex 400bp hit 100bp hit Total loss Potential loss fixed rate book fixed rate book in 31 March on YTL on forex on bond on short As pct of YTLbn in May May BV bonds bonds portfolio position Total loss equity ROE'06F

Akbank 6,500 1,600 6,351 (260) (16) (276) (16) (292) -4.6 23.9 Denizbank 100 500 1,051 (4) (5) (9) (25) (34) -3.3 10.7 Finansbank - 400 1,469 - (4) (4) (34) (38) -2.6 27.9 Garanti 2,000 400 4,154 (80) (4) (84) (18) (102) -2.5 19.8 Isbank 8,000 8,000 10,556 (320) (80) (400) (113) (513) -4.9 16.7 TEB 100 100 493 (4) (1) (5) (12) (17) -3.4 9.9 TSKB 400 100 574 (16) (1) (17) (29) (46) -8.0 13.1 Vakifbank 3,700 2,000 4,030 (148) (20) (168) (15) (183) -4.5 17.6 YKB 1,800 1,600 1,728 (72) (16) (88) (0) (88) -5.1 12.1

Source: Company data, ING estimates

_ Asset quality

We do not expect an Fig 7 NPLs as percent of gross loans as of 31 March 2006 immediate effect on

asset quality; any 9 deterioration should 8 show itself in the latter 7 part of 2006 6 5

4 Two asset categories to 3 watch are credit cards 2 and SME loans 1 0

k k k n nk n a EB YKB b T Isba izban s TSKB Garanti an Akba Vakifbank n Den Fi

Source: Company data

8 Turkish Banks June 2006

Consumer loans

Fig 8 Consumer loans to loans ratio (2005)

35 30 25 20 15 10 5 0

k B nk n K anti Y TEB ba r ifbank sba a Isbank Akbank G eniz ak an V in D F

Source: Company data

Fig 9 Consumer loans to assets ratio (2005)

B i E ant ank YKB T b fbank kbank Isbank Gar niz A Vaki e D Finansbank

Source: Company data

9 Turkish Banks June 2006

Marketable securities

Fig 10 Investment securities available for sale as percent of total assets as at March 2006

35 30 25 20 15 10 5 0

if k k n B ranti TEB YK Va TSKB a kbank sba Isbank G A an enizbank in F D

Source: Company data

Fig 11 Investment securities held to maturity as percent of total assets as at March 2006

0 YKB Garanti Vakif Denizbank Isbank

Source: Company data

10 Turkish Banks June 2006

Valuation summary

Akbank, TSKB, Fig 12 Turkish banks PER (2006F) Vakifbank and TEB are

trading at attractive TSKB 2006F earnings TEB multiples, on our Vakifbank assumptions Garanti Akbank Isbank Industry Finansbank Yapi Kredi Denizbank

0 5 10 15 20 25 30 35 40

Source: Company data, ING estimates

_ On book value Fig 13 Turkish banks P/BV (2006F) multiples; TSKB, Isbank and Vakifbank are at the TSKB bottom Isbank Vakifbank TEB Garanti Akbank Industry Yapi Kredi Denizbank Finansbank

012345

Source: Company data, ING estimates

_ Fig 14 Turkish banks P/B vs ROE (2006F)

5.0

Denizbank 4.0 Finansbank

3.0

Yapi Kredi Akbank 2.0 Garanti

Vakifbank TEB 1.0 Fortis Isbank Isbank the bank TSKB 0.0 0 5 10 15 20 25 30

Source: Company data, ING estimates

11 Turkish Banks June 2006

Share price performance

Turkish banks have Fig 15 1 month share price performance – US$ (%) lagged the market;

Denizbank and 20 Finansbank are 10 exceptions 0 -10 -20 -30 -40 -50

x k k e n nk n EB KB d a ank T in B fba b S izbank ti Ba i Is T Akbank 00 di 1 Vak Den Finansbank Kre ISE pi Garan Ya

Source: Bloomberg

Akbank and Isbank are Fig 16 3 months share price performance – US$ (%) the worst performers

over three months 0 -10 -20 -30 -40 -50 -60

k nk n nk nk B a a Ba ba b b TEB Is TSK 00 index Ak 1 Vakif Denizbank Finansbank ISE Garanti Yapi Kredi Bank

Source: Bloomberg

The big banks are the Fig 17 12-month share price performance – US$ (%) laggards

120 100 80 60 40 20 0 -20 -40

k k B nk nk EB a a T SK b ndex Ban b Ban T i ti Is Ak 00 di Denizbank 1 ran Finansbank a i Kre ISE G p Ya

Source: Bloomberg

12 Turkish Banks June 2006

Forecast revisions

We cut our 2006 forecasts Markets have moved fast and the currency has depreciated 20% in one month. Interest rates have moved up to accommodate this. We have revisited the underlying assumptions of our Turkish bank’s model and reduced our forecasts. We have altered our volume and margin assumptions. We now foresee a more modest growth in loans and other assets. Growth in home loans in particular should be more muted. Below are the four specific reasons for the revision.

1. Our model now accommodates higher interest rates: +300bp on average versus a decline of 75bp previously.

2. Our currency assumptions have also changed. We are now expecting a weaker Turkish lira on average in 2006 versus flat previously.

3. We cut our loan growth assumptions for the industry. The revisions vary between a 10ppt cut and 18ppt cut.

4. We have also adjusted trading revenues downwards. Revisions summary

Fig 18 Turkish banks earnings revision 2006F (YTLm)

Earnings (YTLm) ROE (%) Old New Old New

Akbank 1,862 1,499 27.1 21.7 Denizbank 155 117 14.0 10.7 Finansbank 525 443 32.4 27.9 Garanti 982 841 23.0 19.8 Isbank 1,782 1,245 17.1 12.2 TEB 122 135 23.2 25.9 TSKB 119 94 19.7 15.9 Vakifbank 924 793 20.6 17.6 YKB 341 211 18.1 12.1

Source: ING estimates

_ Ratings summary

Fig 19 Turkish banks' rating summary

Price (YTL) Old rating New rating Old TP (YTL) New TP (YTL)

Akbank 6.55 Hold Hold 10.31 7.10 Denizbank 14.30 Hold Hold 11.90 7.87 Finansbank 8.00 Sell Hold 7.40 5.31 Garanti 3.58 Hold Buy 6.65 6.33 Isbank 6.70 Buy Buy 12.50 8.99 TEB 10.70 Sell Buy 20.55 21.15 TSKB 1.82 Buy Buy 5.13 3.72 Vakifbank 5.20 Buy Buy 11.00 6.99 YKB 2.04 Sell Hold 2.59 2.45

Source: ING estimates

13 Turkish Banks June 2006

Fig 20 Recent stock splits and target prices (YTL)

Old TP before Old TP after stock New TP incl stock split split dividends

Akbank 12.6 10.31 7.29 Denizbank 11.9 11.90 7.93 Finansbank 7.42 7.42 5.34 Garanti 6.65 6.65 6.35 Isbank 12.5 12.50 9.16 TEB 27.2 20.55 21.41 TSKB 7.7 5.13 3.72 Vakif 11.0 11.0 7.07 YKB 6.55 2.59 2.45

Source: ING estimates

14 Turkish Banks June 2006

Operating outlook

Asset growth more balanced The credit market conditions have now changed against the consumer: the May/June rate hikes in home loans (c.300bp on average) signal the end of “irrational pricing”. A correction there has been well overdue and is welcome. We now see a more balanced asset growth in the remainder of the year. We expect growth in consumer loans to slow; but consumer credit should still grow by double digits at all the banks we cover. The measures taken to curb credit card demand should start taking their toll in the latter part of the year. Measures to curb credit growth The interest rate hikes are enough to curb credit growth. The Central Bank has also taken other measures to curtail demand for, particularly, credit card loans. Most of these are already implemented this year. The changes to minimum payment regulation should become effective in 2H06.

1. Interest rates on credit cards are capped at the average of ten banks.

2. Revolving balances on which banks can charge interest are set to fall following the hike in the minimum payment required to 20% from 10% of the balance outstanding.

3. Credit limits are also capped at two months’ salary in the first year of credit, three months’ in the second year and are unlimited thereafter.

4. Marketing credit card products in public places such as supermarkets, malls and college campuses is now banned.

5. In addition, the legal framework regulating the guarantor and creditors is also tightened. Funding side Up until devaluation, home loans had made positive returns when funded by Turkish lira swaps or overnight. Turkish lira deposits, on the other hand, were an expensive funding source due to what we call “irrational pricing” as those banks hoping to find international partners chased market share to look better. The cost of Turkish lira swaps is now well above that of deposits. On the asset side, rates started to increase. The banks with the highest exposure to swaps hiked the home loan interest rates first and others have followed suit. A third (near-term) hike in the rates on housing loans cannot be ruled out as the rates are still below commercially viable levels. Deposit growth and consolidation The rate hikes in deposits have been moderate relative to the hikes we have seen on the assets side. We expect the deposit growth to continue and identify at least three reasons as to why deposit growth should continue without banks having to raise the rates as fast

• First, the banks that have been up for sale pushed the interest rates on deposits to above commercially viable levels in their attempt to improve market share in 2005. These banks are now behaving more “rationally”.

15 Turkish Banks June 2006

• Second, withholding tax on investments is equalised. The tax rate on interest income on earned deposits and government securities is now a flat 15%. A shift away from fixed income securities to deposits has taken place and more is expected. Indeed, the repo positions have declined following the sizeable redemptions in 1Q06.

• Third, the government is considering the removal of an historical privilege granted to the state banks. If the preferential treatment of state banks is removed, they will no longer be the sole destination for public-sector deposits.

16 Turkish Banks June 2006

Foreign banks in Turkey

Foreign banks now Fig 21 Market share by assets control 31% of the banking sector assets in Turkey treating all joint ventures as foreign- Foreign owned 31%

Domestic 69%

Source: Company data

_ Or 40% of loans Fig 22 Market share by loans

Foreign 40%

Domestic 60%

Source: Company data

_ 30% of deposits Fig 23 Market share by deposits

Foreign 30%

Domestic 70%

Source: Company data

17 Turkish Banks June 2006

YKB – a credit card powerhouse

Strength is not an illusion There are numerous providers of credit cards and no major (direct) barriers to entry. The industry structure, however, is not as fragmented as it is in the other segments of the banking business. For example, Yapi Kredi, Garanti, Akbank, Isbank, and Finansbank together command an estimated 82% of the market for credit card transactions while they account for 55% of all the loans outstanding. Early entry is one reason Yapi has maintained its strong hold in Turkish consumer banking, particularly owing to its leading position in credit cards. Yapi’s strength in consumer loans is due to its early entry to credit cards and delayed entry by other banks has helped Yapi Kredi to build a formidable franchise.

Adverse selection another The credit card business is unique among all the other banking products. Once it reaches a critical population unchallenged, it is quite difficult to gain market share later on. Indeed, the credit card market does not conform to perfect competition. The structure is rather oligopolistic. We identify three reasons for this, which have to do with adverse selection, why demand for credit cards does not conform to the behavioural assumptions of perfect competition, not only in Turkey but elsewhere in the world

Adverse selection induced by search costs Consumers face search costs and tend to remain reluctant to change from one provider to another. Credit card indebtedness is inversely related to an individual’s propensity to comparison-shop for the best terms on loans. Consumers with substantial search costs tend to run high balances, evidence that card issuers face an adverse selection problem induced by search costs.

Adverse selection arising from false interpretation of high balances Consumers with larger outstanding balances are more likely to have applications for credit denied and are more likely to have experienced payment problems. Issuers may interpret large balances on credit card loans as a signal of credit risk if they cannot distinguish high-risk applicants from low-risk ones among those applicants with high- card balances.

Adverse selection induced by switch costs More creditworthy borrowers may have higher switch costs because they may have been granted favourable credit limits from their current issuers on the basis of private information. Second, consumers who have large outstanding credit card balances may have difficulty switching to a new card than consumers who have low balances, other factors held constant. Such a correlation between credit card debt and switch costs may arise because applicants intending to switch to take advantage of lower rates or ad hoc promotions may not be distinguishable from those applying for a new card in order to accumulate more debt.

18 Turkish Banks June 2006

Credit card business pays We have three reasons why we think the credit card business is worth more than other bank products of similar size?

Earnings quality Credit cards are among the essential banking products and as such banking income generated on card loans is high quality and recurrent.

Historical above-average returns Credit cards have consistently earned higher returns than most other bank products. In the US, bank credit-card operations earned at least three times the rate of return earned in the banking industry at large each and every year since 1980. In Turkey, we estimate that this multiple is at a compelling five times.

Market power For an issuer with market power (eg, Yapi Kredi) the preferred spread depends on the perceived elasticity of demand for card credit and would shift with perceived changes in demand. Let us consider Yapi Kredi’s credit card business to illustrate the point. The bank generates an estimated US$34 per card in after-tax profits. Equity capital deployed to earn this profit is an estimated US$36.5 per card, consistent with an ROE of 93%! With its current balance sheet, Yapi Kredi earns at best a single-digit ROE in other product categories.

19 Turkish Banks June 2006

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20 Turkish Banks June 2006

Companies

21 Turkish Banks June 2006

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22 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

Akbank Maintained HOLD reiterated Hold

Target price (12 mth): Previously YTL10.31

YTL7.10 Price (26/06/06) Bloomberg/Reuters Banks YTL6.55 AKBNK TI/AKBNK.IS

12-month forecast returns (%) Balance-sheet risks are relatively small. We are more Share price (YTL) 8.4 concerned about growth. We cut our 2006 forecasts but Dividend (YTL) 3.0 12m f'cst total return 11.4 the revision does not warrant a rating downgrade. We reiterate our HOLD rating with a new TP of YTL7.10. Key ratios (%)

2004 2005

Better track record with rising rates. Akbank has a better track Net interest margin 8.0 5.9 record with rising interest rates. Estimated at YTL5bn, its free capital base is Loans to assets 37.1 42.2 Loans to deposits 65.0 70.3 high, on which the bank should earn and benefit from high rates. On the ROA 3.23 3.30 down side, first the marked-to-market losses on the securities portfolio and NPL 1.55 1.59 then the duration gap will cost Akbank. We estimate the 2Q hit at close to

YTL300m. Quarterly data (YTLm)

Volume growth is likely to slow. We believe the static impact of 4Q05 1Q06 devaluation on the bank’s balance sheet is the least important risk for Net interest income 631 655 Revenue 971 1,025 Akbank. We would be more worried about the impact of a slowdown in Net income 306 501 activity on balance-sheet growth. We have cut our volume forecast in line EPS (YTL) 0.14 0.23 with the industry.

The shares have over-reacted. The forecast revisions we report here Share data No. of shares (m) 2,200 are moderate and given the sharp decline in share price – off 54% from its Daily t/o (US$m) 30.0 2006 high – we see no reason for a change in rating. On our assumptions, Free float (%) 34.0 Mkt cap (US$m) 8,624 the shares are trading at a 1.9x our projected book (2006F), at which level we Mkt cap (YTLm) 14,410 find them fairly valued.

Forecasts and ratios Share price performance

Yr to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F 12 Revenue (YTLm) 3,450 3,702 4,354 5,483 6,193 6,746 7,078 10 NII (YTLm) 2,539 2,592 3,012 3,871 4,317 4,620 4,741 Net income (YTLm) 1,021 1,438 1,499 2,369 2,650 2,837 2,906 8 BVPS (YTL) 2.83 2.89 3.40 4.21 5.11 6.08 7.07 EPS (YTL) 0.46 0.65 0.68 1.08 1.20 1.29 1.32 6 PER (x) 14.1 10.0 9.6 6.1 5.4 5.1 5.0 Yield (%) 1.87 2.34 2.99 3.12 4.93 5.52 5.91 4 P/BV (x) 2.3 2.3 1.9 1.6 1.3 1.1 0.9 02/05 06/05 10/05 02/06 06/06 ROE (%) 18.1 22.9 21.7 28.3 25.9 23.1 20.1 Share price Index rebased Source: Company data, ING estimates

Source: Reuters

23 Turkish Banks June 2006

Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F 2010F

Balance-sheet summary Securities 15,238 20,096 23,013 24,059 24,624 24,915 25,187 Loans 12,939 22,106 30,197 39,332 48,850 57,716 64,700 Assets total 34,913 52,385 64,109 76,374 88,522 99,555 108,297 Deposits 19,918 31,451 37,521 42,693 46,617 49,913 52,627 Shareholders’ equity 6,227 6,353 7,477 9,254 11,242 13,370 15,549

Income statement summary Net interest income 2,539 2,592 3,012 3,871 4,317 4,620 4,741 Fees and commissions 427 636 841 1,024 1,214 1,398 1,561 Trading income 329 235 224 297 352 405 452 Other 155 239 278 291 311 322 324 Bank revenues 3,450 3,702 4,354 5,483 6,193 6,746 7,078 Operating expense (1,149) (1,326) (1,726) (1,936) (2,165) (2,351) (2,475) Operating income 2,301 2,376 2,628 3,546 4,029 4,394 4,603 Associates and dividend income 34 50 53 56 58 61 64 Cash flow 2,335 2,426 2,681 3,602 4,087 4,455 4,668 Loan loss provisions (193) (348) (515) (640) (774) (909) (1,035) Monetary gain (646) ------Other/extraordinaries - - (292) - - - - EBT 1,497 2,078 1,873 2,962 3,313 3,546 3,633 Taxes (476) (640) (375) (592) (663) (709) (727) Net income 1,021 1,438 1,499 2,369 2,650 2,837 2,906

Balance sheet ratios (%) Loans to assets 37.1 42.2 47.1 51.5 55.2 58.0 59.7 Bond portfolio to assets 43.6 38.4 35.9 31.5 27.8 25.0 23.3 Loans to deposits 65.0 70.3 80.5 92.1 104.8 115.6 122.9 Equity to assets 17.8 12.1 11.7 12.1 12.7 13.4 14.4

Asset quality NPLs as pc of gross loans 1.6 1.6 0.0 0.0 0.0 0.0 0.0 Coverage 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Accrued interest on loans to gross loans 1.5 1.2 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 1.9 1.3 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 43.6 52.2 43.6 52.2 43.6 52.2 43.6 Fees and commissions as pct of revenues 12.4 17.2 19.3 18.7 19.6 20.7 22.1 Trading income as pct of revenues 9.5 6.3 5.1 5.4 5.7 6.0 6.4

Cost income Cost income ratio 33.3 35.8 39.6 35.3 35.0 34.9 35.0 Cost to NII plus fees 38.7 41.1 44.8 39.6 39.1 39.1 39.3 Fees and commissions coverage of cost 37.1 48.0 48.7 52.9 56.1 59.5 63.1

Margins and returns NIM 8.0 5.9 5.2 5.5 5.2 4.9 4.6 ROE 18.1 22.9 21.7 28.3 25.9 23.1 20.1 ROA 3.2 3.3 3.0 3.3 3.1 3.0 2.7

Sequential growth (%) Loans 70.8 36.6 30.3 24.2 18.2 12.1 Deposits 57.9 19.3 13.8 9.2 7.1 5.4 Assets 50.0 22.4 19.1 15.9 12.5 8.8 Net interest income 2.1 16.2 28.5 11.5 7.0 2.6 Fees and commissions 49.2 32.1 21.8 18.6 15.2 11.6 Net income 40.9 4.2 58.1 11.9 7.0 2.4

Source: Company data, ING estimates

24 Turkish Banks June 2006

Target price and valuation

Valuation methodology We have set our target price for the banking business using our excess return on equity methodology. The method assesses value using the returns on equity tied up with a business over and above the cost of equity. We project the returns five years out and estimate an average ROE. Below is the valuation formula we use to calculate excess ROE-based value. = V qBV0 Where = + { − } q 1 [ROE t CoEt ]/ R f BV = BankBookValue = ROEt RETURNonEQUITY CoE = CostofEquity = R f RiskFreeRate Target price

Fig 2 Akbank TP

YTL per share

Underlying business 7.10 Dividends 0.20 Total 7.29

Source: ING estimates

_ Fig 3 Valuation (YTL per share)

2004 2005 2006F 2007F 2008F 2009F2010F

Risk-free rate 14.3 10.0 11.4 11.1 10.2 9.5 8.8 MRP 3.3 3.0 2.8 2.6 2.5 2.42.3 Beta 1.2 1.2 1.2 1.2 1.2 1.21.2 Cost of equity 18.1 13.5 14.6 14.1 13.0 12.2 11.4 Return on equity 18.1 22.9 21.7 28.9 26.3 23.5 20.4 Q 1.86 2.07 2.09 2.22 2.18 2.112.03 BVPS 2.83 2.89 3.40 4.21 5.11 6.087.07 TP 7.10

Source: Company data, ING estimates

25 Turkish Banks June 2006

Balance sheet summary

Fig 4 Asset mix (2004) Fig 5 Asset mix (2005)

Fixed and non Fixed and non core assets core assets Other 2% Other 1% 12% 11% Reserve Reserve deposits deposits 6% 7% Loans 37% Loans 43%

Securities Securities 43% 38%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 6 Liability mix (2004) Fig 7 Liability mix (2005)

Equity Equity 12% 18% Other 4%

Other 5% Funds borrowed 14%

Funds Deposits borrowed 56% Deposits 14% 60% Interbank funds Interbank 10% funds 7%

Source: Company data, ING estimates Source: Company data, ING estimates

26 Turkish Banks June 2006

Income statement summary

Fig 8 Revenue mix (2004) Fig 9 Revenue mix (2005)

Other Other Trading 4% Trading 6% 10% 6%

Fees and Fees and commissions commissions 12% 17%

Net interest Net interest income income 71% 74%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 10 Breakdown of interest income (2004) Fig 11 Breakdown of interest income (2005)

Other Other 3% 2%

Loans Loans Securities Securities 50% 51% 47% 47%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 12 Breakdown of interest expense (2004) Fig 13 Breakdown of interest expense (2005)

Funds Funds borrowed borrowed 6% Money market 8% 9% Money market 14%

Deposits Deposits 78% 85%

Source: Company data, ING estimates Source: Company data, ING estimates

27 Turkish Banks June 2006

Margins and returns

Fig 14 Net interest margin

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 15 Return on equity

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 16 Return on assets

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

28 Turkish Banks June 2006

Currency mix

Fig 17 Assets currency mix (2004) Fig 18 Assets currency mix (2005)

FX 39%

FX TL 50% 50%

TL 61%

Source: Company data Source: Company data

Fig 19 Loans currency mix (2004) Fig 20 Loans currency mix (2005)

FX 34% FX 40%

TL 60% TL 66%

Source: Company data Source: Company data

Fig 21 Deposits currency mix (2004) Fig 22 Deposits currency mix (2005)

TL 34%

FX 45%

TL 55%

FX 66%

Source: Company data Source: Company data

29 Turkish Banks June 2006

Maturity mix

Fig 23 Assets - maturity mix (2004) Fig 24 Assets - maturity mix (2005)

<1m <1m 23% 23%

12m+ 36% 12m+ 42% 1-3m 1-3m 5% 9%

3-6m 12% 3-6m 11% 6-12m 6-12m 21% 18%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 25 Loans - maturity mix (2004) Fig 26 Loans - maturity mix (2005)

<1m 12m+ 22% <1m 26% 12m+ 30% 30%

1-3m 11%

6-12m 1-3m 18% 3-6m 16% 6-12m 12% 3-6m 25% 10%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 27 Securities - maturity mix (2004) Fig 28 Securities - maturity mix (2005)

<1m 1-3m <1m 1-3m 3-6m 1% 6% 0% 1% 13% 3-6m 14%

6-12m 12m+ 17% 48%

12m+ 6-12m 69% 31%

Source: Company data, ING estimates Source: Company data, ING estimates

30 Turkish Banks June 2006

Fig 29 Deposits - maturity mix (2004) Fig 30 Deposits - maturity mix (2005)

6-12m 6-12m 12m+ 3-6m 3-6m 5% 12m+ 3% 0% 6% 0% 2% 1-3m 15% 1-3m 14%

<1m 75% <1m 80%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 31 Liabilities - maturity mix (2004) Fig 32 Liabilities - maturity mix (2005)

12m+ 12m+ 18% 24%

6-12m 7%

<1m 3-6m 6-12m 53% 3% 8% <1m 61% 1-3m 3-6m 11% 5% 1-3m 10%

Source: Company data, ING estimates Source: Company data, ING estimates

31 Turkish Banks June 2006

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32 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

Denizbank Maintained A better acquisition trade Hold

Target price (12 mth): Previously YTL11.90

YTL7.87 Price (26/06/2006) Bloomberg/Reuters Banking YTL14.30 DENIZ TI/DENIZ.IS

12-month forecast returns (%) The Dexia deal appears to be straightforward and hence Share price (YTL) -45.0 should not run into any regulatory issues. The shares are Dividend (YTL) 0.4 12m f'cst total return -44.6

trading at a 16% discount to the tender price which we find too wide and see near-term trading upside Key ratios (%)

2004 2005 Trading upside in shares in the run-up to tender. A tender call to the Net interest margin 5.8 5.7 minority shareholders of Denizbank (25% free float) is mandatory. The Loans to assets 39.0 48.6 specific timing of the call is unknown; the earliest would be September based Loans to deposits 62.9 86.9 ROA 2.09 2.50 on our experience with other M&A transactions in Turkey. We do not foresee NPL 4.22 2.82 any problems with regulatory approval. The shares should trade at the US dollar tender price minus the execution risk. Quarterly data (YTLm)

The tender price will be adjusted by the difference between the MV of 4Q05 1Q06

Zorlu Enerji and the BV: the acquisition has valued the company at the 31 Net interest income 115 103 March BV. Denizbank has a 39.77% stake at this company, which will be Revenue 175 170 Net income 47 28 carved out at the time of deal close. Denizbank has booked its stake at EPS (YTL) 0.15 0.09 YTL158m in 1Q06, (or US$119m at 31 March exchange rate). The market value of this asset is YTL109m (c.US$65m). Share data No. of shares (m) 316 A recap of the Dexia deal. Dexia, the third-largest bank in Belgium, has Daily t/o (US$m) 8.0 agreed to acquire a 75% stake at US$2,437m, valuing Denizbank at Free float (%) 25.0 Mkt cap (US$m) 2,705 US$3.25bn or US$10.28 per share: 3.88x March 2006 book value or 4.31x Mkt cap (YTLm) 4,520 on an adjusted bank-only book basis.

Share price performance Forecasts and ratios

Yr to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F 16 14 Revenue (YTLm) 481 670 813 1,130 1,287 1,507 1,637 12 NII (YTLm) 342 455 508 750 809 924 947 10 Net income (YTLm) 123 201 117 361 366 486 554 BVPS (YTL) 2.70 3.31 3.61 4.52 5.45 6.68 8.08 8 EPS (YTL) 0.39 0.63 0.37 1.14 1.16 1.54 1.75 6 PER (x) 36.8 22.5 38.5 12.5 12.3 9.3 8.2 4 Yield (%) 0.00 0.00 0.44 0.26 0.80 0.81 1.08 2 P/BV (x) 5.3 4.3 4.0 3.2 2.6 2.1 1.8 02/05 06/05 10/05 02/06 06/06 ROE (%) 17.3 21.1 10.7 28.1 23.2 25.3 23.8 Share price Index rebased Source: Company data, ING estimates Source: Reuters

33 Turkish Banks June 2006

Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F2010F

Balance-sheet summary Securities 1,402 1,351 1,937 2,721 2,786 3,408 3,597 Loans 2,616 4,547 6,115 7,873 9,684 11,355 12,661 Assets total 6,705 9,358 11,504 13,759 15,988 18,003 19,588 Deposits 4,160 5,234 5,685 6,034 6,282 6,480 6,637 Shareholders’ equity 855 1,048 1,142 1,430 1,723 2,112 2,556

Income statement summary Net interest income 342 455 508 750 809 924 947 Fees and commissions 61 105 153 186 235 289 343 Trading income (9) 6 9 13 18 24 32 Other 88 105 143 182 225 270 314 Bank revenues 481 670 813 1,130 1,287 1,507 1,637 Operating expense (294) (375) (502) (635) (781) (850) (896) Operating income 188 295 311 495 506 657 741 Associates and dividend income 91 32 34 36 38 39 41 Cash flow 279 328 345 531 543 696 782 Loan loss provisions (83) (67) (73) (80) (86) (89) (89) Monetary gain (50) ------Other/extraordinaries - - (126) - - - - EBT 145 261 147 451 458 608 693 Taxes (23) (60) (29) (90) (92) (122) (139) Net income 123 201 117 361 366 486 554

Balance sheet ratios (%) Loans to assets 39.0 48.6 53.2 57.2 60.6 63.1 64.6 Bond portfolio to assets 20.9 14.4 16.8 19.8 17.4 18.9 18.4 Loans to deposits 62.9 86.9 107.6 130.5 154.2 175.2 190.8 Equity to assets 12.7 11.2 9.9 10.4 10.8 11.7 13.0

Asset quality NPLs as pc of gross loans 4.2 2.8 0.0 0.0 0.0 0.0 0.0 Coverage 88.5 90.6 88.5 90.6 88.5 90.688.5 Accrued interest on loans to gross loans 1.3 1.3 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 1.7 1.3 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 45.1 62.0 45.1 62.0 45.1 62.0 45.1 Fees and commissions as pct of revenues 12.8 15.7 18.8 16.4 18.3 19.2 21.0 Trading income as pct of revenues -2.0 0.8 1.1 1.1 1.4 1.6 2.0

Cost income Cost income ratio 61.0 56.0 61.7 56.2 60.7 56.4 54.7 Cost to NII plus fees 72.8 67.0 75.9 67.9 74.8 70.1 69.4 Fees and commissions coverage of cost 20.9 28.0 30.5 29.2 30.1 33.9 38.3

Margins and returns NIM 5.8 5.7 4.9 5.9 5.4 5.45.0 ROE 17.3 21.1 10.7 28.1 23.2 25.323.8 ROA 2.1 2.5 2.0 2.6 2.2 2.62.7

Sequential growth (%) Loans 73.8 34.5 28.8 23.0 17.311.5 Deposits 25.8 8.6 6.1 4.1 3.22.4 Assets 39.6 22.9 19.6 16.2 12.68.8 Net interest income 33.0 11.7 47.6 7.9 14.2 2.5 Fees and commissions 71.2 45.5 21.4 26.6 22.8 18.9 Net income 63.6 -41.5 207.2 1.6 32.7 14.1

Source: Company data, ING estimates

34 Turkish Banks June 2006

Target price and valuation

Fig 2 Denizbank TP

YTL per share

Underlying business 7.87 Dividends 0.06 Total 7.93

Source: ING estimates

_ Fig 3 Valuation (YTL per share)

2004 2005 2006F 2007F 2008F 2009F2010F

Risk-free rate 12.8 8.9 10.2 9.9 9.1 8.5 7.9 MRP 3.3 3.0 2.8 2.6 2.5 2.42.3 Beta 1.1 1.1 1.1 1.1 1.1 1.11.1 Cost of equity 16.5 12.3 13.3 12.9 11.9 11.1 10.4 Return on equity 17.3 21.3 10.8 28.7 23.7 25.9 24.2 Q 1.94 2.15 2.18 2.59 2.59 2.752.76 BVPS 2.70 3.31 3.61 4.52 5.45 6.688.08 TP 7.87

Source: Company data, ING estimates

35 Turkish Banks June 2006

Acquisition value

The deal values Fig 4 Denizbank's book value adjustments Denizbank ‘the bank’ at US$m at 31 March 4.3x YTLm exchange rate

Consolidated BV as at March 2006 1,122 850 Minus the BV of 40% at Zorlu Enerji (158) (120) Plus the MV of 40% at Zorlu Enerji 112 69 Adjusted consolidated BV 1,076 799

Denizbank bank-only BV Adjusted BV 1,076 799 Minus the MV of Zorlu Enerji (112) (69) Bank-only BV 964 730

Acquisition cost for a 75% stake announced today 3,974 2,437 Minus MV of 39.77% stake at Zorlu Enerji (112) (69) Implied value for 75% of Denizbank "the bank" 3,862 2,368 Implied value for Denizbank "the bank" 5,149 3,158 Implied P/B after adjustments 4.32

Source: Company data, ING estimates

Adjustments to tender price The tender price will be adjusted by the difference between the market value of Zorlu Enerji and the book value as at March: the acquisition has valued the company at the book value. Zorlu Enerji is a Zorlu group subsidiary with operations in electricity. The company is public. Denizbank has a 39.77% stake at this company, which will be carved out at the time of deal closing.

Denizbank has booked its stake at YTL158m in its 1Q06 financials, (or US$120m at 31 March exchange rate). The market value of this asset is currently YTL128m (c.US$81m). Figure 5 displays the book value adjustments we have made to calculate the bank-only multiple Dexia is prepared to pay as implied by the deal.

Fig 5 Denizbank tender call arithmetics

YTL US$

No. of shares of outstanding (m) 316 316 Acquisition price for a 75% stake (m) 3,966 2,437 Total value implied by the acquisition (m) 5,288 3,250

Per share Acquisition price per share (tender price) 16.73 10.28 Minus the current price (5-day average) (14.30) (8.79) Plus the gains from ZOREN (0.19) (0.12) Upside to tender price 2.24 1.38 Percentage upside (%) 15.7 15.7

Source: Company data, ING estimates

36 Turkish Banks June 2006

Regulatory approval required in Turkey

The deal could take at Fig 6 Dexia-Denizbank transaction - regulatory approvals required in least two months to Turkey complete Institution Prior consent Why Time frame

CB The Competition To make sure the deal does The first application; Board not hurt the competitive approval takes at least 2 environment weeks

BRSA Banking Regulatory Needs the To make sure the deal does The second application; and Supervisory Competition Board's not pose any risk to the approval takes at least 3 Agency opinion financial system weeks

CMB Capital Market Board Needs the BRSA's To make sure the deal is The third application; opinion consistent with the Capital approval takes at least 1 Market Law and does not hurt week the minorities

Source: ING

_ Fig 7 Turkish mergers - how long it takes to tender call

Date of announce- Company Competition BRSA Tender Time to ment or board Board application BRSA CMB Share CMB CMB Offer Tender tender - agreement approval approval filed on approval application transfer decision decision II starts offer ends months

Yapi Kredi 8 May 05 31 Jan 05 11 Aug 05 13 Oct 05 28 Sep 05 21 Dec 05 22 Feb 06 23 Feb 06 9 Mar 06 9.7 Garanti 24 Aug 05 24 Aug 05 1 Nov 05 25 Aug 05 10 Nov 05 22 Mar 06 27 Mar 06 10 Apr 06 7.2 Finansbank 3 Apr 06 25 May 06 Petrol Ofisi 1 31 Jul 02 25 Oct 02 N/A 18 Nov 02 8 Aug 02 22 Nov 02 9 Dec 02 3.8 Petrol Ofisi 2 13 Mar 06 21 Apr 06 24 Apr 06 N/A 18 May 06 16 May 06 Tansas 22 Dec 98 13 Jan 99 6 May 99 N/A 11 Jan 99 17 Jun 99 13 Sep 99 27 Sep 99 8.8

Source: Company data, ING estimates

_ Recent M&A valuation in Turkish Banking

Fig 8 Turkish Banks - Recent M&A Involving Foreign Banks (US$m)

Acquirer Target Date Percent Trans Implied Implied P/B Current Current BV 2005 acquired action mkt cap (2005A) mkt cap P/B (2005) value

HSBC Demirbank Oct-01 100.0 350 350 Unicredito KFS Oct-02 50.0 240 480 BNP TEB Feb-05 42.0 182 433 1.2 490 1.4 350 Fortis Disbank Apr-05 89.3 1,089 1,219 1.5 818 1.0 796 Unicredito YKB Jan-05 28.8 691 2,403 1.9 2,318 1.9 1,252 GE Capital Garanti Aug-05 25.5 1,805 7,078 2.4 4,504 1.5 2,910 Bank Turan Alem Sekerbank Jun-06 34.0 425 1,249 3.6 731 2.1 350 Dubai Islamic Bank MNG Bank Jan-06 100.0 160 160 NBG Finansbank Apr-06 46.0 2,774 5,049 4.2 4,553 3.8 1,210 Dexia Denizbank May-06 75.0 2,437 3,253 3.9 2,708 3.2 837

Source: Company data, ING estimates

37 Turkish Banks June 2006

Denizbank balance sheet highlights

Fig 9 Asset mix (2004) Fig 10 Asset mix (2005)

Fixed and non Fixed and non core assets core assets 4% 3%

Other Other 32% 31%

Loans 39% Loans 49%

Reserve Reserve deposits deposits 3% 4% Securities Securities 14% 21%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 11 Liability mix (2004) Fig 12 Liability mix (2005)

Equity Equity 13% 11% Other Other 5% 6%

Funds borrowed Funds Deposits 15% borrowed 57% Deposits 24% 62% Interbank funds 4% Interbank funds 3%

Source: Company data, ING estimates Source: Company data, ING estimates

38 Turkish Banks June 2006

Income statement summary

Fig 13 Revenue mix (2004) Fig 14 Revenue mix (2005)

Other Other 18% 16%

Fees and Fees and commissions commissions 13% 16%

Net interest Net interest income income 69% 68%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 15 Breakdown of interest income (2004) Fig 16 Breakdown of interest income (2005)

Other Other 18% 16%

Fees and Fees and commissions commissions 13% 16%

Net interest Net interest income income 69% 68%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 17 Breakdown of interest expense (2004) Fig 18 Breakdown of interest expense (2005)

Other Other 8% 8%

Loans Securities 45% 30%

Securities Loans 47% 62%

Source: Company data, ING estimates Source: Company data, ING estimates

39 Turkish Banks June 2006

Margins and returns

Fig 19 Net interest margin

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 20 Return on equity

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 21 Return on assets

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

40 Turkish Banks June 2006

Currency mix

Fig 22 Assets currency mix (2004) Fig 23 Assets currency mix (2005)

TL TL 45% 46% FX FX 55% 54%

Source: Company data Source: Company data

Fig 24 Loans currency mix (2004) Fig 25 Loans currency mix (2005)

FX FX 47% 46% TL TL 53% 54%

Source: Company data Source: Company data

Fig 26 Deposits currency mix (2004) Fig 27 Deposits currency mix (2005)

TL 32% TL 37%

FX FX 63% 68%

Source: Company data Source: Company data

41 Turkish Banks June 2006

Maturity mix

Fig 28 Assets maturity mix (2004) Fig 29 Assets maturity mix (2005)

12m+ 12m+ 27% 26%

<1m <1m 38% 42%

6-12m 6-12m 14% 14%

3-6m 3-6m 1-3m 1-3m 8% 10% 7% 14%

Source: Company data Source: Company data

Fig 30 Liabilities maturity mix (2004) Fig 31 Liabilities maturity mix (2005)

12m+ 14% 12m+ 22%

6-12m 12% <1m 48% 6-12m 3-6m <1m 11% 5% 59%

1-3m 3-6m 10% 7% 1-3m 12%

Source: Company data Source: Company data

Fig 32 Loans maturity mix (2004) Fig 33 Loans maturity mix (2005)

12m+ <1m 20% <1m 23% 12m+ 29% 31%

6-12m 20% 1-3m 1-3m 20% 14% 6-12m 16% 3-6m 3-6m 17% 10%

Source: Company data Source: Company data

42 Turkish Banks June 2006

Fig 34 Securities maturity mix (2004) Fig 35 Securities maturity mix (2005)

<1m 1-3m <1m 5% 1% 6% 3-6m 1-3m 11% 10%

12m+ 3-6m 41% 10%

6-12m 19%

12m+ 64%

6-12m 33%

Source: Company data Source: Company data

Fig 36 Deposits maturity mix (2004) Fig 37 Deposits maturity mix (2005)

12m+ 12m+ 6-12m 6-12m 2% 4% 7% 5% 3-6m 3-6m 5% 6%

1-3m 11% 1-3m 16%

<1m 69% <1m 75%

Source: Company data Source: Company data

43 Turkish Banks June 2006

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44 Turkish Banks June 2006

Turkey Haluk Akdogan London (44 20) 7767 6650 [email protected]

Finansbank Previously: Sell The NBG deal is moving ahead; the Hold execution risk is small

Target price (12 mth): Previously YTL7.42

YTL5.31 Price (26/06/2006) Bloomberg/Reuters Banks YTL8.00 FINBN TI/FINBN.IS

12-month forecast returns (%)

The shares are trading 11% below the tender price. The Share price (YTL) -33.7 Dividend (YTL) 0.5 trading range has been 3-20% since the deal was 12m f'cst total return -33.2 announced. We are upgrading the shares to HOLD with a new 12-month target price of YTL5.31. Key ratios (%)

2004 2005 NBG rights issue given go-ahead by the Greek regulator. NBG’s Net interest margin 7.1 8.0 Loans to assets 60.1 61.8 rights issue of €3bn to finance the Finansbank deal has been approved by Loans to deposits 101.9 124.5 the Capital Market Board in Greece, which removes one hurdle. Regulatory ROA 2.57 3.35 NPL 2.05 2.68 approval in Turkey remains incomplete. Management’s guidance is mid-July at the earliest. From then on, it will launch the tender call. The tender price, if approved by the Turkish CMB, is US$5.32 per share (YTL8.87 at the current Quarterly data (YTLm) exchange rate). Fiba Holding will keep a 9.68% stake in the bank for at least 4Q05 1Q06 two years. Net interest income 214 222 Revenue 296 374 Longer term values. The key long-term risk is how motivated the Net income 78 131 EPS (YTL) 0.08 0.14 chairman and the management team will be in running the bank and whether the management handover will be a smooth one when the current team leaves. As the existing team has been instrumental in creating what has Share data become one of the success stories in Turkey, its interest (or lack of it) in the No. of shares (m) 950 Daily t/o (US$m) 11.0 bank is an important risk source. At the current price, we see better value Free float (%) 45.0 Mkt cap (US$m) 4,548 elsewhere. Mkt cap (YTLm) 7,600

Forecasts and ratios Share price performance Yr to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F

Revenue (YTLm) 763 1,156 1,634 2,045 2,330 2,621 2,765 NII (YTLm) 531 833 1,175 1,470 1,631 1,800 1,838 8 Net income (YTLm) 192 350 443 744 800 869 918 6 BVPS (YTL) 1.10 1.47 1.87 2.53 3.25 4.03 4.85 EPS (YTL) 0.20 0.37 0.47 0.78 0.84 0.91 0.97 4 PER (x) 39.7 21.7 17.2 10.2 9.5 8.7 8.3 2 Yield (%) 0.00 0.00 0.46 0.58 0.98 1.05 1.14 P/BV (x) 7.3 5.4 4.3 3.2 2.5 2.0 1.7 0 ROE (%) 20.8 28.7 27.9 35.6 29.1 25.1 21.8 02/05 06/05 10/05 02/06 06/06 Source: Company data, ING estimates Share price Index rebased _

Source: Reuters

45 Turkish Banks June 2006

Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F 2010F

Balance sheet summary Securities 1,286 2,012 2,732 2,827 3,139 3,558 3,248 Loans 5,191 7,616 10,358 13,465 16,696 19,702 22,066 Assets total 8,630 12,314 15,620 19,213 22,852 26,194 28,831 Deposits 5,092 6,115 6,525 6,838 7,056 7,229 7,366 Shareholders’ equity 1,047 1,397 1,774 2,406 3,086 3,825 4,605

Income statement summary Net interest income 531 833 1,175 1,470 1,631 1,800 1,838 Fees and commissions 190 296 438 551 672 792 897 Trading income (16) (47) (63) (79) (97) (114) (129) Other 59 75 84 103 124 143 159 Bank revenues 763 1,156 1,634 2,045 2,330 2,621 2,765 Operating expense (380) (523) (712) (845) (972) (1,080) (1,154) Operating income 383 633 922 1,200 1,358 1,541 1,611 Associates and dividend income 21 18 19 20 21 22 24 Cash flow 404 651 942 1,220 1,379 1,564 1,635 Loan loss provisions (72) (150) (216) (291) (379) (478) (487) Monetary gain (77) ------Other/extraordinaries - - (172) - - - - EBT 255 502 554 930 1,000 1,086 1,148 Taxes (63) (151) (111) (186) (200) (217) (230) Net income 192 350 443 744 800 869 918

Balance sheet ratios (%) Loans to assets 60.1 61.8 66.3 70.1 73.1 75.2 76.5 Bond portfolio to assets 14.9 16.3 17.5 14.7 13.7 13.6 11.3 Loans to deposits 101.9 124.5 158.7 196.9 236.6 272.5 299.6 Equity to assets 12.1 11.3 11.4 12.5 13.5 14.6 16.0

Asset quality NPLs as pc of gross loans 2.1 2.7 0.0 0.0 0.0 0.0 0.0 Coverage 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Accrued interest on loans to gross loans 1.2 1.4 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 2.2 1.7 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 74.3 79.9 74.3 79.9 74.3 79.9 74.3 Fees and commissions as pct of revenues 24.9 25.6 26.8 27.0 28.9 30.2 32.5 Trading income as pct of revenues -2.1 -4.0 -3.9 -3.9 -4.2 -4.3 -4.7

Cost income Cost income ratio 49.8 45.3 43.6 41.3 41.7 41.2 41.7 Cost to NII plus fees 52.8 46.4 44.1 41.8 42.2 41.6 42.2 Fees and commissions coverage of cost 49.9 56.5 61.5 65.2 69.2 73.4 77.8

Margins and returns NIM 7.1 8.0 8.4 8.4 7.8 7.3 6.7 ROE 20.8 28.7 27.9 35.6 29.1 25.1 21.8 ROA 2.6 3.3 4.3 4.2 3.7 3.5 3.3

Sequential growth (%) Loans 46.7 36.0 30.0 24.0 18.0 12.0 Deposits 20.1 6.7 4.8 3.2 2.5 1.9 Assets 42.7 26.8 23.0 18.9 14.6 10.1 Net interest income 56.9 41.2 25.1 10.9 10.4 2.1 Fees and commissions 55.9 48.0 25.9 22.0 17.8 13.3 Net income 82.9 26.4 67.9 7.6 8.6 5.6

Source: Company data, ING estimates

46 Turkish Banks June 2006

Target price and valuation

Fig 2 Finansbank TP

YTL per share

Underlying business 5.31 Dividends 0.04 Total 5.34

Source: ING estimates

_ Fig 3 Valuation (YTL per share)

2004 2005 2006F 2007F 2008F 2009F2010F

Risk-free rate 12.8 8.9 10.2 9.9 9.1 8.5 7.9 MRP 3.3 3.0 2.8 2.6 2.5 2.42.3 Beta 1.0 1.0 1.0 1.0 1.0 1.01.0 Cost of equity 16.0 11.9 12.9 12.5 11.5 10.8 10.1 Return on equity 20.8 29.4 28.3 36.3 29.6 25.6 22.1 Q 2.58 2.86 2.84 2.94 2.77 2.642.53 BVPS 1.10 1.47 1.87 2.53 3.25 4.034.85 TP 5.31

Source: ING estimates

47 Turkish Banks June 2006

Update

A recap of the deal In a landmark transaction, NBG has agreed to acquire 46% of Finansbank. Fiba Holding, the selling shareholder, has committed to sell more if NBG cannot raise its stake to at least 50.01%. The deal will carve out the international operations of Finansbank. Fiba Holding will pay US$580m to keep the foreign assets, which will have to be re-branded. Tender price arithmetics

Fig 4 Finansbank - Upside to tender price

YTL US$

No. of shares of outstanding (m) 950 950 Acquisition price for a 46% stake (m) 3,878 2,323 Total value implied by the acquisition (m) 8,430 5,050

Per share Acquisition price per share (tender price) 8.87 5.32 Minus the current price (5-day average) (8.00) (4.79) Upside to tender price 0.87 0.52 Percentage upside (%) 10.9 10.9

Source: Company data, ING estimates

_ Regulatory approval required in Turkey

The Greek regulator has Fig 5 Regulatory approvals required in Turkey given the go-head to Institution Prior consent Why Time frame NBG rights issue; we CB The Competition Board To make sure the deal does The first application; approval are now waiting for the not hurt the competitive takes at least 2 weeks Turkish regulators environment

BRSA Banking Regulatory and Needs the To make sure the deal does The second application; Supervisory Agency Competition Board's not pose any risk to the approval takes at least 3 opinion financial system weeks

CMB Capital Market Board Needs the BRSA's To make sure the deal is The third application; approval opinion consistent with the Capital takes at least 1 week Market Law and does not hurt the minorities

Source: ING

48 Turkish Banks June 2006

Balance sheet summary

Fig 6 Asset mix (2004) Fig 7 Asset mix (2005)

Fixed and non Fixed and non core assets core assets Other 2% Other 2% 16% 14%

Reserve Reserve deposits deposits 6% 7%

Securities Securities 16% 15% Loans Loans 60% 62%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 8 Liability mix (2004) Fig 9 Liability mix (2005)

Equity Equity 11% 12% Other 8% Other 10%

Deposits 50%

Deposits Funds 60% borrowed Funds 16% borrowed 30% Interbank Interbank funds funds 2% 1%

Source: Company data, ING estimates Source: Company data, ING estimates

49 Turkish Banks June 2006

Income statement summary

Fig 10 Revenue mix (2004) Fig 11 Revenue mix (2005)

Other Other 8% 6%

Fees and Fees and commissions commissions 25% 24%

Net interest Net interest income income 68% 69%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 12 Breakdown of Interest income (2004) Fig 13 Breakdown of interest income (2005)

Other Other 5% 4% Securities Securities 16% 21%

Loans 74% Loans 80%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 14 Breakdown of interest expense (2004) Fig 15 Breakdown of interest expense (2005)

Funds borrowed Funds Money 9% borrowed market 21% 2%

Money market 3%

Deposits 76% Deposits 89%

Source: Company data, ING estimates Source: Company data, ING estimates

50 Turkish Banks June 2006

Margins and returns

Fig 16 Net interest margin

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 17 Return on equity

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 18 Return on assets

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

51 Turkish Banks June 2006

Currency mix

Fig 19 Assets currency mix (2004) Fig 20 Assets currency mix (2005)

TL 40% TL 46% FX 54% FX 60%

Source: Company data Source: Company data

Fig 21 Loans currency mix (2004) Fig 22 Loans currency mix (2005)

TL 36% TL 44%

FX 56% FX 64%

Source: Company data Source: Company data

Fig 23 Deposits currency mix (2004) Fig 24 Deposits currency mix (2005)

TL 24% TL 34%

FX 66% FX 76%

Source: Company data Source: Company data

52 Turkish Banks June 2006

Maturity mix

Fig 25 Assets - maturity mix (2004) Fig 26 Assets - maturity mix (2005)

12m+ <1m 25% <1m 24% 29% 12m+ 35%

1-3m 6-12m 15% 15% 1-3m 16% 6-12m 3-6m 3-6m 14% 15% 12%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 27 Loans - maturity mix (2004) Fig 28 Loans - maturity mix (2005)

12m+ <1m <1m 18% 16% 15% 12m+ 31%

1-3m 1-3m 22% 6-12m 25% 22%

6-12m 3-6m 3-6m 19% 13% 19%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 29 Securities - maturity mix (2004) Fig 30 Securities - maturity mix (2005)

1-3m <1m <1m 1% 9% 1-3m 1% 3-6m 2% 15%

3-6m 12%

6-12m 12% 6-12m 7%

12m+ 12m+ 70% 71%

Source: Company data, ING estimates Source: Company data, ING estimates

53 Turkish Banks June 2006

Fig 31 Deposits - maturity mix (2004) Fig 32 Deposits - maturity mix (2005)

12m+ 12m+ 6-12m 3% 6-12m 5% 3-6m 2% 6% 5% 3-6m 5% 1-3m 13%

1-3m 12%

<1m 72% <1m 77%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 33 Liabilities - maturity mix (2004) Fig 34 Liabilities - maturity mix (2005)

12m+ 19% 12m+ 25%

6-12m <1m 10% 47% <1m 56% 6-12m 3-6m 9% 6%

1-3m 3-6m 9% 9% 1-3m 10%

Source: Company data, ING estimates Source: Company data, ING estimates

54 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

Garanti Bank Previously: Hold Leaner and better Buy

Target price (12 mth): Previously YTL6.65

YTL6.33 Price (26/06/2006) Bloomberg/Reuters Banks YTL3.58 GARAN TI/GARAN.IS

12-month forecast returns (%) Divesting non-core assets has enhanced financials. The Share price (YTL) 76.9 bank is leaner and better focused, and should deliver Dividend (YTL) 0.5 12m f'cst total return 77.3

both growth and profit in the near future. The shares are trading at compelling earnings and book value multiples. Key ratios (%)

2004 2005 Leaner and better. With all the intra group non core businesses divested, Net interest margin 5.1 5.3 Garanti is looking focused and better prepared for a more competitive Loans to assets 39.2 45.8 industry shaping up in Turkey. Strong volume growth has improved expense Loans to deposits 58.6 70.8 ROA 1.80 2.26 ratios. Productivity gains are significant and new capacity is needed. Return NPL 4.02 4.11 on equity should average 21% pa over the next five years.

Balance sheet is more defensive. Having experienced one of the Quarterly data (YTLm) worst financial crises in Turkey in 2001, Garanti’s balance sheet is far 4Q05 1Q06 healthier now than it was during the turmoil. Unlike 2001, the net open Net interest income 403 424 Revenue 698 761 position in currency is small and the duration gap is manageable. We see Net income 183 251 limited downside risk in financials post devaluation: we have cut our 2006 EPS (YTL) 0.09 0.12 ROE estimate by 200bp. Share data The shares are trading at compelling multiples. We upgrade the No. of shares (m) 2,100 share to BUY from Hold previously. Our new 12-month target price is Daily t/o (US$m) 30.0 YTL6.33. Free float (%) 34.0 Mkt cap (US$m) 4,499 Mkt cap (YTLm) 7,518 Forecasts and ratios

Yr to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F Share price performance Revenue (YTLm) 2,148 2,730 3,387 4,561 5,232 5,898 6,416 NII (YTLm) 1,288 1,675 2,026 2,887 3,182 3,460 3,612 Net income (YTLm) 451 708 841 1,442 1,617 1,944 2,233 8 BVPS (YTL) 1.50 1.86 2.20 2.78 3.44 4.22 5.13 EPS (YTL) 0.21 0.34 0.40 0.69 0.77 0.93 1.06 6 PER (x) 16.7 10.6 8.9 5.2 4.6 3.9 3.4 Yield (%) 0.00 0.00 0.47 0.56 0.96 1.08 1.29 4 P/BV (x) 2.4 1.9 1.6 1.3 1.0 0.8 0.7 ROE (%) 15.7 20.1 19.8 27.6 24.8 24.2 22.7 2 02/05 06/05 10/05 02/06 06/06 Source: Company data, ING estimates _ Share price Index rebased

Source: Reuters

55 Turkish Banks June 2006

Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F 2010F

Balance sheet summary Securities 9,263 10,954 13,571 14,406 15,094 15,788 16,645 Loans 10,313 16,700 22,962 30,138 37,672 44,736 50,328 Assets total 26,280 36,468 45,103 54,322 63,574 72,052 78,792 Deposits 17,612 23,578 26,240 28,356 29,881 31,117 32,107 Shareholders’ equity 3,141 3,900 4,615 5,841 7,216 8,868 10,766

Income statement summary Net interest income 1,288 1,675 2,026 2,887 3,182 3,460 3,612 Fees and commissions 555 738 1,002 1,237 1,532 1,842 2,141 Trading income 163 133 175 216 258 300 337 Other 143 185 184 221 260 296 326 Bank revenues 2,148 2,730 3,387 4,561 5,232 5,898 6,416 Operating expense (1,084) (1,352) (1,635) (1,974) (2,229) (2,442) (2,587) Operating income 1,064 1,378 1,752 2,587 3,004 3,456 3,829 Associates and dividend income 61 3 3 3 4 4 4 Cash flow 1,124 1,381 1,755 2,591 3,007 3,460 3,833 Loan loss provisions (425) (447) (613) (788) (985) (1,031) (1,042) Monetary gain (15) ------Other/extraordinaries - - (91) - - - - EBT 684 934 1,052 1,803 2,022 2,429 2,791 Taxes (234) (226) (210) (361) (404) (486) (558) Net income 451 708 841 1,442 1,617 1,944 2,233

Balance sheet ratios (%) Loans to assets 39.2 45.8 50.9 55.5 59.3 62.1 63.9 Bond portfolio to assets 35.2 30.0 30.1 26.5 23.7 21.9 21.1 Loans to deposits 58.6 70.8 87.5 106.3 126.1 143.8 156.8 Equity to assets 12.0 10.7 10.2 10.8 11.4 12.3 13.7

Asset quality NPLs as pc of gross loans 4.0 4.1 0.0 0.0 0.0 0.0 0.0 Coverage 56.4 66.8 56.4 66.8 56.4 66.8 56.4 Accrued interest on loans to gross loans 1.5 1.3 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 4.8 3.9 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 47.5 57.0 47.5 57.0 47.5 57.0 47.5 Fees and commissions as pct of revenues 25.8 27.0 29.6 27.1 29.3 31.2 33.4 Trading income as pct of revenues 7.6 4.9 5.2 4.7 4.9 5.1 5.3

Cost income Cost income ratio 50.5 49.5 48.3 43.3 42.6 41.4 40.3 Cost to NII plus fees 58.9 56.1 54.0 47.9 47.3 46.1 45.0 Fees and commissions coverage of cost 51.1 54.5 61.3 62.7 68.8 75.4 82.8

Margins and returns NIM 5.1 5.3 5.0 5.8 5.4 5.1 4.8 ROE 15.7 20.1 19.8 27.6 24.8 24.2 22.7 ROA 1.8 2.3 2.3 2.9 2.7 2.9 3.0

Sequential growth (%) Loans 61.9 37.5 31.3 25.0 18.8 12.5 Deposits 33.9 11.3 8.1 5.4 4.1 3.2 Assets 38.8 23.7 20.4 17.0 13.3 9.4 Net interest income 30.0 21.0 42.5 10.2 8.7 4.4 Fees and commissions 33.0 35.8 23.4 23.9 20.2 16.2 Net income 57.2 18.8 71.4 12.1 20.2 14.9

Source: Company data, ING estimates

56 Turkish Banks June 2006

Target price and valuation

Fig 2 Garanti TP

YTL per share

Underlying business 6.33 Dividends 0.02 Total 6.35

Source: ING estimates

_ Fig 3 Valuation (YTL per share)

2004 2005 2006F 2007F 2008F 2009F2010F

Risk-free rate 12.8 8.9 10.2 9.9 9.1 8.5 7.9 MRP 3.3 3.0 2.8 2.6 2.5 2.42.3 Beta 1.1 1.1 1.1 1.1 1.1 1.11.1 Cost of equity 16.4 12.3 13.3 12.8 11.8 11.1 10.3 Return on equity 15.7 31.3 25.1 34.5 30.2 28.8 26.6 Q 2.55 2.92 2.88 3.09 3.06 3.083.07 BVPS 1.50 1.86 2.20 2.78 3.44 4.225.13 TP 6.33

Source: Company data, ING estimates

57 Turkish Banks June 2006

Balance sheet summary

Fig 4 Asset mix (2004) Fig 5 Asset mix (2005)

Fixed and non Fixed and non core assets core assets Other 5% Other 4% 16% 15%

Reserve Reserve deposits deposits 5% 6%

Loans 39% Loans 45%

Securities Securities 30% 35%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 6 Liability mix (2004) Fig 7 Liability mix (2005)

Equity Equity 12% 11% Other Other 4% 4%

Funds Funds borrowed borrowed 13% 15%

Interbank funds Interbank Deposits Deposits 4% funds 65% 67% 5%

Source: Company data, ING estimates Source: Datastream

58 Turkish Banks June 2006

Income statement summary

Fig 8 Revenue mix (2004) Fig 9 Revenue mix (2005)

Other Other 7% 7% Trading Trading 8% 5%

Fees and Fees and commissions commissions 27% Net interest 26% Net interest income income 59% 61%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 10 Breakdown of interest income (2004) Fig 11 Breakdown of interest income (2005)

Other Other 5% 5%

Loans Securities 47% 38%

Securities Loans 48% 57%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 12 Breakdown of interest expense (2004) Fig 13 Breakdown of interest expense (2005)

Funds Funds borrowed borrowed 7% 10% Money market 11% Money market 11%

Deposits Deposits 82% 79%

Source: Company data, ING estimates Source: Company data, ING estimates

59 Turkish Banks June 2006

Margins and returns

Fig 14 Net interest margin

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 15 Return on equity

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 16 Return on assets

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

60 Turkish Banks June 2006

Currency mix

Fig 17 Assets currency mix (2004) Fig 18 Assets currency mix (2005)

TL FX FX 48% 48% TL 52% 52%

Source: Company data Source: Company data

Fig 19 Loans currency mix (2004) Fig 20 Loans currency mix (2005)

FX TL 45% FX 48% 52% TL 55%

Source: Company data Source: Company data

Fig 21 Deposits currency mix (2004) Fig 22 Deposits currency mix (2005)

TL 44% FX 47% TL FX 53% 56%

Source: Company data Source: Company data

61 Turkish Banks June 2006

Maturity mix

Fig 23 Assets maturity mix (2004) Fig 24 Assets maturity mix (2005)

<1m 23% <1m 31%

12m+ 44% 1-3m 12m+ 5% 54%

3-6m 1-3m 9% 5%

6-12m 3-6m 9% 6-12m 11% 9%

Source: Company data Source: Company data

Fig 25 Loans maturity mix (2004) Fig 26 Loans maturity mix (2005)

12m+ <1m <1m 33% 33% 12m+ 33% 38%

1-3m 1-3m 6-12m 7% 10% 6-12m 12% 3-6m 3-6m 11% 12% 11%

Source: Company data Source: Company data

Fig 27 Securities maturity mix (2004) Fig 28 Securities maturity mix (2005)

<1m 1-3m <1m 1-3m 1% 1% 3-6m 3% 3% 11% 3-6m 18% 6-12m 10%

6-12m 12m+ 12% 64%

12m+ 77%

Source: Company data Source: Company data

62 Turkish Banks June 2006

Fig 29 Deposits maturity mix (2004) Fig 30 Deposits maturity mix (2005)

6-12m 12m+ 6-12m 3-6m 12m+ 3-6m 2% 1% 1% 2% 0% 2% 1-3m 13% 1-3m 14%

<1m <1m 81% 84%

Source: Company data Source: Company data

Fig 31 Liabilities maturity mix (2004) Fig 32 Liabilities maturity mix (2005)

12m+ 12m+ 21% 20%

6-12m 6-12m 8% 9% <1m 3-6m <1m 3-6m 56% 3% 60% 3% 1-3m 1-3m 9% 11%

Source: Company data Source: Company data

63 Turkish Banks June 2006

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64 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

Isbank Maintained Slower growth Buy

Target price (12 mth): Previously YTL12.50

YTL8.99 Price (26/06/06) Bloomberg/Reuters Banks YTL6.70 ISCTR TI/ISCTR.IS

2 12-month forecast returns (%) Growth is likely to slow for the rest of the year. We have Share price (YTL) 34.2 cut our volume forecasts and revisited valuation. The Dividend (YTL) 2.5 12m f'cst total return 36.7

forecast cut does not warrant a rating downgrade as the shares have already come off significantly. Key ratios (%)

2004 2005 Balance sheet risks. Devaluation should show itself in the balance Net interest margin 5.9 5.1 sheet. The gains marked to market in the March quarter is likely to disappear Loans to assets 32.3 32.6 in the June quarter. The equity will take the hit. The impact on the second Loans to deposits 51.2 55.5 ROA 1.78 1.87 quarter income statement should be contained: a currency loss plus a loss in NPL 8.34 4.83 trading income.

Loan growth to slow in 2H06. We are more interested in what happens Quarterly data (YTLm) to lending activity after devaluation. The rate hikes should slow the loan 4Q05 1Q06 demand, more on the retail side. The export-oriented SME business should Net interest income 669 633 Revenue 1,042 1,200 drive the lending growth post devaluation. The full-year growth should still Net income 246 408 look good. We cut our loan growth forecast to 25%. EPS (YTL) 0.12 0.21

The shares have already come off to price in all these. Post Share data devaluation, banking sector stocks have lost more than 30% in value. The No. of shares (m) 1,969 reaction has been quick and brutal. We believe that the sell-off is overdone Daily t/o (US$m) 50.0 and that the shares should recover. On our revised forecast, Isbank C class Free float (%) 28.0 Mkt cap (US$m) 7,895 shares are trading at an attractive 1.6x book. We reiterate our BUY. Mkt cap (YTLm) 13,192

Forecasts and ratios Share price performance Yr to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F 14 Revenue (YTLm) 3,709 4,320 5,517 6,605 7,601 8,299 9,031 NII (YTLm) 2,093 2,582 3,589 4,206 4,699 4,885 5,120 12 Net income (YTLm) 635 956 1,245 2,068 2,443 2,825 3,333 10 BVPS (YTL) 3.88 4.91 5.42 6.26 7.25 8.40 9.76 EPS (YTL) 0.32 0.49 0.63 1.05 1.24 1.43 1.69 8 PER (x) 20.8 13.8 10.6 6.4 5.4 4.7 4.0 6 Yield (%) 0.97 1.42 2.54 2.36 3.92 4.63 5.35 P/BV (x) 1.7 1.4 1.2 1.1 0.9 0.8 0.7 4 Bank-only ROE 17.1 16.6 23.5 23.6 23.2 23.3 02/05 06/05 10/05 02/06 06/06 ROE (%) 9.3 11.0 12.2 18.0 18.4 18.3 18.6 Share price Index rebased Source: Company data, ING estimates Source: Reuters

65 Turkish Banks June 2006

_ Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F2010F

Balance sheet summary Securities 13,849 21,573 27,422 30,508 31,727 32,497 35,003 Loans 12,452 20,750 28,531 37,446 46,059 54,004 60,215 Assets total 38,513 63,711 76,648 90,005 102,350 113,370 122,075 Deposits 24,320 37,399 44,104 49,751 53,998 57,544 60,451 Shareholders’ equity 7,640 9,677 10,673 12,328 14,282 16,542 19,208

Income statement summary Net interest income 2,093 2,582 3,589 4,206 4,699 4,885 5,120 Fees and commissions 709 894 1,350 1,683 2,040 2,402 2,753 Trading income 494 239 298 386 485 593 705 Other 414 606 281 330 377 419 453 Bank revenues 3,709 4,320 5,517 6,605 7,601 8,299 9,031 Operating expense (1,516) (1,663) (2,261) (2,530) (2,781) (2,970) (3,087) Operating income 2,193 2,657 3,257 4,075 4,820 5,329 5,943 Associates and dividend income 109 92 96 101 106 111 117 Cash flow 2,302 2,749 3,353 4,176 4,926 5,440 6,060 Loan loss provisions (1,069) (1,100) (1,313) (1,590) (1,872) (1,909) (1,894) Monetary gain (134) ------Other/extraordinaries - 0 (387) - - - - EBT 1,099 1,649 1,653 2,585 3,054 3,531 4,166 Taxes (464) (693) (408) (517) (611) (706) (833) Net income 635 956 1,245 2,068 2,443 2,825 3,333

Balance sheet ratios (%) Loans to assets 32.3 32.6 37.2 41.6 45.0 47.6 49.3 Bond portfolio to assets 36.0 33.9 35.8 33.9 31.0 28.7 28.7 Loans to deposits 51.2 55.5 64.7 75.3 85.3 93.8 99.6 Equity to assets 19.8 15.2 13.9 13.7 14.0 14.6 15.7

Asset quality NPLs as pc of gross loans 8.3 4.8 0.0 0.0 0.0 0.0 0.0 Coverage 100.0 100.0 100.0 100.0 100.0 100.0100.0 Accrued interest on loans to gross loans 5.5 5.1 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 5.0 2.8 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 50.4 55.2 50.4 55.2 50.4 55.2 50.4 Fees and commissions as pct of revenues 19.1 20.7 24.5 25.5 26.8 28.9 30.5 Trading income as pct of revenues 13.3 5.5 5.4 5.8 6.4 7.1 7.8

Cost income Cost income ratio 40.9 38.5 41.0 38.3 36.6 35.8 34.2 Cost to NII plus fees 54.1 47.8 45.8 43.0 41.3 40.8 39.2 Fees and commissions coverage of cost 46.8 53.8 59.7 66.5 73.4 80.9 89.2

Margins and returns NIM 5.9 5.1 5.1 5.0 4.9 4.54.3 ROE 9.3 11.0 12.2 18.0 18.4 18.318.6 ROA 1.8 1.9 2.2 2.4 2.4 2.52.7

Sequential growth (%) Loans 66.6 37.5 31.3 23.0 17.311.5 Deposits 53.8 17.9 12.8 8.5 6.65.1 Assets 65.4 20.3 17.4 13.7 10.87.7 Net interest income 23.4 39.0 17.2 11.7 4.0 4.8 Fees and commissions 26.0 51.0 24.7 21.2 17.8 14.6 Net income 50.4 30.3 66.1 18.1 15.6 18.0

Source: Company data, ING estimates

66 Turkish Banks June 2006

Target price and valuation

Fig 2 Isbank TP

YTL per share

Underlying business 7.74 Participations 1.26 Dividends 0.17 Total 9.16

Source: ING estimates

_ Fig 3 Valuation (YTL per share)

2004 2005 2006F 2007F 2008F 2009F 2010F

Risk-free rate (%) 14.3 10.0 11.4 11.1 10.2 9.5 8.8 MRP (%) 3.3 3.0 2.8 2.6 2.5 2.4 2.3 Beta 1.2 1.2 1.2 1.2 1.2 1.2 1.2 Cost of equity (%) 18.1 13.5 14.6 14.1 13.1 12.2 11.4 Adj bank only return on equity (%) 9.3 17.1 16.6 23.5 23.6 23.2 23.3 Q (x) 1.53 1.79 1.88 2.08 2.18 2.26 2.36 BVPS (YTL) 3.88 4.91 5.42 6.26 7.25 8.40 9.76 Of which bank-only (YTL) 2.17 3.52 4.12 4.83 5.68 6.67 7.85 Target value for the bank (YTL) 7.74 Target value for equity stakes (YTL) 1.26 TP 8.99

Source: Company data, ING estimates

67 Turkish Banks June 2006

Balance sheet summary

Fig 4 Asset mix (2004) Fig 5 Asset mix (2005)

Fixed and non Other Fixed and non core assets 13% core assets 7% Other Reserve 14% 24% deposits 4%

Loans Reserve 33% deposits 2% Loans 32%

Securities 37%

Securities 34%

Source: Company data Source: Company data

Fig 6 Liability mix (2004) Fig 7 Liability mix (2005)

Equity Equity 15% 20%

Other 4% Other 5% Funds borrowed Funds 13% Deposits borrowed Deposits 59% 10% 63% Interbank Interbank funds funds 2% 9%

Source: Company data Source: Company data

68 Turkish Banks June 2006

Income statement summary

Fig 8 Revenue mix (2004) Fig 9 Revenue mix (2005)

Other Other 11% 14%

Trading Trading 6% 13%

Net interest income Fees and Net interest 57% commissions income 59% Fees and 21% commissions 19%

Source: Company data Source: Company data

Fig 10 Breakdown of interest income (2004) Fig 11 Breakdown of interest income (2005)

Other Other 5% 5%

Loans Securities Securities 50% 39% Loans 45% 56%

Source: Company data Source: Company data

Fig 12 Breakdown of interest expense (2004) Fig 13 Breakdown of interest expense (2005)

Funds borrowed Funds 5% borrowed 11% Money market 13% Money market 10%

Deposits Deposits 82% 79%

Source: Company data Source: Company data

69 Turkish Banks June 2006

Margins and returns

Fig 14 Net interest margin

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 15 Return on equity

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 16 Return on assets

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

70 Turkish Banks June 2006

Currency mix

Fig 17 Assets currency mix (2004) Fig 18 Assets currency mix (2005)

FX 35% FX 41%

TL 59% TL 65%

Source: Company data Source: Company data

Fig 19 Loans currency mix (2004) Fig 20 Loans currency mix (2005)

FX 24% FX 34%

TL 66% TL 76%

Source: Company data Source: Company data

Fig 21 Deposits currency mix (2004) Fig 22 Deposits currency mix (2005)

FX 41% TL 47% FX 53% TL 59%

Source: Company data Source: Company data

71 Turkish Banks June 2006

Maturity mix

Fig 23 Assets maturity mix (2004) Fig 24 Assets maturity mix (2005)

<1m 17% <1m 25%

1-3m 5%

3-6m 7% 1-3m 12m+ 12m+ 4% 57% 58% 3-6m 4% 6-12m 14% 6-12m 9%

Source: Company data Source: Company data

Fig 25 Loans maturity mix (2004) Fig 26 Loans maturity mix (2005)

<1m <1m 18% 16%

1-3m 6% 12m+ 44% 1-3m 10% 3-6m 12m+ 7% 55%

3-6m 11% 6-12m 16% 6-12m 17%

Source: Company data Source: Company data, ING estimates

Fig 27 Securities maturity mix (2004) Fig 28 Securities maturity mix (2005)

<1m 1-3m <1m 1-3m 3% 4% 4% 5% 3-6m 9% 3-6m 5% 6-12m 10%

6-12m 19%

12m+ 65% 12m+ 76%

Source: Company data Source: Company data

72 Turkish Banks June 2006

Fig 29 Deposits maturity mix (2004) Fig 30 Deposits maturity mix (2005)

12m+ 6-12m 12m+ 6-12m 3-6m 0% 4% 0% 3-6m 3% 4% 3%

1-3m 1-3m 19% 17%

<1m <1m 75% 75%

Source: Company data Source: Company data

Fig 31 Liabilities maturity mix (2004) Fig 32 Liabilities maturity mix (2005)

12m+ 12m+ 25% 24%

<1m <1m 51% 6-12m 52% 6-12m 7% 7% 3-6m 3-6m 3% 5% 1-3m 1-3m 14% 12%

Source: Company data Source: Company data

73 Turkish Banks June 2006

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74 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

Sekerbank

About to change hands Not Rated

Target price (12 mth)

N/A Price (26/06/06) Bloomberg/Reuters Banks YTL5.85 SKBNK TI/SKBNK.IS

12-month forecast returns (%) Bank Turan Alem Group of Kazakhstan (BTC) has agreed Share price (YTL) N/A to acquire a 34% stake in Sekerbank. The acquisition Dividend (YTL) N/A 12m f'cst total return N/A

values Sekerbank at YTL10.00 per share. The acquisition would trigger a tender call, the timing of which is uncertain. Key ratios (%)

2004 2005 Bank Turan Alem agrees to acquire 34% stake. Bank Turan Alem Net interest margin 10.5 9.4 Group (BTA) of Kazakhstan has agreed to acquire a 33.9787% stake in Loans to assets 41.8 36.2 Sekerbank at YTL10.00 a share. The selling shareholders are Sekerbank Loans to deposits 56.7 46.0 ROA 2.85 1.18 Employee Pension Fund (selling 19.55%) and Sekerbank Employees Social NPL 7.27 16.03 Security Foundation (selling 14.43%). The share transfer agreement was signed on 21 June 2006. Quarterly data (YTLm)

The deal values Sekerbank at 3.56x on 1Q06 book value. The 2004 2005 price BTA is prepared to pay for c.34% stake is c.YTL424.7m which values Net interest income 298 294 the bank at YTL1.25bn (YTL10.00 a share). The implied Turkish lira based Revenue 437 463 price to 1Q06 book multiple is 3.56x. Net income 82 37 EPS (YTL) 0.66 0.30 Tender call prospects. The acquisition would trigger a tender call on minorities unless the Capital Market Board (CMB) granted an exemption. The Share data statement released by Sekerbank does not mention anything about the No. of shares (m) 125 tender call. The selling shareholder expects to complete the (majority) share Daily t/o (US$m) 30.0 Free float (%) 34.0 transfer by 31 October 2006. There are three important regulatory approvals Mkt cap (US$m) 438 needed: the Competition Board, the BRSA (banking sector supervisor) and Mkt cap (YTLm) 731 the CMB. A rights issue will follow the share transfer increasing the share capital to YTL400m from YTL125m currently. Sekerbank plans to do the Share price performance rights offer within one month following the share transfer. BTA could increase its stake with the rights issue if the pension fund did not subscribe. 10 8 Turkish lira tender acquisition price and tender uncertainty warrants discount. The Turkish lira tender price, the rights issue and the 6 tender uncertainty are the risks to existing and potential minority investors. 4 The shares are likely to trade at a good discount to the acquisition price until 2 we have clarity on the risks mentioned. 02/05 06/05 10/05 02/06 06/06

Share price Index rebased

Source: Reuters

75 Turkish Banks June 2006

About Sekerbank Sekerbank has 201 branches, almost as big as Finansbank. But the asset size is c.US$2.3bn as at December 2005, about a quarter of the size of Finansbank. Sekerbank has a 0.79% market share in terms of assets. Its market shares in loans and deposits are 0.76% and 1.02% respectively. Sekerbank’s branch network is underutilised. It needs investments, particularly in retail.

Fig 1 Sekerbank - 2005

YTLm US$m Market share (%)

Assets 3,138 2,342 0.79 Loans 1,135 847 0.76 Deposits 2,468 1,842 1.02 Equity 350 261 Branch network 201 Personnel 3,448

Source: Company data, ING estimates

_ Fig 2 Sekerbank and comparables - 2005

Tekfen Tekstil Seker Alternatif

Branch network 30 40 201 25 Personnel 555 1,075 3,448 596

Balance sheet (US$m) Assets 552 1,462 2,342 876 Loans 231 901 847 436 Deposits 393 792 1,842 532 Equity 72 124 261 114

Valuation (US$m) Market value 264 332 621 282 Value per branch 8.8 8.3 3.1 11.3

Multiples - 2005 (x) Implied P/Deps 0.67 0.42 0.34 0.53 Implied P/B - 2005 3.65 2.69 2.38 2.47

Source: Company data, ING estimates

Fig 3 Sekerbank shareholding structure

Others 32%

The employee pension fund 54%

The foundation 14%

Source: Company data, ING estimates

76 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

TEB Previously: Sell Upgraded to BUY Buy

Target price (12 mth): Previously YTL20.55

YTL21.15 Price (26/06/06) Bloomberg/Reuters Banks YTL10.70 TEBNK TI/TEBNK.IS

12-month forecast returns (%) The drive to retail is changing the balance sheet. The Share price (YTL) 97.7 asset mix should look more balanced within two years, a Dividend (YTL) 2.4 12m f'cst total return 100.1 significant change for a bank with strong corporate credentials. Key ratios (%)

2004 2005

Expansion into retail. TEB has been known for its corporate business Net interest margin 4.9 4.9 and its margins have been low relative to peers but stable. The bank has Loans to assets 44.2 53.9 Loans to deposits 69.7 90.1 launched a new effort targeting the smaller end of the SME market and retail. ROA 0.98 1.75 NPL 1.31 1.14 Consumer loans are on the rise, up to 14.9% of total loans in 2005 from a low 4% in 2004. The mix is likely to grow in 2006 and 2007. Investments in retail would have an adverse effect on margins earlier but they should have a Quarterly data (YTLm)

positive impact later if the drive proves successful. Capital ratios are high: 4Q05 1Q06

Tier-1 is at 13.8% on a consolidated basis (12.3% bank only). Net interest income 50 65 Revenue 88 102 Post devaluation balance sheet. TEB’s balance sheet consolidates Net income 15 48 EPS (YTL) 0.20 0.63 oversees deposits, hence overstates foreign currency denominated liabilities and open position. The potential hit on equity post devaluation is limited assuming no change in the balance sheet mix after 31 March. The duration Share data gap and net fixed rate assets are also at manageable levels. Overall, we see No. of shares (m) 77 Daily t/o (US$m) 1.0 the balance sheet as being less risky among its peer group. Free float (%) 34.0 Mkt cap (US$m) 490 Mkt cap (YTLm) 819 Forecasts and ratios

Yr to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F Share price performance Revenue (YTLm) 260 323 437 561 618 695 729 NII (YTLm) 168 219 295 392 425 480 496 25 Net income (YTLm) 34 79 135 224 252 301 323 BVPS (YTL) 5.15 6.13 7.54 9.88 12.51 15.66 19.04 20 EPS (YTL) 0.44 1.03 1.77 2.92 3.29 3.93 4.22 15 PER (x) 24.2 10.4 6.1 3.7 3.3 2.7 2.5 Yield (%) 1.54 1.04 2.40 4.13 6.83 7.68 9.19 10 P/BV (x) 2.1 1.7 1.4 1.1 0.9 0.7 0.6 5 ROE (%) 9.3 18.2 25.9 33.6 29.4 27.9 24.3 0 Source: Company data, ING estimates 02/05 06/05 10/05 02/06 06/06

_ Share price Index rebased

Source: Reuters

77 Turkish Banks June 2006

_ Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F 2010F

Balance sheet summary Securities 408 1,137 1,498 1,706 1,925 2,350 2,625 Loans 1,575 2,922 3,711 4,453 5,165 5,746 6,149 Assets total 3,566 5,422 6,511 7,511 8,441 9,201 9,748 Deposits 2,260 3,242 3,712 4,096 4,379 4,611 4,799 Shareholders’ equity 394 469 577 756 957 1,198 1,456

Income statement summary Net interest income 168 219 295 392 425 480 496 Fees and commissions 30 41 54 65 74 83 90 Trading income 32 46 62 73 84 94 102 Other 30 17 27 31 35 39 41 Bank revenues 260 323 437 561 618 695 729 Operating expense (172) (198) (239) (267) (289) (305) (312) Operating income 88 125 199 294 329 390 417 Associates and dividend income 7 8 8 9 9 10 10 Cash flow 96 133 207 302 338 400 427 Loan loss provisions (11) (18) (21) (23) (24) (24) (23) Monetary gain (31) ------Other/Extraordinaries 0 - (17) - - - - EBT 54 115 169 280 314 376 404 Taxes (20) (37) (34) (56) (63) (75) (81) Net income 34 79 135 224 252 301 323

Balance sheet ratios (%) Loans to assets 44.2 53.9 57.0 59.3 61.2 62.5 63.1 Bond portfolio to assets 11.4 21.0 23.0 22.7 22.8 25.5 26.9 Loans to deposits 69.7 90.1 100.0 108.7 118.0 124.6 128.1 Equity to assets 11.1 8.6 8.9 10.1 11.3 13.0 14.9

Asset quality NPLs as pc of gross loans 1.3 1.1 0.0 0.0 0.0 0.0 0.0 Coverage 53.8 50.0 53.8 50.0 53.8 50.0 53.8 Accrued interest on loans to gross loans 1.0 1.0 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 1.1 1.0 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 57.4 63.9 57.4 63.9 57.4 63.9 57.4 Fees and commissions as pct of revenues 11.5 12.6 12.4 11.5 12.0 11.9 12.3 Trading income as pct of revenues 12.3 14.2 14.1 13.0 13.6 13.5 14.0

Cost income Cost income ratio 66.0 61.3 54.6 47.6 46.8 43.9 42.8 Cost to NII plus fees 86.5 76.1 68.4 58.5 58.0 54.2 53.2 Fees and commissions coverage of cost 17.4 20.5 22.8 24.2 25.6 27.2 28.8

Margins and returns NIM 4.9 4.9 4.9 5.6 5.3 5.4 5.2 ROE 9.3 18.2 25.9 33.6 29.4 27.9 24.3 ROA 1.0 1.8 2.4 3.1 3.0 3.3 3.3

Sequential growth (%) Loans 85.5 27.0 20.0 16.0 11.3 7.0 Deposits 43.5 14.5 10.3 6.9 5.3 4.1 Assets 52.1 20.1 15.4 12.4 9.0 5.9 Net interest income 30.3 34.3 33.0 8.5 12.9 3.4 Fees and commissions 35.5 34.1 18.7 14.9 11.7 8.5 Net income 132.9 71.8 65.3 12.5 19.6 7.4

Source: Company data, ING estimates

78 Turkish Banks June 2006

Valuation methodology

We have set our target price for the banking business using our excess return on equity methodology. The method assesses value using the returns on equity tied up with a business over and above the cost of equity. We project the returns five years out and estimate an average ROE. Below is the valuation formula we use to calculate excess ROE-based value. = V qBV0 Where = + { − } q 1 [ROE t CoEt ]/ R f BV = BankBookValue = ROEt RETURNonEQUITY CoE = CostofEquity = R f RiskFreeRate Target price

Fig 2 TEB TP

YTL per share

Underlying business 21.15 Dividends 0.26 Total 21.41

Source: ING estimates

_ Fig 3 Valuation (YTL per share)

2004 2005 2006F 2007F 2008F 2009F2010F

Risk-free rate 12.8 8.9 10.2 9.9 9.1 8.5 7.9 MRP 3.3 3.0 2.8 2.6 2.5 2.42.3 Beta 1.2 1.2 1.2 1.2 1.2 1.21.2 Cost of equity 16.8 12.6 13.6 13.1 12.1 11.4 10.6 Return on equity 9.3 17.7 25.6 34.4 30.0 28.4 24.7 Q 2.19 2.60 2.80 2.99 2.93 2.912.80 BVPS 5.15 6.13 7.54 9.88 12.51 15.6619.04 TP 21.15

Source: Company data, ING estimates

79 Turkish Banks June 2006

Balance sheet summary

Fig 4 Asset mix (2004) Fig 5 Asset mix (2005)

Fixed and non core assets Fixed and non 1% core assets 1% Other 20%

Other 38% Loans Reserve 45% deposits 4%

Loans 54%

Securities Reserve 21% deposits Securities 5% 11%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 6 Liability mix (2004) Fig 7 Liability mix (2005)

Equity Equity 9% 11% Other Other 6% 5%

Funds borrowed Funds 12% borrowed 16% Deposits Deposits 59% Interbank Interbank 64% funds funds 14% 4%

Source: Company data, ING estimates Source: Company data, ING estimates

80 Turkish Banks June 2006

Income statement summary

Fig 8 Revenue mix (2004) Fig 9 Revenue mix (2005)

Other Other 11% 5% Trading 14% Trading 12%

Fees and commissions Fees and 13% commissions Net interest 12% income Net interest 65% income 68%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 10 Breakdown of interest income (2004) Fig 11 Breakdown of interest income (2005)

Other Other 15% 22%

Securities 22% Loans 57% Securities Loans 21% 63%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 12 Breakdown of interest expense (2004) Fig 13 Breakdown of interest expense (2005)

Funds Funds borrowed borrowed 10% 16% Money market 7%

Money market 19%

Deposits 65%

Deposits 83%

Source: Company data, ING estimates Source: Company data, ING estimates

81 Turkish Banks June 2006

Margins and returns

Fig 14 Net interest margin

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

_ Fig 15 Return on equity

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

_ Fig 16 Return on assets

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

82 Turkish Banks June 2006

Currency mix

Fig 17 Assets currency mix (2004) Fig 18 Assets currency mix (2005)

FX 38% TL 45%

FX 55% TL 62%

Source: Company data Source: Company data

Fig 19 Loans currency mix (2004) Fig 20 Loans currency mix (2005)

FX 41% FX 47% TL 53% TL 59%

Source: Company data Source: Company data

Fig 21 Deposits currency mix (2004) Fig 22 Deposits currency mix (2005)

TL 30% TL 34%

FX FX 66% 70%

Source: Company data Source: Company data, ING estimates

83 Turkish Banks June 2006

Maturity mix

Fig 23 Assets maturity mix (2004) Fig 24 Assets maturity mix (2005)

12m+ 20%

12m+ <1m 36% 36%

6-12m 8% <1m 54% 3-6m 9%

1-3m 6-12m 1-3m 9% 10% 3-6m 8% 10%

Source: Company data Source: Company data

Fig 25 Loans maturity mix (2004) Fig 26 Loans maturity mix (2005)

12m+ 15% 12m+ 25% <1m 32% 6-12m 8% <1m 41%

3-6m 6-12m 18% 13%

1-3m 14% 1-3m 3-6m 18% 16%

Source: Company data Source: Company data

Fig 27 Securities maturity mix (2004) Fig 28 Securities maturity mix (2005)

3-6m 3-6m 1% 2% 6-12m 6-12m 14% 34%

12m+ 65%

12m+ 84%

Source: Company data Source: Company data

84 Turkish Banks June 2006

Fig 29 Deposits maturity mix (2004) Fig 30 Deposits maturity mix (2005)

3-6m 6-12m 3-6m 1% 2% 1% 1-3m 6-12m 1-3m 8% 0% 10%

<1m <1m 87% 91%

Source: Company data Source: Company data

Fig 31 Liabilities maturity mix (2004) Fig 32 Liabilities maturity mix (2005)

12m+ 12m+ 16% 12%

6-12m 8% 6-12m 3-6m 10% 2% 1-3m 3-6m 7% 3% <1m 1-3m 63% 8% <1m 71%

Source: Company data Source: Company data

85 Turkish Banks June 2006

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86 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

TSKB Maintained Oversold and attractively priced Buy

Target price (12 mth): Previously YTL5.13

YTL3.72 Price (26/06/06) Bloomberg/Reuters Banks YTL1.82 TSKB TI/TSKB.IS

12-month forecast returns (%) The shares have lagged the down market on the back of Share price (YTL) 104.6 worries that the large currency exposure makes the stock Dividend (YTL) 0.0 12m f'cst total return 104.6 a risky choice post devaluation. Given its long dated (ten years+) liabilities, TSKB’s risk appears exaggerated. Key ratios (%)

2004 2005

Lagged the down market. TSKB shares have lagged the market since Net interest margin 6.1 4.8 devaluation. The underperformance is largely due to the belief that the bank Loans to assets 52.7 45.9 Loans to funds borrowed 75.2 71.6 is vulnerable because of its large currency exposure. ROA 2.43 3.57 NPL 4.69 2.83 But the risks are exaggerated. First, the net open position at TSKB is 11.9% of its equity as at 31 March 2006: a hypothetical 20% devaluation Quarterly data (YTLm) would wipe off 240bp in ROE everything else being constant, on our 4Q05 1Q06 assumptions. Second, TSKB has a unique balance sheet mix in that the bulk Net interest income 35 37 of its liabilities is longer dated borrowings; indeed, the duration ‘gap’ is nearly Revenue 62 49 ten years in favour of its liabilities. Net income 30 71 EPS (YTL) 0.10 0.24 The shares now offer excellent value. The valuation is compelling with shares trading at a 1.0x our estimated 2006 book value. We reiterate our Share data BUY rating with a new 12-month target price of YTL3.72. No. of shares (m) 300 Daily t/o (US$m) 3.0 Forecasts and ratios Free float (%) 34.0 Mkt cap (US$m) 327 Yr to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F Mkt cap (YTLm) 546

Revenue (YTLm) 157 181 241 291 324 368 411 NII (YTLm) 119 136 169 200 210 232 253 Share price performance Net income (YTLm) 47 100 94 161 176 203 234 BVPS (YTL) 1.27 1.85 2.10 2.53 3.00 3.54 4.16 6 EPS (YTL) 0.16 0.33 0.31 0.54 0.59 0.68 0.78 PER (x) 11.6 5.5 5.8 3.4 3.1 2.7 2.3 P/BV (x) 1.4 1.0 0.9 0.7 0.6 0.5 0.4 4 ROE (%) 13.9 21.4 15.9 23.2 21.3 20.7 20.2

Source: Company data, ING estimates 2

_ 0 02/05 06/05 10/05 02/06 06/06

Share price Index rebased

Source: Reuters

87 Turkish Banks June 2006

Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F2010F

Balance sheet summary Securities 659 1,113 1,133 1,145 1,128 1,111 1,101 Loans 1,204 1,525 2,051 2,666 3,306 3,852 4,275 Assets total 2,285 3,324 4,066 4,867 5,663 6,338 6,866 Deposits ------Shareholders’ equity 382 554 630 759 900 1,062 1,249

Income statement summary Net interest income 119 136 169 200 210 232 253 Fees and commissions 9 8 18 24 31 40 49 Trading income 2 9 16 20 24 29 33 Other 27 29 39 48 58 67 76 Bank revenues 157 181 241 291 324 368 411 Operating expense (33) (50) (67) (77) (87) (94) (99) Operating income 124 131 173 214 237 274 313 Associates and dividend income 2 3 3 3 4 4 4 Cash flow 126 135 177 217 240 278 317 Loan loss provisions (38) (9) (13) (16) (20) (24) (24) Monetary gain (28) ------Other/extraordinaries - - (46) - - - - EBT 59 126 118 201 221 254 292 Taxes (12) (25) (24) (40) (44) (51) (58) Net income 47 100 94 161 176 203 234

Balance sheet ratios (%) Loans to assets 52.7 45.9 50.4 54.8 58.4 60.8 62.3 Bond portfolio to assets 28.8 33.5 27.9 23.5 19.9 17.5 16.0 Loans to funds borrowed 75.2 71.6 77.7 86.2 96.0 102.8 106.8 Equity to assets 16.7 16.7 15.5 15.6 15.9 16.8 18.2

Asset quality NPLs as pc of gross loans 4.7 2.8 3.0 3.1 3.0 3.0 3.0 Coverage 100.0 100.0 100.0 100.0 100.0 100.0100.0 Accrued interest on loans to gross loans 1.2 1.8 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 1.2 1.1 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 34.3 33.7 34.3 33.7 34.3 33.7 34.3 Fees and commissions as pct of revenues 5.9 4.6 7.3 8.2 9.7 10.9 12.0 Trading income as pct of revenues 1.4 4.9 6.5 6.8 7.5 7.9 8.1

Cost income Cost income ratio 21.1 27.5 27.9 26.6 26.9 25.6 24.0 Cost to NII plus fees 25.9 34.6 36.1 34.6 36.0 34.7 32.7 Fees and commissions coverage of cost 28.1 16.7 26.1 30.7 36.1 42.5 50.0

Margins and returns NIM 6.1 4.8 4.6 4.5 4.0 3.93.8 ROE 13.9 21.4 15.9 23.2 21.3 20.720.2 ROA 2.4 3.6 3.7 3.5 3.3 3.33.5

Sequential growth (%) Loans 26.6 34.5 30.0 24.0 16.511.0 Funds barrowed 32.9 24.0 17.1 11.4 8.8 6.8 Assets 45.4 22.3 19.7 16.4 11.98.3 Net interest income 14.0 24.6 18.4 5.0 10.3 9.1 Fees and commissions -10.6 110.8 35.4 32.0 27.6 23.2 Net income 112.2 -5.6 70.7 9.5 15.2 15.0

Source: Company data, ING estimates

88 Turkish Banks June 2006

Balance sheet highlights

Fig 2 Asset mix (2004) Fig 3 Asset mix (2005)

Fixed and non Fixed and non core assets core assets 2% Other 2% Other 17% 19%

Loans 46% Loans 52% Securities 29% Securities 33%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 4 Liability mix (2004) Fig 5 Liability mix (2005)

Interbank Interbank funds funds Equity 8% Equity 17% 17% 14%

Other Other 5% 5%

Funds borrowed Funds 70% borrowed 64%

Source: Company data, ING estimates Source: Company data, ING estimates

_ Valuation methodology We have set our target price for the banking business using our excess return on equity methodology. The method assesses value using the returns on equity tied up with a business over and above the cost of equity. We project the returns five years out and estimate an average ROE. Below is the valuation formula we use to calculate excess ROE-based value. = V qBV0 Where = + { − } q 1 [ROE t CoEt ]/ R f BV = BankBookValue = ROEt RETURNonEQUITY CoE = CostofEquity = R f RiskFreeRate

89 Turkish Banks June 2006

Target price

Fig 6 TSKB TP

YTL per share

Underlying business 3.72 Dividends 0.00 Total 3.72

Source: ING estimates

_ Fig 7 Valuation (YTL per share)

2004 2005 2006F 2007F 2008F 2009F2010F

Risk-free rate 14.3 10.0 11.4 11.1 10.2 9.5 8.8 MRP 3.3 3.0 2.8 2.6 2.5 2.42.3 Beta 1.0 1.0 1.0 1.0 1.0 1.01.0 Cost of equity 17.5 12.9 14.1 13.6 12.6 11.8 11.0 Return on equity 13.9 21.1 15.9 23.6 21.6 21.0 20.5 Q 1.59 1.78 1.77 1.95 1.98 2.032.08 BVPS 1.27 1.85 2.10 2.53 3.00 3.544.16 TP 3.72

Source: Company data, ING estimates

90 Turkish Banks June 2006

Income statement summary

Fig 8 Revenue mix (2004) Fig 9 Revenue mix (2005)

Other Other 17% 16%

Trading 1% Trading 5% Fees and commissions Fees and 6% commissions 5%

Net interest Net interest income income 76% 74%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 10 Breakdown of interest income (2004) Fig 11 Breakdown of interest income (2005)

Other Other 6.4% 5.7%

Loans Loans 34.3% 33.7%

Securities Securities 59.3% 60.6%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 12 Breakdown of interest expense (2004) Fig 13 Breakdown of interest expense (2005)

Other Money market Money market 15% 10% Other 9% 22%

Funds Funds borrowed borrowed 69% 75%

Source: Company data, ING estimates Source: Company data, ING estimates

91 Turkish Banks June 2006

Margins and returns Fig 14 Margins and returns

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 15 Return on equity

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 16 Return on assets

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

92 Turkish Banks June 2006

Currency mix

Fig 17 Assets currency mix (2004) Fig 18 Assets currency mix (2005)

TL 31%

TL 44%

FX 56%

FX 69%

Source: Company data Source: Company data

Fig 19 Loans currency mix (2004) Fig 20 Loans currency mix (2005)

TL 9% TL 24%

FX 76% FX 91%

Source: Company data Source: Company data

93 Turkish Banks June 2006

Maturity mix

Fig 21 Assets - maturity mix (2004) Fig 22 Assets - maturity mix (2005)

1-3m <1m <1m 1-3m 2% 3-6m 6% 3% 2% 3-6m 2% 3% 6-12m 15% 6-12m 17%

12m+ 12m+ 72% 78%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 23 Loans - maturity mix (2004) Fig 24 Loans - maturity mix (2005)

1-3m <1m <1m 1-3m 2% 3-6m 3-6m 0% 1% 2% 4% 3% 6-12m 6-12m 7% 6%

12m+ 12m+ 87% 88%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 25 Securities - maturity mix (2004) Fig 26 Securities - maturity mix (2005)

<1m 1-3m <1m 1-3m 3-6m 1% 3% 2% 1% 3-6m 0% 4%

6-12m 35% 6-12m 12m+ 38% 55% 12m+ 61%

Source: Company data, ING estimates Source: Company data, ING estimates

94 Turkish Banks June 2006

Fig 27 Liabilities - maturity mix (2004) Fig 28 Liabilities - maturity mix (2005)

<1m 14% <1m 3-6m 20% 2% 6-12m 3% 3-6m 7%

6-12m 7% 12m+ 66%

12m+ 81%

Source: Company data, ING estimates Source: Company data, ING estimates

95 Turkish Banks June 2006

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96 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

Vakifbank Maintained Buy

Target price (12 mth): Previously YTL11.00 YTL6.99 Price (26/06/06) Bloomberg/Reuters YTL5.20 VAKBN TI/VAKBN.IS Banks

12-month forecast returns (%) Strong 1Q06 results and a relatively defensive balance Share price (YTL) 34.4 Dividend (YTL) 1.6 sheet should contain any damage post devaluation. 12m f'cst total return 36.0 Growth should be slower in the rest of the year. The shares are trading at attractive multiples. Key ratios (%)

2004 2005 Vakifbank has an edge in Home loans continue to drive growth. Net interest margin 6.0 4.7 lending to low and middle income families in Turkey via the TOKI system, a Loans to assets 33.3 36.8 collective housing development project run by the state. Total home loans Loans to deposits 45.8 51.9 ROA 3.15 1.89 pooled within TOKI amount to US$1.2bn (13% of all housing loans in Turkey) NPL 8.98 7.74 as at February 2006. Vakifbank’s market share in TOKI loans is 20%. These loans are guaranteed by the Treasury. Quarterly data (YTLm) High capital ratios. The planned expansion in Istanbul to add 30 4Q05 1Q06 branches to the existing 80 does require equity and Vakifbank has it. Indeed, Net interest income 315 385 following the capital increase, Vakifbank is currently running the highest Revenue 475 539 Net income 165 211 capital ratio in system: the Tier-1 ratio stands at 25%. The Turkish lira funding EPS (YTL) 0.13 0.16 based is strong. The bank’s positioning with public institutions has secured a sound deposit base. Money market repos are negligible. Share data Vakifbank is trading at the lowest price to No. of shares (m) 1,279 We reiterate our BUY rating. Daily t/o (US$m) 10.0 book multiples on our assumptions, both on 2006 and 2007. The return on Free float (%) 25.0 Mkt cap (US$m) 3,980 equity we expect the bank will generate this year and next year are close to Mkt cap (YTLm) 6,651 industry average to which Vakifbank trades at a significant 20% discount. In our view, Vakifbank’s share price should rise to close the valuation gap. Share price performance

Forecasts and ratios 10 Year to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F 9 Revenue (YTLm) 1,797 1,916 2,562 3,310 3,680 4,074 4,461 8 NII (YTLm) 1,185 1,318 1,828 2,360 2,480 2,597 2,687 7 Net income (YTLm) 624 535 793 1,180 1,346 1,571 1,836 BVPS (YTL) 1.57 3.33 3.74 4.33 5.02 5.82 6.75 6 EPS (YTL) 0.49 0.42 0.62 0.92 1.05 1.23 1.44 5 PER (x) 10.7 12.4 8.4 5.6 4.9 4.2 3.6 11/05 03/06 Yield (%) 0.00 0.00 1.61 2.39 3.55 4.05 4.72 P/BV (x) 3.3 1.6 1.4 1.2 1.0 0.9 0.8 ROE (%) 40.1 17.1 17.6 22.9 22.5 22.7 22.8 Share price Index rebased

Source: Company data, ING estimates Source: Reuters

97 Turkish Banks June 2006

Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F 2010F

Balance sheet summary Securities 8,595 10,515 13,459 13,827 13,949 13,922 13,931 Loans 8,062 11,905 16,548 21,719 26,845 31,597 35,325 Assets total 24,199 32,383 39,483 46,771 53,676 59,893 64,810 Deposits 17,584 22,946 25,278 27,113 28,425 29,483 30,327 Shareholders’ equity 2,012 4,261 4,777 5,544 6,419 7,440 8,634

Income statement summary Net interest income 1,185 1,318 1,828 2,360 2,480 2,597 2,687 Fees and commissions 250 294 382 528 707 919 1,160 Trading income 117 176 201 243 286 327 363 Other 246 129 151 179 207 231 252 Bank revenues 1,797 1,916 2,562 3,310 3,680 4,074 4,461 Operating expense (722) (732) (907) (1,062) (1,177) (1,268) (1,326) Operating income 1,075 1,184 1,655 2,249 2,502 2,806 3,135 Associates and dividend income 52 10 11 11 12 12 13 Cash flow 1,127 1,195 1,666 2,260 2,514 2,819 3,149 Loan loss provisions (344) (434) (600) (785) (832) (855) (853) Monetary gain (16) ------Other/extraordinaries - (0) (74) - - - - EBT 767 761 992 1,475 1,682 1,964 2,295 Taxes (143) (226) (198) (295) (336) (393) (459) Net income 624 535 793 1,180 1,346 1,571 1,836

Balance sheet ratios (%) Loans to assets 33.3 36.8 41.9 46.4 50.0 52.8 54.5 Bond portfolio to assets 35.5 32.5 34.1 29.6 26.0 23.2 21.5 Loans to deposits 45.8 51.9 65.5 80.1 94.4 107.2 116.5 Equity to assets 8.3 13.2 12.1 11.9 12.0 12.4 13.3

Asset quality NPLs as pc of gross loans 9.0 7.7 0.0 0.0 0.0 0.0 0.0 Coverage 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Accrued interest on loans to gross loans 1.2 1.1 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 4.6 3.1 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 50.3 52.3 50.3 52.3 50.3 52.3 50.3 Fees and commissions as pct of revenues 13.9 15.3 14.9 15.9 19.2 22.6 26.0 Trading income as pct of revenues 6.5 9.2 7.8 7.4 7.8 8.0 8.1

Cost income Cost income ratio 40.2 38.2 35.4 32.1 32.0 31.1 29.7 Cost to NII plus fees 50.3 45.4 41.0 36.8 37.0 36.1 34.5 Fees and commissions coverage of cost 34.7 40.1 42.2 49.7 60.0 72.5 87.5

Margins and returns (%) NIM 6.0 4.7 5.1 5.5 4.9 4.6 4.3 ROE 40.1 17.1 17.6 22.9 22.5 22.7 22.8 ROA 3.1 1.9 2.4 2.7 2.7 2.7 2.9

Sequential growth (%) Loans 47.7 39.0 31.3 23.6 17.7 11.8 Deposits 30.5 10.2 7.3 4.8 3.7 2.9 Assets 33.8 21.9 18.5 14.8 11.6 8.2 Net interest income 11.2 38.7 29.1 5.1 4.7 3.5 Fees and commissions 17.4 30.2 38.0 33.9 30.0 26.3 Net income -14.2 48.3 48.7 14.1 16.7 16.9

Source: Company data, ING estimates

98 Turkish Banks June 2006

Fig 2 Vakifbank TP

YTL per share

Underlying business 6.99 Dividends 0.08 Total 7.07

Source: ING estimates

_ Fig 3 Valuation (YTL per share)

2004 2005 2006F 2007F 2008F 2009F2010F

Risk-free rate 14.3 10.0 11.4 11.1 10.2 9.5 8.8 MRP 3.3 3.0 2.8 2.6 2.5 2.42.3 Beta 1.2 1.2 1.2 1.2 1.2 1.21.2 Cost of equity 18.4 13.7 14.9 14.4 13.3 12.4 11.6 Return on equity 40.1 21.4 18.3 23.3 22.9 23.1 23.3 Q 1.98 1.85 1.87 2.04 2.13 2.232.33 BVPS 1.57 3.33 3.74 4.33 5.02 5.826.75 TP 6.99

Source: Company data, ING estimates

99 Turkish Banks June 2006

Balance sheet summary

Fig 4 Asset mix (2004) Fig 5 Asset mix (2005)

Fixed and non Fixed and non core assets core assets 6% 4% Other Other 22% 25%

Reserve Loans Loans 33% 37% deposits Reserve 4% deposits 2%

Securities Securities 35% 32%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 6 Liability mix (2004) Fig 7 Liability mix (2005)

Equity 8% Equity Other 13% 6% Other Funds 5% borrowed 11% Funds borrowed Interbank 11% funds 3% Interbank funds 0% Deposits Deposits 71% 72%

Source: Company data, ING estimates Source: Company data, ING estimates

100 Turkish Banks June 2006

Income statement summary

Fig 8 Revenue mix (2004) Fig 9 Revenue mix (2005)

Other Other 7% 14% Trading 9% Trading 7%

Fees and commissions Fees and 15% commissions 14% Net interest Net interest income income 65% 69%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 10 Breakdown of interest income (2004) Fig 11 Breakdown of interest income (2005)

Other Other 7% 11%

Loans Loans 50% Securities 52% Securities 43% 37%

Source: Company data, ING estimates Source: Company data, ING estimates

Fig 12 Breakdown of interest expense (2004) Fig 13 Breakdown of interest expense (2005)

Funds Funds borrowed borrowed 5% 5% Money market Money market 3% 1%

Deposits Deposits 92% 94%

Source: Company data, ING estimates Source: Company data, ING estimates

101 Turkish Banks June 2006

Margins and returns

Fig 14 Net interest margin

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data, ING estimates

Fig 15 Return on equity

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data

Fig 16 Return on assets

0 2004 2005 2006F 2007F 2008F 2009F 2010F

Source: Company data

102 Turkish Banks June 2006

Currency mix

Fig 17 Assets currency mix (2004) Fig 18 Assets currency mix (2005)

FX 30% FX 36%

TL 64% TL 70%

Source: Company data Source: Company data

Fig 19 Loans currency mix (2004) Fig 20 Loans currency mix (2005)

FX FX 27% 29%

TL TL 71% 73%

Source: Company data Source: Company data

Fig 21 Deposits currency mix (2004) Fig 22 Deposits currency mix (2005)

FX 29% FX 35%

TL 65% TL 71%

Source: Company data Source: Company data, ING estimates

103 Turkish Banks June 2006

Maturity mix

Fig 23 Assets maturity mix (2004) Fig 24 Assets maturity mix (2005)

<1m <1m 27% 29%

12m+ 12m+ 45% 47% 1-3m 3% 1-3m 3% 3-6m 9% 3-6m 9% 6-12m 6-12m 14% 14%

Source: Company data Source: Company data

Fig 25 Loans maturity mix (2004) Fig 26 Loans maturity mix (2005)

<1m <1m 19% 17%

1-3m 1-3m 6% 6% 12m+ 12m+ 49% 50% 3-6m 8% 3-6m 11%

6-12m 6-12m 19% 15%

Source: Company data Source: Company data

Fig 27 Securities maturity mix (2004) Fig 28 Securities maturity mix (2005)

<1m 1-3m <1m 1-3m 0% 1% 3-6m 4% 13% 3% 3-6m 16%

6-12m 23% 12m+ 57% 12m+ 6-12m 63% 20%

Source: Company data Source: Company data

104 Turkish Banks June 2006

Fig 29 Deposits maturity mix (2004) Fig 30 Deposits maturity mix (2005)

6-12m 12m+ 6-12m12m+ 4% 4% 3-6m 1% 2% 11% 3-6m 15% <1m 32%

<1m 43%

1-3m 41% 1-3m 47%

Source: Company data Source: Company data

Fig 31 Liabilities maturity mix (2004) Fig 32 Liabilities maturity mix (2005)

12m+ <1m 20% 12m+ 25% 24% <1m 33%

6-12m 4%

6-12m 3-6m 7% 12%

3-6m 11% 1-3m 1-3m 33% 31%

Source: Company data Source: Company data

105 Turkish Banks June 2006

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106 Turkish Banks June 2006

Haluk Akdogan Turkey London (44 20) 7767 6650 [email protected]

Yapi Kredi Bank Previously: Sell Merger ratios disappoint but visibility Hold has improved markedly

_ Target price (12 mth): Previously YTL2.59 YTL2.45

Price (26/06/06) Bloomberg/Reuters YKBNK TI/YKBNK.IS Banks YTL2.04

12-month forecast returns (%)

Using equity methodology , we calculate YKB’s Share price (YTL) 4.5 contribution to post-merger book at 87.6% based on Dividend (YTL) 0.0 12m f'cst total return 4.5 which we estimate the minorities’ stake in the new company at 28.6% versus the 19.73% proposed by Kocbank. Key ratios (%)

2004 2005

The swap and merger ratios are announced. The exchange ratio Net interest margin 3.1 4.4 between Yapi Kredi Bank and Kocbank has been set at 0.53 pending CMB Loans to assets 40.1 46.5 Loans to deposits 69.1 65.8 approval. Yapi Kredi Bank would first make a paid-in capital increase to ROA -0.25 -12.36 3,138m from 1,897m. The new shares would then be distributed to NPL 6.61 8.46 Kocbank shareholders. Yapi Kredi’s existing minority shareholders would own 19.73% of the new company (new Yapi Kredi bank) versus its 32.69% Quarterly data (YTLm) stake in Yapi Kredi proper and our estimate of 28.6%. 4Q05 1Q06 Once the merger is over. The market seems to be happy with the Net interest income 237 257 Revenue 431 505 merger ratios given the shares’ positive reaction. Once the merger is Net income -495 56 done, we see the bank capitalising on its strengths, namely retail banking EPS (YTL) -0.26 0.03 and the legacy of Yapi Kredi. We see the merged Yapi Kredi earning above- industry average returns on its equity both in the current year and 2007. The Share data merged bank will also benefit from a five-year tax break as accumulated No. of shares (m) 1,897 losses up to five years at each merging company are tax exempt. Our Yapi Daily t/o (US$m) 30.0 Free float (%) 34.0 Kredi model will be revised once the merger has been approved and the Mkt cap (US$m) 2,318 merger financials are released. We are, however, upgrading the shares to Mkt cap (YTLm) 3,869 HOLD on valuation and better visibility concerning the merger.

Share price performance Forecasts and ratios

Yr to Dec 2004 2005 2006F 2007F 2008F 2009F 2010F 5

Revenue (YTLm) 1,412 1,827 2,116 2,708 2,960 3,185 3,323 4 NII (YTLm) 739 1,064 1,285 1,716 1,808 1,884 1,896 Net income (YTLm) -59 -2,996 211 514 576 657 720 3 BVPS (YTL) 2.45 0.88 0.96 1.13 1.33 1.56 1.80 EPS (YTL) -0.03 -1.58 0.11 0.27 0.30 0.35 0.38 2 PER (x) -65.7 -1.3 18.3 7.5 6.7 5.9 5.4 Yield (%) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1 P/BV (x) 0.8 2.3 2.1 1.8 1.5 1.3 1.1 02/05 06/05 10/05 02/06 06/06 ROE (%) -1.4 -94.9 12.1 26.0 24.7 24.0 22.6

Source: Company data, ING estimates Share price Index rebased

_ Source: Reuters

107 Turkish Banks June 2006

Fig 1 Financial statements (YTLm)

2004 2005 2006F 2007F 2008F 2009F 2010F

Balance sheet summary Securities 5,691 5,814 7,096 8,866 9,028 9,107 9,199 Loans 9,878 11,103 14,501 18,126 21,751 25,014 27,515 Assets total 24,624 23,866 28,796 33,740 38,474 42,650 45,893 Deposits 14,293 16,876 17,893 18,662 19,198 19,621 19,954 Shareholders’ equity 4,640 1,677 1,814 2,149 2,523 2,951 3,419

Income statement summary Net interest income 739 1,064 1,285 1,716 1,808 1,884 1,896 Fees and commissions 479 507 556 667 778 882 973 Trading income 131 71 73 88 102 116 128 Other 63 185 202 238 272 303 327 Bank revenues 1,412 1,827 2,116 2,708 2,960 3,185 3,323 Operating expense (1,089) (3,434) (1,264) (1,429) (1,572) (1,682) (1,748) Operating income 324 (1,607) 853 1,279 1,388 1,503 1,575 Associates and dividend income 33 19 20 21 22 23 24 Cash flow 357 (1,588) 872 1,300 1,410 1,526 1,599 Loan loss provisions (485) (1,580) (608) (657) (690) (704) (699) Monetary gain 112 ------Other/Extraordinaries - 0 (0) - - - - EBT (16) (3,168) 264 643 720 822 900 Taxes (43) 171 (53) (129) (144) (164) (180) Net income (59) (2,996) 211 514 576 657 720

Balance sheet ratios (%) Loans to assets 40.1 46.5 50.4 53.7 56.5 58.6 60.0 Bond portfolio to assets 23.1 24.4 24.6 26.3 23.5 21.4 20.0 Loans to deposits 69.1 65.8 81.0 97.1 113.3 127.5 137.9 Equity to assets 18.8 7.0 6.3 6.4 6.6 6.9 7.4

Asset quality NPLs as pc of gross loans 6.6 8.5 0.0 0.0 0.0 0.0 0.0 Coverage 74.6 80.2 74.6 80.2 74.6 80.2 74.6 Accrued interest on loans to gross loans 8.1 0.9 0.0 0.0 0.0 0.0 0.0 Fixed assets to assets 9.8 5.6 0.0 0.0 0.0 0.0 0.0

Earnings quality Loan interest earned as pct of gross interest 63.0 69.2 63.0 69.2 63.0 69.2 63.0 Fees and commissions as pct of revenues 33.9 27.7 26.3 24.6 26.3 27.7 29.3 Trading income as pct of revenues 9.3 3.9 3.4 3.2 3.4 3.6 3.8

Cost income Cost income ratio 77.1 188.0 59.7 52.8 53.1 52.8 52.6 Cost to NII plus fees 89.4 218.6 68.7 60.0 60.8 60.8 61.0 Fees and commissions coverage of cost 44.0 14.8 44.0 46.7 49.5 52.5 55.6

Margins and returns NIM 3.1 4.4 4.9 5.5 5.0 4.6 4.3 ROE -1.4 -94.9 12.1 26.0 24.7 24.0 22.6 ROA -0.3 -12.4 0.7 1.6 1.5 1.6 1.6

Sequential growth (%) Loans 12.4 30.6 25.0 20.0 15.0 10.0 Deposits 18.1 6.0 4.3 2.9 2.2 1.7 Assets -3.1 20.7 17.2 14.0 10.9 7.6 Net interest income 44.0 20.8 33.5 5.4 4.2 0.6 Fees and commissions 5.9 9.7 19.9 16.6 13.5 10.2 Net income 4989.6 -107.0 143.8 12.1 14.1 9.5

Source: Company data, ING estimates

108 Turkish Banks June 2006

Merger update The merger financials have been jointly released by Yapi Kredi and Kocbank. The legal merger is expected in October. Post merger, Yapi Kredi will control 11% of loans, 9.7% deposits and 27% of credit card transactions in Turkey on a pro-forma basis. In loans and deposits, the merged bank will rank No.3 after Akbank and Isbank.

Legal merger is Fig 2 Yapi Kredi - Kocbank merger timetable expected in October Date Steps

20-Apr-06 Kocbank and YKB file first application for merger to the BRSA 30-May-06 BRSA pre-approval 14-Jun-06 The release of April 2006 audited merger financials, which will form the basis for the merger 27-Jun-06 Merger application is filed with the CMB 28-Jun-06 Proposed merger and swap ratios are announced (19.73% and 53 YKB shares for 100 Kocbank) 29-Jun-06 EGMs to be held to approve the merger financials Oct-06 Legal merger expected

Source: Company data, ING estimates

The merged entity will take Yapi Kredi’s name, a much better brand in retail banking. The figures below report summary financials for Yapi Kredi and Kocbank, respectively. On April 2006 financials, we adopt book value methodology to estimate the relative values.

Fig 3 Yapi Kredi Bank

31 Mar 05 31 Dec 05 31 Mar 06 30 Apr 06

Securities 6,026 5,814 5,667 5,915 Loans 10,119 11,103 11,959 11,306 Reserve deposits 1,028 863 1,361 1,166 Fixed assets 2,375 1,328 1,312 1,290 Other assets 5,200 4,758 3,114 4,067 Assets total 24,746 23,866 23,413 23,745

Deposits 14,458 16,876 15,724 15,866 Funds borrowed 833 1,890 1,361 1,308 Other liabilities 2,082 2,984 3,863 4,876 Shareholders equity 4,831 1,677 1,728 1,695

Source: Company data, ING estimates

_ The book equity of Fig 4 Koçbank Koçbank stands at 31 Mar 05 31 Dec 05 31 Mar 06 30 Apr 06 YTL3,472m versus the bank’s participation in Securities 3,996 3,774 4,595 4,579 Loans 4,466 7,180 6,682 6,779 Yapi Kredi booked at Reserve deposits 606 529 705 502 YTL3,233m Fixed assets 120 132 119 113 Financial participations - 1,966 1,966 3,233 Other assets 1,346 1,210 1,262 1,700 Assets total 10,534 14,792 15,329 16,905

Deposits 7,088 9,535 9,497 9,848 Funds borrowed 1,436 1,408 2,073 2,179 Other liabilities 1,251 1,125 960 1,406 Shareholders’ equity 760 2,724 2,799 3,472 Of which Yapi Kredi - 1,966 1,966 3,233 Kocbank standalone 760 758 832 240

Source: Company data, ING estimates

109 Turkish Banks June 2006

Merger values We have adopted book value methodology on April financials to estimate relative values. Assuming no goodwill booked, we would fully reverse Koçbank’s participation in Yapi Kredi as stated in April financials. We would then restate the Koçbank’s standalone book equity at YTL240m and add YTL1,695m, YKB equity, to obtain YTL1,935m, the equity of the merged bank excluding the new paid-in capital. Figure 5 illustrates how we have estimated the Yapi Kredi minorities’ stake in the new company.

Fig 5 Merged bank's estimated equity

31 Mar 05 31 Dec 05 31 Mar 06 30 Apr 06

Yapi Kredi 4,831 1,677 1,728 1,695 Kocbank standalone 760 758 832 240 The merged bank N/A 2,436 2,560 1,935 Yapi Kredi's contribution to post merger book (%) 68.9 67.5 87.61 Yapi Kredi minorities' stake in new co post merger (%) 28.64

Source: Company data, ING estimates

Yapi Kredi standalone valuation We have set our target price for the banking business using our excess return on equity methodology. The method assesses value using the returns on equity tied up with a business over and above the cost of equity. We project the returns five years out and estimate an average ROE. Below is the valuation formula we use to calculate excess ROE-based value. = V qBV0 Where = + { − } q 1 [ROE t CoEt ]/ R f BV = BankBookValue = ROEt RETURNonEQUITY CoE = CostofEquity = R f RiskFreeRate Target price

Fig 6 YKB TP

YTL per share

Underlying business 2.13 Dividends 0.00 Kocbank's contribution 0.32 Total 2.45

Source: ING estimates

110 Turkish Banks June 2006

The valuation we report Fig 7 Valuation (YTL per share) here treats Yapi Kredi 2004 2005 2006F 2007F 2008F 2009F2010F as a standalone business and ignores Risk-free rate 12.8 8.9 10.2 9.9 9.1 8.5 7.9 MRP 2.9 3.0 2.8 2.6 2.5 2.42.3 Kocbank; the merger Beta 0.9 0.9 0.9 0.9 0.9 0.90.9 would change the Cost of equity 15.5 11.8 12.8 12.4 11.4 10.7 10.0 values Return on equity (1.4) (146.2) 12.7 26.9 25.6 24.8 23.3 Q (0.77) (0.87) 2.23 2.59 2.64 2.692.70 BVPS 2.45 0.88 0.96 1.13 1.33 1.561.80 TP 2.13

Source: Company data, ING estimates

111 Turkish Banks June 2006

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112 Turkish Banks June 2006

Turkish banks 2005

113 Turkish Banks June 2006

2005 results in context

Net interest margin Fig 1 Net interest margin (2005)

4 8.0 5.9 5.7 5.6 5.1 5.1 4.9 4.8 2 4.7 4.4

is ti k k nk rt n n a TEB SKB YKB b Fo T iz Is ba ansbank Akbank Gara n Vakifban Fi Den

Source: Company data

Return on group equity Fig 2 Return on equity (2005)

28.7 22.9 10 21.4 21.1 20.1 18.2 17.1 11.0 7.9 0

k B nk n SK a TEB a T zb Fortis i Is bank ansbank Akbank Garanti n Vakifb Fi Den

Source: Company data

Return on assets Fig 3 Return on assets (2005)

2 3.6 3.3 3.3 2.5 2.3 1 1.9 1.9 1.8 1.2 0

k k nk n n a ank b TEB TSKB kba zbank ifb Fortis ns i k Is ba A Garanti a ina V F Den

Source: Company data

114 Turkish Banks June 2006

Ranking by effective Fig 4 Effective interest earned on loans (2005) interest rate earned on

loans 20

10 18.8 18.8 18.4 17.9 16.5 15.8 15.4 14.6 13.5 5 6.0 0

k k s k n nk ank KB a b Y ban orti b TEB ifba s F k izban TSKB n Is A n Garanti e Vak ina F D

Source: Company data

Effective interest rate Fig 5 Effective interest paid out on deposits (2005) paid out to depositors

10.5 5 9.9 9.1 8.9 8.2 7.2 6.9 6.6 6.0

k k ti tis n nk YKB a ank TEB For b b nsba Akbank Is Garan Vakifban na Fi Deniz

Source: Company data

Banks sorted by 2005 Fig 6 Cost to income ratio (2005) cost income ratios

40 78.5 61.3 56.0 49.5 45.3 20 38.5 38.2 35.8 27.5

ti k is nk nk nk n rt a a a a TEB b b Fo iz s s b TSKB n Garan I Akbank e inan Vakifb D F

Source: Company data

115 Turkish Banks June 2006

Fees and commissions Fig 7 Fees and commissions as percent of revenues (2005)

27.7 27.0 25.6 20.7 10 17.9 17.2 15.7 15.3 12.6 4.6 0

ti k k k n rtis n YKB o an an a TEB F b b TSKB Gara Is bank ansbank Ak n Vakifb Fi Deniz

Source: Company data

Fig 8 Fees and commissions as percent of assets (2005)

3.0

2.0

2.8 2.4 1.0 2.1 1.7 1.5 1.5 1.3 1.0 0.9 0.3 0.0

B k k an an ank YK b TEB Fortis b ifb TSKB Is bank ansbank Garanti Ak n Vak Fi Deniz

Source: Company data

While NPLs are at Fig 9 NPLs as percent of gross loans (2005) manageable levels

8.5 7.7 4.9 4.8 4.1 2.8 2.8 2.7 1.6 1.1 0

s ti k k k n n ank rti a an an YKB r b b TEB ifb Fo TSKB k Is bank Ga nsba Ak Va na Deniz Fi

Source: Company data

116 Turkish Banks June 2006

Fixed assets as percent Fig 10 Fixed assets to assets ratio (2005) of total assets

3 5.6

2 3.9 3.1 2.8 1 1.7 1.7 1.3 1.3 1.1 1.0 0

ti k k k n n n a rtis an YKB o b TEB F iz kba TSKB Gara Is bank n A Vakifb Finansbank De

Source: Company data

Accrued interest Fig 11 Accrued interest on loans to gross loans (2005) receivables on loans as

percent of gross loans 6 outstanding

5.1 2

1.8 1.4 1.3 1.3 1.2 1.1 1.1 1.0 0.9 0

k ti k s KB n rti S an ra an ank o TEB YKB T b b b F Is bank ansbank Ga Ak n Vakif Fi Deniz

Source: Company data

117 Turkish Banks June 2006

Market shares

Fig 12 Loans market share (2004) Fig 13 Loans market share (2005)

Akbank Akbank 13% 14%

Other Other 38% Isbank 38% Isbank 14% 15%

Garanti 8% Garanti 9% YKB YKB 9% Vakifbank Vakifbank 7% Finansbank 9% Denizbank 10% Denizbank 5% 3% Finansbank 3% 5%

Source: Company data Source: Company data

Fig 14 Consumer loans market share (2004) Fig 15 Consumer loans market share (2005)

Akbank Akbank 15% 16% Other 32% Other Isbank 42% Isbank 13% 15%

Garanti 5% YKB Garanti 5% 11% YKB Vakifbank Finansbank Vakifbank Finansbank 4% 4% 8% 25% 5%

Source: Company data Source: Company data

Fig 16 Credit cards market share (2004) Fig 17 Credit cards market share (2005)

Akbank Other Other Akbank 14% 17% 17% 14%

Fortis Fortis Isbank 2% Isbank 3% 12% Vakifbank 12% Vakifbank 4% 4% Finansbank Finansbank 7% 7%

Garanti 21% Garanti YKB 22% YKB 22% 22%

Source: Company data Source: Company data

118 Turkish Banks June 2006

Fig 18 Home loans market share (2004) Fig 19 Home loans market share (2005)

Akbank Akbank 13% 16%

Isbank Other 11% 37% Isbank Other 16% 47% Garanti 8%

YKB 5% Garanti Finansbank Vakifbank 12% 4% YKB Vakifbank 7% Finansbank 5% 12% 7%

Source: Company data Source: Company data

Fig 20 Auto loans market share (2004) Fig 21 Auto loans market share (2005)

Akbank Other Akbank 22% 26% 25% Other 35%

Isbank Isbank 11% 16% Vakifbank Vakifbank Garanti 4% 23% 4% Finansbank Finansbank YKB YKB Garanti 6% 6% 5% 4% 13%

Source: Company data Source: Company data

119 Turkish Banks June 2006

Disclosures Appendix ANALYST CERTIFICATION The analyst(s) who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject securities or issuers and no part of his/her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report.

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RATING DISTRIBUTION (as of end 1Q06) RATING DEFINITIONS

Equity coverage Investment Banking clients* Buy: Forecast 12-mth absolute total return greater than +15%

Buy 37% 17% Hold: Forecast 12-mth absolute total return of +15% to -5% Sell: Forecast 12-mth absolute total return less than -5% Hold 50% 17% Total return: forecast share price appreciation to target price plus forecast annual Sell 13% 17% dividend. Price volatility and our preference for not changing recommendations too 100% frequently means forecast returns may fall outside of the above ranges at times. Research published prior to 15/12/05: EMEA equities’ ratings were based on US * Percentage of companies in each rating category that are Investment Banking dollar total returns; Western Europe’s were based on: absolute return +25%, Strong clients of ING Financial Markets LLC or an affiliate. Buy; greater than +10%, Buy; +10% to -10%, HOLD; lower than -10%, Sell.

120 il EQUITY MARKETS Banks Turkey AMSTERDAM BRUSSELS LONDON NEW YORK SINGAPORE Tel: 31 20 563 84 17 Tel: 32 2 547 75 34 Tel: 44 20 7767 1000 Tel: 1 646 424 6000 Tel: 65 6535 3688 July 2006 Bratislava Edinburgh Madrid Paris Shanghai Tel: 421 2 5934 61 11 Tel: 44 131 527 3000 Tel: 34 91 789 8880 Tel: 33 1 56 39 31 41 Tel: 86 21 6841 3355 Bucharest Geneva Manila Prague Sofia Tel: 40 21 222 1600 Tel: 41 22 593 8050 Tel: 632 840 8888 Tel: 420 2 5747 1111 Tel: 359 2 917 6400 Budapest Hong Kong Mexico City Santiago Taipei Tel: 36 1 268 0140 Tel: 852 2848 8488 Tel: 52 55 5258 2000 Tel: 562 452 2700 Tel: 886 2 2734 7600 Buenos Aires Istanbul Milan Sao Paulo Tokyo Tel: 54 11 4310 4700 Tel: 90 212 258 8770 Tel: 39 02 89629 3660 Tel: 55 11 4504 6000 Tel: 813 5210 0100 Dublin Kiev Moscow Seoul Warsaw Tel: 353 1 638 4000 Tel: 380 44 230 3030 Tel: 7495 755 5400 Tel: 822 317 1800 Tel: 48 22 820 5018