1991 being... 2016 ABANK 2016 ANNUAL REPORT

Cumhuriyet Cad. No:46 Şişli 34367 Istanbul T: +90 212 315 65 00 www.abank.com.tr 2016 ANNUAL REPORT

This report has been published using recycled paper and environment-friendly technologies. CONTENTS

PRESENTATION 75 Internal Audit 04 Our Vision, Mission and Strategy 75 Summary Board of Directors Report Submitted to the 06 Agenda for the Annual General Meeting General Assembly 07 Shares, if any, Held in the Bank by the Chairman and 76 Organisational Structure Members of the Board of Directors, Members of the Board 78 Explanations and Notes about the Bank’s Risk Group of Auditors, Chief Executive Officer and Executive Vice 78 Dividend Policy Presidents 79 Grants and Charitable Donations Made and Expenses 08 Capital and Shareholder Structure Incurred in Conjunction with Social Responsibility Projects 09 The Commercial Bank in Brief in 2016 10 ABank’s History & Market Position 79 Remuneration Paid to the Board of Directors and Senior 11 Financial Indicators Management 14 Milestones in the History of ABank 80 Managers of Internal Systems 18 2016 Highlights 80 Affiliated Companies Report 20 Message from the Chairman 81 Outsourced Services Pursuant to the Regulation on Banks’ 22 Message from the CEO Procurement of Support Services 28 2016 Activities 83 Annual Report Compliance Opinion 28 Corporate Banking 84 Statement of Responsibility for 2016 Annual Report 30 Commercial Banking 85 If an Ordinary General Assembly Was Held during the Year, 33 Retail Banking Information on the Assembly, Including the Date of the 36 Treasury Group Meeting, Decisions Reached, and Actions Taken in Due 38 Financial Institutions Course 41 Operations 42 Human Resources FINANCIAL INFORMATION AND RISK MANAGEMENT 46 Information Technology 85 Financial Position, Profitability and Solvency 51 ABank’s Financial Subsidiaries 86 Evaluation of the Bank’s Capital Strength and Board of MANAGEMENT AND CORPORATE GOVERNANCE Directors’ Assessments PRACTICES 86 Achievement of Targets Set in Previous Periods, Implementation of General Assembly Resolutions, 54 Corporate Governance Any Reasons for Failure to Meet Targets or Implement 59 Names, Terms of Office, Responsibilities, Educational Resolutions, and Assessments Background and Professional Experience of the Chairman 87 Information on Special and Public Audits during the Fiscal and Members of the Board of Directors, Members of the Year Board Audit Committee, Chief Executive Officer, Executive 87 Administrative or Judicial Sanctions Imposed on the Bank Vice Presidents, and Managers of International Systems and the Members of the Board of Directors due to Actions Units in Violation of Applicable Laws 61 Terms of Office and Professional Experience of Auditors 88 Lawsuits Filed against the Bank with a Potential Impact on 62 Activities of the Board Credit Committee and the the Bank’s Financial Standing and Operations, and Their Committees Reporting to, or Set Up to Assist the Board of Possible Outcomes Directors under the Risk Management Systems Pursuant to 88 Credit Ratings Assigned to ABank and Related Explanations the Regulation on the Internal Systems of Banks, Names 89 Financial Highlights and Key Ratios for the Five-Year Period and Principal Duties of the Chairmen and Members Serving 90 Contact Information for Head Office and Branches on Such Committees 65 Risk Management Policies by Risk Type 68 Senior Management 73 Regulatory and Compliance 74 Internal Control This is a special year for us; we are now 25 years old.

This is where youth’s energy meets maturity, enthusiasm meets experience, and goals meet success.

This is a difficult age to describe. Thinking, “25-year-old employees are best placed to talk about the age 25’’, we leave the floor to them. ABANK 2016 ANNUAL REPORT

TOLGA ÜNLÜSOY Corporate Banking Sales Management Assistant Specialist

Being 25 brings A SPECIAL KIND OF ENTHUSIASM AND BLISS.

When I was younger, 25 was one of the milestones I was looking forward to… It is an age where you expect a lot from life. Certain things in life have become clearer for you,and this fuels your enthusiasm further. As a bank that has left behind a quarter century, we are proud to be one of the leading brands in this rather challenging industry. We are excited, because we plan to do a lot more with our focused banking approach, and make a true difference. ABANK 2016 ANNUAL REPORT Our Vision, Mission AND STRATEGY

ABank achieved business success in 2016, by capitalizing on its strong mission and vision, as well as its advanced technological infrastructure and operational excellence.

OUR VISION

To be the Bank of choice for its customers with its world-class solutions-oriented service approach.

OUR MISSION

Differentiating ABank from the competition in corporate, commercial and retail banking in Turkey with an innovative vision; to be on the side of customers wherever and whenever they need with our technology infrastructure, operational excellence standards, and focused banking approach; and to generate tailored solutions to help them attain their goals and business strategies.

4 PRESENTATION

Innovative Focused Business Banking Processes

High Customer Operational Satisfaction Excellence

Sustainable Strong Financial Technological Performance Infrastructure

Sound Capital Expert Human Structure Resource

OUR STRATEGY

ABank is Gearing Up for the Future of Banking with Within the frame of this project that is launched in a bid to its Transformation Project. redefine sector-, customer- and product-focused banking at ABank, we based our new business plan upon operational In line with the transformation project we launched with the excellence, matching technological infrastructure, sector-, strategic road map announced in December 2014, we have customer- and product- focused banking and expert human taken firm steps towards the goal of becoming the first bank in resource. We have devised strategies keeping an eye on the all areas where our customers need assistance. realities of the world and Turkey in the next ten years. We have developed expectations for alternative delivery channels. We focused on looking to the future with a view to satisfying the We have set out to build transformation upon the selected demands of tomorrow while formulating this project, which is a differentiation sectors and segments. Our goal is to be the collaborative effort of all ABank employees and shape the future customer’s preferred bank in identified specialisation sectors of the Bank. and segments. We are confident we will achieve that on the back of our swift business processes, expert human resources and advanced technology.

5 ABANK 2016 ANNUAL REPORT Agenda for the Annual GENERAL MEETING

1. Opening and formation of the presiding Board; authorising the presiding Board to sign the minutes of the Annual General Meeting,

2. Reading out and deliberation on the Board of Directors’ Annual Report for the fiscal year, External Auditor Reports and Balance Sheet and Profit/Loss Statements for 2016 Fiscal Year; decision on their approval,

3. Deliberation and decision on the Board of Directors proposal in relation to the Profit for 2016 Fiscal Year,

4. Release of the Members of the Board of Directors who have served during the fiscal year,

5. Determination of the number, terms of office and attendance fees of Members of the Board of Directors and election of Members,

6. Designating the audit firm that will conduct the external audit of the Bank,

7. Presentation of information to shareholders regarding the premiums paid to employees,

8. Informing the shareholders about the donations made during 2016,

9. Approval of the appointment of new appointed members to the Board of Directors due to the resignation of the members of the Board of Directors appointed at the Ordinary and Extraordinary General Meeting,

10. Authorising the Board of Directors to issue bonds and/or bank bills within legal limits in order to generate funds for the Bank, and to carry out relevant steps and procedures according to the current conditions,

11. The 30th article titled “Duties and Authorities of the Board of Directors” of the Articles of Association of our Bank and the 66th article titled “Determining and Distributing Profits, Reserves and Provisions” are discussed and reconciled in accordance with the approvals received from the relevant institutions,

12. Authorsing the members of the Board of Directors, pursuant to Articles 395 and 396 of the Turkish Commercial Code no. 6102, to carry out the activities that fall under the Bank’s scope, on their own or others’ behalf, to acquire interest in the companies engaged in such fields, and to carry out other such transactions.

6 PRESENTATION

Shares, if any, Held in the Bank by the Chairman and Members of the Board of Directors, Members of the Board of Auditors, CHIEF EXECUTIVE OFFICER AND EXECUTIVE VICE PRESIDENTS

INDIRECT TITLE NAME AREA OF RESPONSIBILITY SHARE CAPITAL (%)

Chairman of Board of Omer Hussain I. H. - - Directors Alfardan

Vice-Chairlady of Board of Directors, Chairlady of Board Members of Board of Audit Committee, Member of Board Remuneration Didem Çerçi - Directors Committee and Alternate Member of Board Credit Committee

Chairman of Board Credit Committee, Chairman of Joseph Abraham Board Executive Committee and Chairman of Board Remuneration Committee

Fahad Abdulrahman Member of Board Credit Committee and Member of Board - Badar Executive Committee

Member of Board Audit Committee and Member of Board İzzat Dajani - Remuneration Committee

Mohd Ismail M. Mandani Alternate Member of Board Credit Committee - Al-Emadi

Paul Gossiaux Member of Board Credit Committee -

Gerard George Rizk Member of Board Audit Committee -

Member of Board of Member of Board Credit Committee and Member of Board Müge Öner - Directors, Acting CEO Executive Committee

Executive Vice Seher Demet Tanrıöver Risk and Credits – Chief Risk Officer - Presidents Çaldağ

Information Technology and Operations – Chief Operating Tanol Türkoğlu Officer

Corporate-Commercial and Retail Banking – Ahmet Kağan Yıldırım Chief Business Officer

Kağan Gündüz Financial Control and Planning

Mete Hakan Güner Commercial Banking

Musa Kerim Mutluay Restructuring and Legal Follow-up

Muzaffer Gökhan Songül Credit Underwriting

Sezin Erken Retail Banking

Suat Çetin Operations – Consumer Relations Coordination Officer

Şakir Sömek Financial Institutions

Durul Selçuk Human Resources

Chief Audit Executive Mustafa Mutlu Çalışkan Internal Audit

7 ABANK 2016 ANNUAL REPORT Capital and SHAREHOLDER STRUCTURE*

The Commercial Bank (P.S.Q.C.)

SHAREHOLDER’S COMPANY NAME/FIRST & LAST NAME SHARE (AMOUNT) SHARE (%)

The Commercial Bank (P.S.Q.C.) 979,999,996.00 100.00

Orient 1 Limited 1 0.00

CBQ Finance Limited 1 0.00

Commercial Bank Finance Services (LLC) 1 0.00

CB Global Limited 1 0.00

TOTAL 980,000,000.00 100.00

* As of 19 December 2016, 25% of Anadolu Endüstri Holding A.Ş. shares were transferred to The Commercial Bank (P.S.Q.C.). As per the Board of Directors Resolution No. 166 of 19 December 2016, the Board of Directors resolved to increase the Bank’s capital from TL 770,000,000.00 to TL 980,000,000.00. Accordingly, The Commercial Bank (P.S.Q.C.) participated in this capital increase in an amount of TL 210,000,000.00. Respective registration procedures are in progress.

SHAREHOLDERS WHO HAVE PRIVILEGED SHARES

NAME/SURNAME/TRADE NAME OF THE SHAREHOLDERS WHO HAVE PRIVILEGED SHARES RATIO OF SHARES (%)

Qatar Holding Company LLC 16.67

8 PRESENTATION The Commercial Bank IN BRIEF

As Qatar’s first private bank, The Commercial Bank (P.S.Q.C.) plays an important role in the economy of the country with its wide customer portfolio ranging from individuals and local entrepreneurs to international institutions.

The Commercial Bank (P.S.Q.C.), founded in 1975, is one of (P.S.Q.C.), purchased majority shares in ABank in 2013, and as the leading financial institutions of Qatar’s rapidly growing and a consequence of the strategic partnerships it has developed, diversifying economy today. As the first privately-owned bank in the Bank offers Integrated services and international trading Qatar, The Commercial Bank (P.S.Q.C.) plays an important role opportunities in topics such as corporate banking, capital in the economy of the country with its wide customer portfolio markets, commercial finance, private banking and syndication ranging from individuals and local entrepreneurs to international loans across Turkey, United Arab Emirates, Oman and Qatar. institutions. Being a 100% shareholder of ABank since December 2016, The As a result of the success of the expansion strategy, it has a Commercial Bank (P.S.Q.C.) sees Turkey as a very important 34.9% share in the National Bank of Oman in Oman, and 40% in centre of investment in the medium and long term, and aims to the United Arab Bank in the United Arab Emirates. In line with offer a perfect banking experience to all its customers. this successful regional growth strategy, The Commercial Bank

9 ABANK 2016 ANNUAL REPORT ABank’s History & MARKET POSITION

ABank moves forward confidently in line with its mission and vision.

Commencing operations in 1991, ABank (Alternatifbank majority stake in ABank in 2013. With this major breakthrough, A.Ş.) has established itself as a well-respected player in the ABank embraced a new and more powerful roadmap with the banking industry thanks to its sound capital structure and objective of penetrating the Gulf Region, as well as increasing strong financial position. Focused on offering high value-added its profitability in Turkey with its revamped strategy, as a products, services and solutions to clients in the corporate, consequence of the share transfer that took place in December commercial and retail banking segments, ABank is differentiated 2016, management and organisational structure. While from its competitors with its innovative vision and also bolstering its strong reputation and high level of credibility in employs differentiated business processes in the corporate domestic and international markets with the firm backing of and commercial banking segments. Operating in the Turkish The Commercial Bank (P.S.Q.C.), ABank also moves forward banking industry for 25 years, ABank conducts face-to-face confidently in line with its mission and vision. The Bank aims banking with its customers via a 53-branch service and 901 to be the sector’s “rising star” thanks to its major competitive employee network by reaching various target segments by way strengths, such as its highly competent human resources, state- of diversified alternative delivery channels. The Commercial of-the-art technology, operational excellence standards and Bank (P.S.Q.C.), Qatar’s prominent bank, acquired a 75% exceptional service quality.

ABANK’S MARKET SHARE (%)

SHAREHOLDERS’ DATE ASSETS LOANS DEPOSITS EQUITY

2016/12 0.60% 0.61% 0.61% 0.41%

2015/12 0.62% 0.65% 0.49% 0.45%

2014/12 0.56% 0.65% 0.54% 0.43%

2013/12 0.63% 0.63% 0.53% 0.32%

2012/12 0.61% 0.68% 0.54% 0.33%

10 PRESENTATION Financial INDICATORS

FINANCIAL INDICATORS (CONSOLIDATED TL MILLION)

31.12.2016 31.12.2015 31.12.2014

Total Assets 17,591 14,065 11,348

Total Loans (Net) 10,489 9,306 7,900

Total Deposits 8,798 6,238 5,653

Total Shareholders’ Equity 1,265 1,015 973

Net Profit/Loss for the Period 30 70 137

TOTAL ASSETS TOTAL LOANS (TL MILLION) (NET) (TL MILLION)

25.07% 12.71% 17,591 10,489 9,306 14,065 7,900 11,348

2014 2015 2016 2014 2015 2016

TOTAL DEPOSITS TOTAL SHAREHOLDERS’ EQUITY (TL MILLION) (TL MILLION)

41.04% 24.63% 8,798 1,265 973 1,015 5,653 6,238

2014 2015 2016 2014 2015 2016

11 ABANK 2016 ANNUAL REPORT

BURCU EKEMEN Analytics and CRM Assistant Specialist

Being 25 brings HOPE ABOUT THE FUTURE.

You have overcome numerous challenges with your education and experience, and remained strong. Every achievement in the past has given you the force to reach out for more achievements. In these 25 years, we continued our progress regardless of the conditions. We looked ahead with hope and continued our ascent with consistent investments. Time, and the results we have achieved confirmed that we were right. ABANK 2016 ANNUAL REPORT Milestones in the History of ABANK

Set to celebrate its 25th anniversary in 2017, ABank enjoys a privileged position in the Turkish banking industry with its focused banking approach.

• ABank was • ABank shares started to • First ATM card “AKart” was • The Bank established in be traded on Istanbul Stock introduced. launched the ad Istanbul on 6 Exchange (Borsa Istanbul) • AYatırım, offering boutique campaign “We November 1991. as of 3 July 1995. investment banking services, Are Listening to • Alternatif Investment was established. You” that was Trust, Turkey’s 3rd biggest • ALease was established received with investment trust, was to offer financial leasing great interest. established. services. • ABank • ABank opened the “Tele earned ISO Branch”, a first in Turkey. 9001 Quality Certification.

1991 1995 1997 2000

1992 1996 1999

• The Bank promoted the “Longest-Term Housing Loan” • The Bank initiated • ABank started to implementation banking activities be managed under that was in February 1992 the majority operated for and opened its first shareholding of the first time in branch. Anadolu Group. Turkey.

14 PRESENTATION

• The Bank • Qatar’s largest private • Mutluparam.com, • ABank was rated for the promoted the bank, The Commercial the digital banking first time by Moody’s with a new “Happy Bank (P.S.Q.C.) became the portal of ABank, was “Baa3” grade, after proving Banking” controlling shareholder launched. its financial foundations in concept with an by purchasing a majority • The Bank successfully the financial market. ad campaign. interest in ABank. carried out the first • Turkey’s first credit card, • Efes Card, a collaborative Eurobond issue, which Diners Club, was re- initiative with Efes was the lowest-interest introduced to customers by Marketing under Anadolu rate bond issue in the ABank. Group organisation, was Turkish banking sector. introduced.

2010 2013 2014 2015

2001 2012 2016

• Recording a huge success, the Basel III-compliant 10-year subordinated loan was oversubscribed four times due to ample demand from overseas capital markets. • The syndication loan secured by ABank with the participation of 18 banks from 12 countries was yet another confirmation of the high level of trust that banking and finance circles place in ABank. • ABank’s corporate website was upgraded in line with ever- changing technology dynamics and trends. • At the Ege Branch and İstanbul-Kozyatağı Branch, ABank has initiated its new generation branch practices, one of the most • The Bank introduced important components of its focused banking vision. ABank Bonus, a co- • ABank Operations Centre, Data Centres and Business Continuity • ABank launched its branding initiative with Centre moved to new locations. Internet Banking Branch. Bonus. • The Commercial Bank (P.S.Q.C.), one of the most important banks in the Gulf region and the first private bank in Qatar, came to own all the shares of ABank after acquiring the remaining 25% stake from Anadolu Group.

15 ABANK 2016 ANNUAL REPORT

SEMİH MUTLU Legislation and Compliance Assistant Specialist

Being 25 brings RENEWAL IN EVERY SENSE.

At this age, you have matured significantly and started to find your own style. You try to make a difference rather than blending in the crowd; you refresh yourself and create your own fashion. We serve a special audience with unique characteristics, needs and preferences. That’s why we constantly refresh ourselves, and welcome our guests in branches built around brand new concepts. In this sense, we set an example for the entire sector with our unique style. ABANK 2016 ANNUAL REPORT 2016 HIGHLIGHTS

The Commercial Bank (P.S.Q.C.), which had acquired a 70.8% stake in ABank from Anadolu Group in July 2013 before increasing its holding to 75% with a share buyback, bought Anadolu Group’s remaining 25% interest in December 2016, thereby becoming the sole owner of the Bank.

• Recording a big success, ABank’s Basel III-compliant • Upon a resolution adopted by the Anadolu Endüstri Holding 10-year subordinated loan was oversubscribed four times A.Ş. Board of Directors on July 18, 2016, the holding due to robust demand from overseas capital markets. Over has decided to exercise its right to sell its 25% stake in 160 investors from the Far East to Europe and the Gulf region Alternatifbank A.Ş. to The Commercial Bank (P.S.Q.C.), in line participated in the USD 300 million transaction. with the Shareholders Agreement executed on July 18, 2013.

• In a collaboration between ABank and Anadolu Foundation, • The Operations and Technology Centre was moved to the social responsibility project “Libraries in Parks, Reading is Kozyatağı AND Plaza, which stands out with its central Wonderful” was launched to encourage people to read more location, state-of-the-art features and LEED Platinum and share books. Under the initiative, open-air libraries were certification. Furthermore, ABank Data Centres located in established in the most prominent parks in the town of Bafra; İstanbul and Ankara, were moved to new locations at Tier 3 classics of literature were placed in these library facilities quality standards. with the support of ABank and local government. • ABank upgraded its corporate web site in line with recent • ABank secured a syndication loan worth USD 225 million with advanced technology dynamics and trends. With interfaces the participation of 18 banks from 12 different countries. This perfectly tailored for different types of devices, the ABank loan was considered by the banking and financial world as a website delivers a high quality experience to users across all clear indication of the trust enjoyed not only by ABank and its channels of communication, including mobile phones, tablets parent company The Commercial Bank (P.S.Q.C.), but also by and computers. Users can easily find what they seek without the Turkish banking industry as a whole. getting lost in the menu, thanks to a design that places the focus on delivering an exceptional user experience. • Designed to deliver a highly professional, one-on-one service to corporate, commercial and retail clients in a • The Commercial Bank (P.S.Q.C.), which had acquired a 70.8% state-of-the-art environment, the new generation branch stake in ABank from Anadolu Group in July 2013 before concept was implemented in the Aegean Branch and İstanbul increasing its holding to 75% with a share buyback, bought Kozyatağı Branch. Resting areas featuring the comfort of a Anadolu Group’s remaining 25% interest in December 2016, lounge, private meeting rooms, cutting-edge technological thereby becoming the sole owner of the Bank. infrastructure and unique interior decor all differentiate this new generation branch completely from run-of-the-mill bank branches. In response to customer expectations and in line with the Bank’s targets, this concept will be extended across the entire branch network.

18 19 ABANK 2016 ANNUAL REPORT Message from the CHAIRMAN

ABank conducted its operations by adopting a focused banking approach, executing effective management practices and embracing its responsibility to support Turkey’s sustainable growth while achieving successful results.

Esteemed Stakeholders, Turkey stood its ground during a challenging 2016.

We have left behind a year dominated by growth The Turkish economy once again recorded an impressive concerns and cyclical fluctuations. growth performance in the first half of 2016 despite weakness in global trade and repercussions of geopolitical risks. Early Concerns pertaining to the global economy continued in 2016 in the second half of the year, on July 15, a coup attempt due to cyclical fluctuations and growing financial risks. The occurred in Turkey, testing the economy’s resilience. The slowdown in trade and investment added new risks to the Turkish government implemented proactive crisis management low growth environment in many developed and emerging policies in the aftermath of the thwarted coup while taking economies this year. We have witnessed the adverse effects major steps to ensure the continuity of brisk economic activity, of the Brexit shock, the tense election campaign in the United making confidence-building pronouncements to domestic States and the challenges in the European banking industry in and international investors, and re-establishing the positive 2016. environment.

As the US continued to decouple from other developed countries The impacts of S&P’s downgrade of Turkey’s credit rating by a in the positive direction, America’s Central Bank (the Fed) hiked notch and Moody’s downgrade of the country’s sovereign debt interest rates at year-end in line with market expectations rating to below investment grade were limited as the Turkish due to a strengthening labour market and closing in on the economy remained resilient. inflation target. The Euro zone started the year on a high note thanks to the European Central Bank’s pro-growth monetary We firmly believe that Turkey’s economy—which has proved its policy, a decline in unemployment, and a rebound in internal resilience to heavy shocks time and again in the past—will once demand. However, the Euro zone economy fell back into a again successfully overcome this test of endurance despite the slowdown spiral due to high government debt levels, a fragile challenges triggered for the most part by geopolitical risks. banking system and persistent political problems. Emerging markets continued to be plagued by commodity price trends The Turkish banking industry maintained its sustainable growth and concerns over China, in addition to the risks stemming even in a year of extreme fluctuations. The sector’s asset quality from their own internal dynamics. Other major risk factors for remained robust despite slowing credit growth and the loss of developing economies include a potential shift of the US trade value in the Turkish lira. According to Banking Regulation and policy towards a more protectionist stance under the new Supervision Agency (BRSA) data, total assets of the banking administration and indications that the Fed might pursue a more industry amounted to TL 2.7 billion as of December 2016, up aggressive tightening cycle in monetary policy. 22% compared to year-end 2015. Loans ended the year at TL 1.7 billion with a y-o-y increase of 19% while deposits climbed to TL 1.5 billion with 16% growth. The capital adequacy standard ratio of the sector remained strong at 16% as of September 2016.

20 PRESENTATION

ABANK HAS MOVED FORWARD WITH ROBUST STRIDES AND CONTRIBUTED TO THE TURKISH ECONOMY SINCE THE DAY IT WAS ESTABLISHED DESPITE THE EVOLVING CHALLENGES OF THE BANKING INDUSTRY, BOTH GLOBALLY AND LOCALLY.

ABank is moving forward even more strongly. ABank has moved forward with robust strides and contributed to the Turkish economy since the day it was established despite the ABank conducted its operations by adopting a focused banking evolving challenges of the banking industry, both globally and approach, executing effective management practices and locally. In 2017—our 25th anniversary year—we will continue embracing its responsibility to support Turkey’s sustainable to generate new value in accordance with this mission thanks growth while achieving solid results. At year’s end, the Bank to our focused banking approach, strong human capital and reported TL 17.6 billion in total assets, TL 10.5 billion in net the support of our stakeholders. We firmly believe that Müge loans, TL 8.8 billion in customer deposits and TL 1.3 billion in Öner, our new CEO who took office in March 2016, will raise shareholders’ equity. the ABank flag higher and that the Bank will steer its course toward new accomplishments under her stewardship. As ABank We witnessed some developments in 2016 that will allow ABank continues to grow and expand, we will not hesitate to actively to stand more firmly behind its goals. The Commercial Bank support the Bank in the years ahead. (P.S.Q.C.) acquired 25% of Anadolu Group shares in ABank in December 2016, and as a result of this transaction ABank On behalf of the Board of Directors, I would like to thank all became a wholly-owned subsidiary of The Commercial Bank our stakeholders, but especially the Bank’s former shareholder (P.S.Q.C.). Our goal is to leverage the Turkish economy’s growth Anadolu Group, whom we worked with in great harmony during potential and strengthen trade and commercial ties between the last three years, for joining forces with us against all the Qatar and Turkey in order to increase ABank’s share in The challenges we have encountered in this new investment region Commercial Bank (P.S.Q.C.)’s consolidated financial figures. for our Group. To our great satisfaction, we observed the further deepening Respectfully yours, of the robust and strategic relationship between Qatar and Turkey in 2016. Despite the developments that threatened the investment environment in Turkey, Qatar’s investments in numerous strategic industries, led by finance and energy, continued without interruption and grew last year, OMER HUSSAIN I. H. ALFARDAN demonstrating the strength of the fraternity and partnership Chairman of the Board of Directors between the two countries. We believe that this move by The Commercial Bank (P.S.Q.C.) will make a major contribution to commercial relations between Turkey and Qatar, paving the way for new partnership opportunities. We have never been more optimistic about the future of ABank, a rising star in Turkey and in Turkish banking, which are growing on robust fundamentals.

21 ABANK 2016 ANNUAL REPORT Message from the CEO

Despite the volatilities in the global and local environment, our Bank continued its balanced growth in 2016.

Esteemed Stakeholders, The Commercial Bank acquires 100% of ABank. The Commercial Bank (P.S.Q.C.) - ABank’s majority shareholder In 2016, ABank continued creating added-value not only for the and one of the largest banks in the Gulf region - acquired Bank, but also for employees, customers and all its stakeholders Anadolu Group’s 25% share in ABank in 2016. As a result, thanks to its “focused banking” vision, defined as a result of the ABank became a wholly-owned subsidiary of The Commercial Bank’s long-term perspective. Bank (P.S.Q.C.). By making the Bank its largest investment outside Qatar, The Commercial Bank (P.S.Q.C.) not only During the year, ABank’s total assets on a consolidated basis demonstrated its confidence in ABank, but also its strong grew 25% to TL 17.6 billion while total deposits jumped 41% to perception of Turkey and the Turkish banking industry as a major TL 8.8 billion. Shareholders’ equity totalled investment opportunity in the medium and long term. TL 1.3 billion, up 25%. Meanwhile, ABank’s capital adequacy ratio stood at 17%. In addition, the Bank’s paid-in capital was The strong international reputation we enjoy thanks to The increased 58% to TL 980 million. Commercial Bank (P.S.Q.C.) helped us further diversify our sources of funding in 2016. The Bank’s 10-year Basel III- Our support for Turkey’s growth continued as reflected in the compliant Tier II Capital in international bond markets was Bank’s loan book reaching TL 10.5 billion in 2016. After growing oversubscribed four times due to heavy demand from numerous 13% in 2016, loans comprised 60% of the Bank’s balance countries - a great accomplishment for ABank. This USD 300 sheet at year’s end. In order to manage our loan portfolio in a million issuance, drawing interest from more than 160 investors more risk-averse manner, we improved the Bank’s credit risk from across the world, bolstered ABank’s capital base and parameters. accelerated its sustainable growth. The funds obtained via this transaction were extended mainly in the corporate and Despite leaving behind a year of major organisational and commercial banking segments, boosting our support to the real infrastructural changes in pursuit of our focused banking economy. strategy and sustainable growth, ABank announced net profit of TL 30 million thanks to its successful performance in the second In July, a period marked by uncertainties in the markets, half of 2016. we undertook a borrowing transaction that became a major accomplishment for the Turkish banking industry. We obtained a USD 225 million syndicated loan, with the participation of 18 banks from 12 countries, as a result of our soaring international reputation thanks to the support of The Commercial Bank (P.S.Q.C.). The geographic breadth of the deal and the diversity of countries involved reaffirmed the market’s confidence in the Bank in addition to our strong correspondent relationships spanning regions across the world.

22 PRESENTATION

ABANK CONTINUED TO PROVIDE PRIVILEGED, CUSTOMISED SERVICES WITH ITS EXPERT HUMAN RESOURCES AND APPEALING PRODUCT PORTFOLIO.

We have left behind a vibrant year. Understanding that a bank can differentiate from the competition only by creating a specialised world for the In 2016, ABank continued to meet the specialised credit needs customer, we rolled out our next generation branch concept of Corporate Banking clients with a business partner approach, in 2016. Specially designed to render a face-to-face banking by providing corporate finance, derivative products, trade experience to customers in a modern environment, our Ege and financing, structured products, among other solutions. We also Kozyatağı Branches opened during the year. We plan to expand made significant strides toward becoming a bank preferred by this transformation initiative, which aims to move beyond the companies doing business in the Gulf Region, boosted by the traditional bank branch perception, to cover all ABank branches synergies created with National Bank of Oman (S.A.O.G.) and in the coming period. United Arab Bank (P.J.S.C.), two affiliates of The Commercial Bank (P.S.Q.C.). Our focused banking transformation effort also had a physical dimension in 2016. During the year, we relocated the ABank By designing our Commercial Banking services around a Operations and Technology Centre to the LEED Platinum relationship-oriented advisory approach, we continued our certified Kozyatağı AND Plaza, which stands out with its support to the real sector with niche solutions geared toward strategic location, contemporary architectural design, and various industries, thereby making key changes in the banking advanced technical features. This relocation significantly segment structure. In line with our overall transformation boosted the efficiency of our operations. strategy, we prioritised growth in the commercial segment. In order to support this strategy, we optimised our branch network As a bank that embraces the internalisation of technology in serving this segment on the basis of provinces and branch products and services as a core goal, ABank unveiled innovative locations during 2016. products in 2016 to make the lives of customers easier and speed up their banking transactions. In line with current ABank’s retail banking growth strategy aims to deepen in target technological advances and trends, we improved the user segment customers while continuing to provide privileged, friendliness and mobile compatibility features of our corporate customised services with its expert human resources and website. In addition, we enhanced the design and functionality appealing product portfolio. Thanks to these efforts, ABank’s of the retail banking website. retail banking deposits grew 13% in 2016. In addition, we re-introduced Diners Club, the widely recognised brand that was also Turkey’s first ever credit card, under ABank’s umbrella, further enriching the Bank’s world of privileges for its clients.

23 ABANK 2016 ANNUAL REPORT Message from the CEO

Understanding that a bank can differentiate from the competition only by creating a specialised world for the customer, we rolled out our next generation branch concept in 2016.

We are committed to our social responsibilities as In the consequence of ABank becoming a wholly-owned much as our own business. subsidiary of the globally-renowned financial institution The Commercial Bank (P.S.Q.C.), we will step up efforts to benefit At ABank, we believe that the value the Bank generates for its from the stronger ties with our parent company in 2017. The stakeholders should create lasting positive impacts not only on Bank will enhance its differentiated and specialised organisation the banking industry and the economy but also on the society and continue pursuing sustainable growth by means of of which we are part. To this end, ABank constructed outdoor leveraging the support of the service network of The Commercial libraries in the 10 largest parks in Bafra, a city in Turkey’s Bank (P.S.Q.C.). Black Sea Region, in order to encourage reading among young members of society, as part of the “Libraries in Parks, Reading is I would like to take this opportunity to thank our parent Wonderful” project. company and our Board of Directors for inspiring us to Corporate goals that are growing with the vision of pursue these ambitious goals; our customers for boosting our The Commercial Bank (P.S.Q.C.). determination with their confidence in us; my colleagues for their dedicated efforts and contributions to these successful In 2017, we plan to expand our business volume in all our results; and all ABank’s stakeholders. focus segments, led by Corporate and Commercial Banking, while remaining committed to our effective risk management Respectfully yours, approach and Retail Banking. ABank will increase its support in project finance and continue creating value for its stakeholders in addition to the Turkish economy. Another priority for the Bank will be providing support to the ever-growing cooperation between Qatar and Turkey and capitalise on the opportunities MÜGE ÖNER that will emerge from this partnership. Acting CEO

24 PRESENTATION

25 ABANK 2016 ANNUAL REPORT

CANSU ÖZDEMİR Large-Scale Commercial Customers Management Assistant Specialist

Being 25 brings SEEING THAT YOU HAVE GROWN.

When you are 25, you realise how much you have matured, and how much progress you have made. You are now capable of much better decisions. Active in the Turkish banking sector for 25 years, ABank has grown more and more every year it has left behind. Now, boasting a network of 53 branches, we are capable of reaching the targets we set ourselves, and displaying a robust growth performance. ABANK 2016 ANNUAL REPORT Corporate BANKING

Focused on developing multi-faceted and long-term relationships with new customers while further deepening existing customer relationships, ABank Corporate Banking makes proactive contributions to clients that enhance their competitive strengths and help them seize growth opportunities.

Operating as a separate business line since 2015, Corporate ABank offers customised finance solutions to meet the long- Banking has swiftly ascended to become an integral part of term financing needs of its clients in various industries such as ABank’s vision to be the best bank in its class. construction, manufacturing, energy, logistics, and particularly retail. The Bank also provides financing for projects in several Serving companies with annual turnover of at minimum TL areas such as renewable energy, hotels, construction of business 150 million, Corporate Banking generates alternative financial centres and office buildings. solutions in line with its customers’ demands related to their activities. The Department also delivers results-oriented Focused on developing multi-faceted and long-term solutions custom-tailored for specific customer needs relationships with customers while further deepening existing particularly in specialised segments, such as corporate finance, customer relationships, ABank Corporate Banking makes trade finance and derivatives. proactive contributions to clients that enhance their competitive strengths and help them seize growth opportunities. ABank Corporate Banking provides high quality services to corporate clients through four corporate branches; three ABank Corporate Banking expanded its loan portfolio in 2017 branches in Istanbul, one in Ankara and two mixed branches in line with its targets. It now plans to become one of the first in Izmir & Gaziantep and Head Office staff, with a total of 40 banks to come to mind in loan products that require expertise employees. and know-how, such as corporate finance, derivative products, trade financing, and structured products. The Corporate Banking Focusing on sustainable and productive growth by placing Department will continue to pursue its key objectives, which targeted relationships at the centre of its banking model, are increasing the number of clients through its customer and Corporate Banking’s deposits rose to TL 4,545 million and the industry-focused approach, providing structured products cash and non-cash loan book expanded to TL 5,220 million as of tailored to the needs of clients, and raising its clients to a higher end-2016. position within the Bank’s entire portfolio.

In 2016, with the synergy created among ABank, The Commercial Bank (P.S.Q.C.) and the latter’s affiliates National Bank of Oman (S.A.O.G.) and United Arab Bank (P.J.S.C.), the foreign trade volume reached USD 1.6 billion. Furthermore, the Bank capitalises on this group synergy for financing and project loans to secure the resources with the most favourable cost structure, creating an additional loan allocation volume.

28 PRESENTATION

25 years Serving in the Turkish banking 53 sector for 25 years, ABank continues to offer its customers a Total Number of privileged banking concept. Branches

29 ABANK 2016 ANNUAL REPORT

In 2016, ABank management continued to implement the transformation project, initiated in 2015 as a strategic Commercial roadmap and scheduled for completion by 2017. Under the transformation effort, Corporate and Commercial Banking was restructured as two separate business units. Commercial Banking was reorganised to cover the SME Banking segment and BANKING serves firms with annual turnover of up to TL 150 million. Developed to redesign the Commercial Banking loan book as part of the Bank’s management strategies, the transformation ABank continued to provide the financial plan was carried out successfully in 2016. Specifically, projects were undertaken to manage the loan portfolio more effectively; services required by customers in management actions necessitated by market developments were made promptly and effectively; and the targeted level of line with market trends and economic profitability was achieved. This approach further increased developments in 2016. In accordance ABank’s cooperation with its commercial banking customers while boosting the Bank’s effectiveness among clients. with the transformation strategy, ABank continued to provide the financial services required the Bank prioritised growth in the by customers in line with market trends and economic developments in 2016. In accordance with the transformation commercial segment. strategy, the Bank prioritised growth in the commercial segment by targeting customers with annual turnover of TL 40 million to TL 150 million using a relationship-oriented banking approach. While continuing to serve existing customers in the SME segment, the Bank focused on clients that promise growth potential and that can move up into the commercial customer segment in the range of annual return TL 25-40 million with medium to long term financial support.

30 PRESENTATION

ABank extended project-based credit support in various income- with a product range that is continuously enriched with new generating areas that include energy, hotel, and business loan, deposit, investment, foreign trade, insurance, treasury/ centre and office space construction projects. The Bank also derivative transactions, and cash management products. This provided boutique financing solutions to meet the long-term holistic approach also contributes to the success of ABank in finance needs of customers in target sectors such as tourism, winning new customers and enhancing customer loyalty. construction, automotive, retail, food and clothing, chemicals, and metals, with a particular focus on the renewable energy Committed to maintaining loan portfolio diversification sector. Through the funds made available to the real sector with by segment, 47% of ABank’s overall loan book consists of the help of financing solutions that rely on its deep experience commercial loans and SME loans. As of year-end 2016, total and rational analyses, the Bank provided support to projects of cash and non-cash loans extended for the benefit of the Turkish those commercial customers that drive their respective sectors economy stood at TL 4.8 billion. Commercial Banking accounted and that operate nationally and/or internationally. In 2016, for an 18% share of the Bank’s total deposits of TL 8.8 billion as project financing loans extended to clients in the commercial of year’s end. segment made up 10% of the total commercial banking loan portfolio. In addition to working to achieve its financial targets, ABank continued to pursue structural and organisational objectives ABank Commercial Banking offers customers a holistic in line with annual plans. As of December 31, 2016, the service model based on a contemporary product range that 200-strong specialised Commercial Banking team serves can effectively respond to current needs. With its integrated customers at 45 commercial and mixed branches in 20 service approach in this key segment, Commercial Banking provinces in Turkey. Pursuant to the plans initiated a year provides services to meet the needs of companies at all levels earlier, the Bank’s management has optimised the branch comprising the value chain of customers. Commercial Banking network to bring operational costs under control, yield works together with Corporate Banking to ensure that synergy is operational productivity, and support the ABank’s future bolstered in the value chain management of the Bank’s customer development. To this end, the Bank completed efforts to portfolio. ABank delivers effective, cutting-edge solutions to restructure the network in terms of provinces and locations, in Commercial Banking clients at every stage of their operations. keeping with the overall corporate strategy in 2016. The Bank provides high quality, customer focused services

31 ABANK 2016 ANNUAL REPORT Commercial BANKING

ABank provides customers with industry-specific cash management solutions backed by innovative technology. These products contribute to clients’ receivables management efforts and operational efficiency while boosting the Bank’s customer satisfaction and loyalty.

ABank continued to analyse customer needs by industry and In the fourth quarter, ABank restructured the Insurance Unit develop tailored solutions to meet these specific needs during in line with a broker-type organisational model in terms of the 2016 fiscal year. The Bank identified market- and regulatory employees and modus operandi, and repositioned it under technology-based requirements and conducted product Commercial Banking. In 2016, the Insurance Unit completed development efforts geared toward alternative channels to the necessary research studies (on price-based competition, address these needs. As part of this effort, the Bank continued product formation, appropriate insurance company selection, to develop new products and services – in the insurance, contracts, and compliance processes) in order to transform the treasury/derivative transactions, supplier financing and cash life insurance and pension businesses into a model suitable to management segment in particular – to improve customer the Bank’s operational structure. satisfaction, roll out new products addressing customer-specific needs and upgrade its technology systems infrastructure. In the field of elementary insurance, the Insurance Unit worked on the development of tailor-made service solutions for Meanwhile, commercial collection systems and relevant services customers in receivables insurance, car fleet package insurance, continued in 2016. At year’s end, the total limits allocated under engineering risks, industrial package risks, financial loss and the Direct Debit System (DDS) was TL 214,400 million and the liability insurance, and contributed to the Bank’s non-interest total volume of collection mediated by the DDS channel was TL revenues. 3.8 billion. ABank also laid the foundation for the continuation of the In order to support SME financing more proactively by gaining loan cycle by transferring the loan risk-bearing customers to access to the Treasury’s loan-guarantee programs, ABank started the insurance system. During the same period, the operating participating in the Credit Guarantee Fund of Turkey (KGF) as a structure of the Bank’s elementary insurance and group health partner in April 2015. Efforts are currently underway to leverage insurance were improved and the Bank’s in-house advisory this partnership in designing special funding programs in 2016. processes were carried out.

The Bank continued to help SME customers obtain financing In collaboration with the Treasury Department, effective via programs that offer European Union (EU)-sponsored solutions are offered to ABank customers in order to minimise nonrecourse loans to SMEs in previous years, such as Instrument currency and interest rate risks. In 2016, ABank continued to for Pre-Accession Assistance Rural Development (IPARD), and leverage the synergies with Group banks The Commercial Bank facilities procured from other resources, such as International (P.S.Q.C.), National Bank of Oman (S.A.O.G.) and United Arab Financial Corporation (IFC) and European Fund for Southeast Bank (P.J.S.C.) to create fast and low-cost financing alternatives Europe (EFSE). In addition, ABank maintained its ongoing particularly for the foreign trade, guarantee and loan needs of support for export financing through its intermediation of companies conducting business in the Gulf region. Eximbank loans.

32 PRESENTATION Retail BANKING

The 2016 operating period was a year in which the transformation process of ABank’s Retail Banking business line and the strategic decisions taken in this context were implemented.

In 2016, ABank Retail Banking boosted its efficiency as well Another change during 2016 was that ABank became the as its effectiveness. In the fiercely competitive Retail Banking exclusive issuer of Diners Club credit cards in Turkey. Diners segment, the Bank has adopted the model of Affluent Deposits Club enjoys high prestige in the credit card sector and provides and ADC Focused Retail Banking as its growth strategy. In order generous benefits, by offering the exclusive advantages to put this strategy into practice, the Bank restructured its sales demanded by the target segment. As such, Diners Club is teams and developed a range of products to respond to all the expected to become one of the foremost products in the ABank needs of customers in ABank’s retail banking target segments. retail credit card portfolio. As of year-end, ABank’s highly qualified retail sales team and branch network has had access to 80% of all deposits in Turkey ABank continued to offer solutions designed to accommodate in the Bank and started to manage them accordingly. the periodic and special needs of its high-income customers via its branch network. The Bank improved its retail loan risk ABank expanded its range with ground-breaking products such management infrastructure during the year. From the second as the 3-Currency Deposit Account, Time Deposit Account half of the year onwards, the Bank added momentum to its credit without a Fixed Term (VOV), and Accumulating Deposit Account facilities, maintaining its market share in this area. Additionally, which were all launched in previous year. As a result, the infrastructure works, that were initiated in 2015 with the aim number of the Bank’s customers in the target segment and term of using alternative distribution channels more efficiently, have deposit volume expanded by 13% throughout 2016. In addition, been concluded in 2016; the innovations and developments the Bank focused on investment products and processes and resulting from these efforts will be operationalised in 2017. proceeded to upgrade them. It also expanded its investment fund contracted portfolios and attained a product and process In fourth quarter 2016, ABank Retail banking extended its infrastructure capable of meeting all investment needs of service range by adopting customised insurance products in customers. Consequently, the investment product volume order to meet the needs of its customers. expanded by over 200% when compared to the previous year. The expansion in the volume and revenue of these products is With its growing team of experts and expanded product range, expected to continue to increase in 2017. ABank Retail Banking will continue to focus on deposits and investment products and to grow by meeting all the needs of Affluent Segment customers, including loan and insurance products.

13% 200% Growth in Investment Growth in Term Product Volume Deposit Volume

33 ABANK 2016 ANNUAL REPORT

YASEMİN YANKI GARAGÖZ Corporate Communications Assistant Specialist

Being 25 brings SAYING HI TO A NEW STAGE IN LIFE.

At 25, you leave behind a crucial stage in life and step into another, and set more ambitious goals. New initiatives, partnerships and opportunities appear before you. We say a very ambitious hello to the next 25 years which lie ahead of us. Since The Commercial Bank (P.S.Q.C.), a leading bank in Qatar, has brought its stake in ABank to 100%, we have set for the Bank more ambitious goals. ABANK 2016 ANNUAL REPORT Treasury GROUP

In visits to ABank clients, the Treasury Marketing Department makes presentations and aims to expand the transaction volume with existing Treasury Marketing clients.

Expert Treasury Management in the International Trading Department Markets The Trading Department is comprised of three units: the ABank Treasury Group consists of the Asset/Liability Fixed-Income Securities Desk, the Foreign Exchange Desk, Management Department, the Trading Department, the Treasury and the Derivatives Desk. The Department’s main product Marketing Department, and the Economic Research Unit. portfolio includes spot and forward currency (Turkish lira cross) transactions, spot and forward foreign exchange transactions Asset and Liability Management Department in other G20 and developing country currencies, domestic and international bonds and bills, interest rate swaps, cross-currency The Asset and Liability Management Department primarily swaps, and derivatives. engages in liquidity management, interest risk management, and fund transfer pricing. As part of liquidity management, The Trading Department’s competitive pricing plays a key the Department actively manages the Bank’s liquidity in all role in strengthening the Bank’s position in capital markets currencies in compliance with internal and legal liquidity limits. and supporting the Treasury Marketing Unit via FX and FX It executes borrowing and placement transactions in organised derivatives transactions entered into with corporate and and over-the-counter markets using FX swaps, repo/reverse commercial customers. Effective pricing is provided to repo, and other similar instruments. In addition, it also carries customers in accordance with their market expectations as part out efforts to secure funding facilities under various structuring of options portfolio and risk parameters management efforts. arrangements from international banks. The Department cooperates with other departments to develop various products for the needs of corporate clients with a The Asset and Liability Management Department also performs customer-oriented approach. duration-based fund transfer pricing. This model reflects the Bank’s marginal cost while taking into consideration behavioural The Fixed-Income Securities Desk actively carries out trade analyses regarding the products. The Department manages the executions in organised and over-the-counter (OTC) markets in balance sheet interest risk and ABank’s investments in line with response to customers’ and the Bank’s trading or balance sheet the guidance of the Asset and Liability Committee, within the needs. The Foreign Exchange Desk provides comprehensive limits set by the Board of Directors. Interest rate swaps (IRS), access to currency markets and as well as competitive pricing for swaption, and cross-currency swap transactions are utilised client needs. The Derivatives Desk offers competitive pricing and to hedge interest risk. The unit also acts as an intermediary customised solutions in all derivative products in order to meet in securities trading and related funding transactions, with hedging needs of customers while aiming to generate income in the purpose of boosting balance sheet profitability, within the derivatives markets. investment limits. All positions and risk limits at ABank are determined by the Board of Directors. The Trading Department aims to attain the profit goals within these limits.

36 PRESENTATION

Treasury Marketing Department Economic Research Unit The Treasury Marketing Department serves retail, commercial, The Economic Research Unit regularly briefs the Treasury and corporate clients. The Department performs spot foreign Division, the Bank’s Senior Management, and customers via currency trading, and provides pricing options and shares reports on economic developments, expectations, and risks. market reports in order to minimise the exchange rate, interest Aside from the regular reports, the Department also monitors rate, and commodity risks of customers. and reports on the developments of the banking industry, prepares presentations regarding the economic outlook for In visits to ABank clients, the Department makes presentations customers, and supports the Treasury Marketing Department in and aims to expand the transaction volume with existing these efforts. In addition, client visits and reports are conducted Treasury Marketing clients. The main objectives of the as part of marketing activities of various business lines. Department include: • Expanding the spot transaction volume, • Converting potential customers to active customers by increasing client visits, • Increasing transaction volumes for customers who need risk protection products but have not taken due action, • Taking a large share from the transactions of clients who are using treasury products, and boosting the contribution to the Bank’s profitability to the next level.

37 ABANK 2016 ANNUAL REPORT Financial INSTITUTIONS

ABank’s reputation and credibility in the field of international banking is particularly well known among peer banks.

In 2016, ABank Financial Institutions Department successfully sustained its extensive correspondent banking network, acted as an intermediary in its clients’ foreign trade operations, provided medium and long term funds to both the Bank and its customers under competitive market thresholds. Furthermore, it continued to mediate in long term subordinated debt and bond issuances from both the alliance banks and international debt capital markets, in order to help to meet the Bank’s capital requirements as well as leverage the Bank’s lending capabilities.

Correspondent Banking Relations ABank is a diversified and specialised service provider in the area of international banking with long-standing and well- established correspondent relations, stemming from its focused Financial Institutions strategy, ratings credentials and, most importantly, the robust support of its parent company.

ABank delivers products and solutions for the varying needs of its customers in foreign trade through its active relations sustained with over 1,000 international and domestic correspondent banks. Utmost attention is paid to the continuity and efficiency of relations with the main correspondent banks, in particular by making efficient use of the principle of reciprocity among the Bank’s focused priority. Financial Institutions. As a result of these efforts, the maturity and pricing structure of foreign funds, which account for a significant share in the Bank’s liabilities’ mix, make a positive contribution to the overall cost of funds and the maturity gap. Due to the nature of ABank’s shareholding structure, efforts have been expanded to create regional synergies by paying particular attention to relations with banks that are located in the Gulf Region.

38 Foreign Trade While implementing its focused banking strategy, ABank has established itself as an important partner of its clients who are active in foreign trade. The volume of foreign trade transactions intermediated by the Bank amounted to USD 1.6 billion in 2016. Leveraging its high level of credibility in international markets, ABank provided practical solutions to clients’ foreign trade transactions and bolstered its relations with correspondent banks by using a customer-oriented approach. As part of the Bank’s strategies that have been integrated under the transformation process, ABank aims to step up Corporate Banking activities, by achieving higher market penetration in the foreign trade segment, and increasing transaction diversification and volumes. One of the main points of focus at ABank is foreign trade schemes supported by the incentive and campaign programs designed by the Corporate Banking and Commercial Banking business units.

One of the most prominent achievements in the foreign trade arena in 2016 was the USD 50 million Trade Facilitation Program signed with the European Bank for Reconstruction and Development (EBRD). The Bank’s participation in this program, which includes over 900 banks from 23 countries, has demonstrated ABank’s robust relations with international multilateral institutions and the Bank’s ambitious growth targets in foreign trade. As a result of the program, ABank has added yet another prestigious name to its list of international partners, following the Global Trade Finance Program—with a USD 100 million limit—signed with International Finance Corporation (IFC) in 2011. The referenced agreements are expected to enhance ABank’s foreign trade transaction capacity and bring it to an even more competitive position in pricing.

Access to Overseas Funds Pursuant to the strategy of diversifying its funding resources, ABank continued to take ambitious steps to secure funds from overseas markets in 2016. As a result of these efforts, USD 1.4 billion was secured on an outstanding basis from international counterparties as of year-end 2016. The Bank’s external borrowing to total funding ratio was above the sector average. The factors underlying this high international credibility enjoyed by ABank are its strong shareholder structure, focused FI strategy towards international financial institutions, and the Bank’s sound credit rating.

In a ground-breaking achievement in April 2016, ABank completed a Basel III-compliant 10-year bond issuance in international debt capital markets, which was oversubscribed four times due to robust demand from investors from various countries across the world. More than 160 investors from the Far East, Europe and Gulf countries participated in the transaction, which stood at USD 300 million. The transaction is the third Basel III-compliant issuance in Turkey, and the first such issue among banks in ABank’s category.

39 ABANK 2016 ANNUAL REPORT Financial INSTITUTIONS

While implementing its focused banking strategy, ABank has established itself as an important partner of its clients who are active in foreign trade. The volume of foreign trade transactions intermediated by the Bank amounted to USD 1.6 billion in 2016.

ABank’s annual syndicated borrowing, which is among its most The Financial Institutions Department maintains close important external resources item, was executed in July 2016. coordination with international institutions, domestic banks, in The 1-year loan, which amounts to USD 225 million, stands addition to financial institutions in the Gulf region with a focus out as an important funding source for the Bank’s customers on reducing overall funding cost while improving borrowing active in foreign trade. Secured in dual currencies, USD 110 maturities also for the Bank’s leasing subsidiary, ALease. million and EUR 103.75 million, the loan was priced at Libor + 1.40% for the tranche in US dollars and Euribor + 1.30% for Enjoying a strong position among its peer group institutions in the tranche in Euros. The facility transaction featured a vast terms of external borrowing, ABank plans to sustain its active geographic base with the participation of 18 banks from 12 role also during 2017, by preferably placing in longer maturity different countries, confirming ABank’s strong relations with the terms, bilateral external funds across international markets. The international financial world. In addition, the Bank also supports Bank has taken steps forward to become an intermediary bank its customers with long term renewable energy and energy in allocating long term funds from the World Bank (IBRD) to the efficiency loans. real economy via Türk Eximbank, which has allocated a USD 50 million line with a tenor of up to seven years for this purpose. ABank’s relationship with international multilateral institutions plays a major role in extending its foreign funding sources across Alliance Banking Group Activities a longer maturity term. The Bank contributes to development 2016 marked a very important year for the Bank, since it and sustainable growth in SME financing, renewable energy and became a wholly-owned subsidiary of the Commercial Bank energy efficiency areas via long term facilities obtained from (P.S.Q.C.). The Commercial Bank (P.S.Q.C.) Alliance Banking International Finance Corporation (IFC), Black Sea Trade and Group consists of The Commercial Bank, ABank, the U.A.E.- Development Bank (BSTDB), German Development Bank (DEG), based associate United Arab Bank (P.J.S.C.) and the Oman- Dutch Development Bank (FMO), European Fund for Southeast based associate National Bank of Oman (S.A.O.G.). As the Europe (EFSE), ECO Trade and Development Bank (ETDB), Group’s members, the four banks work in close cooperation European Bank for Reconstruction and Development (EBRD), and and coordination with one another and expend efforts to other major international financial institutions. Consequently, achieve process improvements and maximise synergy within the Bank can deliver significant value added to the operating the Group. Capturing a share of the transactions among the capital and export activities of SMEs in particular, which in turn member countries of the Gulf Cooperation Council and their contribute substantially to the development of the nation’s transactions with Turkey, and acting in coordination in relation economy. to such transactions constitute some of the main objectives of the Group.

40 PRESENTATION

OPERATIONS

The Operation Department’s goals with all its stakeholders include designing processes in a safe and efficient manner, continuously improving existing processes in order to accelerate transaction speed, and, as a result, bringing about customer satisfaction.

ABank’s Central Operations Department comprises the The Operation Department’s goals with all its stakeholders Foreign Trade Operations, Credit Operations, Current Branch include designing processes in a safe and efficient manner, Transactions, Organisation, Operation Coordination, Treasury continuously improving existing processes in order to accelerate Operation, Real Estate Expertise and Sales, Administrative transaction speed, and, as a result, bringing about customer Affairs, Construction and Real Estate functions. satisfaction.

The primary objective of the Operations Department is standard, Aside from their core duties in 2016, the Operations error-free, and prompt service delivery to internal and external Department’s teams designed the projects required to move all customers in coordination with the business units, through the operational teams at the Head Office to the new Operation centrally designed and managed processes. Centre; ensured that the new location is ready to function; and executed the transition of all teams without any interruption Significant efforts are being expended to remove and automate in services. Additionally, as part of the new branch concept unnecessary steps in the process with a customer-focused initiative, the Department carried out the transformation of the approach. first selected branches in line with the new banking philosophy of ABank. In addition to these core activities, the Operations Department monitors local and international legislative changes and provides necessary information to ABank branches and Head Office departments, offers guidance on legislation, and directs process design and system development studies to adapt the legal and regulatory changes to the banking system.

41 ABANK 2016 ANNUAL REPORT Human RESOURCES

ABank Human Resources Policy employs contemporary human resources systems in order to support continuous success and development in coordination with all business lines in accordance with the Bank’s goals.

ABank Human Resources Policy employs contemporary human The BEST (Be Extraordinary Shape Your Talent) project was resources systems in order to support continuous success launched in 2014 in an effort to identify and develop the talent and development in coordination with all business lines in within ABank and to increase their engagement in the Bank. accordance with the Bank’s goals. The Talent Pool, which consists of 31 employees selected by Executive Vice Presidents at the Bank, was administered a one- Information on Human Resources Practices year special training program. Career Management: Employees who create added value and Sixteen employees joined ABank through the MT process that perform successfully are given the opportunity to rise up to was restarted in 2015. These new employees, who went through the highest echelons of the organisation; as much as possible, training and internships processes until January, were placed in managers are promoted from within the Bank. Similarly, great their respective departments as of January 2016. importance is placed on career management efforts at the Bank. With “Career Training”, the continuity of human resources is Performance Management: ABank’s Performance Management targeted. System was designed to raise the bar for the Bank’s success and support continuous development. An open system based All horizontal and vertical career move opportunities within on concrete and measurable goals, the ABank Performance the Bank are first announced to the employees via the intranet Management System sets goals in the beginning of the year and portal. The “Open Positions Model” gives deference to assesses employee performance at the end of the year according employees in managing their own future plans. For the open to these goals as well as the individual’s competencies. positions that are not filled from within the Bank, applications Assessment results are shared with employees and used as input via the Bank website, career portals, and e-mail are reviewed for training and career planning efforts and promotion decisions. and considered. All applications that are submitted are recorded Promotions are made by the employee committee based on in the human resources database and are kept in the database performance data. In addition, ABank pays a bonus to personnel for one year. Priority is given to interviewing suitable candidates every year based on the Bank’s operating results and the in the existing database records based on the Bank’s annual individual performance of the employees. Premiums paid in cash workforce planning formulated at the beginning of the year, or by the Bank and its subsidiaries to employees in 2016 amounted when a position opens up due to attrition. to TL 7,805 thousand (2015: TL 16,492 thousand). At ABank, new university graduates from economics, business Compensation Management: In an attempt to maintain administration and engineering departments, who are highly the highest level of employee motivation, ABank monitors fluent in English, take a series of exams and interviews. developments in the industry and within the Bank and strives to Successful applicants are offered the chance to participate in pursue a dynamic and fair compensation policy that meets the a 6-month Long Term Internship program. At the end of the needs of the organisation. 6-month period, the high performing interns may be recruited as contracted or permanent staff at various Head Office departments or at branches.

42 PRESENTATION

All horizontal and vertical career move opportunities within the Bank are first announced to employees via the intranet portal. The “Open Positions Model” gives deference to employees in managing their own future plans.

85% Number of Employees

Ratio of University and 901 Higher Education Graduates

43 ABANK 2016 ANNUAL REPORT Human RESOURCES

ABank Human Resources Policy employs contemporary human resources systems in order to support continuous success and development in coordination with all business lines in accordance with the Bank’s goals.

The Bank’s compensation practices are overseen and supervised Training and development activities organised by ABank by the Remuneration Committee on behalf of the Board of Development Centre include: Directors. The Compensation Policy is reviewed at least once each year in order to ensure the effectiveness of this policy. Orientation Program Experienced or inexperienced employees who just joined the Our Training Policy and Our Development Centre: From July Bank attend an Orientation Program designed according to the 3, 2013, ABank began managing its training and development position they will assume. activities through ABank Development Centre under the concept “All about Development.” Having adopted the vision of “being Banking Training an innovative and solutions-oriented centre of development that gives maximum support to its employees’ development,” ABank The Banking Training initiatives, designed to increase Development Centre offers innovative development solutions occupational knowledge of the employees, develops the in line with global trends, as opposed to classic approaches personnel in their respective fields of specialisation. to training. The primary goals of ABank Development Centre include aligning training and development activities with the Academic Cooperation Bank’s goals, strategies and working principles, investing in The Bank organises various certification programs and special the development of its employees so as to support the vision programs in cooperation with leading universities. of being the primary bank preferred by its customers, and strengthening our values and leadership competencies. Personal Development Training Combining under a single roof all the training needs of ABank The Bank designs special training initiatives to develop employees—from department-specific development programs competencies in such areas as stress management, effective and development implementations, to distant education and time management, and personal image management. ad hoc programs developed in cooperation with universities— ABank Development Centre is capable of offering training Distance Learning concurrently to 10% of the total Bank workforce. New product trainings as well as training modules on core topics that can be accessed anytime are provided through our distance-learning platform Ak@mpüs. In April 2016, Ak@mpüs TV was inaugurated, and has started to serve the Bank’s staff with instructional videos on Work, Humanities, Science and Technology, Personal Development, Leadership and Management Skills.

Leadership and Talent Programs We develop programs for training future managers, and management trainees, who have joined the Bank after going through various evaluation stages.

We also offer visionary training programs tailored to managers and talented employees.

44 PRESENTATION

Human Resources Profile Data on the ABank staff as of year-end 2016 is as follows:

NUMBER OF EMPLOYEES 2012 2013 2014 2015 2016

Head Office 483 550 507 535 476

Branches 747 863 708 503 425

TOTAL 1,230 1,413 1,215 1,038 901

GENDER 2012 2013 2014 2015 2016

Male 52% 51% 51% 51% 53%

Female 48% 49% 49% 49% 47%

TOTAL 100 100 100 100 100

AVERAGE AGE 2012 2013 2014 2015 2016

Average Age 35 35 36 37 36

EDUCATION 2012 2013 2014 2015 2016

Primary School 22 19 17 14 10

High School 179 225 183 147 125

University 898 1,043 897 758 666

Post-Graduate 131 126 118 119 100

Proficiency in a Foreign Language 460 534 450 456 346

AVERAGE SENIORITY 2012 2013 2014 2015 2016

Average Seniority in Years 5.6 4.7 4.9 5.6 5.8

Human Resources Activities in 2016 • GelecekSEN Project: Some 45 interns were hired under the long-term internship process in 2016. To date, 18 persons • Competency Project: Competencies co-defined with the Hay from this program joined the Bank as permanent staff. Consultancy firm on the basis of departments under the title • Happy CVs: Thirty-four resumes were shared as part of this “ABank Excellence Model” continued to be used during the project whereby the Bank’s employees refer the CVs that they year. are willing to endorse to us through the portal. • Social Media: Under the management efforts of the Facebook page/ABank Career-HR Facebook page, the number of followers total 14,445. The Abankkariyer.com blog was managed as part of social media initiatives.

45 ABANK 2016 ANNUAL REPORT

The ABank Information Systems Department successfully continued its technology development and investments in line Information with the needs of the business units during the 2016 operating year. The Department’s goal was to satisfy business goals, business requirements, and information systems compliance; increase efficiency and effectiveness; reduce costs; and TECHNOLOGY introduce products to the market within timeframes that create a competitive advantage for the Bank. The Department developed requested projects as well as projects deemed critical from the technology perspective. ABank Information Systems Department ABank Information Systems Department initiated a Digital Transformation project, comprising location, channel and process transformation, in fiscal year 2016. initiated a Digital Transformation project, comprising location, channel Location Transformation The Bank’s Primary Data Centre in İstanbul and Secondary and process transformation, in fiscal Data Centre in Ankara were moved to their new locations with state-of-the-art facilities, without any service interruption. The year 2016. infrastructure capacity of the main system hardware was upgraded in line with current day requirements. In addition to these centres, the infrastructure of the independent business capacity centre was also upgraded and its service capacity was boosted.

Channel Transformation In line with the Bank’s vision of going digital, the corporate web site, the Retail and Corporate Internet Banking channels and the Mobile Banking channel were restructured; in addition, the services delivered via these channels were upgraded. During the year, hardware devices in the ATM network started to be replaced with the latest models. The replacement of all ATM devices will be completed in first quarter 2017.

46 PRESENTATION

Process Transformation Customer-Focus

Both financial and non-financial banking processes are gradually • CMB Compliance Test Application being transformed according to ABank’s plan in order to become • CMB Investment Product Bank Statement customer-focused, and harmonious with the Bank’s vision and • Integration of Derivative Forms business requirements. Some of the projects completed in this • Integration of Bill Payment Centre Collections respect include: • Automatic Payments and Receipt Issuance • Spot Transactions T+1 Day Value Accounting COMPLETED PROJECTS Product and Channel Diversity

Efficient Revenue and Risk Management • Mobile Banking App • ABank Digital – New Generation Retail Internet Banking • Moody’s Balance Sheet and Scoring App Implementation • ABank Digital – New Generation Corporate Internet Banking • Upgrading Retail Loan and Credit Card Decision Support • Diners Club Card – TAV Integration, Infrastructure for Bonus Systems Point Expenditure • Diners Acquiring • Doğa Insurance Integration • MASAK – Swift Bank Statement • Collective Payment System • Cash Management Products Reporting and Profitability • Equal Principal Payment Mortgage Module • Restructuring for Non-Performing Loans Efficient Process Management • New Web Calculation Tools • Discount Facilities Automation • Ageing and Setting Aside Reserves • Interbank Card Centre (BKM) Data Warehouse Project • Collection of Legal Proceedings Accounts • Integral Platform Integration • Improvement of Loan Collection Infrastructure • Segmentation Project • Renewal of Corporate - Commercial Loan Processes Authority • Overseas Credits Module Structure • TMSF e-Seizure • Rating History Infrastructure • Deposit Module - E-Hostage and Insurance Integration • SKYS, Collection and Legal Proceedings Improvements

47 ABANK 2016 ANNUAL REPORT Information TECHNOLOGY

IT strategies and resource planning as well as compliance of business strategies were accomplished on the basis of the global project management approach in 2016 at ABank.

Infrastructure Projects Efficient Process Management

• Datacentre Transportation and Infrastructure Technology • Experian – Credit Card Processor Integration Upgrade Project • Credit Process Improvements • Uninterrupted Commissioning of New Core Banking Systems • Risk Data Warehouse at New Datacentre • Disaster Centre Transportation Project Project Management • Disaster Centre Infrastructure Technology Upgrade and IT strategies and resource planning as well as compliance of Performance Improvement Project business strategies were accomplished on the basis of the global • Banking Systems Technology Upgrade Project project management approach in 2016 at ABank. Reporting • Banking Business Continuity Systems Upgrade and at specified periods has increased the visibility of IT work Configuration Project and allowed for the creation of a measurable infrastructure, • Transition to IP Telephone Infrastructure which facilitates decision-making. The Department enhanced • Central Log Management Structure Upgrade Project information technology project effort estimation methods and • ABank Process Operating System started to use the Function Point Analysis method, which is a • Operation Deposit League Portal parametric estimation model. • Customer Welcoming and Login App • Altunizade Business Continuity Centre Installation Project Information Security Strategies ONGOING PROJECTS In 2016, the Bank’s information security strategies, which are key elements of the Digital Transformation initiative, were kept Efficient Revenue and Risk Management up to date on an ongoing basis. The system and applications, especially those elements included in the transformation • Central Utility Bill Registration System process, were submitted to legislation and self-assessment • FOCUS ABank ALM Project penetration in order to guarantee the cyber security of the Bank. • Corporate KKB Renovation These tests covered alternative distribution channels as well; • LKS Feedback Reports and Online Inquiry all online and mobile channels were duly audited. The Bank • GIB Real Estate Report and Evas Report resolved all problems identified in the previous period, carefully followed the prepared action plans, and carried out necessary Product and Channel Diversification measures.

• TROY Card In addition, in 2016, the COBIT audit process was carried out • POS/ATM Troy Card Use with success. The Bank continued its efforts to establish a • Call Centre Phase 2 “Cyber Events Response Team,” and to develop the necessary • Mapfre Insurance Integration security structures based on daily vulnerability reports, • SMS Credit briefings, and analysis results Alongside the other aspects of • Credit from the Web the digital transformation effort, ABank renewed the central log • Virtual POS Dealer/Sub-Dealer Upgrades management structure. In 2016, the Bank explored automation solutions for access management and planned actions for their implementation.

48 PRESENTATION

In accordance with the Law on the Protection of Personal Data, ABank carried out necessary actions, followed up the compliance process and implemented controls during the year. The Bank plans to continue with control activities and other efforts in 2017.

In accordance with the Law on the Protection of Personal Certification Efforts Data, ABank carried out necessary actions, followed up the Committed to running all operational procedures at compliance process and implemented controls during the year. internationally recognised standards, ABank maintained its ISO The Bank plans to continue with control activities and other 9001:2008 Quality Management System and ISO 27001:2013 efforts in 2017. Information Security Management System certifications— Management System obtained in fiscal year 2015—as a result of the external audit performed in 2016. The Information Security Management System is a management system that encompasses people, processes, and information During November, the Information Security, Quality and systems, and that is supported by the Senior Management, Project Management Department conducted studies related aimed at ensuring corporate information security. It is designed to the Bank’s audit processes. At the end of the month, the to safeguard information assets and to ensure reassuring, Department performed a monitoring audit for ABank’s ISO adequate and commensurate security controls. The ISO 27001 27001* (Information Security Management System)/9001 Information Security Management System covers the corporate (Quality Certification). In addition, the Department performed organisation, policies, planning activities, responsibilities, the first audit for the Bank’s new 10001 certification (Customer practices, procedures, processes, and resources. The Satisfaction Standard). Information Security Management System is aimed at: ISO 27001 and ISO 9001 auditors did not report any major • Generating accurate, reliable and valid information, findings that could impede the continuation of the Bank’s • Improving banking practices, existing certifications; these two certifications were extended • Making improvements in the Information Security, IT Systems at the end of the year. In addition, the Bank completed the ISO Infrastructure, IT Network, Communication Infrastructure, 10002 (Customer Satisfaction Standard) process with success, Information Technology Technical Support process and thus receiving its third certification. practices such as creation of an asset inventory, classification of information assets, assessment of assets based on the The Bank plans to launch three new certification processes in confidentiality/integrity/accessibility criteria, change 2017 to be coordinated by the Information Security, Quality and management, information security event/breach management, Project Management Department. The process will be supported leakage and internal vulnerability tests, access and user with chief auditor training for the Management Representative authorisation management, recordkeeping, and installation, (Deputy Manager of the Information Security, Quality and review and Management oversight of the information security Project Department). management system, • Facilitating Business Continuity and Disaster Recovery planning, * The ISO/IEC 27001: 2013 – Information Technology – Security Techniques • Improving physical security practices, – Information Security Management Systems – Requirements standard was • Increasing the effectiveness of information security controls devised to establish, develop, operate, monitor, review, sustain and improve and raising information security awareness through Human an Information Security Management System (ISMS). ISO/IEC 27001 is an information security management standard. Resources Training Efforts, • Improving supplier management and business process management.

49 ABANK 2016 ANNUAL REPORT Information TECHNOLOGY

ABank plans to obtain the following certifications in 2017: • BS 10012 Data Protection Personal Information Management System: This system provides guidance on how to protect • 22301 International Business Continuity Management: ISO data. It is a standard that encompasses the improvement of 22301 Business Continuity Management (BCM) certification companies’ data storage and protection, and enhancement of guarantees that a firm is fully ready to serve its stakeholders, the data’s transfer to transactions. and that it can meet the expectations of both internal and external customers. • ISO 20000 Information Technology Service Management System: The ISO 20000-1 Standard pertains to the way an information technology company manages its operations. The ISO/IEC 20000: 2005 standard, on the other hand, specifies the level that must be achieved when providing services to customers.

50 PRESENTATION ABank’s FINANCIAL SUBSIDIARIES

ABank

ALease AMenkul 99.99% 100%

Alternatif Finansal Kiralama A.Ş. (ALease) Alternatif Menkul Değerler A.Ş. (AMenkul) An Anadolu Group company established in 1997 and operating Established in 1997 as a subsidiary of ABank, AMenkul is a in the financial services sector, ALease was acquired by notable player in the sector with successful investment advisory ABank in 2013. Having capital of TL 50 million, the company and asset management services for institutional and individual provides financial leasing services at high-quality standards to investors, in addition to brokerage services in the capital a distinguished client group from four branch locations. During markets. Granted authorisation in all fields of activity by the the year, the company’s total assets grew 56.54% to TL 1,110 CMB, AMenkul delivers a broad range of services in brokerage, million, while shareholders’ equity went up 47.43% to TL 113 asset management and corporate finance. million.

51 ABANK 2016 ANNUAL REPORT

ARİF EMRE MURSALOĞLU Retail Banking Sales Management Specialist

Being 25 brings MEANS ASPIRING FOR THE SUMMIT.

You are at the beginning of your career. There is a long road before you, and you are always looking ahead. You aspire for the summit. We continue to power ahead with our strong prestige and credibility in domestic and international markets. We strive to become the rising star of the industry, with our operational capabilities and a well-experienced workforce, further strengthened with young professionals. Now we aspire for the summit, and take strong steps towards a productive future. ABANK 2016 ANNUAL REPORT Corporate GOVERNANCE

BOARD OF DIRECTORS

Omer Hussain I. H. Alfardan, Chairman Mr. Alfardan is the Managing Director of Alfardan Corporation and is also President and CEO of Alfardan Group and its Subsidiaries, one of the most successful privately owned family businesses in Qatar and across the region. Mr. Alfardan holds a Bachelor’s Degree in Business Administration and a Master’s Degree in Finance from Webster University in Geneva, Switzerland. As a distinguished businessman with a visionary approach, Mr. Alfardan played a vital role in the Group’s sustained growth, success and strategic expansion into diversified business sectors in Qatar and the region. Mr. Alfardan is a fervent supporter of charitable, social and human enhancement programs and founder Member of the GCC Family Business Council. Mr. Alfardan joined ABank as a Board Member in September 2014.

Didem Çerçi, Vice-Chairlady Didem Çerçi completed her university degree at Boğaziçi University, Faculty of Business Administration. She started her career at the marketing department of Koç Holding - Beko Teknik A.Ş. She worked at the Corporate Banking Department of İktisat Bankası between the years 1991 and 1994. In the following years, she assumed responsibilities as a senior executive in the corporate and commercial banking departments of WestLB Head Office, Cıngıllıoğlu Group (Ulusalbank A.Ş. and Demirbank A.Ş.) and İktisat Bankası, respectively. She acted as a board member at The Interbank Card Center (BKM) between 2001 and 2002. In 2002, she joined Oyakbank, later ING Bank which acquired Oyakbank in Turkey. Subsequently, she assumed responsibility as an executive vice president in charge of the Commercial Banking Department at ING Bank. She served as a board member at ING Factoring and ING Leasing companies between 2008 and 2010. As of January 2011, Didem Çerçi started working at Aras Holding where she worked as Group General Coordinator between 2013 and 2016. She was a board member at AYatırım between 2011 and 2014. Didem Çerçi has been serving as a Member of the Board of Directors of ABank since April 2011.

54 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES

Joseph Abraham, Board Member Mr. Abraham has been the Chief Executive Officer of The Commercial Bank (P.S.Q.C.) since 4 July 2016 and has extensive banking experience across both developed and emerging markets. Before joining The Commercial Bank (P.S.Q.C.), he was CEO of ANZ Indonesia (Australia and New Zealand Banking Group) based in Jakarta, a position he served in from 2008 to 2016. Mr. Abraham graduated with an MBA from Stanford Business School and has worked in Indonesia, Singapore, Hong Kong, Ghana, the UK and India in various country and regional banking roles with a successful track record covering general management, corporate banking, strategy, product management as well as mergers and acquisitions. Prior to joining ANZ Indonesia, Mr. Abraham was with Standard Chartered Bank, where he served in a number of roles including Chief of Staff to the Global Head of Client Relationships, Wholesale Bank; Head of Strategy and Product Management, North East Asia; Managing Director and CEO Ghana; and Executive Director Corporate Banking. In addition to his MBA from Stanford, Mr. Abraham has a Masters in Management Science from the University of Bombay and a BA (Economics) from St. Stephens College, University of Delhi. Mr. Abraham was appointed as a Board Member of ABank in December 2016.

Fahad Abdulrahman Badar, Board Member Mr. Badar graduated from the University of Wales with a BA in Banking & Finance. He then obtained his MBA from Durham University, UK in 2006. Mr. Badar has been with The Commercial Bank (P.S.Q.C.) for the past 17 years, where he has undertaken different roles in Operations and Cards, before joining Retail Banking as a Branch Manager in 2004. In 2007, he joined the International Banking Division where he worked on several transactions with multinational companies (MNCs) and GCC corporates, such as USD 100 million working capital facilities and QAR 515 million contract financing facilities. Subsequently, he assumed the role of Head of Government and Public Sector Relations, managing the various corporate banking requirements of this customer segment. In 2011, he assumed the role of Executive General Manager (EGM), Government & International Banking, handling the International Banking corporate portfolio, MNCs operating in Qatar, Financial Institutions Group, and Government & Public Sector relations. In 2013, he was appointed as Head of Wholesale Banking, and his role expanded to further include Domestic Corporates, Transaction Banking and Structured Finance. Mr. Badar was appointed in December 2014 as Executive General Manager, International Banking managing the Bank’s international operations. Mr. Badar joined ABank as a Board Member in August 2013.

55 ABANK 2016 ANNUAL REPORT Corporate GOVERNANCE

Izzat Dajani, Board Member Mr. Dajani is a seasoned banker, civic and business leader, and well-known investment professional. He is recognised for his leadership roles in Banking, Corporate Advisory, Investment Management, and Private Equity across countries in the Middle East, including Turkey, Australia and East Asia. Mr. Dajani has an MPA from Harvard University, a BSc from Liverpool School of Pharmacy, and has completed the Executive Management Programme at Stanford University Graduate School of Business. Mr. Dajani was Chairman and CEO of Citibank in Qatar. He was also Head of Key & Priority Clients of the Investment Management Division at Goldman Sachs, covering the MENA region. Mr. Dajani was Chief Executive of the Investment & Development Office, leading major investment activities of this RAK Sovereign Wealth Fund in UAE, and managing multi-billion dollar investments. He was Chairman and Board Member of various large corporations in the oil & gas, industrial, real estate, hospitality, education and healthcare sectors. Mr. Dajani was also Senior Vice President of Rasmala Investments, a regional private equity group. He has been serving as a Member of the Board of Directors of ABank since July 2013.

Mohd Ismail M Mandani Al-Emadi, Board Member Mr. Al-Emadi graduated from Holy Names College, California with a Bachelor of Arts degree in Business Administration and Economics and has over 30 years of banking experience. Mr. Al-Emadi has held a number of key roles at The Commercial Bank (P.S.Q.C.) from 1982 until 2007, after which he served as Chief Executive Officer of Qatar Real Estate Investment Company up to 2011 and also served as its Director from 2003 until 2005. Mr. Al-Emadi has also served as a Board Member for Doha Securities Market, Qatar from 2000 to 2003; Qatar Shipping Co. (P.S.Q.C.) from 2000 to 2006; and Mannai Corporation Co. (P.S.Q.C.) Qatar from 2001 to 2004. Mr. Al-Emadi currently serves as a Board Member of The Commercial Bank (P.S.Q.C.) and a Board Member of the National Bank of Oman (S.A.O.G.). Mr. Al-Emadi joined ABank as a Board Member in September 2014.

56 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES

Paul Gossiaux, Board Member Mr. Gossiaux is a highly experienced senior executive and seasoned credit professional with a broad range of skills in both risk management and transaction structuring, approval and execution. He has built and managed business marketing teams as well as risk management and control teams in both the commercial banking and investment banking sectors across the UK, Europe, Middle East, Asia, and emerging markets for over 25 years. Having joined The Commercial Bank (P.S.Q.C.) in 2010, he is currently Chief Credit Officer and was previously Head of Credit for International Banking and Public Sector lending as well as Regional Head of Credit. Prior to joining The Commercial Bank (P.S.Q.C.), Mr. Gossiaux was Head of Credit Risk for the Business Support and Recoveries Group of Barclays Bank SA (Madrid) from 2008-2010. He was a Director in the Leveraged and Structured Finance Credit Risk Management team of Deutsche Bank (London) from 2007-2008, and an Executive Director in the Leveraged and Structured Finance Credit Risk Control team of UBS Investment Bank (London) from 2001-2007. Mr. Gossiaux was an EMEA Divisional Credit Risk Management Executive for Bank of America NA (London) from 1999-2001 and Regional Risk Manager for Bank of America SA (Madrid) from 1993-1999. He has held various other senior credit and business development positions with Bank of America NT&SA and Manufacturers Hanover Trust Company in London, New York, and Singapore. Mr, Gossiaux holds an MIA degree from Columbia University (New York), School of International Affairs and Russian Institute, and a BA degree from Fordham University (New York). Mr Gossiaux was appointed as a Board Member of ABank in December 2016.

Gerard George Rizk, Board Member Mr. Rizk has extensive experience in the banking sector and has served as the Group Chief Risk Officer of BLOM Bank Sal Lebanon. He has worked extensively on European and Middle Eastern markets from both a commercial and investment banking perspective for institutions such as The Commercial Bank (P.S.Q.C.), Bank Audi, Nomura International and BLOM Invest Bank. Mr Rizk holds a Bachelor of Science degree from the University of Salford in the United Kingdom. Mr Rizk joined ABank as a Board Member in May 2016.

57 ABANK 2016 ANNUAL REPORT Corporate GOVERNANCE

Müge Öner, Board Member and Acting CEO Mrs. Öner graduated from Tevfik Fikret High School in 1991 and from Bilkent University, Business Administration in 1996. She worked as a Specialist at Arthur Andersen between 1996 - 1999, Assistant Manager at Finansbank Financial Control and Planning department between 1999 – 2001. She served as Credit Europe Bank N.V. Deputy Group Head, Finansbank Financial Control Group Head between 2003 and 2005, and later as Ernst & Young Managing Partner from 2005 to 2014. Müge Öner, after working as Chief Financial Officer at ABank between May 2014 and March 2016, assumed the position of ABank’s Acting CEO and Board Member on March 18, 2016.

Board of Directors Meetings Board of Directors’ 2016 meeting dates and number of attendees are given at the table below.

DATE OF MEETING NUMBER OF ATTENDEES PRESENT 21.01.2016 13 17.02.2016 13 31.03.2016 9 27.04.2016 8 23.05.2016 7 29.06.2016 8 29.09.2016 9 03.11.2016 8 19.12.2016 9

58 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES

Names, Terms of Office, Responsibilities, Educational Backgrounds and Professional Experience OF THE CHAIRMAN AND MEMBERS OF THE BOARD OF DIRECTORS MEMBERS OF THE BOARD AUDIT COMMITTEE, CHIEF EXECUTIVE OFFICER, EXECUTIVE VICE PRESIDENTS, AND MANAGERS OF INTERNATIONAL SYSTEMS UNITS

BANKING OR BUSINESS DATE OF NAME POSITION ACADEMIC DEGREE AREA OF RESPONSIBILITY MANAGEMENT APPOINTMENT EXPERIENCE (YEARS) CHAIRMAN AND MEMBERS OF BOARD OF DIRECTORS Webster University Omer Hussain I H Chairman 16.09.2014 (Switzerland), Master’s - 23 Alfardan Degree in Finance Chairwoman of Board Audit Boğaziçi University Committee, Member of Board Vice- Didem Çerçi 30.03.2011 (Turkey), Faculty of Remuneration Committee and 26 Chairwoman Business Administration Alternate Member of Board Credit Committee Chairman of Board Credit Committee, Chairman of Stanford University Joseph Abraham Member 19.12.2016 Board Executive Committee 24 (USA), MBA and Chairman of Board Remuneration Committee Member of Board Credit Fahad Abdulrahman University of Durham Member 01.08.2013 Committee and Member of 15 Badar (UK), MBA Board Executive Committee Harvard University Member of Board Audit Kennedy School of Committee and Member İzzat Dajani Member 18.07.2013 Government (USA), 23 of Board Remuneration Master’s Degree in Public Committee Administration Holy Names University (USA), Bachelor of Arts Mohd İsmail M Alternate Member of Board Member 16.09.2014 Degree in Business 34 Mandani Al-Emadi Credit Committee Administration and Economics Columbia University Member of Board Credit Paul Gossiaux Member 19.12.2016 (USA), Master’s Degree in 25 Committee International Affairs Salford University (UK), Bachelor of Science in Member of Board Audit Gerard George Rizk Member 21.04.2016 28 Social Sciences and Committee Humanities Bilkent University Müge Öner Member 18.03.2016 (Turkey), Faculty of Acting CEO 18 Business Administration

* As per the decision at the ABank Annual General Meeting on 31 March 2016, Nicholas Charles Coleman, Bahattin Gürbüz, İpek Özkan and Kemal Semerciler resigned from their roles as Members of the Board of Directors, thereby, the number of Board Members reduced from 13 to nine. ** Andrew Charles Stevens resigned from his role as Member of the Board of Directors as per the Board of Directors’ resolution No. 48 dated 21 April 2016. *** Tuncay Özilhan and Mehmet Hurşit Zorlu resigned from their roles as Members of the Board of Directors as per the Board of Directors’ resolution No. 179 dated 19 December 2016.

59 ABANK 2016 ANNUAL REPORT

Names, Terms of Office, Responsibilities, Educational Backgrounds and Professional Experience OF THE CHAIRMAN AND MEMBERS OF THE BOARD OF DIRECTORS, MEMBERS OF THE BOARD AUDIT COMMITTEE, CHIEF EXECUTIVE OFFICER, EXECUTIVE VICE PRESIDENTS, AND MANAGERS OF INTERNATIONAL SYSTEMS UNITS

BANKING OR BUSINESS DATE OF NAME POSITION ACADEMIC DEGREE RESPONSIBILITIES MANAGEMENT APPOINTMENT EXPERIENCE (YEARS) CHIEF EXECUTIVE OFFICER AND EXECUTIVE VICE PRESIDENTS Board Member Bilkent University Faculty of Business Müge Öner* 18.03.2016 Acting CEO 18 and Acting CEO Administration Seher Demet Boğaziçi University Faculty of Business Risk and Credits - Chief EVP 08.09.2014 23 Tanrıöver Çaldağ Administration Risk Officer Operations and Middle East Technical University Tanol Türkoğlu EVP 01.12.2014 Information Technology 27 Faculty of Engineering - Chief Operating Officer Middle East Technical University Corporate-Commercial Ahmet Kağan EVP 27.04.2016 Faculty of Economics and and Retail Banking - 21 Yıldırım Administrative Sciences Chief Business Officer Middle East Technical University Mete Hakan Güner EVP 01.02.2015 Faculty of Economic and Administrative Commercial Banking 21 Sciences Columbia University Business Sezin Erken EVP 15.09.2014 Retail Banking 14 School (Master’s Degree) Middle East Technical University Operations-Consumer Suat Çetin EVP 03.09.2012 Faculty of Economic and Administrative Relations Coordination 18 Sciences Officer Hacettepe University Faculty of Restructuring and Musa Kerim Mutluay EVP 01.01.2015 Economics and Administrative 18 Legal Follow-up Sciences (Master’s Degree) Istanbul University Faculty of Business Administration / Marmara Muzaffer Gökhan EVP 01.01.2015 University International Economics Credit Underwriting 13 Songül (Master’s Degree) / Kadir Has University (Doctorate Degree) University of Wisconsin / The American Şakir Sömek EVP 14.03.2008 Financial Institutions 27 Un. Econ. (Master’s Degree) Koç University Faculty of Economic and Financial Control and Kağan Gündüz EVP 27.04.2016 10 Administrative Sciences Planning Middle East Technical University Durul Selçuk EVP 24.10.2016 Faculty of Business Administration and Human Resources 22 Economics Erkan Ayaz Group Head 19.10.2015 Istanbul University Law School General Counsel 21 Mustafa Mutlu Chief Audit Istanbul University Faculty of Economics 31.10.2011 Internal Audit 22 Çalışkan Executive (English) University of Wales / Banking Finance Hamdi Ozan Tuncer Group Manager 23.05.2016 Risk Management 17 (Master’s Degree) Middle East Technical University Faculty Gürsoy Zorlu Deputy Manager 03.11.2016 Internal Control 10 of Economic and Administrative Sciences Middle East Technical University Faculty Legislation and Hamdi İlkay Girgin Manager 15.12.2010 of Economics / Imperial College London 15 Compliance (MBA)

* Müge Öner, who has been working as Acting CEO since March 18, 2016, has been assigned as CEO in accordance with the decision of BoD dated January 31, 2017.

60 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES Terms of Office and PROFESSIONAL EXPERIENCE OF AUDITORS

At the Bank’s 2015 Annual General Meeting held on March 31, 2016, it was decided to designate Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. (KPMG) as the Bank’s Independent Auditor pursuant to the Banking Law, CMB legislation and the Turkish Commercial Code. The referenced company has conducted the independent external audit of the Bank since 2014.

61 ABANK 2016 ANNUAL REPORT

Activities of the Board Credit Committee and the Committees Reporting to or Set Up to Assist the Board of Directors Under the Risk Management Systems Pursuant to the Regulation on the Internal Systems of Banks NAMES AND PRINCIPAL DUTIES OF THE CHAIRMEN AND MEMBERS SERVING ON SUCH COMMITTEES

Committees under the Board of Directors The Board Credit Committee convened a total of 22 times with the attendance of all members on the below dates during the course of 2016: Board Credit Committee The Bank’s Board Credit Committee is responsible for handling matters related to credit facilities within the limits provided MEETING DATES NUMBER OF MEMBERS PRESENT in accordance with the applicable legislation. The Committee 12.01.2016 5 reviews, discusses, and decides on those credit proposals that are submitted for its approval by the Management. Unanimous 02.02.2016 5 decisions on credit proposals that fall within the delegated 23.02.2016 5 credit approval authority of the Board Credit Committee are executed with immediate effect. On the other hand, decisions 01.03.2016 5 that are taken by majority of votes are executed after the 11.03.2016 5 Board of Directors’ approval on the matter, regardless of the fact the concerned credit proposal falls within the delegated 24.03.2016 5 credit approval authority of the Board Credit Committee. The 05.04.2016 3 Committee consists of the following Board Members: 11.04.2016 3 Board Member Name, Role within the Committee 13.04.2016 3 Joseph Abraham, Chairman Fahad Abdulrahman Badar, Member 25.04.2016 3 Paul Gossiaux, Member Müge Öner, Member 17.05.2016 3 Didem Çerçi, Alternate Member 20.06.2016 3 Mohd Ismail M Mandani Al-Emadi, Alternate Member 27.06.2016 3 The Committee’s role, responsibilities, composition, membership 14.07.2016 3 requirements and other relevant information are documented in the Risk Charter as well as relevant section of the Board 04.08.2016 3 Committees Charter. 01.09.2016 3

Board Credit Committee holds its meetings on a bimonthly basis. 22.09.2016 3 Activities and decisions of the Board Credit Committee are subject to the supervision of Board of Directors. Therefore, each 13.10.2016 3 Board Member is entitled to request any kind of information 27.10.2016 3 from the Board Credit Committee with respect to its activities and to perform any and all controls for this purpose. 15.11.2016 3 06.12.2016 3

20.12.2016 4

62 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES

Board Audit Committee The Board Audit Committee convened a total of eight times with the attendance of all members on the below dates during the The Board Audit Committee is responsible for assisting the course of 2016: Board in fulfilling its responsibilities for overseeing the quality and integrity of the accounting, auditing, internal control and NUMBER OF MEMBERS MEETING DATES financial reporting practices of the Bank as well as setting forth PRESENT compliance and anti-money laundering, and combating financing of terrorism requirements, criteria and control mechanisms for 20.01.2016 3 all activities involving Bank-wide related risks. 21.03.2016 3

In accordance with its resolution No. 180 dated 19 December 18.04.2016 3 2016, ABank Board of Directors decided to transfer the duties 21.06.2016 3 and responsibilities of the Board Risk Committee to the Board Audit Committee, thereby terminating the activities of the 14.07.2016 3 Board Risk Committee. Accordingly, the Board Audit Committee 19.09.2016 3 assumes responsibilities for all aspects of enterprise-wide risk management including, but not restricted to business, 17.10.2016 3 credit, market, operational, legal and reputational risk. For this 05.12.2016 3 purpose, the Committee reviews policies on all risk matters, maintains an oversight of all bank risks through the Management Risk Committee (MRC), Asset and Liability Management Executive Committee of the Board Committee (ALCO), the CEO and the CRO. Established under article 366 of the Turkish Commercial Code, The Committee was established pursuant to Article 24 of the the Executive Committee of the Board is authorised - outside Banking Law No. 5411 and is composed of the following Board of the powers and operations falling within the authority of the Members: Board of Directors - to deal with issues related to governance, overall strategy of the Bank, plans, budgets, goals, policies, to Board Member Name, Role within the Committee give recommendations to the Board on procedures and systems Didem Çerçi, Chairwoman and to review the performance of the Bank in accordance with İzzat Dajani, Member legal provisions and the Bank’s Articles of Association. Gerard George Rizk, Member In accordance with its resolution No. 45 dated 31 March 2016, The Chairwoman is also responsible for coordinating and ABank Board of Directors decided to transfer the duties and overseeing the activities of departments that operate under the responsibilities of the Board Corporate Governance Committee Internal Systems structure (i.e. Internal Audit, Internal Control, to the Executive Committee of the Board, thereby terminating Compliance and Risk Management Departments). the activities of the Board Corporate Governance Committee. Accordingly, the Executive Committee of the Board assumes In line with the respective legislation, Committee Members responsibility for monitoring the compliance with the Bank’s do not assume any executive function within the Bank and the corporate governance principles, in addition to conducting Committee’s role, responsibilities, composition, membership improvement studies and making recommendations to the requirements and other information are documented in the Board of Directors in this respect as defined by BRSA Corporate relevant section of the Board Committees Charter. Governance Principles.

63 ABANK 2016 ANNUAL REPORT

Activities of the Board Credit Committee and the Committees Reporting to, or Set Up to Assist, the Board of Directors Under the Risk Management Systems Pursuant to the Regulation on the Internal Systems of Banks NAMES AND PRINCIPAL DUTIES OF THE CHAIRMEN AND MEMBERS SERVING ON SUCH COMMITTEES

The Committee is composed of the following Board Members: The Committee comprises the following Board Members:

Board Member Name, Role within the Committee Board Member Name, Role within the Committee Joseph Abraham, Chairman Joseph Abraham, Chairman Fahad Abdulrahman Badar, Member Didem Çerçi, Member Müge Öner, Member İzzat Dajani, Member

The Committee operates in accordance with the principles set The Committee carries out its activities in line with the out in the relevant section of the Board Committees Charter. Regulation on Banks’ Corporate Governance Principles, which was published by the Banking Regulation and Supervision The Executive Committee of the Board met a total of seven times Agency in the Official Gazette No. 26333 dated 1 November with the attendance of all members on the below dates during 2006. the course of 2016: The Committee’s role, responsibilities, composition, membership requirements and other information are documented in the NUMBER OF MEMBERS MEETING DATES relevant section of the Board Committees Charter. PRESENT

18.01.2016 5 The Remuneration Committee of the Board met a total of six times on the below dates during the course of 2016: 10.02.2016 5

22.03.2016 5 NUMBER OF MEMBERS MEETING DATES 27.04.2016 4 PRESENT

17.05.2016 4 17.02.2016 3

07.09.2016 4 24.03.2016 3

27.10.2016 4 30.03.2016 3 27.04.2016 3 Remuneration Committee of the Board 07.09.2016 3 The Remuneration Committee of the Board is responsible for evaluating the compensation and remuneration of the Members 14.12.2016 2 of the Board of Directors, management and staff and setting the key performance indicators in line with the Bank’s strategy and policies.

64 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES Risk Management POLICIES BY RISK TYPE

ABank Risk Management Group aims to identify measure, Customer selection and monitoring of their credibility are analyse, and monitor the financial and non-financial risks that performed by expert credit teams employing internal rating the Bank is or may be exposed to, in accordance with applicable systems. The rating systems are constantly reviewed and laws, rules and regulations. monitored for their performance independently by the Risk Management Department. The Bank undertakes constant Activities performed on a daily, weekly, monthly, quarterly and improvement efforts for the rating systems and takes on annual basis, depending on the nature of the issue at hand, are development of more successful statistical models for arising presented to the Bank’s Senior Management. requirements in order to achieve compliance with Basel criteria, base customer assessments on more objective criteria and thus Credit Risk improve the Bank’s risk measurement capability. As part of these studies, the Bank transitioned to Moody’s rating system in 2016, Credit risk is defined as the potential loss arising from any and now employs this system in the evaluation of commercial borrower’s inability to meet, in part or in whole, its contractual and corporate customers. obligations to the Bank. Due to the large share it takes from the balance sheet, credit risk is of the highest concern for the Bank Market Risk and it is vital to manage it appropriately. Therefore, credit risk management policies were set up to ensure the independence Market risk refers to the risk of loss that may occur in the value and integrity of risk assessment practices. Customer selection of positions in trading accounts due to movements in interest criteria and creditworthiness evaluation, income generation rates, share prices and exchange rates. The Bank calculates and repayment capability and resources, credit structure of the legal capital requirements for market risk by using the contract provisions and their compatibility with customer needs, standard method, in accordance with the BRSA regulations. collateralisation principles, and comprehensive and healthy Moreover, market risks associated with trading accounts are documentation are the core elements of credit risk management quantified and monitored on a daily basis through the Value at policies. Another purpose of these policies and procedures is Risk (VaR) method. The VaR calculations that use the historical to ensure that all personnel who are involved in the decision- simulation method for the last 252 business days form the basis making process share the same views in similar matters and of the Bank’s risk-based trading limits. In addition, the Bank take similar actions. Another major element of credit risk monitors its trading portfolio for losses under extraordinary management policies is the monitoring process that needs to be conditions using Stress VaR, forecasts potential losses under administered to ensure unproblematic repayment of the loan extreme market movements, and tries to manage these potential to the Bank once the lending relationship begins. The Bank’s losses. The trading portfolio risks, which are quantified and risk exposure, either on- or off-balance sheet, are monitored reported to the Bank’s Management on a daily basis, are also and managed both individually and also on a portfolio basis. assessed periodically at the ALCO and the Management Risk The NPL management system introduced in 2015 monitors the Committee meetings. The validity of the VaR model is monitored loan portfolio in a systematic fashion. ABank’s potentially non- through back testing. In this methodology, the daily VaR, performing customers are identified in advance and necessary which is calculated by the VaR model, is compared both with actions are taken. In addition, the development of NPLs is the theoretical losses/gains and also with the actual losses/ monitored closely and reported on a regular basis. In order to gains the next business day based on the existing portfolio, and maintain the structure and quality of its loan portfolio at the deviations, if any, are monitored. desired level, the Bank regularly analyses the distribution of this portfolio in terms of sector, collateral, loan size and rating. The Bank also conducts scenario analyses and stress tests at regular intervals.

65 ABANK 2016 ANNUAL REPORT Risk Management POLICIES BY RISK TYPE

Structural Interest Rate Risk Liquidity Risk Structural interest rate risks are those risks that the Bank is The purpose of liquidity risk management is to ensure that exposed to through products such as credits, securities and necessary precautions are taken in a timely and appropriate deposits, which bear interest sensitivity despite being monitored manner to address possible liquidity crises associated with in non-trading accounts. The Bank aims to keep changes in its cash-flow mismatches caused by market conditions and/or the economic value within the limits, which have been determined Bank’s balance sheet structure. It is founded on the premise that based on its shareholders’ equity, in the event that the Bank is the Bank’s cash holdings and available borrowing resources are subject to standard interest rate shocks determined by the BRSA adequate to cover, in a timely manner and at pre-determined as well as internal interest rate shocks. In addition to the change levels, deposits and other liabilities that create a need for in the Bank’s net economic value, ABank also monitors the liquidity. The Bank monitors its liquidity position in each earnings at risk (EaR) level due to interest rate fluctuations and currency separately, as well as in terms of total liquidity. Cash ensures that the changes in the income that will be generated flow and liquidity on the Bank’s balance sheet are tracked on by the balance sheet remain within certain limits. Duration/ the basis of regulatory thresholds as well as internally-defined gap reports are produced by placing those financial products parameters; they are tested under various stress scenarios that are monitored in non-trading accounts into the cash flow and the results are reported to the related Committees and the statements on a currency basis, according to the repricing Senior Management. periods or durations. The structural interest rate risk arising from maturity mismatch is measured by applying standard Operational Risk and Business Continuity interest rate shocks to the gaps on a maturity tranche basis Management and the risk is continuously monitored for its compliance with Operational risk is defined as the possibility of a direct or determined limits. The interest sensitivity of the balance sheet indirect loss the Bank is exposed to, which is caused by people, is measured regularly by the Risk Management Department processes, systems or external factors. The Risk Management and evaluated in Asset Liability Committee meetings. When Department is responsible for defining, measuring and following required, interest rate risk is hedged or limited with derivatives up operational risks, as well as for coordinating respective transactions. The Asset Liability Committee takes necessary managerial initiatives. All related units, particularly the Internal actions to maintain the Bank’s net economic value and to create Control and Board of Internal Auditors contribute to the efforts a stable income structure. The balance sheet’s interest rate aimed at determining and eliminating the operational risks that risk level and the actions taken by the ALCO are also reported arise during the Bank’s operations. Risks are identified via the periodically to the Management Risk Committee. Risk Control Self-Assessment study and controls are conducted to counter these risks.

The compliance of all activities with applicable regulations and with the Bank’s procedures and policies is monitored closely. The most important elements of the operational risk management framework are based on designing all processes across the Bank in a way that minimises operational risks; establishing an effective internal control organisation that encompasses systemic control structures; and creating and executing a tiered and transparent resolution, monitoring and management process for operational risk events.

66 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES

Records of events leading to monetary losses are stored in • The Bank sees Human Resources as one of the most a database established to follow up on operational risks. significant factors in realising its strategy and attaining its Operational events that frequently occur or lead to significant sustainable growth goal. In an attempt to ensure the across- losses are evaluated by the Risk Committee, and making in the-board adoption of the targeted “world-class risk culture” depth analysis upon which necessary action plans are produced within the Bank, creation of an Analytics team alongside the and the efficiency of control and audit is enhanced so as to risk management staff increased the effectiveness of the risk manage these events. management and decision-making processes. • Oversight of the Senior Management is a key element of Business Continuity Management aims to manage the risks an effective risk management framework. Increasing the that threaten the continuity of the Bank’s critical processes, influence of the Board of Directors and Management-level and to ensure the recovery of these processes in targeted committees made a major contribution to ensuring the periods. Policies under the scope of Business Continuity are integrity of the risk management process. updated annually and presented for the approval of the Board of Directors. The Bank’s Disaster Centre tests are conducted every Information on the Activities and Reports of the year with the participation of the relevant units, with the results Board of Directors Risk Committee and actions shared with Senior Management and the Board of The Board of Directors Risk Committee is responsible for the Directors. risk management of the entire Bank, including credit, market, Risk Management Activities and Developments operational, regulatory and reputation risks. In addition to its new strategy and growth targets, ABank has The Committee’s responsibilities include assessing the risk adopted the primary goal of building a sound capital structure management strategies and policies; setting limits for main risk and a sustainable growth trajectory based on a world-class risk elements the Bank faces; monitoring the breaches of limits; management culture. To this end in 2016, in accordance with overseeing the risk identification, definition, measurement, the Bank’s updated strategies and new risk mission: evaluation, and management processes; ensuring the accuracy of risk measurement methods and results through supervision; • Internal policies and procedures based on the Bank’s new taking the necessary steps to create an effective internal control strategy continued to be implemented effectively in 2016 with mechanism that encompasses risk management, information the aim of pursuing advanced risk management practices. systems, and the processes in an attempt to minimise the risks • New investments were made in measurement and evaluation that can also have adverse effects on the Bank’s shareholders systems, a major component of effective risk management, and stakeholders; and internalising the risk culture. The which enhanced the Bank’s risk management capability. These Committee regularly reports its activities as well as its efforts are expected to continue at an accelerated pace in assessments and recommendations regarding the Bank’s overall 2017. risk appetite and profile to the Board of Directors. • Risk-adjusted return and effective capital allocation were raised to a more prominent role at the core of the Bank’s decision-making processes. Efforts were finalised to switch to a risk/return-based performance process. Implementations put into practice across the entire Bank.

67 ABANK 2016 ANNUAL REPORT Senior MANAGEMENT

Müge Öner, Acting CEO and Board Member Mrs. Öner graduated from Tevfik Fikret High School in 1991 and from Bilkent University, Business Administration in 1996. She worked as a Specialist at Arthur Andersen between 1996-1999, Assistant Manager at Finansbank Financial Control and Planning department between 1999-2001. She served as Credit Europe Bank N.V. Deputy Group Head, Finansbank Financial Control Group Head between 2003 and 2005, and later as Ernst & Young Managing Partner from 2005 to 2014. Müge Oner, after working as Chief Financial Officer at ABank between May 2014 and March 2016, assumed the position of ABank’s Acting CEO and Board Member on March 18, 2016.

Seher Demet Tanrıöver Çaldağ, CRO Mrs. T. Çaldağ graduated from Üsküdar American Academy for Girls in 1988 and from Boğaziçi University, Business Administration in 1992. She worked as Management Trainee at Saudi Arabian Bank Corporate Banking Group between 1992-1994, Account Manager at Saudi Arabian Bank Corporate Banking Group between 1994-1995, Account Manager at ABN AMRO Bank İstanbul Branch Corporate Banking Department between 1995-1997, Senior Account Manager at ING Bank N.V. Corporate Banking Department between 1997-1998, Senior Credit Analyst at ING Bank N.V. ING Barings Global Lending Risk Management Department between 1998-1999, Manager at ING Bank N.V. Risk Management Department between 1999-2001, Vice President at ING Bank N.V. ING Wholesale (International) Banking Department between 2001-2004, Vice President at ABN AMRO Bank N.V. Group Risk Management Department between 2004 -2005, Vice President at ABN AMRO Bank N.V. Commercial Clients Department between 2005-2006, Executive Director at ABN AMRO Bank N.V. Group Risk Management Department between 2006-2010, CRO at Royal Bank of Scotland Turkey, Head of Corporate Credit, Emerging Markets (CEEMEA) between 2010-2014. As of 8 September 2014, Mrs. Demet T. Çaldağ was assigned as CRO of ABank.

68 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES

Ahmet Kağan Yıldırım, CBO Mr. Yıldırım graduated from Ankara Atatürk Anatolian High School in 1991 and from Middle East Technical University, Political Science & Public Administration in 1996. He worked as Assistant Manager in the Corporate Banking Department of Finansbank between December 1996-May 2000, Relationship Manager in the Corporate Banking Department of HSBC Bank between May 2000-May 2002, Manager in the Global Corporate Banking Department of Citibank between May 2002-August 2003, Executive Vice President in the Global Corporate Banking Department of Citibank / Turkey between August 2003-January 2008. He served as Turkey Global Corporate Banking Executive Vice President, Citibank Abu Dhabi’s Assistant General Manager-Corporate and Investment Banking between January 2008 and May 2011, Citibank A.Ş. Turkey’s Assistant General Manager-Corporate and Investment Banking from May 2011 to February 2012, and as The Commercial Bank (P.S.Q.C.)’s Assistant General Manager- International Banking between August 2012 and December 2014. Ahmet Kağan Yıldırım, after working as ABank’s Executive Vice President-Corporate Banking from January 2015 to April 2016, was appointed ABank’s CBO on April 27, 2016.

Tanol Türkoğlu, COO Mr. Türkoğlu graduated from Kabataş Erkek High School in 1984 and from Middle East Technical University, Computer Engineering in 1989. He worked as Software Analyst at Yapı Kredi technology company Bilpa A.Ş. between 1989-1993, IT Manager at Yapı Kredi technology company Bilpa A.Ş. Network and Systems Support between 1994-1996, Senior IT Manager at Yapı Kredi technology company Bilpa A.Ş. Alternative Delivery Channels between 1996-2000, Coordinator at İktisat Bank T.A.Ş. IT & Operations and Organisation between 2000-2002, CIO at Şekerbank T.A.Ş. between 2002-2014, Executive Board Member at Şeker Bilişim A.Ş. between March 2014-November 2014. As of December 1, 2014, Mr. Tanol Türkoğlu was assigned as IT and Operations Group COO of ABank.

Mustafa Mutlu Çalışkan, Chief Audit Executive Mr. Çalışkan graduated from Galatasaray High School in 1987 and from Istanbul University, Faculty of Economics in 1993. He worked as assistant Auditor in the Internal Audit Department of Garanti Bank A.Ş. between 1994-1996, Auditor in the Internal Audit Department of İktisatbank A.Ş. between 1996-1998, Manager in the Internal Audit Department of İktisatbank A.Ş. between 1998-2002, Director in the Accounting, Budget and Management Control Department of Renault Mais A.Ş between 2005-2008, Manager in the Internal Audit Department of ABank between 2003-2005, Manager in the Internal Control Department of ABank between 2008-2011. As of 31 October, 2011, Mr. M. Mutlu Çalışkan was assigned as Chief Audit Executive of ABank.

69 ABANK 2016 ANNUAL REPORT Senior MANAGEMENT

Suat Çetin, EVP Mr. Çetin graduated from Çankaya High School in 1984 and from Middle East Technical University, Public Administration in 1989. He worked as an Assistant Specialist at the State Institute of Statistics between 1991-1993, Manager, Treasury Operations at Ottoman Bank between 1993-2001, Project Leader, General Manager Consultancy Department at Akbank A.Ş. between February, 2002-June 2002, Group Head, Central Operations at Koçbank between 2002-2006, Group Head, Operations at Yapı ve Kredi Bankası A.Ş. between 2006-2012. As of 3 September 2012, Mr. Suat Çetin has been serving as Executive Vice President of ABank, responsible for Operations.

Sezin Erken, EVP Mrs. Erken graduated from TED Ankara College in 1994 and from Middle East Technical University, Management in 1998. She graduated from Columbia Business School, MBA Master’s Program in 2003. She worked as a Business Analyst at Mckinsey&Company between 1998-2001. Afterwards, she worked as Product Management Manager between 2003- 2006 and 2006-2007, Retail Banking Deposit Pricing Director between 2007-2009, Group Manager, Banking Pricing and Data Analysis between 2009-2014 at Capital One New York. She joined ABank in September 2014 as Executive Vice President in charge of Asset-Liability Management. Since 1 June 2015, Mrs. Sezin Erken has been serving as Executive Vice President of ABank responsible for the Retail Banking Group.

Kağan Gündüz, EVP Kağan Gündüz graduated from Adnan Menderes Anatolian High School in 2002, and then from Koç University with a double major in Business Administration and Economics in 2006. He served as Senior Manager at Ernst & Young between September 2006 and May 2014. Kağan Gündüz then worked as Financial Control Group Manager at the Bank from May 2014 to May 2016. He assumed the position of Executive Vice President-Financial Affairs and Planning Group on April 27, 2016.

70 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES

Mete Hakan Güner, EVP Mr. Güner graduated from Ankara Atatürk Anatolian High School in 1991 and from Middle East Technical University, Business Administration in 1995. He worked as Portfolio Manager in the Commercial Banking Department of Garanti Bank Gimat Branch between August 1995-October 1996, Portfolio Manager in the Commercial Banking Department of Garanti Bank Levent Branch between October 1997-November 1997, Cash Management Assistant Manager in the Corporate Banking Department of Finansbank between January 1998-September 1999, Manager at Commercial Banking Department of Finansbank between October 1999-November 2001, Manager in the Corporate Banking Department of Finansbank between December 2001-June 2002, Cash Management Group Head in the Corporate Banking Department of Finansbank between June 2002-December 2004, Regional Manager in the Commercial Banking Department of Finansbank between January 2005-January 2008, Senior Vice President in the Commercial Banking Sales Department of Finansbank between January 2008-December 2010, Senior Vice President in the SME and Commercial Banking Department of Finansbank between December 2010-August 2012, Director in the Commercial Banking Department of Finansbank between August 2012-January 2015. As of 1 February 2015, Mr. Mete Hakan Güner has been serving as Executive Vice President of ABank Commercial Banking.

Musa Kerim Mutluay, EVP Mr. Mutluay graduated from Konya Gazi High School in 1991 and from Hacettepe University, Department of Public Administration in 1996. He then graduated from Hacettepe University, Public Administration and Political Science Master’s Program in 2001. He worked as MT in the Financial Analysis Department of Yaşar Bank between March 1998-August 2000, Specialist in the Financial Analysis Department of Tekstilbank between August 2000-July 2001, İstanbul Region Assistant Manager in the Commercial Marketing Sales Department of Oyak Bank between January 2003-May 2004, Assistant Manager in the Commercial Marketing Sales Department of Oyak Bank between May 2004-May 2006, Manager in the Commercial Marketing Sales Department of ING Bank between May 2006-January 2010, Group Manager in the SME Department of ING Bank between January 2010-June 2013, Group Manager in the Non-Performing Loans Department of ING Bank between June 2013-June 2014, Group Manager in the Restructuring & Legal Follow-Up Department of ABank between July 2014-December 2014. As of 1 January 2015, Mr. Musa Kerim Mutluay has been serving as Executive Vice President of ABank Restructuring & Legal Follow-Up Group.

Durul Selçuk, EVP Durul Selçuk graduated from Ankara Çankaya High School in 1988 and from Middle East Technical University, Department of Political Science and Public Administration in 1994. He worked as Branch Distribution Support Management Trainee at Yapı Kredi Bankası A.Ş. from September 1994 until March 1997; Human Resources Officer at Dusa A.Ş. from March 1997 to October 1999; Human Resources and Industrial Relations Officer at Sakosa A.Ş. between October 1999 and February 2001; Human Resources Officer at Sabancı Holding A.Ş. from February 2001 to September 2003; Human Resources Vice President at Citibank A.Ş. between September 2003 and April 2013; and Human Resources Department Head at Burgan Bank A.Ş. from May 2013 to October 2016. Durul Selçuk has served as ABank’s Executive Vice President -Human Resources since October 24, 2016.

71 ABANK 2016 ANNUAL REPORT Senior MANAGEMENT

Muzaffer Gökhan Songül, EVP Muzaffer Gökhan Songül graduated from Kenan Evren Anatolian High School in 1998 and from Istanbul University, Faculty of Political Sciences, Department of Business Administration in 2002. In 2005, he received his Master’s degree from Marmara University, Department of International Economics. He is currently a Ph.D. candidate in Finance and Banking at Kadir Has University. Between 2001 and 2004, he worked as a finance manager in the private sector. He served as VP in the Corporate and Commercial Loans Department with responsibility for Project Finance Loans at Garanti Bank from September 2004 until June 2007; Credit Underwriting VP at the ABN AMRO Bank Turkey office between June 2007 and April 2010; Senior Credit Underwriting Director and Deputy CRO at Royal Bank of Scotland Istanbul Branch from April 2010 to July 2014; and Board Member and CRO at Royal Bank of Scotland Istanbul Branch between July 2014 and November 2014. Muzaffer Gökhan Songül has been serving as Executive Vice President of ABank responsible for Credit Underwriting since January 1, 2015.

Şakir Sömek, EVP Mr. Sömek graduated from University of Wisconsin, River Falls, Business Administration in 1985; he received his Master’s degree in economics from American University in Washington D.C. in 1987. He worked as Customer Representative at Turkishbank in 1988, Credit and Marketing Officer at 1990 Kıbrıs Endüstri Bankası (Industry Bank of Cyprus) in 1990, various posts at Körfezbank, Financial Institutions Department between 1995 -1998, Manager at ABank, International Financial Institutions Department between 1998-2008. As of January 1, 2008, Mr. Şakir Sömek was assigned as Executive Vice President of Financial Institutions. As of March 14, 2008, Mr. Sakir Somek has been serving as Executive Vice President of ABank responsible for Financial Institutions.

The table below contains information about the Senior Executives of the Bank, who resigned in 2016.

ENDING DATE OF REGISTER NAME AND SURNAME FUNCTION TITLE EMPLOYMENT Human 24 İSMAİL MURAT ÖZER Executive Vice President 31.03.2016 Resources IŞIL FUNDA ÖNEY Information 3318 Executive Vice President 31.03.2016 BABACAN Technology 3935 İZZET METCAN Digital Banking Executive Vice President 31.03.2016 CEO - Member of the 3922 MERİÇ ULUŞAHİN Management 07.04.2016 Board of Directors 2992 AYTAY TOLGA ŞENEFE Treasury Executive Vice President 15.05.2016

72 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES Regulatory and COMPLIANCE

As part of its consultancy services, the Legal Compliance Department answers all the questions from the Bank’s various departments and branches.

It is essential to ensure compliance with the relevant laws and ABank has established the Bank’s Compliance Policy according regulations put forward by the authorised institutions in order to the relevant legislation. The establishment of the compliance to perform banking activities. The Regulatory and Compliance units, the appointment of a Compliance Officer and preparation Department operates under the Audit Committee and performs of the written bank policies and procedures have been legislation follow-up from the Official Gazette and other completed. Monitoring, control, risk management, internal audit related institutions’ websites on a daily basis. The current and training activities are ongoing for prevention of laundering legislative amendments are interpreted and are announced to the proceeds of crime. ABank aims to enable the assessment of the relevant units/ departments within the Bank. The action customers, transactions and presented services with a risk- follow-up of the announcements is reported regularly to the based approach, to develop strategies, operational rules and Board Risk Committee. The follow-up letters received from responsibilities for the purpose of mitigating risks to be exposed the official institutions (Banking Regulations and Supervision to within this scope, to raise the awareness of our employees Agency, Capital Markets Board, Central Bank of the Republic in this respect and to prevent the risks which the Bank and of Turkey, Financial Crimes Investigation Board) and their employees may be exposed to with the help of the constituted submission to the relevant departments are also performed policy and procedures. by the Legal Compliance Department. The Bank’s activities being performed and planned to be performed, new products, projects, advertising and promotional campaigns, and their related processes and documentation are also analysed in terms of compliance with the legislation, the Bank’s internal policies and procedures. As part of its consultancy services, the Legal Compliance Department answers all the questions from the Bank’s various departments and branches.

The Compliance Unit of ABank Regulatory and Compliance Department is in charge of ensuring the compliance with the Law No. 5549 on Prevention of Laundering Proceeds of Crime and Law No. 6415 on the Prevention of the Financing of Terrorism. They are in charge of ensuring compliance with the obligations relating to terrorism financing prevention and laundering proceeds of crime. Within this context, the Legal Compliance Department Manager takes the position of the Bank’s Compliance Officer.

73 ABANK 2016 ANNUAL REPORT Internal CONTROL

Internal Control Department employees abide by the laws, regulations, official communiqués, internal bylaws, announcements and the Bank’s procedures and principles.

Internal Control System Internal Control Department collaborates with the senior managers of relevant units in designing the internal control system and internal control activities and how they will be Internal Control Coordination performed, paying due regard to the qualities of all operations The Internal Control Coordination Department carries out its carried out by the Bank. The Internal Control Department sets activities under the Audit Committee and reports to the Board of up and runs the structure aimed at the handling of controls Directors. The Internal Control Department, Head Office Control pertaining to the transactions and activities at the Bank, firstly Unit, Branches Control Unit and Basic Controls and Support by the employees in charge of implementing them, and then Units are organised under the Internal Control Department. by assigned internal control employees. The Internal Control Internal Control employees perform their duties at the head Department is authorised to conduct daily/weekly/monthly/ office or related departments or branches. Internal Control periodic/instantaneous monitoring, examination and control Department is functionally designed as part of the Bank’s activities at all of the Bank’s branches, Head Office departments day-to-day operations. In their activities, The Internal Control and the Bank’s consolidated subsidiaries. With the purpose of Department employees abide by the laws, regulations, official monitoring, examining and controlling that all of the Bank’s communiqués, internal bylaws, announcements and the Bank’s functions are executed securely by using internal control procedures and principles. The controls that fall under internal mechanisms, Internal Control Department employees request control activities are specified below: information that relies on reporting, and conducts controls or examinations that are based on general or specific observations • Control of operational transactions involved in the execution and monitoring using various control documents and tools. They of activities, document their findings in reports or prepare warning messages, • Control of communication channels and information systems, which are then served on the relevant units. The results of the • Control of financial reporting systems, control work are shared in the form of reports with the relevant • Verification of the conformity of all of the Bank’s ongoing and unit / branch managers, the CEO and concerned senior managers, planned activities, and its new transactions and products with the The Board of Directors Audit Committee and Board of the Law and other applicable legislation, the Bank’s internal Directors. Periodical evaluations are performed on the basis of policies and guidelines, as well as banking customs. these reports so as to devise and upgrade control systems, and to take the necessary measures.

The Coordinatorship, which has ten employees as of year-end 2016, carried out the following activities: • In risk-centred controls, the “Audit Command Language” program started being used in parallel with the Bank reporting system so as to enhance the efficiency and productivity of control activities, • All pre-planned controls at Head Office units and branches were completed at the frequency and with the methodology determined beforehand via remote monitoring, • Forty-five branches were visited and control studies were carried out.

74 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES Internal AUDIT

The Internal Audit Department, reporting directly to the Board The Internal Audit Department, which employs 11 auditors of Directors, audits the activities of ABank and its subsidiaries and assistant auditors as of year-end 2016, also carries out for compliance with the Bank’s policies and procedures as inspections, enquiries and investigations in addition to the well as laws and regulations in accordance with international aforementioned functions. Audit reports that are drafted standards, and assesses the efficacy and adequacy of the following the inspections are classified according to significance business processes from a risk-oriented perspective. To this and priority and reported to the Audit Committee of the Board end, the Quality Review carried out by the independent auditing of Directors, Senior Management, and related units. The firm Ernst&Young in 2010 had concluded that the Internal action plans formulated in response to the identified issues Audit Department performs its activities in compliance with are monitored by the Internal Audit Department. The Board international auditing standards. The Internal Audit Department of Directors closely monitors the work of the Internal Audit was subjected to a new Quality Review by the independent Department in addition to the periodic activity reports presented auditing firm in 2015, which affirmed that the Board continues through the Audit Committee. to execute its tasks in accordance with international auditing standards. The Internal Audit Department audited the operations and lending processes of 49 branches as well as 106 Head Office departments and/or processes during the 2016 operating year, as well as information systems and banking processes, as part of the Management Declaration applications were audited.

Summary Board of Directors Report Submitted to the GENERAL ASSEMBLY

Distinguished Stakeholders, we respectfully greet our stakeholders, their proxies and our guests who have honoured the 2016 Annual General Meeting, in which the Bank’s financial statements for 2016 are presented for your perusal and approval. We have reviewed the Bank’s 2016 financial statements, which contain no misrepresentations and/or omissions in material aspects which could be misleading, and that present a fair and accurate view of the Bank’s financial standing, including the significant risks and uncertainties it is exposed to.

In 2016, ABank recorded growth on an unconsolidated basis, with cash up 13.52% and deposits rising 41.67%. In Corporate/ Commercial Banking, our core business, we boosted the support we extended to the manufacturing industry and worked to increase customer penetration. We completed our first Eurobond issue in international markets with great success, and carried out the lowest-interest rate bond issue of the Turkish banking industry. We are fully confident that we will achieve our Bank’s ever-growing performance targets with the ongoing support of our strong shareholders.

As of 31 December 2016, the Bank’s results on an unconsolidated basis were as follows: Total assets increased 25.21% to TL 16,465 million, Total loans increased 13.52% to TL 10,358 million, Total deposits increased 41.67% to TL 8,909 million, Shareholders’ equity increased 22.92% to TL 1,225 million, Net profit totaled TL 8,804 million and the capital adequacy ratio was 18.31%.

75 ABANK 2016 ANNUAL REPORT Organisational STRUCTURE

Board Audit Committee

Risk Regulations, Audit Internal Management Compliance Committee Control Group

COO CRO Operations & IT Risk & Credits

Restructuring Credit Operations and Legal Underwriting EVP Follow-Up EVP EVP

Information Technology Group Manager

76 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES

Credit Committee

Corporate Affairs Executive Committee Office Board of Remuneration Directors Committee

Risk Committee

CEO CEO Office - Project Management Office - Corporate Communication

CBO, Corporate, Commercial and Retail Banking

Financial Commercial Retail Human Financial Treasury Affairs and Banking Banking Resources Institutions EVP Planning EVP EVP EVP EVP EVP

Performance Legal Management Group Group Manager Manager

77 ABANK 2016 ANNUAL REPORT Explanations and Notes about the BANK’S RISK GROUP

Volume of the transactions related to the risk group in which the bank is included, deposit transactions and outstanding loan transactions at the end of the period, and revenues and expenses regarding the period

1. 31 December 2016

ASSOCIATES, BANK’S DIRECT OTHER REAL AND LEGAL SUBSIDIARIES AND AND INDIRECT PERSONS IN THE RISK (*) (**) BANK’S RISK GROUP JOINT VENTURES SHAREHOLDERS GROUP CASH NON-CASH CASH NON-CASH CASH NON-CASH Loans and Other Receivables Beginning Balance (TL Thousand) 55,395 1,897 79,726 53,526 130,282 26,379 Ending Balance (TL Thousand) 102,576 6,125 - 80,452 18,795 - Interest and Commission Income (TL Thousand) 4,098 577 - 26 122 4

2. Information regarding the deposits of risk group in which the bank is included.

ASSOCIATES, BANK’S DIRECT OTHER REAL AND LEGAL BANK’S RISK GROUP (*) SUBSIDIARIES AND AND INDIRECT PERSONS IN THE RISK JOINT VENTURES SHAREHOLDERS GROUP 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER 31 DECEMBER DEPOSITS 2016 2015 2016 2015 2016 2015 Beginning Balance (TL Thousand) 49,552 22,114 256,033 944,138 94,743 291,313 Ending Balance (TL Thousand) 110,659 49,552 - 256,033 21,532 94,743 Interest Deposit Cost (TL Thousand) 4,168 5,671 28,104 59,408 1,250 23,253

(*) As defined in Article 49 of the Banking Law no. 5411. (**) The information in the table above includes receivables from banks, as well as loans extended. Dividend POLICY

Corporate Affairs Office Principles for dividend distribution at ABank are stipulated in Article 66 of the Bank’s Articles of Association. Accordingly net profit is the income generated by the Bank during a fiscal year less all kinds of costs, provisions and taxes. Out of the amount that remains after deducting prior year losses from such profit:

• 5% general legal reserves is set aside in accordance with Article 519 of the Turkish Commercial Code, • From the remaining amount, dividends may be distributed to shareholders in the ratio and amount to be determined in accordance with the provisions of the CMB regulations and other applicable legislation subject to the decision of the General Assembly, • The General Assembly is authorised to set aside the remaining amount, in part or in whole, as free reserves or to distribute the same as dividends to shareholders. As per the law, the General Assembly may not decide to set aside further reserves or to carry over profit to the following year, unless the mandatory reserves and the dividends determined for shareholders in the Articles of Association and required to be distributed by the CMB are set aside.

78 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES Grants and Charitable Donations Made and Expenses Incurred in CONJUNCTION WITH SOCIAL RESPONSIBILITY PROJECTS IN 2016

In 2016, ABank made a donation of TL 1,000,000 for our martyrs who lost their lives in the coup attempt of July 15, 2016, and TL 100,000 for our policemen martyred in the terrorist attack made in Beşiktaş.

Remuneration Paid to the Board of Directors and SENIOR MANAGEMENT

At the Bank’s 2016 Annual General Meeting held on 31 March 2016, it was decided to pay Board Member Didem Çerçi a gross salary of TL 50,000, and to pay a net fee of TL 10,000 for each Board meeting and committee meeting that Board members attend to pay a net fee of TL 4,000. The related General Meeting minutes are posted on the Bank’s corporate website. Financial benefits provided by the Bank to the senior management during 2016, including attendance fees, salaries, premiums, bonuses and dividends; allowances, travel, accommodation and representation expenses reimbursed; and cash and non-cash facilities, insurance and other guarantees amounted to TL 26.9 million.

79 ABANK 2016 ANNUAL REPORT Managers of INTERNAL SYSTEMS

BANKING OR DATE OF NAME DUTY STATE OF EDUCATION RESPONSIBILITIES INDUSTRY APPOINTMENT EXPERIENCE Mustafa Mutlu Chief Audit Istanbul University Faculty Internal Audit 31.10.2011 22 Çalışkan Executive of Economics (English) Department Istanbul University – Group Business Administration/ Hamdi Ozan Tuncer 23.05.2011 Risk Management 17 Manager University of Wales- Banking and Finance Deputy Chairman Middle East Technical Internal Audit Engin Turan of The 15.12.2011 University- Political Science 13 Department Internal Audit and Public Administration Department Bogazici University- Tankut Hayri Internal Audit Manager 04.03.2016 Management Information 10 Çopuroğlu Department Systems Middle East Technical University Faculty of Legislation and Hamdi İlkay Girgin Manager 15.12.2010 15 Economics / Imperial Compliance College London (MBA) Middle East Technical Deputy Gürsoy Zorlu 03.11.2016 University- Political Science Internal Control 10 Manager and Public Administration

*Risk Management Group Manager Abdullah Sen resigned on April 30, 2016 and Ufuk Türkan, Internal Control Manager also resigned on 30 September 2016.

Affiliated Companies REPORT

Under Article 199 and other applicable provisions of Turkish Commercial Code no. 6102, the Bank’s Board of Directors made the following declaration in the Affiliated Companies Report issued with regard to relations with related parties. In all dealings between our Bank and the controlling company and its affiliated companies in the fiscal year from January 1, 2016 to December 31, 2016, there were, to the best of our knowledge, no transactions, which were carried out with the controlling company’s guidance, to inure to the benefit of the controlling company or an affiliated company thereof, nor were there any actions taken or avoided to the benefit of the controlling company or an affiliated company thereof during fiscal year 2015. Therefore, we hereby declare that our Company did not sustain any losses that need to be compensated nor did the Company derive any non-proportional gains by virtue of the transactions carried out with regard to fiscal year 2015, and that the dealings with the controlling company and affiliated companies do not entail any gains or losses that need to be offset.

80 MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES Outsourced Services Pursuant to the Regulation on BANKS’ PROCUREMENT OF SUPPORT SERVICES

RELATED COMPANY NAME DESCRIPTION OF SERVICE DEPARTMENT

Maro Uluslararası Bilgi Teknolojileri Information Danışmanlık Geliştirme Destek Hizmetleri Business analyst employment service Technologies San. Tic. Ltd. Şti.

V.R.P. Veri Raporlama Programlama Software, development, and activation services related to "ABank Information Bilişim Yazılım ve Dan. Hizm. Ticaret A.Ş. Internet Banking and Loan Sales Application Project" Technologies

Information Vera Teknoloji Hizm. Ltd. Şti. Software Engineer / Business analyst employment service Technologies

Operations / SWIFT software maintenance and development services / Business Fineksus Bilişim Çözümleri Ticaret A.Ş. Information analyst employment service Technologies

Maintenance, which includes changes and updates to the modules and systems of the BID (İHS), RETAIL PAYMENT (PÖS), ADUP2, Mor Tekn. Yazılım İletişim Bilişim EFT3, EMKT2 and BASUB systems, EFT2 and ESTS systems, support Information Danışmanlık ve Enerji San. Tic. Ltd. Şti. and modification services. Licensing, maintenance, support and Technologies modification services to be provided to the Bank in relation to the EFT2 and ESTS systems emergency application package.

Active Bilgisayar Hizmetleri ve Ticaret NOVA Securities and NOVA VOB software maintenance services Operations Ltd. Şti.

Printing the deliveries on commodities, distributing, and delivering Aktif İleti ve Kurye Hizm. A.Ş. the deliveries of the bank that may vary in weight and size, and Operations returning the received commodities to the Bank

Güzel Sanatlar Çek Basım Ltd. Şti. Printing check books and delivering them to the Bank Operations

Iron Mountain Arşivleme Hizmetleri A.Ş. Archiving services Operations

Desmer Güvenlik Hizmetleri Ticaret A.Ş. Security personnel employment services Operations

Aras Kurye Servisi A.Ş. Distributing and delivering the commodities of the Bank Operations

ADC & Card Asseco See Teknoloji A.Ş. E-commerce secure payment systems services Payment Systems Department

81 ABANK 2016 ANNUAL REPORT Outsourced Services Pursuant to the Regulation on BANKS’ PROCUREMENT OF SUPPORT SERVICES

RELATED COMPANY NAME DESCRIPTION OF SERVICE DEPARTMENT

Receiving the loan and credit card payments to be made to the Bank via Halkbank's branch network (payment at the teller’s desk) Türkiye Halk Bankası A.Ş. Retail Banking and alternative distribution channels of Halkbank such as internet banking, ATM, telephone banking (electronic payment)

ADC & Card Teknoser Bilgisayar Teknik Hizmetler San. POS field services Payment Systems ve Dış Tic. A.Ş. Department

Printing and enveloping Bank statements, letters and other requested printed documents to be sent by the Bank, producing ADC & Card paper and envelopes, converting them into PDF format in electronic Hobim Digital Elektronik Hizmetler A.Ş. Payment Systems environment, e-mailing them to third parties, printing the legal Department books upon the request of the Bank, recording, destroying returned commodities

Transporting documents between the Headquarters and branches or Temp Danışmanlık Kuryecilik Sağlık between the branches, personnel employment services for dealing Human Resources Hizmetleri ve Enerji Sanayi Tic. Ltd. Şti. with the process of delivering the receipts and declarations to public institutions, and the procedures in notary and collection offices

Identification of customers resident in Qatar who apply via the Commercial Bank of Qatar Internet to open an account at the Bank. Customer recognition, Retail Banking Receiving necessary documentation from the customers.

ADC & Card Personalisation and delivery services for raw cards to be E-Kart Elektr. Kart Sist. San. Tic. A.Ş. Payment Systems ordered by the Bank Department

Collectürk Alacak Yönetimi ve Call services for the Bank’s receivables, and directing them for Individual Danışmanlık A.Ş. collection Collection

(Turkcell) - Superonline İletişim Hosting services for Bank Data Centres Information Hizmetleri A.Ş. (Main and Disaster Data Centre) Technologies

82 FINANCIAL INFORMATION AND RISK MANAGEMENT Annual Report COMPLIANCE OPINION

CONVENIENCE TRANSLATION INTO ENGLISH OF THE INDEPENDENT AUDITOR’S REPORT RELATED TO ANNUAL REPORT ORIGINALLY ISSUED IN TURKISH

To the Board of Directors of Alternatifbank Anonim Şirketi

Report on the Audit of Board of Directors’ Annual Report Based on Standards on Auditing

We have audited the accompanying annual report of Alternatifbank Anonim Şirketi. (the “Bank”), for the year ended 31 December 2016.

Board of Directors’ Responsibility for the Annual Report In accordance with the Article 514 of the Turkish Commercial Code No. 6102 (“TCC”) and “Regulation on the Principles and Procedures Concerning the Preparation of and Publishing Annual Reports by Banks” published in the Official Gazette dated 1 November 2006 and No. 26333 in accordance with “Banking Regulation and Supervision Agency (“BRSA”) Accounting and Reporting Legislation” which includes the “Regulation on Accounting Applications for Banks and Safeguarding of Documents” published in the Official Gazette No.26333 dated 1 November 2006, and other regulations on accounting records of Banks published by Banking Regulation and Supervision Board and circulars and interpretations published by BRSA and requirements of the Turkish Accounting Standards for the matters not regulated by the aforementioned legislations, and for such internal control as management determines is necessary to enable the preparation of the annual report.

Auditor’s Responsibility Our responsibility is to express an opinion on the Bank’s annual report based on our audit conducted in accordance with the provisions of the Article 397 of the TCC and the regulation on “Independent Auditing of Banks’’ published in the Official Gazette dated 2 April 2015 with No. 29314, whether the consolidated and unconsolidated financial information included in the accompanying annual report is consistent with the financial statements of the Bank and provides fair presentation.

We conducted our audit in accordance with the Independent Standards on Auditing which is a component of the Turkish Auditing Standards (“TAS”) published by the Public Oversight Accounting and Auditing Standards Authority (“POA”). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial information included in the annual report is consistent with the consolidated and unconsolidated financial statements and provide fair presentation.

An audit involves performing procedures to obtain audit evidence about the historical financial information. The procedures selected depend on the auditor’s judgment.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion In our opinion, the financial information included in the Board of Directors’ annual report is consistent, in all material respects, with the audited consolidated and unconsolidated financial statements and provides a fair presentation.

Report on Other Regulatory Requirements

In accordance with the third clause of the Article 402 of TCC, no material issue has come to our attention that shall be reported about the Bank’s ability to continue as a going concern in accordance with TAS 570 Going Concern.

Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. A member of KPMG International Cooperative

MURAT ALSAN, SMMM Partner

10 March 2017 İstanbul, Turkey

83 ABANK 2016 ANNUAL REPORT Statement of Responsibility for 2016 ANNUAL REPORT

We have reviewed the Bank’s 2016 Annual Review, which contains no misrepresentations and/or no omissions in material aspects which could be misleading, and that presents a fair and accurate view of the Bank’s financial standing, including the significant risks and uncertainties it is exposed to.

DIDEM ÇERÇI IZZAT DAJANİ Chairlady of Board Audit Committee Member of Board Audit Committee

MÜGE ÖNER KAĞAN GÜNDÜZ ALPER UZELI CEO EVP-Financial Affairs and Planning Financial Control Manager

84 FINANCIAL INFORMATION AND RISK MANAGEMENT

If an Ordinary General Assembly Was Held During the Year, Information on the Assembly, Including the Date of the Meeting, DECISIONS REACHED AND ACTIONS TAKEN IN DUE COURSE

In accordance with the amendments to the Bank’s Articles of Association, the Ordinary General Assembly was held on December 1, 2016 at 11:00 am, at the Bank’s Head Office located at the address Cumhuriyet Caddesi No: 46 Elmadağ/İstanbul.

Financial Position, PROFITABILITY AND SOLVENCY

In 2016, ABank booked a pretax profit of TL 2 million, while total assets of the Bank went up 25.21% to TL 16,465 million. Donations made in 2016 amounted to TL 1.1 million.

Assets Performance The expansion in the Bank’s assets in 2016 was driven mainly by loans which grew 13.52% year-on-year and constituted 62.91% of total assets. At end-2016, the Bank set aside provisions at a rate of 61.55% for non-performing loans.

Liabilities Performance The Bank’s primary funding source, deposits climbed 41.67% year-on-year, bringing their share in total liabilities up to 54.11%. Shareholders’ equity grew 22.92% to TL 1,225 million. The Bank’s capital adequacy ratio in 2016 was 18.31%.

Profitability Interest income from loans amounted to TL 865,074 thousand, while interest expenses paid on deposits were TL 494,479 thousand. The Bank recorded net interest income of TL 345,536 thousand, net fees and commissions income of TL 27,857 thousand, and operating income of TL 612,312 thousand. The Bank booked net profit of TL 8,804 thousand for 2016.

85 ABANK 2016 ANNUAL REPORT

Evaluation of the Bank’s Capital Strength and BOARD OF DIRECTORS’ ASSESSMENTS

As of year-end 2016, the Bank’s capital adequacy standard ratio on an unconsolidated basis was 18.31%, which is above the minimum regulatory requirements. As a result, the Bank does not have any issues with respect to capital sufficiency, and the Bank’s assets are at a level to cover its liabilities.

Achievement of Targets Set in Previous Periods, Implementation of General Assembly Resolutions, Any Reasons for Failure to Meet Targets or IMPLEMENT RESOLUTIONS AND ASSESSMENTS

Our Bank has achieved growth within the budget targets set for 2016 with an increase of 25.21% in its assets. Growth in loans, which constitute 63% of total assets, was 14%, while growth in securities, another important item in the assets, was 35% higher than the budget. As of 2016 year-end, the size of the assets reached 2% higher than the budget. In terms of liabilities, 42% growth was achieved in deposits as the main funding source while reaching a 2% higher figure than the budget target. Furthermore, in 2016 the Bank continued to diversify its funding sources with the Basel III compliant subordinated debt, and the syndicated loans that were renewed by 67%. With the growth and business volume it created particularly in the second six months of 2016, the Bank was able to carry its operating revenue to a level 10% higher than the budget level. Moreover, a positive deviation in comparison to the budget was observed at the net profit level as a consequence of keeping the operating expenses under control.

86 FINANCIAL INFORMATION AND RISK MANAGEMENT

Information on Special and Public Audits During the FISCAL YEAR

No special audit requests were received from shareholders in 2016. Thus, a private audit was not conducted at the Bank in 2016. Meanwhile, the Banking Regulation and Supervision Agency, Central Bank of the Republic of Turkey and Ministry of Customs and Trade, Inspectorship of Customs and Trade carried out examinations at the Bank as part of public audit related activities.

Administrative or Judicial Sanctions Imposed on the Bank and the Members of the Board of Directors Due to ACTIONS IN VIOLATION OF APPLICABLE LAWS

There were no administrative or judicial sanctions imposed on the members of the Board of Directors in 2016 on account of practices in violation of law. In 2016, the Bank paid a total of TL 7,976 in administrative fines under Banking Law No. 5411 and a total of TL 213,232 under Labor Law No.4857.

87 ABANK 2016 ANNUAL REPORT

Lawsuits Filed Against the Bank With a Potential Impact on the Bank’s Financial Standing and OPERATIONS, AND THEIR POSSIBLE OUTCOMES

Pursuant to precautionary principles, TL 13.2 million has been set aside as provisions for lawsuits initiated against the Bank.

Credit Ratings Assigned to ABank and RELATED EXPLANATIONS

FITCH RATINGS: AUGUST 2016 Foreign Currency Long Term BBB (Negative) Short Term F2 Turkish Lira Long Term BBB (Negative) Short Term F2 Support Note AAA (tur) (Stable) National Note 2 Financial Capacity Note b+

MOODY’S: SEPTEMBER 2016 Foreign Currency Long Term Ba2 Short Term NP Turkish Lira - Long Term Ba1 Short Term NP National Long Term Aa1.tr National Short Term TR-1 Outlook Stable

88 FINANCIAL INFORMATION AND RISK MANAGEMENT Financial Highlights and Key Ratios for THE FIVE-YEAR PERIOD

CONSOLIDATED (TL MILLION)

NET PROFIT/ SHAREHOLDERS’ PAID-IN YEAR ASSETS LOANS DEPOSITS LOSS FOR THE EQUITY CAPITAL PERIOD

31.12.2016 17,591 10,489 8,798 1,265 980 30

31.12.2015 14,065 9,306 6,238 1,015 620 70

31.12.2014 11,348 7,900 5,653 973 620 137

31.12.2013 10,990 6,441 4,981 606 420 71

31.12.2012 8,029 5,201 4,170 591 420 73

89 ABANK 2016 ANNUAL REPORT Contact Information for Head Office and BRANCHES

ABank operates in Turkey as a deposit bank backed by private capital.

Head Office Address: Cumhuriyet Cad. No: 46, 34367 Şişli - Istanbul / TURKEY Phone: +90 212 315 65 00 Fax: +90 212 225 76 15 Website address: www.abank.com.tr Email address: [email protected] Trade Registry Number: 280445-228027

Contact information for our branches are accessible on the Bank’s website, under “Our Branches and ATMs” within the “About Us” section.

90

ALTERNATIFBANK A.Ş.

Unconsolidated Financial Statements As of and For the Year Ended 31 December 2016 With Independent Auditors’ Report Thereon

(Convenience Translation of Unconsolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish)

31 January 2017 This report includes “Independent Auditors’ Report” comprising 1 pages and; “Unconsolidated Financial Statements and Related Disclosures and Footnotes” comprising 101 pages. Convenience Translation of the Independent Auditors’ Report Originally Prepared and Issued in Turkish to English (See Note I in Section Three)

To the Board of Directors of Alternatifbank Anonim Şirketi;

Report on the Unconsolidated Financial Statements

We have audited the accompanying unconsolidated financial statements of Alternatifbank Anonim Şirketi (“the Bank”) which comprise the unconsolidated statement of financial position as at 31 December 2016 and the unconsolidated statement of income, unconsolidated statement of income and expense items under shareholders’ equity, unconsolidated statement of changes in shareholders’ equity, unconsolidated statement of cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Unconsolidated Financial Statements

Management is responsible for the preparation and fair presentation of these unconsolidated financial statements in accordance with the “Banking Regulation and Supervision Agency (“BRSA”) Accounting and Reporting Legislation” which includes the “Regulation on Accounting Applications for Banks and Safeguarding of Documents” published in the Official Gazette No.26333 dated 1 November 2006, and other regulations on accounting records of Banks published by Banking Regulation and Supervision Board and circulars and interpretations published by BRSA and requirements of Turkish Accounting Standards for the matters not regulated by the aforementioned legislations, and for such internal control as management determines is necessary to enable the preparation of unconsolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these unconsolidated financial statements based on our audit. We conducted our audit in accordance with the “Regulation on Independent Audit of the Banks” published in the Official Gazette No.29314 dated 2 April 2015 by BRSA and Independent Standards on Auditing which is a component of the Turkish Auditing Standards published by the Public Oversight Accounting and Auditing Standards Authority (“POA”). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the unconsolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the unconsolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the unconsolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the unconsolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the unconsolidated financial statements present fairly, in all material respects, the financial position of the Alternatifbank Anonim Şirketi as at 31 December 2016, and its financial performance and its cash flows for the year then ended in accordance with BRSA Accounting and Reporting Legislation.

Report on Other Legal and Regulatory Requirements

1) Pursuant to the fourth paragraph of Article 402 of the Turkish Commercial Code (“TCC”) No.6102; no significant matter has come to our attention that causes us to believe that the Bank’s bookkeeping activities for the period 1 January-31 December 2016 are not in compliance with TCC and provisions of the Bank’s articles of association in relation to financial reporting.

2) Pursuant to the fourth paragraph of Article 402 of the TCC; the Board of Directors provided us the necessary explanations and required documents in connection with the audit.

Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi A member firm of KPMG International Cooperative

Murat Alsan Partner, SMMM

31 January 2017 İstanbul, Turkey

Additional paragraph for convenience translation to English

The accounting principles summarized in Note I Section Three, differ from the accounting principles generally accepted in countries in which the accompanying unconsolidated financial statements are to be distributed and International Financial Reporting Standards (“IFRS”). Accordingly, the accompanying financial statements are not intended to present the financial position and results of operations in accordance with accounting principles generally accepted in such countries of users of the unconsolidated financial statements and IFRS. THE UNCONSOLIDATED FINANCIAL REPORT OF ALTERNATİFBANK A.Ş. AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2016

Headquarters Address : Cumhuriyet Cad. No:46 34367 Şişli/İstanbul Telephone : 0 212 315 65 00 Fax : 0 212 225 76 15 Web site : www.abank.com.tr E-mail : [email protected]

The unconsolidated financial report as of and for the year ended 31 December 2016 prepared in accordance with the communiqué of “Financial Statements and Related Disclosures and Footnotes to be Announced to Public by Banks” as regulated by the Banking Regulation and Supervision Agency, comprises the following sections.

• GENERAL INFORMATION ABOUT THE BANK • UNCONSOLIDATED FINANCIAL STATEMENTS OF THE BANK • EXPLANATIONS ON THE ACCOUNTING POLICIES APPLIED IN THE CURRENT PERIOD • INFORMATION ON THE FINANCIAL POSITION AND RISK MANAGEMENT OF THE BANK • EXPLANATIONS AND NOTES ON THE UNCONSOLIDATED FINANCIAL STATEMENTS • OTHER EXPLANATIONS • DISCLOSURES RELATED TO INDEPENDENT AUDITORS’ REPORT

The accompanying unconsolidated financial statements and notes to these financial statements for the year ended which are expressed, unless otherwise stated, in thousands of Turkish Lira (TL) , have been prepared and presented based on the accounting books of the Bank in accordance with the Regulation on Accounting Applications for Banks and Safeguarding of Documents, Turkish Accounting Standards, Turkish Financial Reporting Standards, and related appendices and interpretations of these, and have been independently audited and presented as attached.

Omer Hussain I H Müge Öner Kağan Gündüz Alper Uzeli Al-Fardan Acting CEO Financial Control and Financial Control Chairman of the Board Planning Executive Vice Manager of Directors President

Didem Çerçi Izzat Dajani Vice-Chairlady of the Board Member of Board of of Directors and Chairlady Directors and Member of of Board Audit Committee Board Audit Committee

The authorized contact person for questions on this financial report:

Name-Surname / Title : Alper Uzeli / Financial Control Manager Telephone Number : 0 212 315 69 53 Fax Number : 0 212 226 76 15 ABANK 2016 ANNUAL REPORT

SECTION ONE General Information About the Bank I. Explanations on the Establishment Date and Initial Status of the Bank, and History Including the Changes in the Former Status 95 II. Explanations on the Capital Structure, Shareholders who Directly or Indirectly, Solely or Jointly Undertake the Management and Control of the Bank, any Changes in the Period, and Information on the Bank’s Risk Group 95 III. Explanation on the Board of directors, members of the audit committee, president and executive vice presidents, changes in these matters (if any) and shares in the Bank 96 IV. Information on the Bank’s Qualified Shareholders 97 V. Summary information on the Bank’s activities and services 97 VI. Differences between the communique on preparation of consolidated financial statements of banks and Turkish Accounting Standarts and short explanation about the institutions subject to line-by-line method or proportional unconsolidated and institutions which are deducted from equity or not included in these three method 97 VII. Existing or potential, actual or legal obstacles to immediate transfer of equity, or repayment of debt between the Bank and its subsidiaries 97

SECTION TWO Unconsolidated Financial Statements I. Balance sheet (Statement of Financial Position) 98-99 II. Off-balance sheet items 100 III. Income statement 101 IV. Statement of income and expense items accounted under Shareholder’s Equity 102 V. Statement of changes in shareholders’ equity 103-104 VI. Statement of cash flows 105 VII. Profit Distribution Statement 106

SECTION THREE Explanations on Accounting Policies I. Basis of presentation 107 II. Strategy of using financial instruments and foreign currency transactions 107 III. Investments in Associates, Subsidiaries and Joint Ventures 107 IV. Forward transactions, options and derivative instruments 108 V. Interest income and expense 108 VI. Fee and commission income and expense 108 VII. Financial assets 108-110 VIII. Impairment of financial assets 110 IX. Offsetting financial assets 110 X. Sales and repurchase agreements and securities lending transactions 110 XI. Assets held for sale and discontinued operations 111 XII. Goodwill and other intangible assets 111 XIII. Property and equipment 111 XIV. Leasing transactions 111-112 XV. Provisions, contingent commitments and contingent assets 112 XVI. Obligations related to employee rights 112 XVII. Taxation 112-113 XVIII. Additional explanations on borrowings 113 XIX. Share certificates and issuance of share certificates 113 XX. Avalized drafts and acceptances 113 XXI. Government grants 113 XXII. Profit reserves and profit distribution 113 XXIII. Earnings per share 113 XXIV. Related parties 113 XXV. Cash and cash equivalents 114 XXVI. Operating segments 114-115

SECTION FOUR Information on the Financial Position and Risk Management of the Bank I. Explanations on shareholders’ equity 116-124 II. Explanations on currency risk 124-126 III. Explanations on interest rate risk 126-130 IV. Explanations on stock position risk 130 V. Explanations on liquidity risk management and liquidity coverage ratio 130-137 VI. Explanations on leverage ratio 138 VII. Explanations on the risk management 138-158 VIII. Explanations Regarding the Presentation of Financial Assets and Liabilities at Their Fair Value 159-160 IX. Explanations on Hedge Accounting 160-161

SECTION FIVE Explanations and Notes on the Unconsolidated Financial Statements I. Explanations and notes on the assets 162-173 II. Explanations and notes on liabilities 174-181 III. Explanations and notes on off-balance sheet accounts 181-183 IV. Explanations and notes on income statement 183-187 V. Explanations and notes on changes in shareholders’ equity 187-188 VI. Explanations and notes on statement of cash flow 188-189 VII. Explanations and notes on bank’s risk group 189-191 VIII. Explanations and notes on the domestic, foreign off-shore branchs and foreign representatives of the bank 191 IX. Explanations and notes on subsequent evemts 191

SECTION SIX Other Explanations I. Other explanations related to the Bank’s operations 192

SECTION SEVEN Disclosures on Independent Auditor’s Report I. Explanations on independent auditor’s report 192 II. Explanations and footnotes prepared by independent auditor 192

94 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION ONE

GENERAL INFORMATION ABOUT THE BANK

I. Explanations on Establishment Date and Initial Status of the Bank, History Including the Changes in the Former Status

Alternatifbank A.Ş. (“the Bank”) was established in Istanbul on 6 November 1991 and started banking activities on February 1992. The Bank’s ordinary shares started to be traded in Istanbul Stock Exchange on 3 July 1995. The Bank is still a privately owned commercial bank status and provides banking services through 53 (31 December 2015: 59) branches.

The Bank made an application to Capital Market Board and Borsa İstanbul A.Ş. about to leave the partnership and delisting the stock- exchange quotation in accordance with clauses of Capital Market Board “Squeeze-out and Sell-out Rights Communiqué” on 11 July 2014. “Capital Issue Document” prepared for the capital increase allocated to controlling shareholder Commercial Bank of Qatar in the context of the process of squeeze-out and sell-out rights from the minority in accordance with “Squeeze-out and Sell-out Rights Communiqué” has been approved by Capital Market Board on 23 July 2015. As of this date, Alternatifbank A.Ş. delisted from the stock- exchange.

II. Explanations on the Capital Structure, Shareholders who Directly or Indirectly, Solely or Jointly Undertake the Management and Control of the Bank, any Changes in the Period, and Information on the Bank’s Risk Group

As of 31 December 2016, 100% of the shares of the Bank are owned by The Commercial Bank (P.S.Q.C.) Shareholder’s structure of the Bank is as follows:

31 December 2016 31 December 2015 Name/Commercial Name Share Amount Share Ratio Share Amount Share Ratio The Commercial Bank (P.S.Q.C.) 980,000 100% 465,000 75.00% Anadolu Endüstri Holding A.Ş. (**) - - 106,683 17.21% Anadolu Aktif Teşebbus ve Makine Ticaret A.Ş.(**) - - 48,317 7.79% Total (*) 980,000 100% 620,000 100%

(*) It is decided to increase the capital in cash by TL 150,000 with the decision of Board of Directors as of 21 January 2016, after the approval of BRSA the paid in capital is increased TL 150,000 to TL 770,000 as of 14 April 2016. With the decision of number 166 of the Board of Directors dated on 19 December 2016 and with the approval of BRSA dated on 29 December 2016, decided to increase the capital from TL 770,000 to TL 980,000. In this respect, The Commercial Bank (P.S.Q.C.) was included in the capital increase with TL 210,000. Registration process is continuing. (**) With the decision number 166 of the Board of Directors dated on 19 December 2016 and with the approval of BRSA dated on 26 October 2016, 25% and 192.500.000 in the name of the holder shares of Anadolu Endüstri Holding A.Ş. was transferred to The Commercial Bank (P.S.Q.C.).

95 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

III. Explanation on the Board of Directors, Members of the Audit Committee, President and Executive Vice Presidents, Changes in These Matters (if any) and Shares in the Bank

Indirect Share Title Name Responsibility (*) Capital (%) Chairman of Board of Directors Omer Hussain I H Al-Fardan - - Vice-Chairlady of the Board of Directors and Member of Board of Directors Didem Çerçi Chairlady of Board Audit Committee - Chairman of the Credit Committee, Chairman of the Executive Committee of the Board, Joseph Abraham Chairman of the Remuneration Committee - Member of the Credit Committee and the Fahad Abdulrahman Badar Executive Committee of the Board - Member of the Audit Committee and the İzzat Dajani Remuneration Committee - Mohd İsmail M Mandani Al-Emadi Alternate Member of the Audit Committee - Paul Gossiaux Member of the Credit Committee - Gerard George Rizk Member of the Audit Committee -

Member of the Credit Committee, The Member of Board of Directors Executive Committee of and Acting General Manager Müge Öner the Board -

Executive Vice Presidents Seher Demet Tanrıöver Çaldağ Credit Risk Management-Chief Risk Officer - Operations- Consumer Relations Coordination Suat Çetin Officer - Sezin Erken Retail Banking - Kağan Gündüz Financial Control and Planning - Mete Hakan Güner Commercial Banking - Musa Kerim Mutluay Restructuring and Legal Follow-up - Durul Selçuk Human Resources - Muzaffer Gökhan Songül Credit Allocation - Şakir Sömek Financial Institutions - Information Technologies and Operations- Tanol Türkoğlu Chief Operating Officer - Ahmet Kağan Yıldırım Chief Business Officer - Chairman of Board of Inspectors Mustafa Mutlu Çalışkan Board of Inspectors -

(*) With the decision of the Board of Directors dated on 19 December 2016, the duties and responsibilities of Risk Committee were transferred to the Audit Committee and the activities of the Risk Committee have been terminated. With the decision taken at the Bank Ordinary General Meeting dated 31 March 2016, members of the Board of Directors Nicholas Charles Coleman, Bahattin Gürbüz, İpek Özkan and Kemal Semerciler were resigned from the Board of Directors. With the decision number 48 of the Board of Directors dated on 21 April 2016, Andrew Charles Stevens was resigned from the Board of Directors. With the decision number 179 of the Board of Directors dated on 19 December 2016, Tuncay Özilhan and Mehmet Hurşit Zorlu were resigned from the Board of Directors.

96 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

IV. Information on the Bank’s Qualified Shareholders

According to the Banking Act No: 5411 regarding definition of Qualified Shares and Bank Transactions that are subject to Permission and Indirect Shareholding Regulation’s article 13, direct and indirect qualified shareholders of the Bank’s Capital is as follows.

Share Amounts Paid-in Capital Unpaid Name/Commercial Title (Nominal) Share Rates (Nominal) Portion The Commercial Bank (P.S.Q.C.) 980,000 100.00% 980,000 -

V. Summary Information on the Bank’s Activities and Services

The Bank’s operations are extending TL and foreign currency cash and non-cash loans, performing Capital market transactions, opening deposit and making other banking transactions according to regulation principles given by the Bank’s Articles of Association.

As of 31 December 2016, the Bank has 53 branches (31 December 2015: 59 branches) and has 928 employees (31 December 2015: 1,038 employees).

VI. Differences Between the Communique on Preperation of Unconsolidated Financial Statements of Banks and Turkish Accounting Standarts and Short Explanation About the Institutions Subject to Line-by-Line Method or Proportional Consolidation and Institutions Which Are Deducted From Equity or Not Included in These Three Methods

None.

VII. Existing or Potential, Actual or Legal Obstacles to Immediate Transfer of Equity or Repayment of Debt between the Bank and Its Subsidiaries

None.

97 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. UNCONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

I.BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

Note (Section Five) 31 December 2016 31 December 2015 ASSETS TL FC Total TL FC Total I. CASH AND BALANCES WITH CENTRAL BANK I-a 149,340 1,820,848 1,970,188 51,568 1,493,930 1,545,498 II. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS (Net) I-b 26,673 35,277 61,950 22,625 5,037 27,662 2.1 Financial Assets Held for Trading 26,673 35,277 61,950 22,625 5,037 27,662 2.1.1 Public Sector Debt Securities - 526 526 1 421 422 2.1.2 Equity Securities ------2.1.3 Derivative Financial Assets Held for Trading 26,673 34,751 61,424 22,624 4,616 27,240 2.1.4 Other Marketable Securities ------2.2 Financial Assets at Fair Value Through Profit and Loss ------2.2.1 Government Debt Securities ------2.2.2 Equity Securities ------2.2.3 Loans ------2.2.4 Other Marketable Securities ------III. BANKS I-c 120,814 419,583 540,397 289,598 321,844 611,442 IV. MONEY MARKET PLACEMENTS 350,081 - 350,081 350,105 - 350,105 4.1 Interbank Money Market Placements ------4.2 Receivables from Istanbul Stock Exchange Money Market - - - 50,017 - 50,017 4.3 Receivables from Reverse Repurchase Agreements 350,081 - 350,081 300,088 - 300,088 V. FINANCIAL ASSETS AVAILABLE-FOR-SALE (Net) I-d 299,939 2,028,756 2,328,695 353,778 462,164 815,942 5.1 Share Certificates 4,721 - 4,721 4,721 - 4,721 5.2 Government Debt Securities 293,186 1,701,761 1,994,947 343,916 323,156 667,072 5.3 Other Marketable Securities 2,032 326,995 329,027 5,141 139,008 144,149 VI. LOANS I-e 5,298,550 5,272,137 10,570,687 5,105,041 4,240,328 9,345,369 6.1 Loans 5,085,781 5,272,137 10,357,918 4,884,144 4,240,328 9,124,472 6.1.1 Loans to the Bank’s Risk Group 161 121,210 121,371 15,853 249,550 265,403 6.1.2 Public Sector Debt Securities ------6.1.3 Other 5,085,620 5,150,927 10,236,547 4,868,291 3,990,778 8,859,069 6.2 Non Performing Loans 553,355 - 553,355 476,025 - 476,025 6.3 Specific Provisions (-) 340,586 - 340,586 255,128 - 255,128 VII. FACTORING RECEIVABLES ------VIII. HELD-TO-MATURITY INVESTMENTS (Net) I-f ------8.1 Public Sector Debt Securities ------8.2 Other Marketable Securities ------IX. INVESTMENTS IN ASSOCIATES (Net) I-g ------9.1 Accounted for Under Equity Method ------9.2 Unconsolidated Associates ------9.2.1 Financial Investments ------9.2.2 Non-financial Investments ------X. INVESTMENT IN SUBSIDIARIES (Net) I-h 166,380 - 166,380 166,380 - 166,380 10.1 Unconsolidated Financial Subsidiaries 166,380 - 166,380 166,380 - 166,380 10.2 Unconsolidated Non-Financial Subsidiaries ------XI. ENTITIES UNDER COMMON CONTROL (JOINT VENTURES) (Net) I-i ------11.1 Consolidated Under Equity Method ------11.2 Unconsolidated ------11.2.1 Financial Joint Ventures ------11.2.2 Non-Financial Joint Ventures ------XII. LEASE RECEIVABLES (Net) I-j ------12.1 Finance Lease Receivables ------12.2 Operation Lease Receivables ------12.3 Other ------12.4 Unearned Income (-) ------XIII. HEDGING DERIVATIVE FINANCIAL ASSETS I-k ------13.1 Fair Value Hedges ------13.2 Cash Flow Hedges ------13.3 Net Foreign Investment Hedges ------XIV. TANGIBLE ASSETS (Net) 35,914 - 35,914 27,815 - 27,815 XV. INTANGIBLE ASSETS (Net) 34,747 - 34,747 30,632 - 30,632 15.1 Goodwill ------15.2 Other 34,747 - 34,747 30,632 - 30,632 XVI. INVESTMENT PROPERTY (Net) I-l ------XVII. TAX ASSET II-i 46,524 - 46,524 4,806 - 4,806 17.1 Current Tax Asset ------17.2 Deferred Tax Asset 46,524 - 46,524 4,806 - 4,806 XVIII. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (Net) I-m ------18.1 Assets Held for Sale ------18.2 Assets of Discontinued Operations ------XIX. OTHER ASSETS I-n 233,160 126,034 359,194 187,472 36,540 224,012 TOTAL ASSETS 6,762,122 9,702,635 16,464,757 6,589,820 6,559,843 13,149,663

The accompanying notes are an integral part of these unconsolidated financial statements.

98 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. UNCONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

I.BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

31 December 2016 31 December 2015 Note LIABILITIES (Section Five) TL FC Total TL FC Total I. DEPOSITS II-a 4,643,384 4,265,262 8,908,646 3,437,104 2,851,016 6,288,120 1.1 Deposits from Bank’s Risk Group 56,648 75,543 132,191 264,243 136,085 400,328 1.2 Other 4,586,736 4,189,719 8,776,455 3,172,861 2,714,931 5,887,792 II. DERIVATIVE FINANCIAL LIABILITIES HELD FOR TRADING II-b 49,287 18,725 68,012 1,093 12,303 13,396 III. FUNDS BORROWED II-c 12,123 2,987,945 3,000,068 20,864 3,473,406 3,494,270 IV. MONEY MARKET FUNDS 173,326 313,068 486,394 241,579 116,444 358,023 4.1 Funds from Interbank Money Market ------4.2 Funds from Istanbul Stock Exchange Money Market ------4.3 Funds Provided Under Repurchase Agreements 173,326 313,068 486,394 241,579 116,444 358,023 V. MARKETABLE SECURITIES ISSUED (Net) - 889,656 889,656 - 735,736 735,736 5.1 Bills - 889,656 889,656 - 735,736 735,736 5.2 Asset Backed Securities ------5.3 Bonds ------VI. FUNDS ------6.1 Borrower Funds ------6.2 Other ------VII. MISCELLANEOUS PAYABLES 87,180 83,127 170,307 88,721 115,041 203,762 VIII. OTHER LIABILITIES II-d 74,137 297 74,434 122,741 2,666 125,407 IX. FACTORING PAYABLES ------X. LEASE PAYABLES (Net) II-e ------10.1 Finance Lease Payables ------10.2 Operating Lease Payables ------10.3 Other ------10.4 Deferred Financial Lease Expenses (-) ------XI. DERIVATIVE FINANCIAL LIABILITIES FOR HEDGING PURPOSES II-f 404 - 404 113 - 113 11.1 Fair Value Hedges 404 - 404 113 - 113 11.2 Cash Flow Hedges ------11.3 Net Foreign Investment Hedge ------XII. PROVISIONS II-g 111,024 8 111,032 137,061 3 137,064 12.1 General Loan Loss Provision 52,211 - 52,211 93,386 - 93,386 12.2 Provisions for Restructuring ------12.3 Reserve for Employee Benefit 9,328 - 9,328 8,396 - 8,396 12.4 Insurance Technical Provisions (Net) ------12.5 Other Provisions 49,485 8 49,493 35,279 3 35,282 XIII. TAX LIABILITY II-h 21,783 - 21,783 26,944 - 26,944 13.1 Current Tax Liability 21,783 - 21,783 26,944 - 26,944 13.2 Deferred Tax Liability ------XIV. PAYABLES FOR ASSET HELD FOR SALE AND DISCONTINUED OPERATIONS (Net) 1,200 3,100 4,300 - 2,660 2,660 14.1 Held for Sale 1,200 3,100 4,300 - 2,660 2,660 14.2 Discontinued Operations ------XV. SUBORDINATED LOANS II-j - 1,504,693 1,504,693 - 767,558 767,558 XVI. SHAREHOLDERS’ EQUITY II-k 1,375,837 (150,809) 1,225,028 1,008,006 (11,396) 996,610 16.1 Paid-in Capital 980,000 - 980,000 620,000 - 620,000 16.2 Capital Reserves (18,435) (150,809) (169,244) (17,462) (11,396) (28,858) 16.2.1 Share Premium 54 - 54 54 - 54 16.2.2 Share Cancellation Profits ------16.2.3 Marketable Securities Valuation Reserve (15,303) (150,809) (166,112) (16,041) (11,396) (27,437) 16.2.4 Tangible Assets Revaluation Reserve ------16.2.5 Intangible Assets Revaluation Reserve ------16.2.6 Investment Property Revaluation Reserve ------16.2.7 Bonus Shares Obtained from Investments in Associates, Subsidiaries and Joint Ventures ------16.2.8 Hedging Reserves (Effective portion) ------16.2.9 Value Differences of Assets Held for Resale and Discontinued Operations ------16.2.10 Other Capital Reserves (3,186) - (3,186) (1,475) - (1,475) 16.3 Profit Reserves 405,089 - 405,089 339,861 - 339,861 16.3.1 Legal Reserves 26,254 - 26,254 22,993 - 22,993 16.3.2 Status Reserves ------16.3.3 Extraordinary Reserves 378,835 - 378,835 316,868 - 316,868 16.3.4 Other Profit Reserves ------16.4 Profit or (Loss) 9,183 - 9,183 65,607 - 65,607 16.4.1 Prior Years’ Profit or (Loss) 379 - 379 6,096 - 6,096 16.4.2 Current Year Profit or (Loss) 8,804 - 8,804 59,511 - 59,511 TOTAL LIABILITIES 6,549,685 9,915,072 16,464,757 5,084,226 8,065,437 13,149,663

The accompanying notes are an integral part of these unconsolidated financial statements.

99 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. UNCONSOLIDATED STATEMENT OF OFF-BALANCE SHEET ITEMS AS AT 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

II. OFF- BALANCE SHEET ITEMS

31 December 2016 31 December 2015 Note (Section Five) TL FC Total TL FC Total A. OFF-BALANCE SHEET COMMITMENTS (I+II+III) 7,342,239 12,826,298 20,168,537 5,103,282 9,704,545 14,807,827 14,807,827 I. GUARANTEES AND WARRANTIES III-a-2 1,042,789 1,907,803 2,950,592 1,215,593 1,946,450 3,162,043 1.1 Letters of Guarantee III-a-2.ii 1,041,129 1,045,258 2,086,387 1,215,593 1,013,426 2,229,019 1.1.1 Guarantees Subject to State Tender Law 19,059 17,442 36,501 26,863 10,339 37,202 1.1.2 Guarantees Given for Foreign Trade Operations ------1.1.3 Other Letters of Guarantee 1,022,070 1,027,816 2,049,886 1,188,730 1,003,087 2,191,817 1.2 Bank Acceptances III-a-2.i - 3,885 3,885 - 35,849 35,849 1.2.1 Import Letter of Acceptance - 3,885 3,885 - 35,849 35,849 1.2.2 Other Bank Acceptances ------1.3 Letters of Credit III-a-2.i 1,660 266,777 268,437 - 345,843 345,843 1.3.1 Documentary Letters of Credit 1,660 266,777 268,437 - 345,843 345,843 1.3.2 Other Letters of Credit ------1.4 Prefinancing Given as Guarantee ------1.5 Endorsements ------1.5.1 Endorsements to the Central Bank of the Republic of Turkey ------1.5.2 Other Endorsements ------1.6 Securities Issue Purchase Guarantees ------1.7 Factoring Guarantees ------1.8 Other Guarantees III-a-2.i - 591,883 591,883 - 551,332 551,332 1.9 Other Warrantees ------II. COMMITMENTS 604,653 252,959 857,612 642,462 282,755 925,217 2.1 Irrevocable Commitments 604,653 252,959 857,612 642,462 282,755 925,217 2.1.1 Asset Purchase and Sales Commitments 20,846 60,548 81,394 7,151 78,176 85,327 2.1.2 Deposit Purchase and Sales Commitments - 192,411 192,411 - 204,579 204,579 2.1.3 Share Capital Commitments to Associates and Subsidiaries ------2.1.4 Commitments for Loan Limits III-a-1 191,311 - 191,311 228,546 - 228,546 2.1.5 Securities Issue Brokerage Commitments ------2.1.6 Commitments for Reserve Deposit Requirements ------2.1.7 Commitments for Cheques 218,711 - 218,711 234,499 - 234,499 2.1.8 Tax and Fund Liabilities from Export Commitments 3,738 - 3,738 3,738 - 3,738 2.1.9 Commitments for Credit Card Limits 128,405 - 128,405 125,780 - 125,780 2.1.10 Promotion Commitments for Credit Cards and Banking Services ------2.1.11 Receivables from Short Sale Commitments of Marketable Securities ------2.1.12 Payables for Short Sale Commitments of Marketable Securities ------2.1.13 Other Irrevocable Commitments 41,642 - 41,642 42,748 - 42,748 2.2 Revocable Commitments ------2.2.1 Revocable Commitments for Loan Limits ------2.2.2 Other Revocable Commitments ------III. DERIVATIVE FINANCIAL INSTRUMENTS III-b 5,694,797 10,665,536 16,360,333 3,245,227 7,475,340 10,720,567 3.1 Hedging Derivative Financial Instruments 220,000 - 220,000 220,000 - 220,000 3.1.1 Transactions for Fair Value Hedge 220,000 - 220,000 220,000 - 220,000 3.1.2 Transactions for Cash Flow Hedge ------3.1.3 Transactions for Foreign Net Investment Hedge ------3.2 Trading Derivative Financial Instruments 5,474,797 10,665,536 16,140,333 3,025,227 7,475,340 10,500,567 3.2.1 Forward Foreign Currency Buy/Sell Transactions 124,595 253,116 377,711 165,022 169,878 334,900 3.2.1.1 Forward Foreign Currency Transactions-Buy 47,584 128,590 176,174 77,419 79,246 156,665 3.2.1.2 Forward Foreign Currency Transactions-Sell 77,011 124,526 201,537 87,603 90,632 178,235 3.2.2 Swap Transactions Related to Foreign Currency and Interest Rates 4,596,309 8,029,429 12,625,738 2,750,533 4,909,242 7,659,775 3.2.2.1 Foreign Currency Swap-Buy 2,773,068 3,536,711 6,309,779 1,104,676 2,729,152 3,833,828 3.2.2.2 Foreign Currency Swap-Sell 1,823,241 4,492,718 6,315,959 1,645,857 2,180,090 3,825,947 3.2.2.3 Interest Rate Swap-Buy ------3.2.2.4 Interest Rate Swap-Sell ------3.2.3 Foreign Currency, Interest Rate and Securities Options 753,893 2,326,684 3,080,577 109,672 2,349,530 2,459,202 3.2.3.1 Foreign Currency Options-Buy 310,722 849,263 1,159,985 43,385 626,975 670,360 3.2.3.2 Foreign Currency Options-Sell 443,171 708,925 1,152,096 66,287 603,127 669,414 3.2.3.3 Interest Rate Options-Buy - 384,248 384,248 - 559,714 559,714 3.2.3.4 Interest Rate Options-Sell - 384,248 384,248 - 559,714 559,714 3.2.3.5 Securities Options-Buy ------3.2.3.6 Securities Options-Sell ------3.2.4 Foreign Currency Futures ------3.2.4.1 Foreign Currency Futures-Buy ------3.2.4.2 Foreign Currency Futures-Sell ------3.2.5 Interest Rate Futures ------3.2.5.1 Interest Rate Futures-Buy ------3.2.5.2 Interest Rate Futures-Sell ------3.2.6 Other - 56,307 56,307 - 46,690 46,690 B. CUSTODY AND PLEDGES RECEIVED (IV+V+VI) 39,833,977 17,692,992 57,526,969 36,121,954 14,496,620 50,618,574 IV. ITEMS HELD IN CUSTODY 641,207 567,996 1,209,203 683,157 649,790 1,332,947 4.1 Customer Fund and Portfolio Balances 249,254 - 249,254 282,335 - 282,335 4.2 Investment Securities Held in Custody 6,480 40,195 46,675 380 17,717 18,097 4.3 Cheques Received for Collection 233,535 9,556 243,091 258,016 18,653 276,669 4.4 Commercial Notes Received for Collection 38,858 24,736 63,594 29,346 934 30,280 4.5 Other Assets Received for Collection ------4.6 Assets Received for Public Offering ------4.7 Other Items Under Custody 113,080 493,509 606,589 113,080 612,486 725,566 4.8 Custodians ------V. PLEDGES RECEIVED 39,177,050 17,124,804 56,301,854 35,426,040 13,846,671 49,272,711 5.1 Marketable Securities ------5.2 Guarantee Notes 26,912,553 9,829,715 36,742,268 26,500,704 8,578,674 35,079,378 5.3 Commodity 877,870 119,322 997,192 147,207 75,869 223,076 5.4 Warranty ------5.5 Immovable 9,117,030 5,392,089 14,509,119 7,260,996 4,294,007 11,555,003 5.6 Other Pledged Items 2,269,597 1,783,678 4,053,275 1,517,133 898,121 2,415,254 5.7 Pledged Items-Depository ------VI. ACCEPTED INDEPENDENT GUARANTEES AND WARRANTIES 15,720 192 15,912 12,757 159 12,916 TOTAL OFF-BALANCE SHEET COMMITMENTS (A+B) 47,176,216 30,519,290 77,695,506 41,225,236 24,201,165 65,426,401

The accompanying notes are an integral part of these unconsolidated financial statements.

100 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. UNCONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

III. INCOME STATEMENT

Note 1 January 2016– 1 January 2015– INCOME AND EXPENSE ITEMS (Section Five) 31 December 2016 31 December 2015 I. INTEREST INCOME IV-a 1,052,203 1,071,060 1.1 Interest on Loans 865,074 967,078 1.2 Interest Received from Reserve Requirements 8,841 3,194 1.3 Interest Received from Banks 17,471 9,351 1.4 Interest Received from Money Market Transactions 56,962 27,149 1.5 Interest Received from Marketable Securities Portfolio 99,046 60,459 1.5.1 Trading Financial Assets 771 468 1.5.2 Financial Assets at Fair Value Through Profit or Loss - - 1.5.3 Available-for-sale Financial Assets 98,275 59,991 1.5.4 Held-to-maturity Investments - - 1.6 Financial Lease Income - - 1.7 Other Interest Income 4,809 3,829 II. INTEREST EXPENSE IV-b 706,667 559,423 2.1 Interest on Deposits 494,479 416,571 2.2 Interest on Funds Borrowed 162,651 93,824 2.3 Interest Expense on Money Market Transactions 21,102 2.4 Interest on Securities Issued 25,851 23,461 2.5 Other Interest Expenses 2,584 2,862 III. NET INTEREST INCOME (I-II) 345,536 511,637 IV. NET FEES AND COMMISSIONS INCOME/EXPENSE 27,857 62,617 4.1 Fees and Commissions Received 56,954 75,058 4.1.1 Non-cash Loans 29,187 31,864 4.1.2 Other IV-k 27,767 43,194 4.2 Fees and Commissions Paid 29,097 12,441 4.2.1 Non-cash Loans 542 333 4.2.2 Other IV-k 28,555 12,108 V. DIVIDEND INCOME IV-c - - VI. TRADING INCOME / LOSS (Net) IV-d 59,949 (40,164) 6.1 Trading Gains/ Losses on Securities 25,886 4,479 6.2 Trading Gains/ Losses on Derivative Financial Instruments (59,176) 71,633 6.3 Foreign Exchange Gains/ Losses 93,239 (116,276) VII. OTHER OPERATING INCOME IV-e 178,970 169,553 VIII. TOTAL OPERATING INCOME (III+IV+V+VI+VII) 612,312 703,643 IX. PROVISION FOR LOAN LOSSES AND OTHER RECEIVABLES (-) IV-f 237,386 207,970 X. OTHER OPERATING EXPENSES (-) IV-g 372,989 410,564 XI. NET OPERATING INCOME/ LOSS (VIII-IX-X) 1,937 85,109 XII. EXCESS AMOUNT RECORDED AS INCOME AFTER MERGER - - XIII. INCOME/ LOSS FROM INVESTMENTS IN SUBSIDIARIES CONSOLIDATED BASED ON EQUITY METHOD - - XIV. INCOME/ LOSS ON NET MONETARY POSITION - - XV. INCOME/ LOSS BEFORE TAX FROM CONTINUING OPERATIONS (XI+…+XIV) IV-h 1,937 85,109 XVI. TAX PROVISION FOR CONTINUING OPERATIONS (±) IV-i 6,867 (25,598) 16.1 Current Tax Provision (2,074) (24,664) 16.2 Deferred Tax Provision 8,941 (934) XVII. NET INCOME/ LOSS FROM CONTINUING OPERATIONS (XV±XVI) 8,804 59,511 XVIII. INCOME FROM DISCONTINUED OPERATIONS - - 18.1 Income from Non-Current Assets Held for Resale - - 18.2 Sale Income from Associates, Subsidiaries and Joint Ventures - - 18.3 Other Income from Discontinued Operations - - XIX. EXPENSES FROM DISCONTINUED OPERATIONS (-) - - 19.1 Expense from Non-Current Assets Held for Resale - - 19.2 Sale Losses from Associates, Subsidiaries and Joint Ventures - - 19.3 Other Expenses from Discontinued Operations - - XX. INCOME/LOSS BEFORE TAX FROM DISCONTINUED OPERATIONS (XVIII -XIX) - - XXI. TAX PROVISION FOR DISCONTINUED OPERATIONS (±) - - 21.1 Current Tax Provision - - 21.2 Deferred Tax Provision - - XXII. NET PROFIT/ LOSS FROM DISCONTINUED OPERATIONS (XX± XXI) - - XXIII. NET PROFIT/LOSS (XVII+XXII) IV-j 8,804 59,511 Earnings / (Loss) Per Share in (Full TL) 0.0121 0.0960

The accompanying notes are an integral part of these unconsolidated financial statements.

101 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. UNCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

IV. STATEMENT OF INCOME AND EXPENSE ITEMS ACCOUNTED UNDER SHAREHOLDER’S EQUITY

1 January 2016– 1 January 2015– INCOME AND EXPENSE ITEMS ACCOUNTED IN EQUITY 31 December 2016 31 December 2015 I. ADDITIONS TO THE MARKETABLE SECURITIES VALUATION RESERVE FROM THE AVAILABLE FOR SALE FINANCIAL ASSETS (173,344) (26,104) II. REVALUATION DIFFERENCES OF TANGIBLE ASSETS - - III. REVALUATION DIFFERENCES OF INTANGIBLE ASSETS - - IV. FOREIGN EXCHANGE TRANSLATION DIFFERENCES FOR FOREIGN CURRENCY TRANSACTIONS - - V. INCOME/LOSS ON CASH FLOW HEDGE DERIVATIVE FINANCIAL ASSETS -(Effective Part of Fair Value Changes) - - VI. PROFIT/LOSS FROM FOREIGN INVESTMENT HEDGE DERIVATIVE FINANCIAL ASSETS (Effective Part of Fair Value Changes) - - VII. EFFECTS OF CHANGES IN ACCOUNTING POLICY AND ERRORS - - VIII. OTHER INCOME AND EXPENSE ITEMS ACCOUNTED IN EQUITY ACCORDING TO TAS (2,139) (1,844) IX. DEFERRED TAX ON VALUATION DIFFERENCES 35,097 5,590 X. NET INCOME/LOSS ACCOUNTED DIRECTLY IN EQUITY (I+II+...+IX) (140,386) (22,358) XI. CURRENT PERIOD INCOME/LOSS 8,804 59,511 11.1 Net Change in Fair Value of Marketable Securities (Transfer to Income Statement) 20,709 3,584 11.2 Portion of Cash Flow Hedge Derivative Financial Assets Reclassified and Presented on the Income Statement - - 11.3 Portion of Foreign Investment Hedge Derivative Financial Assets Reclassified and Presented on the Income Statement - - 11.4 Other (11,905) 55,927 XII. TOTAL PROFIT/LOSS RELATED TO THE CURRENT PERIOD (X±XI) (131,582) 37,153

The accompanying notes are an integral part of these unconsolidated financial statements.

102 FINANCIAL INFORMATION AND RISK MANAGEMENT ------Total Total Equity 59,511 (1,475) 996,610 (20,883) 959,457 959,457 Shareholders’ Shareholders’ ------Valuation Valuation Difference Difference of AHS and of AHS and Operations Discontinued Discontinued ------Hedging Hedging Reserves ------from from Bonus Bonus Shares Shares Obtained Obtained Investments ------Assets Assets Reserve Intangible Intangible Revaluation Revaluation Tangible and and Tangible ------(6,554) Reserve (27,437) (20,883) Valuation Valuation Securities Securities Marketable Marketable ------473 473 5,623 6,096 5,623 (Loss) Prior Period Prior Period Net Income/ Net Income/ ------(Loss) 59,511 59,511 Current Current 130,064 130,064 Income / / Income (130,064) (130,064) Period Net Net Period ------Other Other (1,475) (1,475) Reserves ------118,219 198,649 198,649 316,868 118,219 Reserves Extraordinary ------Status Status Reserves ------Legal Legal 6,222 6,222 16,771 16,771 22,993 Reserves ------Share Share Profits Cancellation Cancellation ------54 54 Share Share Premium ------Capital to Share to Share Adjustment Adjustment ------Capital Paid-in Paid-in 620,000 620,000 620,000 The accompanying notes are an integral part financial statements. of these unconsolidated accompanying The Note (Section Five) (Section 31 December 2015 31 December End Balance Prior Period in the Period Changes Increase/Decrease due to the Merger Differences Securities Valuation Marketable Hedging Reserves (Effective Portion) Hedge Investment Foreign Assets Differences of Tangible Revaluation Differences of Intangible Assets Revaluation in Associates, Bonus Shares Obtained from Investments Subsidiaries and Joint Ventures Difference Exchange Foreign due to the Disposal of Assets Changes of the Assets due to the Reclassification Changes in Associates in Equity Effects of Investments of Changes Profits Share Cancellation to Share Capital Adjustment the Period for Net Profit or Loss to Reserves Transfers +XVIII) End Balance(I+II+III+… Period Profit Distribution Cash Flow Hedge Cash Flow Capital Increase Other Other Other Cash Dividend Paid Internal Resources Share Premium UNCONSOLIDATED STATEMENT OF CHANGES IN EQUITY IN CHANGES OF STATEMENT UNCONSOLIDATED 2016 DECEMBER 31 ENDED YEAR THE FOR V. STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY SHAREHOLDERS’ IN CHANGES OF STATEMENTS V. II. ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS I. V. XVIII. III. IV. 4.1 VI. VII. VIII. IX. X. XI. XII. XV. XVI. 18.3 XVII. 4.2 12.1 18.1 18.2 12.2 XIII. XIV.

103 ABANK 2016 ANNUAL REPORT ------Total Total 8,804 Equity (1,711) 360,000 996,610 360,000 (138,675) 1,225,028 Shareholders’ Shareholders’ ------Valuation Valuation Difference Difference of AHS and of AHS and Operations Discontinued Discontinued ------Hedging Hedging Reserves ------from from Bonus Bonus Shares Shares Obtained Obtained Investments ------Assets Assets Reserve Intangible Intangible Revaluation Revaluation Tangible and and Tangible ------Reserve (27,437) Valuation Valuation Securities Securities (166,112) (138,675) Marketable Marketable ------379 6,096 (Loss) (5,717) (5,717) Prior Period Prior Period Net Income/ Net Income/ ------8,804 8,804 (Loss) 59,511 Current Current (59,511) Income / / Income (59,511) Period Net Net Period ------Other Other (1,475) (3,186) (1,711) Reserves ------61,967 61,967 316,868 378,835 Reserves Extraordinary ------Status Status Reserves ------Legal Legal 3,261 3,261 22,993 26,254 Reserves ------Share Share Profits Cancellation Cancellation ------54 54 Share Share Premium ------Capital to Share to Share Adjustment Adjustment ------Capital Paid-in Paid-in 360,000 620,000 980,000 360,000 The accompanying notes are an integral part financial statements. of these unconsolidated accompanying The Note Note Five) (Section (Section Prior Period End Balance Prior Period 31 December 2016 31 December in the Period Changes Increase/Decrease due to the Merger Differences Securities Valuation Marketable Hedging Reserves (Effective Portion) Hedge Investment Foreign Assets Differences of Tangible Revaluation Differences of Intangible Assets Revaluation in Associates, Bonus Shares Obtained from Investments Subsidiaries and Joint Ventures Difference Exchange Foreign due to the Disposal of Assets Changes of the Assets due to the Reclassification Changes in Associates in Equity Effects of Investments of Changes Profits Share Cancellation to Share Capital Adjustment the Period for Net Profit or Loss +XVIII) End Balance(I+II+III+… Period Profit Distribution Cash Flow Hedge Cash Flow Capital Increase Other Dividend Paid Cash Transfers to Reserves Transfers Internal Resources Other Other Share Premium UNCONSOLIDATED STATEMENT OF CHANGES IN EQUITY IN CHANGES OF STATEMENT UNCONSOLIDATED 2016 DECEMBER 31 ENDED YEAR THE FOR V. STATEMENTS OF CHANGES CHANGES OF STATEMENTS V. EQUITY SHAREHOLDERS’ IN ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS II. I. IV. XVIII. III. 4.1 V. VI. VII. VIII. IX. X. XI. XII. XV. XVI. 18.1 4.2 12.1 XVII. 18.2 12.2 18.3 XIII. XIV.

104 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. UNCONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VI.STATEMENT OF CASH FLOWS

Note (Section 1 January 2016- 1 January 2015- Five) 31 December 2016 31 December 2015 A. CASH FLOWS FROM BANKING OPERATIONS 1.1 Operating Profit Before Changes in Operating Assets and Liabilities 1,117,531 1,351,419 1.1.1 Interest Received 843,455 1,024,004 1.1.2 Interest Paid (708,504) (548,406) 1.1.3 Dividend Received - - 1.1.4 Fees and Commissions Received 56,954 75,058 1.1.5 Other Income 142,100 86,072 1.1.6 Collections from Previously Written-off Loans and Other Receivables 103,995 100,941 1.1.7 Payments to Personnel and Service Suppliers (140,444) (153,174) 1.1.8 Taxes Paid (53,175) (36,443) 1.1.9 Other VI-c 873,150 803,367 1.2 Changes in Operating Assets and Liabilities (477,035) (629,580) 1.2.1 Net (Increase)/Decrease in Trading Securities (106) 168 1.2.2 Net (Increase)/Decrease in Fair Value Through Profit/Loss Financial Assets - - 1.2.3 Net Increase/(Decrease) in due from Banks (166,247) (215,086) 1.2.4 Net (Increase)/Decrease in Loans (2,193,700) (2,381,324) 1.2.5 Net (Increase)/Decrease in Other Assets (94,948) (41,235) 1.2.6 Net (Increase)/Decrease in Bank Deposits 322,341 161,429 1.2.7 Net Increase/(Decrease) in Other Deposits 2,292,358 450,502 1.2.8 Net Increase/(Decrease) in Funds Borrowed (675,238) 1,482,365 1.2.9 Net Increase/(Decrease) in Payables - - 1.2.10 Net Increase/(Decrease) in Other Liabilities VI-c 38,505 (86,399) I. Net Cash Provided from Banking Operations 640,496 721,839 B. CASH FLOWS FROM INVESTING ACTIVITIES II. Net Cash Provided from Investing Activities (1,536,493) 56,174 2.1 Cash Paid for Acquisition of Investments, Associates and Subsidiaries - (21,537) 2.2 Cash Obtained from Disposal of Investments, Associates and Subsidiaries - 900 2.3 Purchases of Property and Equipment (27,787) (22,008) 2.4 Disposals of Property and Equipment 3,396 18,815 2.5 Cash Paid for Purchase of Investments Available-for-sale (3,811,002) (1,047,154) 2.6 Cash Obtained from Sale of Investments Available-for-sale 2,298,900 1,127,158 2.7 Cash Paid for Purchase of Investment Securities - - 2.8 Cash Obtained from Sale of Investment Securities - - 2.9 Other - - C. CASH FLOWS FROM FINANCING ACTIVITIES - - III. Net Cash Provided from Financing Activities 1,405,705 399,329 3.1 Cash Obtained from Funds Borrowed and Securities Issued 1,045,705 596,429 3.2 Cash Used for Repayment of Funds Borrowed and Securities Issued - (197,100) 3.3 Issued Capital Instruments 360,000 - 3.4 Dividends Paid - - 3.5 Payments for Finance Leases - - 3.6 Other - - IV. Effect of Change in Foreign Exchange Rate on Cash and Cash Equivalents VI-c (322,333) (341,253) V. Net Increase in Cash and Cash Equivalents (I+II+III+IV) 187,375 836,089 VI. Cash and Cash Equivalents at Beginning of the Period VI-a 1,286,132 450,043 VII. Cash and Cash Equivalents at End of the Period 1,473,507 1,286,132

The accompanying notes are an integral part of these unconsolidated financial statements.

105 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. STATEMENT OF PROFIT DISTRIBUTIONS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VII. PROFIT DISTRIBUTION STATEMENT

31 December 2016 (*) 31 December 2015 (**) I. DISTRIBUTION OF CURRENT YEAR INCOME 1.1.CURRENT YEAR INCOME 1,937 85,109 1.2.TAXES AND DUTIES PAYABLE (-) 6,867 (25,598) 1.2.1. Corporate Tax (Income tax) (2,074) (24,664) 1.2.2. Income withholding tax - - 1.2.3. Other taxes and duties (***) 8,941 (934) A. NET INCOME FOR THE YEAR (1.1-1.2) 8,804 59,511 1.3.PRIOR YEAR LOSSES (-) - - 1.4.FIRST LEGAL RESERVES (-) - 2,976 1.5.OTHER STATUTORY RESERVES (-) - - B. NET INCOME AVAILABLE FOR DISTRIBUTION [(A-(1.3+1.4+1.5)] (*) - 56,535 1.6.FIRST DIVIDEND TO SHAREHOLDERS (-) - - 1.6.1. To Owners of Ordinary Shares - - 1.6.2. To Owners of Privileged Shares - - 1.6.3. To Owners of Preferred Shares - - 1.6.4. To Profit Sharing Bonds - - 1.6.5. To Holders of Profit and Loss Sharing Certificates - - 1.7.DIVIDENDS TO PERSONNEL (-) - - 1.8.DIVIDENDS TO BOARD OF DIRECTORS (-) - - 1.9.SECOND DIVIDEND TO SHAREHOLDERS (-) - - 1.9.1. To Owners of Ordinary Shares - - 1.9.2. To Owners of Privileged Share - - 1.9.3. To Owners of Preferred Shares - - 1.9.4. To Profit Sharing Bonds - - 1.9.5. To Holders of Profit and Loss Sharing Certificates - - 1.10. SECOND LEGAL RESERVES (-) - - 1.11. STATUTORY RESERVES (-) - - 1.12. EXTRAORDINARY RESERVES - 56,535 1.13. OTHER RESERVES - - 1.14. SPECIAL FUNDS - - II. DISTRIBUTION OF RESERVES - - 2.1.APPROPRIATED RESERVES - - 2.2.SECOND LEGAL RESERVES (-) - - 2.3.DIVIDENDS TO SHAREHOLDERS (-) - - 2.3.1. To owners of ordinary shares - - 2.3.2. To owners of privileged shares - - 2.3.3. To owners of preferred shares - - 2.3.4. To profit sharing bonds - - 2.3.5. To holders of profit and loss sharing certificates - - 2.4.DIVIDENDS TO PERSONNEL (-) - - 2.5.DIVIDENDS TO BOARD OF DIRECTORS (-) - - III. EARNINGS PER SHARE (****) 3.1.TO OWNERS OF ORDINARY SHARES 0.0121 0.091 3.2.TO OWNERS OF ORDINARY SHARES ( % ) 1.21 9.1 3.3.TO OWNERS OF PRIVILEGED SHARES - - 3.4.TO OWNERS OF PRIVILEGED SHARES ( % ) - - IV. DIVIDEND PER SHARE 4.1TO OWNERS OF ORDINARY SHARES - - 4.2.TO OWNERS OF ORDINARY SHARES ( % ) - - 4.3.TO OWNERS OF PRIVILEGED SHARES - - 4.4.TO OWNERS OF PRIVILEGED SHARES ( % ) - -

(*)Profit distribution is decided by the Board of Director of the Bank. Annual General Meeting has not been held as of reporting date. (**)Statement of profit distribution related to prior period has been approved and restated in accordance with General Assembly Decision as of 31 March 2016, after issuance of audited financial statements of 31 December 2015. (***)The amount related to the current period is deferred tax income; the amount related to the previous period is deferred tax expense. (****)Full TL amount has been stated for each nominal amount of 1.000.

106 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION THREE

EXPLANATIONS ON ACCOUNTING POLICIES

I. Basis of Presentation

As prescribed in the Article 37 of the Banking Act No. 5411, the Bank prepares its financial statements and underlying documents in accordance with the “Regulation on the Procedures and Principles for Accounting Practices and Retention of Documents by Banks” and other regulations, explanations and circulars on accounting and financial reporting principles announced by the Banking Regulation and Supervision Agency (“BRSA”) and Turkish Accounting Standards (“TAS”) published by Public Oversight Accounting and Auditing Standards Authority (“POA”) except for BRSA regulations. TAS consists of Turkish Accounting Standards, Turkish Financial Reporting Standards and related appendices and interpretations.

The unconsolidated financial statements have been prepared in TL, under the historical cost basis as modified in accordance with inflation adjustments applied until 31 December 2004, except for the financial assets and liabilities carried at fair value.

The preparation of unconsolidated financial statements in conformity with BRSA Accounting and Reporting Legislation requires the use of certain critical accounting estimates by the Bank management to exercise its judgment on the assets and liabilities of the balance sheet and contingent issues as of the balance sheet date. These estimates are being reviewed regularly and, when necessary, suitable corrections are made and the effects of these corrections are reflected to the income statement.

The accounting policies and valuation principles applied in the preparation of these financial statements and valuation principles are defined and applied in accordance with BRSA Accounting and Reporting Legislation. Those accounting policies and valuation principles are explained in Notes II to XXVI below.

Additional paragraph for convenience translation to English

The differences between accounting principles, as described in the preceding paragraphs, and the accounting principles generally accepted in countries, in which the accompanying financial statements are to be distributed, and International Financial Reporting Standards (“IFRS”), may have significant influence on the accompanying unconsolidated financial statements. Accordingly, the accompanying unconsolidated financial statements are not intended to present the unconsolidated financial position and unconsolidated results of operations in accordance with the accounting principles generally accepted in such countries and IFRS.

II. Strategy of Using Financial Instruments and Foreign Currency Transactions

A major portion of the Bank’s funding has fixed interest rates; almost all TL placements consist of low-risk short-term transactions. Liquidity risk is monitored closely and the adequacies of available resources (which will be due within a certain period of fulfillment of obligations) are closely monitored. The maturity structure of placements is aimed to be in line with the maturities of resources of the country to the extent permitted by current conditions.

Risk bearing short term positions of currency, interest or price movements in money and capital markets is evaluated within the trading risk. The Bank evaluated the required economic Capital for trading risk and based on that risk limits are determined. This portfolio, being priced by the market on a daily basis and the limits are monitored on a daily basis. Risk limits are approved by Board of Directors once a year following the approval of the budget except a revision is required due to the economic conditions.

As of 31 December 2016 and 31 December 2015, the Bank does not have any investment in foreign companies.

III. Investments in Associates, Subsidiaries and Joint Ventures

The Bank has two subsidiaries denominated in Turkish Liras, which are are Alternatif Finansal Kiralama A.Ş., Alternatif Yatırım A.Ş. Non – public traded subsidiaries are Alternatif Finansal Kiralama A.Ş. ve Alternatif Menkul Değerler A.Ş., they are accounted for cost value according to “Individual Financial Statements” (TAS 27) and if they have provision for impairment, provision is deducted, after reflected to financial statements.

As of 31 December 2016 and 31 December 2015, the Bank has not any foreign currency association and subsidiaries.

As of 31 December 2016 and 31 December 2015, the Bank has not any joint ventures.

107 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

IV. Forward Transactions, Options and Derivative Instruments

The Bank uses derivative financial instruments to hedge its foreign currency and interest rate risk.

Bank’s derivative transactions include foreign currency swap, interest rate swap, foreign exchange forward contracts, futures and options.

Derivatives are initially recorded with their fair values and related transaction costs as of the contract date are recorded on gain or loss. The following periods of initial reporting, they are measured with their fair values. The result of this assessment, offsetting debit and credits stemming from each contract debit and credits are reflected to the financial statements as a contract-based single asset and liability. The method of accounting gain or loss changes according to related derivative transaction whether to be held for hedges or not and to the content of hedge accounting.

The Bank notifies in written the relationship between hedging instrument and related account, risk management aims of hedge and strategies and the methods using to measure of the hedge effectiveness. The Bank evaluates the method of hedge whether to be effective on the expected changes in fair values in this process or not or each result of hedge effectiveness whether to be between the range of 80% and 125%.

Changes in fair values of derivative transactions determined as hedge for fair value are recorded in profit or loss together with changes in hedging asset or liability. The difference in current values of derivative transactions fair value hedge is shown in “Trading Gains/ Losses on derivative financial instruments” account. In the balance sheet, change in fair value of hedge asset or liability during the hedge accounting to be effective is shown with the related asset or liability. In case of inferring hedge accounting, corrections made to the value of hedge account using straight-line amortization method within the days to maturity are reflected to “Trading gains/losses on derivative financial instruments” account in income statement.

The Bank classifies its derivative instruments except for derivatives held for cash flow hedges as “Held-for-hedging” or “Held-for- trading” in accordance with “Financial Instruments: Turkish Accounting Standard for Recognition and Measurement (“TAS 39”)”. According to this, certain derivative transactions while providing effective economic hedges under the Bank’s risk management position, are recorded under the specific rules of TAS 39 and are treated as derivatives “Held-for-trading”.

The notional amounts of derivative transactions are recorded in off-balance sheet accounts based on their contractual amounts. “Financial instruments at fair value through profit or loss” are measured at fair value. If the fair value of derivative financial instruments is positive, it is disclosed under the main account “financial assets at fair value through profit or loss” in “derivative financial assets held for trading” and if the fair value difference is negative, it is disclosed under “derivative financial liabilities held for trading”. Fair value changes are recorded under “Derivative Financial Transactions Gains/ (Losses)” in the income statement. The fair values of the derivative financial instruments are calculated using quoted market prices or by using discounted cash flow models.

V. Interest Income and Expense

Interest income and expenses are recognized in the income statement on an accrual basis by using the effective interest method (the rate that equals the future cash flows of a financial asset or liability to its presented book value) periodically.

The Bank ceases accruing interest income on non-performing loans and, any interest income accruals from such loans are being reversed and no income is accounted until the collection is made according to the related regulation.

VI. Fee and Commission Income and Expense

Except for the banking services revenues are recognized as income at the time of collection, commission income related with the cash and non-cash loans are deferred and recognized as income by using with the effective interest rate method depending on nature of fees and commission income derived from agreements and asset purchases for third parties are recognized as income when realized.

Fees and commission expenses paid to the other institutions are recognized as operation cost in the prepaid expense and recorded using the effective interest rate method and reflected to expense accounts in related period according to periodicity.

VII. Financial Assets

Financial instruments comprise financial assets and liabilities and derivative instruments. Financial instruments constitute the basis of the Bank’s business activities and operations. Risks related to these activities form a significant part among total risks the Bank undertakes. Financial instruments affect liquidity, market, and credit risks on the Bank’ balance sheet in all respects. The Bank trades these instruments on behalf of its customers and on its own behalf.

108 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Basically, financial assets create the majority of the commercial activities of the Bank. These instruments expose, affect and diminish the liquidity, credit and interest risks in the financial statements.

Regular purchases and sales of financial assets are recorded based on settlement date. Settlement date of a financial asset is the date that the asset is received or delivered by the Bank. Settlement date accounting requires; (a) accounting for the financial asset when the asset is received and (b) accounting of disposal of the financial asset and recording the related profit and loss when the asset is delivered. The fair value changes of an asset to be acquired between the trade date and settlement date is accounted in accordance with the basis of valuation of assets.

The purchase or sale of financial assets is a transaction based on regulation or market convention that requires delivery of assets within a defined time frame. Changes in fair value of assets to be received during the period between the trade date and the settlement date are accounted for in the same way as the acquired assets. Changes occurring in the fair value, cost or amortized cost are not recognized for the asset; fair value recognition in profit or loss in respect of a financial asset classified as the resulting gain or loss in profit or loss; the gain and loss arising in financial assets available for sale is recognized in equity.

The methods and assumptions used in determining the reasonable estimated values of all of the financial instruments are described below. a. Cash, Banks and Other Financial Institutions

Cash and cash equivalents consists of cash on hand, demand deposits, and highly liquid short-term investments, not bearing risk of significant value change, and that are readily convertible to a known amount of cash. The carrying values of these assets are their fair values. b. Marketable securities

Financial assets which are classified as “financial assets at fair value through profit or loss”, are classified in two main groups; (i) Trading securities are securities which were either acquired for generating a profit from short-term fluctuations in price or dealer’s margin, or are securities included in a portfolio with a pattern of short-term profit taking. (ii) These are the financial assets that are classified as fair value difference profit/loss during the initial recognition performed by the Bank. The Bank may only use this kind of classification under allowance and in the cases which results in a better presentation of information.

Trading financial assets are initially recognized at fair value and are subsequently re-measured at their fair value in the financial statements. The fair values of the listed marketable securities are being calculated by using the stock market fair values.

The differences between the costs and fair values of financial assets at fair value through profit or loss are reflected to interest income and accruals or impairment provision. All gains and losses arising from these evaluations are recognized in the income statement. Interest earned while holding financial assets is reported as interest income and dividends received are included separately in dividend income.

In 2014, the Bank has sold a significant portion of its securities, classified in held to maturity portfolio as 31 December 2013 amounting TL 1,727,972 before the maturity dates of such securities. Therefore the Bank will not able to classify its investment in held to maturity portfolio for two years beginning from 1 January 2015.

Available for sale assets are initially recognized at cost including the transaction costs. After initial recognition, subsequent valuation of available for sale financial assets are carried over fair value and the unrealized profit or loss arising in the changes resulting from changes in fair value and the changes between discounted value of assets is shown in “Marketable Securities Value Increase Fund” in equity. In the case that disposal of available for sale financial assets, the value gains/losses transferred to the income statement from “Marketable Securities Value Increase Fund”. c. Loans and receivables

Bank loans and receivables are carried initially at cost and subsequently recognized at the amortized cost value calculated using “effective interest rate method”. The expenses incurred for the assets received as collateral are considered as transaction costs and are not recognized in the expense accounts.

Cash loans in personal and corporate loans, according to the Uniform Chart of Accounts ("UCA") and Prospectus are recognized in accordance with their original balances in the account specified.

109 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

The foreign exchange indexed commercial and individual loans are being monitored by the exchange rate of the opening date over Turkish Lira in the TL accounts. Repayments are calculated at the exchange rate at the date of payment, the resulting exchange differences are recognized in the income and expense account.

Starting from 24 March 2014, the Bank has hedged the fair value effects of changes in libor interest rates, fixed interest rate loans amounting TL 20,547 with maturity 3 years and TL 36,654 with maturity 5 years funding by using interest rate swaps. The both nominal value of interest rate swaps is TL 55,000 with maturity 3 years and 5 years respectively. In this context, TL 1,052 which was calculated for these loans is refered to ‘Interest on Loans’.

VIII. Impairment of Financial Assets

At each balance sheet date, the Bank evaluates the carrying amounts of its financial asset or a group of financial assets to determine whether there is an objective indication that those assets have suffered an impairment loss or not. If any such indication exists, the Bank determines the related impairment.

A financial asset or a financial asset group incurs impairment loss only if there is an objective indicator related to the occurrence of one or more than one event (“loss event”) after the first recognition of that asset; and such loss event (or events) causes, an impairment as a result of the effect on the reliable estimate of the expected future cash flows of the related financial asset and asset group. Irrespective of high probability the expected losses caused by the future events are not recognized.

Impairment losses attributable to the held to maturity investments are measured as the difference between the present values of expected future cash flows discounted using the original interest rate of financial asset and the carrying value of asset. The related difference is recognized as a loss and it decreases the carrying value of the financial asset. At subsequent periods, if the impairment loss amount decreases, impairment loss recognized is reversed.

When impairment occurs in the fair values of the “financial assets available for sale” of which value decreases and increases are recognized in equity, the accumulated profit/loss that had been recognized directly in equity is transferred from equity to period profit or loss. If, in a subsequent period, the fair value of the related asset increases, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss.

Loans are classified and followed in line with the provisions of the “Regulation on Procedures And Principles For Determination Of Qualifications Of Loans And Other Receivables By Banks And Provisions To Be Set Aside”, published on the Official Gazette numbered 26333 dated 1 November 2006. Within the in line with of the relevant legislation, until May 2014, the Bank allocated 100% of the credit amount as provisions in accordance with mentioned the minimum provision rates in the Communiqué. Provisions released in the same year, "Provision Expense" account are credited in the past years, the remaining part of the provisions in the "Other Operating Income" account transferred to and recognized.

Except than specific allowances, the Bank provides general provision for its loans and other receivables according to above mentioned regulation.

IX. Offsetting Financial Assets

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when the Bank has a legally enforceable right to offset the recognized amounts and to collect/pay related financial assets and liabilities on a net basis, or there is an intention to realize the asset and settle the liability simultaneously. Otherwise, any related financial assets and liabilities are not offset.

X. Sales and Repurchase Agreements and Securities Lending Transactions

Funds obtained by the Bank from repurchase agreements (“repo”) are accounted under “Funds Provided Under Repurchase Agreements” in liabilities.

The Bank’s repurchase agreements are composed short-term government bonds and treasury bills. Financial assets subject to repurchase agreements, parallel to the classification of financial instruments, the fair value recognition in profit or loss, are classified as available for sale or held to maturity financial assets. Repo subjected financial assets’ income recognized in interest income, while expenses paid under repurchase agreements are recognized in interest expenses.

Funds given against securities purchased under agreements to resell (“Reverse Repo”) are accounted under “Receivables from Reverse Repurchase Agreements” on the balance sheet.

110 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

XI. Assets Held for Sale and Discontinued Operations

A tangible asset (or a group of assets to be disposed) classified as “asset held for resale” is measured at lower of carrying value and fair value less costs to sell. An asset (or a group of assets to be disposed) is regarded as “asset held for resale” only when the sale is highly probable and the asset (or a group of assets to be disposed) is available for immediate sale in its present condition. For a highly probable sale, there must be a valid plan prepared by the management for the sale of asset including identification of possible buyers and completion of sale process. Furthermore, the asset should be actively in the market at a price consistent with its fair value.

Additionally, assets that were acquired due to non-performing receivables are accounted in the financial statements in accordance with the “Communiqué Regarding the Principles and Procedures for the Disposals of Immovables and Commodities Acquired due to Receivables and for Trading of Precious Metal” published in the Official Gazette dated 1 November 2016, No. 26333 and classified as assets held for resale.

A discontinued operation is a part of the Bank’s business classified as sold or held-for-sale. The operating results of the discontinued operations are disclosed separately in the income statement.

The Bank has no discontinued operations.

XII. Goodwill and Other Intangible Assets

There is no goodwill in unconsolidated financial statements as of balance sheet date.

The intangible assets which are purchased before 1 January 2005 have been restated fot the effects of inflation and the intangible assets after this date are presented with their purchase cost, accumulated depreciation and amortization and impairment. According to the regular amortization method, long term assets depreciate regarding to their useful lives. The amortization method and the period are reviewed in each year-end. The intangible assets are mainly consisted of software programs and rights and according to the straight line method of depreciation, they amortize in between 3 to 15 years.

XIII. Property and Equipment

Property and equipment is measured at its cost when initially recognized and any directly attributable costs of setting the asset in working order for its intended use are included in the initial measurement. Subsequently, property and equipment are carried at cost less accumulated depreciation and provision for impairment, if any.

Fixed assets are being depreciated by applying the straight-line method, in accordance with the Tax Procedure Law which estimates the useful lives.

The depreciation charge for items remaining in property and equipment for less than an accounting period at the balance sheet date is calculated in proportion to the period the item remained in property and equipment.

If fix assets’ value, adjusted for inflation (until 31 December 2004) is higher than the current value, exceeding amount is being allocated for impairment and determined amounts are reflected in the financial statements.

Gain or loss resulting from disposals of the tangible fixed assets is reflected to the income statement as the difference between the net proceeds and net book value.

Expenditures for the repair and renewal of property and equipment are recognised as expense.

There are no pledges, mortgages or other restrictions on the tangible fixed assets.

XIV. Leasing Transactions

The Bank does perform financial operations as “Lessor”.

Tangible assets acquired through finance leasing are recognized in tangible assets and the obligations under finance leases arising from the lease contracts are presented under ‘Finance Lease Payables’ account in the financial statements. In the determination of the related asset and liability amounts, the lower of the fair value of the leased asset and the present value of leasing payments is considered. Financial costs on leasing agreements are expanded in lease periods at a fixed interest rate. If there is impairment in the value of the assets obtained through finance lease and in the expected future benefits, the leased assets are valued with net realizable value. Depreciation for assets obtained through finance lease is calculated in the same manner as tangible assets.

111 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Operating lease transactions

Transactions regarding operational lease agreements are accounted as an expense on an accrual basis in accordance with the terms of the related contracts.

XV. Provisions, Contingent Commitments and Contingent Assets

Provisions and contingent liabilities except for the specific and general provisions recognized for loans and other receivables are accounted in accordance with the “Turkish Accounting Standard for Provisions, Contingent Liabilities and Contingent Assets” ( TAS 37 ).

Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are determined by using the Bank Management' s best expectation of expenses in fulfilling the obligation, and discounted to present value if material. When the amount of the obligation cannot be estimated and there is no possibility of an outflow of resources from the Bank, it is considered that a “Contingent” liability exists and it is disclosed in the related notes to the financial statements.

XVI. Obligations Related to Employee Rights

Obligations related to employee termination and vacation rights are accounted in accordance with “Turkish Accounting Standard for Employee Rights” (“TAS 19”). Under the Turkish Labor Law, the Bank is required to pay a specific amount to the employees who have retired or whose employment is terminated other than for the reasons specified in the Turkish Labor Law. The reserve for employment termination benefits represents the present value of the estimated total reserve for the future probable obligation arising from this liability. Actuarial gains and losses are accounted for under equity.

XVII. Taxation a. Current tax

Corporate Tax Law No. 5520 became effective after being published in the Official Gazette dated 21 June 2006 No. 26205. According to the Tax Law, the corporate tax rate in Turkey is payable at the rate of 20%. The corporate tax rate is calculated on the total income after adjusting for certain disallowable expenses, exempt income and other allowances. No further tax is payable unless the profit is distributed.

Dividends paid to non-resident corporations, which have a place of business in Turkey or to resident corporations are not subject to withholding tax. Otherwise, dividends paid are subject to withholding tax at the rate of 15%. An increase in capital via issuing bonus shares is not considered as profit distribution and thus does not incur withholding tax.

Corporations are required to pay advance corporate tax quarterly at a rate of 20% on their corporate income. Advance tax is declared by the 15th and paid by the 17th day of the second month following each calendar quarter end. Advance tax paid by corporations which is for the current period is credited against the annual corporation tax calculated on their annual corporate income in the following year. Despite the offset, if there is temporary prepaid tax remaining, this balance can be refunded or used to offset any other financial liabilities to the government.

A 75% portion of the capital gains derived from the sale of equity investments and immovable properties held for at least two years is tax exempt, if such gains are added to paid-in capital or held in a special account under shareholder’s equity for five years.

Under the Turkish Corporate Tax Law, losses can be carried forward to offset against future taxable income for up to five years. Losses cannot be carried back to offset profits from previous periods.

In Turkey, there is no procedure for a final and definitive agreement on tax assessments. Tax returns are required to be filled and delivered to the related tax office until the evening of the 25th of the fourth month following the balance sheet date. Tax returns are open for five years from the beginning of the year following the date of filing during which period the tax authorities have the right to audit tax returns, and the related accounting records on which they are based, and may issue re-assessments based on their findings. b. Deferred tax

The Bank calculates and accounts for deferred income taxes for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in these financial statements in accordance with “Turkish Accounting Standard for Income Taxes” (“TAS 12”) and the related decrees of the BRSA concerning income taxes. In the deferred tax calculation, the enacted tax rate, in accordance with the tax legislation, is used as of the balance sheet date.

112 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Deferred tax liabilities are recognized for all resulting temporary differences whereas deferred tax assets resulting from temporary differences are recognized to the extent that it is probable that future taxable profit will be available against which the deferred tax assets can be utilized.

The calculated deferred tax asset and deferred tax liability are presented as net in these financial statements.

XVIII. Additional Explanations on Borrowings

Trading and derivative financial liabilities are valued with their fair values and the other financial liabilities are carried at “amortized cost” using the “effective interest rate method” (internal rate of return).

XIX. Share Certificates and Issuance of Share Certificates

At capital increases, the Bank accounts the difference between the issued value and nominal value as “share issue premium under shareholders” in equity, in the case where the issued value is higher than the nominal value.

There is no decision of Bank for dividend distribution after the balance sheet date.

XX. Avalized Drafts and Acceptances

Guaranteed bills and acceptances shown as liabilities against assets are included in the “Off-balance sheet commitments”.

XXI. Government Grants

As of 31 December 2016 and 31 December 2015, the Bank has no government grants.

XXII. Profit Reserves and Profit Distribution

Retained earnings as per the statutory financial statements other than legal reserves are available for distribution, subject to the legal reserve requirement referred to below. Under the Turkish Commercial Code (“TCC”) the legal reserves are composed of first and second reserves. The TCC requires first reserves to be 5% of the profit until the total reserve is equal to 20% of issued and fully paid-in share capital. Second reserves are required to be 10% of all cash profit distributions that are in excess of 5% of the issued and fully paid-in share capital. However holding companies are exempt from this application. According to the Turkish Commercial Code, legal reserves can only be used to compensate accumulated losses and cannot be used for other purposes unless they exceed 50% of paid-in capital.

XXIII. Earnings Per Share

Earnings per share disclosed in the income statement are calculated by dividing net profit/(loss) for the year to the weighted average number of shares outstanding during the period concerned.

31 December 2016 31 December 2015 Profit Attributable to Shareholders 8,804 59,511 Weighted Average Number of Issued Ordinary Shares (Thousand) (*) 727,796 620,000 Earnings Per Share (Disclosed in full TL) 0.0121 0.0960

(*) Weighted average number of issued ordinary shares, calculated by considering the capital increase as of 14 April 2016 and 19 December 2016.

In Turkey, companies can increase their share capital by making a pro-rata distribution of shares “bonus shares” to existing shareholders from retained earnings. For the purpose of earnings per share computations, the weighted average number of shares outstanding during the year has been adjusted in respect of bonus shares issued without a corresponding change in resources by giving them a retroactive effect for the year in which they were issued and for each earlier period.

No bonus shares were issued as of and for the year ended 31 December 2016 (31 December 2015: None).

XXIV. Related Parties

For the purpose of these financial statements, shareholders, key management personnel and board members together with their families and companies controlled by/affiliated with them, and associated companies are considered and referred to as related parties in accordance with “Turkish Accounting Standard for Related Parties” (“TAS 24”). The transactions with related parties are disclosed in detail in Note V. of Section Five.

113 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

XXV. Cash And Cash Equivalents

For the purposes of the cash flow statement, “Cash” includes cash, effectives, cash in transit, purchased cheques and demand deposits including balances with the Central Bank; and “Cash equivalents” include interbank money market placements and time deposits at banks with original maturity periods of less than three months.

XXVI. Operating Segments

Information about operating segments which are determined in line with TFRS 8 “Turkish Accounting Standard about Operating Segments” together with organizational and internal reporting structure of the Bank, are disclosed. a) The Bank provides basic banking services in corporate/commercial banking and treasury. b) Corporate banking services consists of automatic money transfers, current accounts, deposits, open loan transactions as well as option and other derivative instruments that are used for banking operations. c) Investment banking services consists of trading of financial instruments and fund management. d) Other operations consist of subsidiaries and joint ventures, tangible assets, intangible assets, deferred tax asset and equity amounts and other income/loss accounts associated with these accounts. e) The Bank’s software requirements, possible software updates and additional software requirements to compete with other firms are provided by the Bank. f) According to the table provided, share of each Bank’s operating segment in the Balance sheet is as follows; corporate/retail banking 64%, investment banking 30% and other 6%.

Major balance sheet and income statement items based on operating segments

Corporate / Investment Total Operations 31 December 2016 Retail Banking Banking Other of the Bank Net Interest Income 372,820 (27,284) - 345,536 Net Fees and Commissions Income and Other Operating Income 206,827 - - 206,827 Trading Profit/Loss - 59,949 - 59,949 Dividend Income - - - - Impairment Provision for Loans and Other Receivables (-) (237,232) (154) - (237,386) Other Operating Expenses (-) (366,735) (6,254) - (372,989) Profit Before Taxes (24,320) 26,257 - 1,937 Tax Provision - - - 6,867 Net Profit for the Period (24,320) 26,257 - 8,804 31 December 2016 Segment Assets 10,570,687 4,901,230 826,460 16,298,377 Investments in Associates and Subsidiaries - - 166,380 166,380 Total Assets 10,570,687 4,901,230 992,840 16,464,757 Segment Liabilities 8,908,646 3,554,474 2,776,609 15,239,729 Shareholders’ Equity - - 1,225,028 1,225,028 Total Liabilities 8,908,646 3,554,474 4,001,637 16,464,757

114 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Corporate / Retail Investment Total Operations 31 December 2015 Banking Banking Other of the Bank Net Interest Income 551,474 (39,837) - 511,637 Net Fees and Commissions Income and Other Operating Income 232,170 - - 232,170 Trading Profit/Loss - (40,164) - (40,164) Dividend Income - - - - Impairment Provision for Loans and Other Receivables (-) (204,598) (3,372) - (207,970) Other Operating Expenses (-) (410,564) - - (410,564) Profit Before Taxes 168,482 (83,373) - 85,109 Tax Provision - - - (25,598) Net Profit for the Period 168,482 (83,373) - 59,511 31 December 2015 Segment Assets 9,345,369 3,000,544 637,370 12,983,283 Investments in Associates and Subsidiaries - - 166,380 166,380 Total Assets 9,345,369 3,000,544 803,750 13,149,663 Segment Liabilities 6,288,120 3,865,689 1,999,244 12,153,053 Shareholders’ Equity - - 996,610 996,610 Total Liabilities 6,288,120 3,865,689 2,995,854 13,149,663

115 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION FOUR

INFORMATION ON THE FINANCIAL POSITION AND RISK MANAGEMENT OF THE BANK

I. Explanations on Shareholders’ Equity

The standard rate of the capital adequacy of the Bank is 18.31% (31 December 2015: 15.55%).

The calculation of the standard rate of the Capital adequacy is made within framework of the “Regulation on the Measurement and Assessment of the Capital Adequacy of Banks (Regulation)”, which was published in Official Gazette No.29111 dated 6 September 2014. a. Information on Shareholder’s Equity

Amounts related to treatment before Amount 1/1/2014 (*) COMMON EQUITY TIER 1 CAPITAL” Paid-in capital following all debts in terms of claim in liquidation of the Bank 980,000 Share issue premiums 54 Reserves 405,089 Gains recognized in equity as per TAS - Profit 9,183 Current Period Profit 8,804 Prior Period Profit 379 Shares acquired free of charge from subsidiaries, affiliates and jointly controlled partnerships and cannot be recognised within profit for the period - Common Equity Tier 1 Capital Before Deductions 1,394,326 Deductions from Common Equity Tier 1 Capital Common Equity as per the 1st clause of Provisional Article 9 of the Regulation on the Equity of Banks - Portion of the current and prior periods’ losses which cannot be covered through reserves and losses reflected in equity in accordance with TAS (-) 169,298 Improvement costs for operating leasing (-) 17,482 Goodwill (net of related tax liability) 20,848 34,747 Other intangibles other than mortgage-servicing rights (net of related tax liability) - Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) 46,524 Differences are not recognized at the fair value of assets and liabilities subject to hedge of cash flow risk - Communiqué Related to Principles of the amount credit risk calculated with the Internal Ratings Based Approach, total expected loss amount exceeds the total provison - Gains arising from securitization transactions - Unrealized gains and losses due to changes in own credit risk on fair valued liabilities - Defined-benefit pension fund net assets - Direct and indirect investments of the Bank in its own Common Equity - Shares obtained contrary to the 4th clause of the 56th Article of the Law - Portion of the total of net long positions of investments made in equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or less of the issued common share capital exceeding 10% of Common Equity of the Bank - Portion of the total of net long positions of investments made in equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital exceeding 10% of Common Equity of the Bank - Portion of mortgage servicing rights exceeding 10% of the Common Equity - Portion of deferred tax assets based on temporary differences exceeding 10% of the Common Equity - Amount exceeding 15% of the common equity as per the 2nd clause of the Provisional Article 2 of the Regulation on the Equity of Banks - Excess amount arising from the net long positions of investments in common equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital - Excess amount arising from mortgage servicing rights - Excess amount arising from deferred tax assets based on temporary differences -

116 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Other items to be defined by the BRSA - Deductions to be made from common equity due to insufficient Additional Tier I Capital or Tier II Capital - Total Deductions From Common Equity Tier 1 Capital 254,152 Total Common Equity Tier 1 Capital 1,140,174 ADDITIONAL TIER I CAPITAL Preferred Stock not Included in Common Equity and the Related Share Premiums - Debt instruments and premiums approved by BRSA - Debt instruments and premiums approved by BRSA(Temporary Article 4) - Additional Tier I Capital before Deductions - Deductions from Additional Tier I Capital - Direct and indirect investments of the Bank in its own Additional Tier I Capital - Investments of Bank to Banks that invest in Bank's additional equity and components of equity issued by financial institutions with compatible with Article 7. - Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital - The Total of Net Long Position of the Direct or Indirect Investments in Additional Tier I Capital of Unconsolidated Banks and Financial Institutions where the Bank Owns more than 10% of the Issued Share Capital - Other items to be defined by the BRSA (-) - Transition from the Core Capital to Continue to deduce Components Goodwill and other intangible assets and related deferred tax liabilities which will not deducted from Common Eguity Tier 1 capital for the purposes of the first sub-paragraph of the Provisional Article 2 of the Regulation on Banks’ Own Funds (-) 13,899 Net deferred tax asset/liability which is not deducted from Common Eguity Tier 1 capital for the purposes of the sub-paragraph of the Provisional Article 2 of the Regulation on Banks’ Own Funds (-) - Deductions to be made from common equity in the case that adequate Additional Tier I Capital or Tier II Capital is not available (-) - Total Deductions From Additional Tier I Capital 13,899 Total Additional Tier I Capital - Total Tier I Capital (Tier I Capital=Common Equity Tier 1 Capital+Additional Tier I Capital) 1,126,275 TIER II CAPITAL Debt instruments and share issue premiums deemed suitable by the BRSA 1,485,208 Debt instruments and share issue premiums deemed suitable by BRSA (Temporary Article 4) - Debt instruments and share issue premiums deemed suitable by the BRSA 52,211 Tier II Capital Before Deductions 1,537,419 Deductions From Tier II Capital Direct and indirect investments of the Bank on its own Tier II Capital (-) - Investments of Bank to Banks that invest on Bank's Tier 2 and components of equity issued by financial institutions with the conditions - Portion of the total of net long positions of investments made in equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or less of the issued common share capital exceeding 10% of Common Equity of the Bank (-) - Portion of the total of net long positions of investments made in Additional Tier I Capital item of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital exceeding 10% of Common Equity of the Bank - Other items to be defined by the BRSA (-) - Total Deductions from Tier II Capital - Total Tier II Capital 1,537,419 Total Capital (The sum of Tier I Capital and Tier II Capital) 2,663,694 Deductions from Total Capital 2,663,694 Deductions from Capital Loans granted contrary to the 50th and 51th Article of the Law 355 Net Book Values of Movables and Immovables Exceeding the Limit Defined in the Article 57, Clause 1 of the Banking Law and the Assets Acquired against Overdue Receivables and Held for Sale but Retained more than Five Years 3,344 Other items to be defined by the BRSA (-) -

117 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

In transition from Total Core Capital and Supplementary Capital (the capital) to Continue to Download Components - - The Sum of net long positions of investments (the portion which exceeds the 10% of Banks Common Equity) in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued common share capital of the entity which will not deducted from Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital for the purposes of the first sub-paragraph of the Provisional Article 2 of the Regulation on Banks’ Own Funds - - The Sum of net long positions of investments in the Additional Tier 1 capital and Tier 2 capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued common share capital of the entity which will not deducted from Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital for the purposes of the first sub-paragraph of the Provisional Article 2 of the Regulation on Banks’ Own Funds - - The Sum of net long positions of investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued common share capital of the entity, mortgage servicing rights, deferred tax assets arising from temporary differences which will not deducted from Common Eguity Tier 1 capital for the purposes of the first sub-paragraph of the Provisional Article 2 of the Regulation on Banks’ Own Funds - - TOTAL CAPITAL Total Capital (The sum of Tier I Capital and Tier II Capital) 2,659,995 2,659,995 Total risk weighted amounts 14,524,534 14,524,534 CAPITAL ADEQUACY RATIOS Core Capital Adequacy Ratio (%) 7.85% 7.75% Tier 1 Capital Adequacy Ratio (%) 7.75% 7.75% Capital Adequacy Ratio (%) 18.31% 18.31% BUFFERS Bank specific total Common Equity Tier 1 Capital requirement (%) 0.63% - Capital conservation buffer requirement (%) 0.63% - Bank specific counter-cyclical buffer requirement (%) - - The ratio of Additional Common Equity Tier 1 capital which will be calculated by the first paragraph of the Article 4 of Regulation on Capital Conservation and Countercyclical Capital buffers to Risk Weighted Assets (%) 1.75% - Amounts below the Excess Limits as per the Deduction Principles Portion of the total of net long positions of investments in equity items of unconsolidated banks and financial institutions where the bank owns 10% or less of the issued share capital exceeding the 10% threshold of above Tier I capital - - Portion of the total of investments in equity items of unconsolidated banks and financial institutions where the bank owns 10% or less of the issued share capital exceeding the 10% threshold of above Tier I capital - - Remaining Mortgage Servicing Rights - - Amount arising from deferred tax assets based on temporary differences - - Limits related to provisions considered in Tier II calculation General provisions for standard based receivables (before tenthousandtwentyfive limitation) - - Up to 1.25% of total risk-weighted amount of general reserves for receivables where the standard approach used - - Excess amount of total provision amount to credit risk Amount of the Internal Ratings Based Approach in accordance with the Communiqué on the Calculation 52,211 - Excess amount of total provision amount to 0.6% of risk weighted receivables of credit risk Amount of the Internal Ratings Based Approach in accordance with the Communiqué on the Calculation 52,211 - Debt instruments subjected to Article 4 (to be implemented between 1 January 2018 and 1 January 2022) Upper limit for Additional Tier I Capital subjected to temprorary Article 4 - - Amounts Excess the Limits of Additional Tier I Capital subjected to temprorary Article 4 - - Upper limit for Additional Tier II Capital subjected to temprorary Article 4 - - Amounts Excess the Limits of Additional Tier II Capital subjected to temprorary Article 4 - -

(*) Amounts taken in consideration during the transition period.

118 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

COMMON EQUITY 31 December 2015 (*) Paid-in capital to be entitled for compensation after all creditors 620,000 Share premium 54 Share cancellation profits - Legal reserves 338,386 Other comprehensive income according to TAS - Profit 65,607 Net Current Period Profit 59,511 Prior Period Profit 6,096 Provisions for possible losses - Bonus shares from associates, subsidiaries and joint-ventures not accounted in current period’s profit - Common Equity Before Deductions 1,024,047 Deductions From Common Equity Current and prior periods’ losses not covered by reserves, and losses accounted under equity according to TAS (-) 27,437 Leasehold improvements on operational leases (-) 12,234 Goodwill and intangible assets and related deferred tax liabilities (-) 6,126 Net deferred tax assets / liabilities (-) 4,806 Shares obtained against article 56, paragraph 4 of the Banking Law (-) - Investments in own common equity (-) - Total of Net Long Positions of the Investments in equity items of unconsolidated banks and financial institutions where the bank does not own 10% or less of the issued share capital exceeding the 10% threshold of above Tier I Capital (-) - Total of net long positions of the investments in equity items of unconsolidated banks and financial institutions where the bank owns 10% or less of the issued share capital exceeding the 10% threshold of above Tier I Capital(-) - Mortgage Servicing Rights Exceeding the 10% Threshold of Tier I Capital (-) - Net Deferred Tax Assets Arising from Temporary Differences Exceeding the 10% Threshold of Tier I Capital (-) - Amount Exceeding the 15% Threshold of Tier I Capital as per the Article 2, Clause 2 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-) - The Portion of Net Long Position of the Investments in Equity Items of Unconsolidated Banks and FinancialInstitutions Where the Bank Owns 10% or More of the Issued Share Capital Not Deducted from Tier I Capital (-) - Mortgage servicing rights not deducted (-) - Excess amount arising from deferred tax Assets from temporary differences (-) - Other items to be defined by the BRSA (-) - Deductions from Tier I Capital in cases where there are no adequate aditional Tier I or Tier II Capitals (-) - Total Regulatory Adjustments to Common Equity 50,603 Total Common Equity 973,444

119 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

ADDITIONAL TIER I CAPITAL Privileged Stock Not Included in Tier I Capital and the Related Share Premiums - Directly Issued Qualifying Additıonal Tier 1 Instruments (Approved by the Regulators) Plus Related Stock Surplus (Issued or Obtained After 1.1.2014) - Directly Issued Qualifying Additıonal Tier 1 Instruments (Approved by the Regulators) Plus Related Stock Surplus (Issued or Obtained Before 1.1.2014) - Additional Tier I Capital Before Deductions - Deductions from Additional Tier I Capital Direct and Indirect Investments of the Bank on Its Own Additıonal Core Capital (-) - Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or Less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-) - The Total of Net Long Position of the Direct or Indirect Investments in Additıonal Tier I Capital of Unconsolidated Banks and Financial Institutions Where the Bank Owns more Than 10% of the Issued Share Capital (-) - Other Items to be Defined by the BRSA (-) - Deductions from Additional Core Capital in Cases Where There are no Adequate Tier II Capital (-) - Total Deductions from Additional Tier I Capital - Total Additional Tier I Capital - Deductions from Tier I Capital Goodwill and Other Intangible Assets and Related Deferred Taxes not Deducted from Tier I Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-) 24,506 Net Deferred Tax Asset/Liability not Deducted from Tier I Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-) - Total Tier I Capital 948,938 TIER II CAPITAL Directly Issued Qualifying Tier 2 Instruments (That are Approved by the Regulator) Plus Related Stock Surplus (Issued or Obtained after 1.1.2014) - Directly Issued Qualifying Tier 2 Instruments (That are Approved by the Regulator) Plus Related Stock Surplus (Issued or Obtained before 1.1.2014) 660,989 Pledged Sources on Behalf of the Bank for the Use of Committed Share Capital Increase by Shareholders - General Provisions 93,386 Tier II Capital before Deductions 754,375 Deductions from Tier II Capital Direct and Indirect Investments of the Bank on Its OwnTier II Capital (-) - Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or Less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-) - The Total of Net Long Position of the Direct or Indirect Investments in Additıonal Core Capital and Tier II Capital of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of Tier I Capital (-) - Other Items to be Defined by the BRSA (-) - Total Deductions from Tier II Capital - Total Tier II Capital 754,375

120 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

CAPITAL Loans Granted Against the Articles 50 and 51 of the Banking Law (-) - Net Book Values of Movables and Immovables Exceeding the Limit Defined in the Article 57, Clause 1 of the Banking Law and the Assets Acquired Against Overdue Receivables and Held for Sale but Retained more than Five Years (-) 3,584 Loans to Banks, Financial Institutions (domestic/foreign) or Qualified Shareholders in the Form of Subordinated Debts or Debt Instruments Purchased from Such Parties and Qualified as Subordinated Debts (-) - Deductions as per the Article 20, Clause 2 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-) - Other Items to be Defined by the BRSA (-) - The Portion of Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or Less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not Deducted from Tier I Capital, Additional Core Capital or Tier II Capital as per the Temporary Article 2, Clause 1 of the Regulation (-) - The Portion of Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns more than 10% of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not Deducted from Additıonal Core Capital or Tier II Capital as per the Temporary Article 2, Clause 1 of the Regulation (-) - The Portion of Net Long Position of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or more of the Issued Share Capital, of the Net Deferred Tax Assets Arising from Temporary Differences and of the Mortgage Servicing Rights not Deducted from Tier I Capital as per the Temporary Article 2, Clause 2, Paragraph (1) and (2) and Temporary Article 2, Clause 1 of the Regulation (-) - SHAREHOLDERS’S EQUITY 1,699,727 Amounts lower than Excesses as per Deduction Rules Remaining Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or Less of the Issued Share Capital - Remaining Total of Net Long Positions of the Investments in Tier I Capital of Unconsolidated Banks and Financial Institutions Where the Bank Owns more than 10% or Less of the Tier I Capital - Remaining Mortgage Servicing Rights - Net Deferred Tax Assets Arising from Temporary Differences -

(*) Total capital has been calculated in accordance with the “Regulations regarding to changes on Regulation on Equity of Banks” effective from date 31 December 2016, the information given in the prior period column has been calculated pursuant to former regulation.

121 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Details on Subordinated Liabilities

The Commercial Bank (P.S.Q.C.), United Arab Bank, National Issuer Bank Of Oman Unique identifier (eg CUSIP, ISIN) - Regulation on Equity of Banks (Published in the Official Gazette Nr. Governing law (s) of the instrument 28756 dated 5 September 2013 Regulatory treatment Subject to 10% deduction as of 1/1/2015 No Eligible on Unconsolidated/ consolidated / both unconsolidated and consolidated Valid on Consolidated and Unconsolidated Basis Instrument type Secondary Subordinated Loan Amount recognised in regulatory capital (Currency in million TRL, as of most recent reporting date) 439,900 Par value of instrument (Million TRL) 439,900 Accounting classification 347 Original date of issuance 30.06.2015 Demand or time Time Original maturity date 10 years +1 day Issuer call subject to prior supervisory approval -Illegality, - After 5th year, -Taxation reason and -Depending on regulatory as a reason BRSA has the right to refund. Optional call date, contingent call dates and redemption amount - Subsequent call dates, if applicable - Coupons / dividends Fixed or floating dividend/coupon Floating Coupon rate and any related index Libor+6 Existence of a dividend stopper - Fully discretionary, partially discretionary or mandatory Mandatory Existence of step up or other incentive to redeem - Non-cumulative or cumulative Non-cumulative Convertible or non-convertible If convertible, conversion trigger (s) - If convertible, fully or partially - If convertible, conversion rate - If convertible, mandatory or optional conversion - If convertible, specify instrument type convertible into - If convertible, specify issuer of instrument it converts int - Write-down feature When unsustainable situation is realized,value decrement is If write-down, write-down trigger (s) realized. If write-down, full or partial Partial or completely value decrement is should be realized. If write-down, permanent or temporary Permanent If temporary write-down, description of write-up mechanism - Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Before core capital, after all creditors Whether conditions which stands in article of 7 and 8 of Banks’ shareholder equity law are possessed or not Possess According to article 7 and 8 of Banks' shareholders equity law that are not possesed -

122 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Issuer Alternatif Bank A.Ş. Unique identifier (eg CUSIP, ISIN) ISIN: XS1396282177 Regulation on Equity of Banks (Published in the Official Gazette Nr. Governing law(s) of the instrument 28756 dated 5 September 2013 Regulatory treatment Subject to 10% deduction as of 1/1/2015 No Eligible on Unconsolidated/ consolidated / both unconsolidated and consolidated Valid on Consolidated and Unconsolidated Basis Instrument type Secondary Subordinated Loan Amount recognised in regulatory capital (Currency in million TRL, as of most recent reporting date) 1,045,308 Par value of instrument (Million TRL) 1,045,308 Accounting classification 347 Original date of issuance 15.04.2016 Demand or time Time Original maturity date 10 years+ 1 day Issuer call subject to prior supervisory approval -Illegality, - After 5th year, -Taxation reason and -Depending on regulatory as a reason BRSA has the right to refund. Optional call date, contingent call dates and redemption amount - Subsequent call dates, if applicable - Coupons / dividends Fixed or floating dividend/coupon Fixed Coupon rate and any related index 8.75% Existence of a dividend stopper - Fully discretionary, partially discretionary or mandatory Mandatory Existence of step up or other incentive to redeem - Non-cumulative or cumulative Non-cumulative Convertible or non-convertible If convertible, conversion trigger (s) - If convertible, fully or partially - If convertible, conversion rate - If convertible, mandatory or optional conversion - If convertible, specify instrument type convertible into - If convertible, specify issuer of instrument it converts int - Write-down feature If write-down, write-down trigger(s) - If write-down, full or partial - If write-down, permanent or temporary - If temporary write-down, description of write-up mechanism - Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Before core capital, after all creditors Whether conditions which stands in article of 7 and 8 of Banks’ shareholder equity law are possessed or not Possess According to article 7 and 8 of Banks' shareholders equity law that are not possesed -

123 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

The Internal Assessment Process of Internal Capital Adequacy Regarding the Current and Future Operations

The ultimate objective of the internal assessment process of capital requirement is to sustain considering assess the capital adequacy of the Bank in line with the risk profile and risk appetite by considering the Bank’s strategies, credit growth prospects, structure of assets and liabilities, future funding sources and liquidity, and dividend distribution policy and possible fluctuations in the capital due to the economic cycle.

Within this scope, legal and internal capital requirements are assessed prospectively, along with the annual targets of the Bank, in parallel to the preparation of 3 year strategic plans. In the process of assessing internal capital requirements, the credit risk, market risk, and operational risks, in the first pillar, and the interest rate risk resulting from the Banking accounts, concentration risk, business risk, reputation risk, model risk, and exchange risk are also included.

The risks that the Bank can encounter due to its operations are being evaluated in 2016 budget works and the possible capital requirements according to The Bank’s goal and strategies are evaluated. The evaluation of legal and internal capital ratio requirements considers normal conditions as well as the stress conditions.

The stress scenarios are designed after estimation of post macroeconomic variables, the effects of these variables on the loan costs and market risk factors (exchange rate, interest rates etc.). The effects of stress scenarios on capital, income, risk weighted assets and capital requirement are calculated.

Internal assessment of internal capital requirement is considered by the Bank as an improving process and further upgrades to this method is planned for the future.

II. Explanations on Currency Risk

The difference between the Bank’s foreign currency denominated and foreign currency indexed on and off-balance sheet assets and liabilities is defined as the “Net Foreign Currency Position” and it is the basis of currency risk. Another important dimension of the currency risk is the change in the exchange rates of different foreign currencies in “Net Foreign Currency Position” (cross currency risk).

The Bank keeps the amount at currency risk within the legal limits and monitors the foreign currency positions daily/momentarily. Even though the Bank’s determined foreign currency limit is minimal compared to the legal limit, the positions throughout the year did not exceed the limits. Term option contracts such as swap and forward are used for hedging the currency risk. Stress tests are performed to mitigate the fluctuations of the exchange rates.

The Bank’s publicly announced foreign exchange bid rates as of the date of the financial statements and for the last five days prior to that date.

Usd Euro Rate used: TL 3.5192 TL 3.7099 31 December 2016 Foreign Currency Bid Rate TL 3.5192 TL 3.7099 30 December 2016 Foreign Currency Bid Rate TL 3.5192 TL 3.7099 29 December 2016 Foreign Currency Bid Rate TL 3.5318 TL 3.6939 28 December 2016 Foreign Currency Bid Rate TL 3.5329 TL 3.6901 27 December 2016 Foreign Currency Bid Rate TL 3.5135 TL 3.6711

The Bank’s foreign currency bid rates for the reporting date and average of 30 days before the reporting day is as follows:

Usd: TL 3.4935 Euro: TL 3.6840

As of 31 December 2015;

Usd Euro Rate Used: TL 2.9181 TL 3.1838

124 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) a. Information on currency risk of the Bank

The Bank’s real foreign currency position, both in financial and economic terms, is presented in the table below: Euro Usd Yen Other FC Total 31 December 2016 Assets Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with The Central Bank of the Republic of Turkey 37,460 1,451,772 1 331,615 1,820,848 Banks 66,262 351,609 337 1,375 419,583 Financial Assets at Fair Value Through Profit and Loss (*) 18 11,594 - - 11,612 Money Market Placements - - - - - Financial Assets Available-For-Sale - 2,028,756 - - 2,028,756 Loans (**) 3,114,284 3,250,249 - - 6,364,533 Investments in Associates, Subsidiaries and Joint Ventures - - - - - Held-to-Maturity Investments - - - - - Hedging Derivative Financial Assets - - - - - Tangible Assets - - - - - Intangible Assets - - - - - Other Assets (***) 56,835 69,171 - - 126,006 Total Assets 3,274,859 7,163,151 338 332,990 10,771,338 Liabilities Bank Deposits 89,023 66,678 - 591 156,292 Foreign Currency Deposits 1,466,780 2,122,803 338 519,049 4,108,970 Money Market Funds - 313,068 - - 313,068 Funds Borrowed From Other Financial Institutions 943,089 3,549,549 - - 4,492,638 Marketable Securities Issued - 889,656 - - 889,656 Miscellaneous Payables 16,333 65,867 - 927 83,127 Derivative Financial Liabilities For Hedging Purposes - - - - - Other Liabilities (****) 3,297 6,699 - - 9,996 Total Liabilities 2,518,522 7,014,320 338 520,567 10,053,747 Net Balance Sheet Position 756,337 148,831 - (187,577) 717,591 Net Off-Balance Sheet Position (737,268) (170,228) 4 192,604 (714,888) Financial Derivative Assets 1,737,935 2,672,898 3,504 207,012 4,621,349 Financial Derivative Liabilities 2,475,203 2,843,126 3,500 14,408 5,336,237 Non-Cash Loans (*****) 752,380 1,135,648 19,188 587 1,907,803 31 December 2015 Total Assets 2,270,936 5,009,141 164 208,879 7,489,120 Total Liabilities 1,383,161 6,446,818 45 234,981 8,065,005 Net Balance Sheet Position 887,775 (1,437,677) 119 (26,102) (575,885) Net Off-Balance Sheet Position (887,195) 1,495,362 (123) 25,331 633,375 Financial Derivative Assets 710,406 2,755,325 242 67,758 3,533,731 Financial Derivative Liabilities 1,597,601 1,259,963 365 42,427 2,900,356 Non-Cash Loans 409,965 1,531,570 106 4,809 1,946,450

(*) Accruals of derivative assets held for trading amounting to TL 23,665 (31 December 2015: TL 4,119) have been deducted from fair value through profit and loss. (**) FC indexed loans and accruals amounting to TL 1,092,396 (31 December 2015: TL 933,448) are shown in loans. (***) Accruals of spot transaction amounting to TL 28 (31 December 2015: TL 52) have been deducted from other assets. (****) Accruals of derivative liabilities held for trading amounting to TL 12,126 (31 December 2015: TL 11,825) and other provisions amounting to TL 8 (31 December 2015: TL 3) have been deducted from other liabilities. (*****) No effect on net off-balance sheet position.

125 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Exposure to Currency Risk

The table below represent the sensitivity Bank’s 10% weakening of TL against USD, EUR and other currencies and the effects on equity and income statement (without tax effect) as of 31 December 2016 and 31 December 2015.

31 December 2016 31 December 2015 Income statement Equity Income statement Equity Usd (2,140) (2,140) 5,768 5,768 Euro 1,907 1,907 58 58 Other FC 503 503 (77) (77) Total, net 270 270 5,749 5,749

The table below represent the sensitivity Bank’s 10% strenghtening of TL against USD, EUR and other currencies and the effects on equity and income statement (without tax effect) as of 31 December 2016 and 31 December 2015.

31 December 2016 31 December 2015 Income statement Equity Income statement Equity Usd 2,140 2,140 (5,768) (5,768) Euro (1,907) (1,907) (58) (58) Other FC (503) (503) 77 77 Total, net (270) (270) (5,749) (5,749)

Analysis are assumed with other variables especially interest rate remain stable.

III. Explanations on Interest Rate Risk

Assets, liabilities and off-balance sheet items’ interest rate sensitivity are measured.

The expected impact on the financial position and on the cash flow of the bank due to the fluctuations in the market interest rates are being followed within the framework of Asset-Liability management principles and also interest rate risk limits restricted on balance sheet by the Board of Directors. These limits also impose restriction to indirect profit centers can carry on maturity mismatches.

The Bank has not encountered to any significant interest rate risk in last period.

Average interest rates applied to monetary financial instruments reflect market rates.

126 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) a. Interest rate sensitivity of assets, liabilities and off-balance sheet items (based on re-pricing dates)

Non- Up to 1-3 3-12 5 Years and Interest 31 December 2016 1 Month Months Months 1-5 Years Over Bearing Total Assets Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic Turkey 1,749,540 - - - - 220,648 1,970,188 Banks 515,322 - - - - 25,075 540,397 Financial Assets at Fair Value Through Profit and Loss 42,054 7,950 11,856 90 - - 61,950 Money Market Placements 350,081 - - - - - 350,081 Financial Assets Available-for-Sale 2,033 814,083 1,475,266 - 32,592 4,721 2,328,695 Loans 2,625,700 1,180,542 3,105,751 2,746,580 699,345 212,769 10,570,687 Held-to-Maturity Investments ------Other Assets (*) 121 170 765 1,530 - 640,173 642,759 Total Assets 5,284,851 2,002,745 4,593,638 2,748,200 731,937 1,103,386 16,464,757 Liabilities Bank Deposits (**) 562,825 86,015 - - - 24,581 673,421 Other Deposits 5,194,047 2,201,791 491,762 277 - 347,348 8,235,225 Money Market Funds 416,096 70,298 - - - - 486,394 Miscellaneous Payables - - - - - 170,307 170,307 Marketable Securities Issued - - - 889,656 - - 889,656 Funds Borrowed From Other Financial Institutions 895,775 765,672 2,841,169 2,145 - - 4,504,761 Other Liabilities and Shareholders’ Equity (***) 28,855 32,298 7,527 31 - 1,436,282 1,504,993 Total Liabilities 7,097,598 3,156,074 3,340,458 892,109 - 1,978,518 16,464,757 Balance Sheet Long Position - - 1,253,180 1,856,091 731,937 - 3,841,208 Balance Sheet Short Position (1,812,747) (1,153,329) - - - (875,132) (3,841,208) Off-Balance Sheet Long Position - - 9,291 - - - 9,291 Off-Balance Sheet Short Position (137,337) (45,557) - (541) - - (183,435) Total Position (1,950,084) (1,198,886) 1,262,471 1,855,550 731,937 (875,132) (174,144)

(*) Investments in associates and subsidiaries are classified as tangible and intangible fixed assets, sundry receivables, deferred tax assets, other assets and other non-interest bearing assets. (**) Precious metal bank account is presented under “Bank Deposits”. (***) Tax payables, levies, charges and premiums, provisions and shareholders equity are classified as non-interest bearing other liabilities.

127 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Non- Up to 1-3 3-12 1-5 5 Years Interest 31 December 2015 1 Month Months Months Years and Over Bearing Total Assets Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic Turkey 1,442,488 - - - - 103,010 1,545,498 Banks 583,718 - - - - 27,724 611,442 Financial Assets at Fair Value Through Profit and Loss 4,295 3,507 19,860 - - - 27,662 Money Market Placements 350,105 - - - - - 350,105 Financial Assets Available-for-Sale 36,578 471,265 225,045 49,992 28,341 4,721 815,942 Loans 4,347,911 461,705 1,599,401 2,026,163 689,292 220,897 9,345,369 Held-to-Maturity Investments ------Other Assets (*) 53 - - - - 453,592 453,645 Total Assets 6,765,148 936,477 1,844,306 2,076,155 717,633 809,944 13,149,663 Liabilities Bank Deposits 554,792 - - - - 485 555,277 Other Deposits 3,736,326 1,494,977 122,878 7,801 - 370,861 5,732,843 Money Market Funds 264,966 93,057 - - - - 358,023 Miscellaneous Payables - - - - - 203,762 203,762 Marketable Securities Issued - - - 735,736 - - 735,736 Funds Borrowed From Other Financial Institutions 1,176,047 926,975 2,151,267 7,539 - - 4,261,828 Other Liabilities and Shareholders’ Equity (**) 8,088 2,270 3,593 - - 1,288,243 1,302,194 Total Liabilities 5,740,219 2,517,279 2,277,738 751,076 - 1,863,351 13,149,663 Balance Sheet Long Position 1,024,929 - - 1,325,079 717,633 - 3,067,641 Balance Sheet Short Position - (1,580,802) (433,432) - - (1,053,407) (3,067,641) Off-Balance Sheet Long Position - - 12,519 - - - 12,519 Off-Balance Sheet Short Position (11,262) (296) - - - - (11,558) Total Position 1,013,667 (1,581,098) (420,913) 1,325,079 717,633 (1,053,407) 961

(*) Investments in associates and subsidiaries are classified as tangible and intangible fixed assets, sundry receivables, deferred tax assets, other assets and other non-interest bearing assets. (**) Tax payables, levies, charges and premiums, provisions and shareholders equity are classified as non-interest bearing other liabilities.

128 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Average interest rates for monetary financial instruments

The following average interest rates have been calculated by weighting the rates with their principal amounts as of the balance sheet date.

31 December 2016 Euro Usd Other FC TL Assets % % % % Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic of Turkey - 0.75 - 3.31 Banks 0.01 0.79 - 8.35 Financial Assets at Fair Value Through Profit and Loss 4.64 4.71 - - Money Market Placements - - - 8.49 Financial Assets Available-for-Sale - 6.48 - 8.09 Loans 4.71 5.60 - 14.34 Held-to-Maturity Investments - - - - Liabilities Bank Deposits 2.42 3.00 - 9.03 Other Deposits 1.53 2.81 - 11.28 Money Market Funds - 0.38 - 6.80 Miscellaneous Payables - - - - Marketable Securities Issued - 3.12 - - Funds Borrowed From Other Financial Institutions 2.05 5.08 - 7.52

31 December 2015 Euro Usd Other FC TL Assets % % % % Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic of Turkey - 0.28 - 2.78 Banks - 0.32 - 10.94 Financial Assets at Fair Value Through Profit and Loss 3.74 4.63 - 9.49 Money Market Placements - - - 10.74 Financial Assets Available-for-Sale - 4.12 - 9.38 Loans 4.43 5.32 - 16.20 Held-to-Maturity Investments - - - - Liabilities Bank Deposits 1.08 1.69 - 9.00 Other Deposits 1.40 2.27 - 12.36 Money Market Funds - 0.38 - 6.37 Miscellaneous Payables 4.46 - - - Marketable Securities Issued - 3.12 - - Funds Borrowed From Other Financial Institutions 1.77 2.54 - 7.66 c. Interest rate risk arising from banking accounts

Interest rate risk resulting from banking accounts are evaluated in the framework of re-pricing risk, yield curve risk, base risk and option risk and interest rate risk resulting from banking accounts being managed with the international standards and with hedging transactions and limits the risk reduction.

The sensitivity of assets, liabilities and off-balance sheet items are evaluated in the Assets-Liabilities Committee meetings with the developments in the market. Interest rate risk assessment process arising from banking accounts will be included interest rate position that determined as banking account by the Bank. Besides this process has been created and conducted in reference to related re-pricing and maturity data.

129 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Due to the maturity mismatch in the balance sheet, monitoring interest rate risk exposure within the scope of duration gap, maturity gap and sensitivity analysis are used. Duration gap, maturity gap and sensitivity analysis are calculated on a two week periods to the Assets-Liabilities Committee.

In the analysis, the fair values are calculated from interest sensitive assets and liabilities at fixed interest rates through cash flow, in the variable interest rates based on the re-pricing term market interest rates, using yield curves. The terms of the demand products is settled on basing of the frequency of interest rate determination and customer behavior. These results are supported periodically by the sensitivity and scenario analysis performed to assess the effect of the market fluctuations may occur.

Interest rate risk resulting from the banking accounts is measured in accordance with "Regulation No. 28034 on Measurement and Evaluation of Interest Rate Risk resulting from Banking Accounts with Standard Shock Method", dated 23 August 2011 and legal limits based on these measurements are monitored and reported on a monthly basis.

Interest rate risk related to interest-sensitive financial instruments classified in trading portfolio is assessed within the scope of the market risk.

Branches and line of businesses, being free from the market risk, the management of market risk depends on Fund Management Group Asset and Liability Management Department (ALM) is transferred by transfer pricing system and market risk management are realized by this section centrically. ALM, in the market risk management; uses balance sheet (long-term debt) and off-balance sheet (derivatives) instruments.

Applied Shock (+/- x Gains/Equity-Losses/ 31 December 2016 basis point) Gains/Losses Equity 1.TRY +500bps (133,927) (5.03) % -400 bps 80,664 3.03% 2.EURO +200 bps (42,694) (1.61) % -200 bps 42,384 1.59% 3.USD +200 bps (59,404) (2.23) % -200 bps 77,348 2.91% Total (For Negative Shocks) (236,025) (8.87) % Total (For Positive Shocks) 200,396 7.53%

Applied Shock (+/- x Gains/Equity-Losses/ 31 December 2015 basis point) Gains/Losses Equity 1.TRY +500bps (89,877) (5.29) % -400 bps 83,776 4.93% 2.EURO +200 bps (24,403) (1.44) % -200 bps 19,839 1.17% 3.USD +200 bps 23,165 1.36% -200 bps (24,107) (1.42) % Total (For Negative Shocks) 79,508 4.68% Total (For Positive Shocks) (91,115) (5.37) %

IV. Explanation on Stock Position Risk

None.

V. Explanations on Liquidity Risk Management and Liquidity Coverage Ratio

There is a liquidity limit approved and monitored on a weekly basis by the Bank Risk Committee. This limit is used by the Assets- Liability Management Committee for deciding to funding sources composition and pricing policy.

Maturity and interest rate mismatches impact on profitability and capital is measured using scenario analysis.

The Bank’s most important source of liquidity is deposits denominated in TL and foreign exchange deposit accounts. In addition, there are also borrowing opportunities available from Borsa İstanbul repo market, Takas Bank and Interbank market.

In accordance with the “Regulation on calculation of Bank’s liquidity coverage ratio”, published in Official Gazette no. 28948, dated 21 March 2014, the deposit banks are subject to set 70% and 50% liquidity ratios for Total and Foreign Currency accordingly. The liquidity ratio is calculated by dividing the high quality liquid assets by net cash outflows.

130 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

1. a. Information on liquidity risk management regarding how to provide communication with the Board of Directors and lines of business for risk capacity of the Bank, liquidity risk, responsibility and structure of management, reporting of Bank’s liquidity risk, liquidity risk strategy, policies and practices

Liquidity risk management aims to take necessary measures in a timely manner and correct way with respect to potential liquidity shortage caused by cash flow mismatches of Bank's balance sheet structure and/or market conditions. It is on ground of the meeting the liquidity needs cash and disposable borrowing resources at specified level and time of held deposits and other liabilities creating liquidity. Bank monitors liquidity position both in terms of foreign currency and total liquidity basis.

According to the liquidity risk management about the liquidity position, necessary guidance to the line of businesses and pricing are performed by the Asset and Liability Management Department by taking into account the cash flow of the Bank with maturities. Liquidity risk informations are reported regularly to the such Asset and Liability Committee and Management Risk Committees. The liquidity risk parameters determined within the frame of liquidity risk parameters are monitored and reported to the business units by Risk Management consistently. The actions need to be taken in conditions such as convergence and excess of limits are decided by Asset-Liability Committee.

1.b. Information on the centralization degree of liquidity management and funding strategy and the operation between the Bank and the Bank's shareholders

The responsibility of liquidity risk management in accordance with the risk appetite determined by the Board of Directors belongs to the Treasury Asset-Liability Management Department. Risk Management Department is responsible for determining the level of bank-wide liquidity risk and its measurement, monitoring and reporting. Liquidity management and funding strategies of Bank and its shareholders are determined by Bank’s Asset and Liability Management Committees and monitored by the Treasury Department.

1.c. Information on the Bank's funding strategy including policies on diversity of fund terms and resources

For the Bank's effective, correct and sustainable liquidity risk management, it is provided to be followed by the relevant committees with the approval of Liquidity Management Policy Board. The Bank's core funding source has been targeted as a deposit. Non- deposit funding sources are used to provide a variety of core sources and maturities. These resources are mainly syndicated loans, subordinated loans and bond issuances. Despite term of deposits are determined by market conditions and generally on short term basis, it is aimed to collect the deposits of customers who have high stickiness to the Bank. Non-deposit sources also preferred because they are more long-term resources.

1.d. Information on liquidity management on the basis of currencies constitute the minimum five percentage of the Bank's total liabilities

Turkish Lira, US Dollars and Euros are the currencies that constitute the minimum five per cent of the Bank's liabilities. It is intended to have effective foreign currency and liquidity risk management analysing these currencies on foreign exchange and total liquidity management basis. Liquidity gap analysis are measured and managed with the same way. Deposits and other long term sources should be preffered, performing liquidity management on currency basis, in order to avoid the increase of market risk fluctuations on foreign currency positions.

1.e. Information on current liquidity risk mitigation techniques

Liquid assets as defined under Basel III are held with the intention of liquidity risk management managing the Bank’s liquidity risk. Market liquidity and maturity of liquid assets are considered as risk reduction for liquidity management. In this context, the range of liquid assets is important in the management of liquidity risk. Potential risks are minimized by avoiding concentration of liquid assets during the potential liquidity needs and the Bank’s ability to fulfill its obligations.

1.f. Information on the use of stress testing

Stress tests on the basis of the liquidity risk are performed at the beginning of the each year. The test results are presented with the details of the stress test and ICAAP report annually. The Board of Directors approve the stress test results and they are shared with the BRSA during the process. In addition to these stress tests, cash flow and liquidity position analyzes are maintained according to the Bank's internal needs.

131 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

1.g. General information about the emergency and contingency liquidity plan

Information on emergency and contingency liquidity plan is detailed in the Bank "Emergency Funding Plan Policy". Definitions regarding the liquidity crisis and actions that the Bank may take against a liquidity crisis that may occur in the market are implemented the action plan outlined. The Bank's special liquidity crisis levels set out in alarm conditions and the parameters to be monitored as an indicator are detailed. Crisis Committee members and the Committee's duties and responsibilities are determined for the Bank’s stress scenarios specific to the market and the Bank.

2. Liquidity Coverage Ratio

The Bank’s calculated liquidity coverage ratios are presented as below pursuant to “Measurement and Assesment of the Liquidity Coverage Ratios of Banks” published in the Official Gazette on 21 March 2014 and numbered 28948. The highest and lowest values of the average of last three months unconsolidated foreign currency and total liquidity coverage ratios are as follows:

Consideration Ratio Consideration Ratio Unapplied Applied 31 December 2016 to Total Value (*) to Total Value (*) TL+FC FC TL+FC FC HIGH QUALITY LIQUID ASSETS 1 High Quality Liquid Assets 2,229,413 1,818,505 CASH OUTFLOWS 2 Retail and Small Business Customers 3,110,666 1,289,888 281,201 128,989 3 Stable Deposits 597,316 - 29,866 - 4 Less Stable Deposit 2,513,350 1,289,888 251,335 128,989 5 Unsecured Wholesale Funding 4,472,992 2,149,216 3,046,466 1,369,383 6 Operational Deposits - - - - 7 Non-operational Deposits 3,504,281 1,746,980 2,078,028 967,147 8 Other Unsecured Fundings 968,711 402,236 968,438 402,236 9 Secured Funding 101,710 101,710 10 Other Cash Outflows 31,321 1,524 31,321 1,524 11 Derivative cash outflow and liquidity needs related to market valuation changes on derivatives or other transactions 31,321 1,524 31,321 1,524 12 Obligations related to structured financial products - - - - 13 Commitments related to debts to financial markets and other off-balance sheet obligations - - - - 14 Other revocable off-balance sheet commitments and contractual obligations 2,773,401 1,301,581 422,040 181,397 15 Other irrevocable or conditionally revocable off-balance sheet obligations 584,746 584,746 29,237 29,237 16 TOTAL CASH OUTFLOWS 3,911,975 1,812,240 CASH INFLOWS 17 Secured lending 218,335 - - - 18 Unsecured lending 1,890,068 645,308 1,434,005 582,236 19 Other cash inflows 6,988 6,904 6,988 6,904 20 TOTAL CASH INFLOWS 2,115,391 652,212 1,440,993 589,140 Total Adjusted Value 21 TOTAL HIGH QUALITY ASSETS STOCKS 2,229,413 1,818,505 22 TOTAL CASH OUTFLOWS 2,470,982 1,226,085 23 LIQUIDITY COVERAGE RATIO (%) 91.45% 161.48%

(*) The average of the last three months liquidity coverage ratio calculated by monthly and weekly simple averages.

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ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Consideration Ratio Consideration Ratio Unapplied Applied to Total Value (*) to Total Value (*) 31 December 2015 TL+FC FC TL+FC FC HIGH QUALITY LIQUID ASSETS 1 High Quality Liquid Assets 2,034,644 1,409,901 CASH OUTFLOWS 2 Retail and Small Business Customers 3,335,836 1,687,610 302,663 171,520 3 Stable Deposits 709,077 - 35,978 - 4 Less Stable Deposit 2,626,759 1,687,610 266,685 171,520 5 Unsecured Wholesale Funding 3,193,166 1,673,096 2,142,318 1,201,143 6 Operational Deposits - - - - 7 Non-operational Deposits 2,528,734 1,334,040 1,469,548 858,343 8 Other Unsecured Fundings 664,432 339,056 672,770 342,800 9 Secured Funding 90,100 90,100 10 Other Cash Outflows 56,155 2,513 57,504 2,513 11 Derivative cash outflow and liquidity needs related to market valuation changes on derivatives or other transactions 56,155 2,513 57,504 2,513 12 Obligations related to structured financial products - - - - 13 Commitments related to debts to financial markets and other off-balance sheet obligations - - - - 14 Other revocable off-balance sheet commitments and contractual obligations 3,331,820 2,224,343 574,178 325,292 15 Other irrevocable or conditionally revocable off-balance sheet obligations 35,691 35,691 1,810 1,810 16 TOTAL CASH OUTFLOWS 3,168,573 1,792,378 CASH INFLOWS 17 Secured lending 399,489 - - - 18 Unsecured lending 1,531,230 366,618 1,063,930 267,635 19 Other cash inflows 1,758 523,442 1,758 537,948 20 TOTAL CASH INFLOWS 1,932,477 890,060 1,065,688 805,583 Total Adjusted Value 21 TOTAL HIGH QUALITY ASSETS STOCKS 2,034,644 1,409,901 22 TOTAL CASH OUTFLOWS 2,102,885 986,795 23 LIQUIDITY COVERAGE RATIO (%) 98% 171%

(*) The average of the last three months liquidity coverage ratio calculated by monthly and weekly simple averages.

3. Banks explanations as a minimum regarding the liquidity ratio:

3.a Important factors affected by the results of Liquidity Coverage Ratio and the change of the items taken into account in the ratio calculation over time.

Despite all components have significant role, bond and reverse repurchase amounts cash outflows/unsecured debts of due to banks line, cash outflows/irrevocable commitments or revocable contingent commitments of off balance sheet liabilities, cash inflows/ unsecured receivables of due from financial institutions are high volatile assets. Related items have an effective role on variability of ratio.

3.b Explanations on the components of high-quality liquid assets:

High-quality assets is generated by cash balances and Central Bank and issued debt securities by those with 0% risk weightings of credit quality level risk. The changes in the reverse repo balance at the period effects high-quality asset stock value.

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ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3.c Funding source components and the intensity of them in all funds

Basically deposits, loans and subordinated loans as unsecured debt items have the most significant portion in Bank’s funding balances. As of 31 December 2016, the proportion of total liabilities to all deposits of the bank is 54% and borrowings constitutes 18% portion whereas subordinate debt is 9%. Secured borrowings such as repo transactions has lower portion (3%). In addition, as a funding item, the Bank has issued securities amounting to USD 250,000.

3.d Information about the outflows arising from derivative transactions and the possible completing collateral transactions

Cash outflows arising from derivative product balances are occurred when the derivative products liabilities are higher than the receivables. As of 31 December 2016, net of derivative assets and liabilities amounting to TL 143. In addition, cash outflow balances are reported with calculation against the change of derivatives fair value. This calculation is performed by checking the output margin within last 24 months of the counterparty balance. The maximum value in the past 24 months is considered as cash outflow as of reporting date. In this context, according to calculations as of 31 December 2016, the liability balance is computed as TL 29,763 in case of a change in fair value of derivatives products.

3.e Counterparty and fund resources on the basis of products and concentration limits on collaterals

As of 31 December 2016, the Bank’s more than 32.5% of time deposit cap arised from retail banking. The remaining time deposits are constituted from legal entities. Another significant funding resource of borrowings generated from foreign banks (97%). As of 31 December 2016, 30% of the subordinated loans which are subject to capital adequacy calculations provided from The Commercial Bank (P.S.Q.C.) and rest of the part is provided from development agencies. In addition, Bank has issued securities amounting to USD 250,000.

3.f The liquidity risk for the potential funding needs for the bank itself , the branches in foreign countries and its consolidated partnerships with considering the operational and legal factors inhibiting the liquidity transfer

In the current position of the Bank and its consolidated subsidiaries, there are no such risks drawing attention.

3.g The information about the other cash inflows and outflows located in the liquidity leverage ratio calculation but not located in the second paragraph of disclosure template and considered as related with liquidity profile

In this context, there is no excluded cash inflow and outflow in statements on the current situation.

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ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Breakdown of assets and liabilities according to their outstanding maturities

Up to 1-3 3-12 1-5 5 Year Demand 1Month Months Months Year and Over Unclassified Total 31 December 2016 Assets Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic of Turkey 220,648 1,749,540 - - - - - 1,970,188 Due From Banks 25,075 515,322 - - - - - 540,397 Financial Assets at Fair Value Through Profit and Loss - 42,054 7,598 11,690 184 424 - 61,950 Money Market Placements - 350,081 - - - - - 350,081 Financial Assets Available-for-Sale - - - 32,279 759,360 1,532,335 4,721 2,328,695 Loans - 1,462,433 406,557 2,924,736 3,717,760 1,846,432 212,769 10,570,687 Held-to-Maturity Investments ------Other Assets (*) 587 33,372 7,203 10,014 10,665 16,383 564,535 642,759 Total Assets 246,310 4,152,802 421,358 2,978,719 4,487,969 3,395,574 782,025 16,464,757 Liabilities Bank Deposits (***) 24,581 562,825 86,015 - - - - 673,421 Other Deposits 347,348 5,194,047 2,201,791 491,762 277 - - 8,235,225 Funds Borrowed From Other Financial Institutions - 84,487 24,531 1,721,270 586,194 2,088,279 - 4,504,761 Money Market Funds - 416,096 70,298 - - - - 486,394 Marketable Securities Issued - - - - 889,656 - - 889,656 Miscellaneous Payables ------170,307 170,307 Other Liabilities (**) - 100,188 32,298 7,527 31 - 1,364,949 1,504,993 Total Liabilities 371,929 6,357,643 2,414,933 2,220,559 1,476,158 2,088,279 1,535,256 16,464,757 Liquidity Gap (125,619) (2,204,841) (1,993,575) 758,160 3,011,811 1,307,295 (753,231) - 31 December 2015 Total Assets 130,989 3,479,179 753,943 2,802,982 3,660,788 1,724,867 596,915 13,149,663 Total Liabilities 371,346 4,792,487 1,994,350 1,964,336 1,404,478 1,253,634 1,369,032 13,149,663 Liquidity Gap (240,357) (1,313,308) (1,240,407) 838,646 2,256,310 471,233 (772,117) -

(*) Assets that are necessary for banking activities and that cannot be liquidated in the short-term, such as fixed and intangible assets, stationary stocks, prepaid expenses and loans under follow-up, are classified in this column. (**) Shareholders’ equity is presented under “Other liabilities” item in the “Unclassified” column. (***) Precious Metal bank account is presented under “Bank Deposits”.

Financial liabilities according to their remaining maturities:

In accordance with TFRS 7, the maturity distribution of the Bank's non-derivative financial liabilities shown as in the table below. The allocation table shows the undiscounted cash outflows of the Bank's financial liabilities according to the nearest possible contractual maturity.

Up to 1-3 3-12 1-5 5 years 31 December 2016 1 month months months years and over Total Liabilities Bank Deposits 587,966 86,197 - - - 674,163 Other Deposits 5,557,324 2,223,524 498,580 340 - 8,279,768 Funds Borrowed From Other Financial Institutions 194,215 67,360 1,976,136 1,261,796 2,345,314 5,844,821 Money Market Funds 416,343 70,592 - - - 486,935 Marketable Securities Issued - - - 891,959 - 891,959 Total 6,755,848 2,447,673 2,474,716 2,154,095 2,345,314 16,177,646

135 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Up to 1-3 3-12 1-5 5 years 31 December 2015 1 month months months years and over Total Liabilities Bank Deposits 440,905 646,402 31,928 - - 1,119,235 Other Deposits 1,302,659 4,277,642 339,452 51,698 5 5,971,456 Funds Borrowed From Other Financial Institutions - - - - 894,605 894,605 Money Market Funds 57,315 50,962 737,494 2,123,839 569,587 3,539,197 Marketable Securities Issued - - - 725,710 - 725,710 Total 1,800,879 4,975,006 1,108,874 2,901,247 1,464,197 12,250,203

Contractual maturity analysis of the Bank’s derivative instruments:

Up to 1-3 3-12 1-5 5 years 1 month months months years and over Total 31 December 2016 Net Paid Hedging Derivative Financial Instruments - 110,000 - 110,000 - 220,000 Forward Foreign Exchange Transactions 206,568 91,103 80,040 - - 377,711 Money and Interest Rate Swaps 3,023,409 2,506,944 1,179,429 4,997,728 918,228 12,625,738 Options 127,700 554,304 2,390,833 7,740 - 3,080,577 Other - - - 56,307 - 56,307 Total 3,357,677 3,262,351 3,650,302 5,171,775 918,228 16,360,333

Up to 1-3 3-12 1-5 5 years 1 month months months years and over Total 31 December 2015 Net Paid Hedging Derivative Financial Instruments - - - 220,000 - 220,000 Forward Foreign Exchange Transactions 128,508 115,369 91,023 - - 334,900 Money and Interest Rate Swaps 3,953,199 807,606 152,576 2,359,046 387,348 7,659,775 Options 121,350 98,995 2,238,857 - - 2,459,202 Other - - - 46,690 - 46,690 Total 4,203,057 1,021,970 2,482,456 2,625,736 387,348 10,720,567

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ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Collaterals in terms of Risk Groups

Financial Other/ Physical Guarantees and 31 December 2016 Amount Guarantees (*) Guarantees Credit Derivatives Risk Groups 1 Contingent and Non-Contingent Receivables from Central Governments or Central Banks 3,911,970 - - - 2 Contingent and Non-Contingent Receivables from Regional Government or Domestic Government 1,086 - - - 3 Contingent and Non-Contingent Receivables from Banks and Intermediaries 2,072,344 5 - - 4 Contingent and Non-Contingent Corporate Receivables 9,863,630 503,783 - - 5 Contingent and Non-Contingent Retail Receivables 1,027,282 30,522 - - 6 Contingent and Non-Contingent Receivables Secured by Residential Property 1,145,731 10,065 - - 7 Non-Performing Receivables 212,769 360 - - 8 Other Receivables 641,614 - - - Total 18,876,426 544,735 - -

(*) The financial guarantees are reported with deducting from the risk amounts before loan risk reduction and credit conversion.

Financial Other/ Physical Guarantees and 31 December 2015 Amount Guarantees (*) Guarantees Credit Derivatives Risk Groups 1 Contingent and Non-Contingent Receivables from Central Governments or Central Banks 2,144,694 - - - 2 Contingent and Non-Contingent Receivables from Regional Government or Domestic Government 1,310 - - - 3 Contingent and Non-Contingent Receivables from Banks and Intermediaries 1,885,533 23,881 - - 4 Contingent and Non-Contingent Corporate Receivables 6,525,406 388,532 - - 5 Contingent and Non-Contingent Retail Receivables 1,402,766 48,888 - - 6 Contingent and Non-Contingent Receivables Secured by Residential Property 2,460,681 27,904 - - 7 Non-Performing Receivables 220,897 86 - - 8 Receivables Identified as High Risk by the Board 83,365 3,602 - - 9 Other Receivables 501,117 - - - Total 15,225,769 492,893 - -

(*) The financial guarantees are reported with deducting from the risk amounts before loan risk reduction and credit conversion.

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ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VI. Explanations on Leverage Ratio

Explanations about the aspects that cause the difference between the leverage ratios of current and prior years

The Bank's unconsolidated leverage ratio is 4.98% and calculated in compliance with "Regulation on Measurement and Evaluation of Leverage Levels of Banks’ (31 December 2015: 5.36%). Changes in the leverage ratio are mainly due to the increase in the amount of assets’ risk on-balance sheet. Regulation has been arrived at a decision of the minimum leverage ratio of 3%.

31 December 2016 (*) 31 December 2015 (*) Assets in Balance Sheet 1 On-balance sheet items (excluding derivative financial instruments and credit derivatives but including collateral) 15,739,124 13,427,983 2 Assets deducted in determining Tier 1 capital (90,915) (43,946) 3 Total on-balance sheet risks (sum of lines 1 and 2) Derivative financial instruments and credit derivatives 15,648,209 13,384,037 Derivative financial instruments and credit derivatives 4 Replacement cost associated with all derivative financial instruments and credit derivatives 117,569 40,727 5 Add-on amounts for PFE associated with all derivative financial instruments and credit derivatives 364,750 14,735 6 Total risks of derivative financial instruments and credit derivatives (sum of lines 4 to 5 Securities or commodity financing transactions) 482,319 55,462 Securities or commodity financing transactions 7 Risks from SCFT assets of off-balancesheet - - 8 Risks from brokerage activities related exposures - - 9 Total risks related with securities or commodity financing transactions (sum of lines 7 to 8) Other off-balance sheet transactions - - Off-balance sheet transactions 10 Gross notional amounts of off-balance sheet transactions 4,840,824 4,852,040 11 (Adjustments for conversion to credit equivalent amounts) (591,489) (366,409) 12 Total risks of off-balance sheet items (sum of lines 10 and 11) Capital and total risks 4,249,335 4,485,631 Capital and Total Risk 13 Tier 1 capital 1,015,915 960,898 14 Total risks (sum of lines 3, 6, 9 and 12) Leverage ratio 20,379,863 17,925,130 Leverage ratio 15 Leverage ratio 4.98% 5.36%

(*) Amounts in the table are three-month average amounts.

VII. Explanations on the Risk Management a. Risk Management and General Information on Risk Weighted Amount

Notes and explanations in this section have been prepared in accordance with the Communiqué on Disclosures about Risk Management to Be Announced to Public by Banks that have been published in Official Gazette no. 29511 on 23 October 2015 and became effective as of 31 March 2016. According to the Communiqué these notes have to be presented on a quarterly basis. Due to usage of standard approach for the calculation of capital adequacy by the Bank, the following tables have not been presented as of 31 December 2016:

- RWA flow statements of credit risk exposures under Internal Rating Based (IRB) - RWA flow statements of CCR exposures under the Internal Model Method (IMM) - RWA flow statements of market risk exposures under an Internal Model Approach (IMA)

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ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

1. The Bank’s risk management approach

Bank`s risk management approach is defined as creating added value for shareholders, customers and employees in parallel with the Bank general business strategy by increasing the efficiency of Bank activities within the framework of risk-return relationship in accordance with the best practices and legal requirements.

The Risk Strategy and its governance are set by the Board of Directors (the Board). The Board has the ultimate responsibility for the management of all risks assumed and faced by the Bank. The Board manages risk through the Audit & Compliance; Risk; Executive Committees.

While the risk appetite at the Bank is linked to the overall risk management framework and business strategy of the Bank, the update of Risk Appetite statement approved by the Board and monitoring of the Bank`s risk profile management are provided within Risk Management Department general responsibility.

Banking risks include in general credit risk, market risk, operational risk, liquidity risk, interest rate risk in banking accounts, concentration risk, country risk, strategic risk and reputation risk and Bank risk appetite is a statement of the limits of these risks. Risk Appetite monitoring activities are reported to the Board Risk Committee and Audit Committee. In case of any Risk Appetite threshold breach occurs, it is ensured that the risk management treatment and business controls are implemented to bring the exposure levels for each metric back within an acceptable range as approved by the BOD.

Issues related to Bank’s work programs and business objectives are discussed in the Board Risk Committee, and necessary acknowledgment, monitoring and approval processes are performed herein.

Practices of defining, measuring with analytical methods, analyzing, reporting risks and regularly monitoring the general risk levels in order to ensure systematical management of incurred consolidated and unconsolidated-based risks of the Bank and its affiliates are performed.

The Bank identifies, measures, assesses, monitors the risks it is exposed to by way of using internationally recognised quantitative and analytical techniques found suitable for the Bank in particular, and reports related results to the Top Management.

The Bank also monitors the compliance of credit facilities and treasury operations etc. with the Bank’s risk policies, administers internal reporting and monitors the results on a regular basis.

The Bank adopts an integrated approach to stress-testing and conduct stress tests on a bank-wide basis and on a consolidated basis where applicable, providing a spectrum of perspectives at portfolio and risk-specific levels.

Stress tests are conducted for key risk factors within Market Risk, Credit Risk, Operational Risk, Structural Interest Rate Risk, Concentration Risk and Liquidity Risk areas and other risks if deem material level and the impact of stress is measured on the Bank’s solvency and liquidity.

Risk management model has 3 level protection strategy designed with the purpose of efficient management of the risks:

1. Protection Level (Risk-taking departments): All business units of the Bank which are directly responsible from controlling and reducing to minimum levels the risks resulting from the activities conducted by each one of the units as per the Bank standards and policies.

2. Protection Level (Risk Management): Risk Management Department which is responsible from developing risk management methodologies, instruments and guidances to be used in managing risks and the principal responsible of presenting such documents to the usage of related people. Risk Management Department is supported by specialized departments in terms of risk management such as Internal Control, Compliance, Legal, Human Resources, Information Technologies, and Financial Control. Furthermore, risk watching does also belong to this protection level in addition to provide assistance to determine the risk reducing actions.

3. Protection Level (Internal Audit), Responsibility of assessment for effectiveness and compliance of risk management framework and application of it in the whole organization belongs to Internal Audit.

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ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Overview of Risk Weighted Amount

Minimum capital Risk Weighted Amount requirement 31 December 2016 31 December 2015 31 December 2016 1 Credit risk (excluding counterparty credit risk) (CCR) 13,183,912 9,933,660 1,054,713 2 Standardised approach (SA) 13,183,912 9,933,660 1,054,713 3 Internal rating-based (IRB) approach - - - 4 Counterparty credit risk 343,594 63,352 27,488 5 Standardised approach for counterparty credit risk (SA-CCR) 343,594 63,352 27,488 6 Internal model method (IMM) - - - 7 Basic risk weight approach to internal models equity position in the banking account - - - 8 Investments made in collective investment companies – look- through approach - - - 9 Investments made in collective investment companies – mandate-based approach - - - 10 Investments made in collective investment companies-%1250 weighted risk approach - - - 11 Settlement risk - - - 12 Securitization positions in banking accounts - - - 13 IRB ratings-based approach (RBA) - - - 14 IRB Supervisory Formula Approach (SFA) - - - 15 SA/simplified supervisory formula approach (SSFA) - - - 16 Market risk 141,975 56,863 11,358 17 Standardised approach (SA) 141,975 56,863 11,358 18 Internal model approaches (IMM) - - - 19 Operational Risk 855,053 878,588 68,404 20 Basic Indicator Approach 855,053 878,588 68,404 21 Standart Approach - - - 22 Advanced measurement approach - - - 23 The amount of the discount threshold under the equity (subject to a 250% risk weight) - - - 24 Floor adjustment - - - 25 Total (1+4+7+8+9+10+11+12+16+19+23+24) 14,524,534 10,932,463 1,161,963

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1. General qualitative information about credit risk

Credit risk is one of the most important risks that banks may expose and described as the potential loss that the Bank may suffer due to partial or complete failure of the credit customer in fulfilling his/her liabilities as per the credit contract entered. It is not described only as one of the most important risks of a Bank but managing the credit risk plays a critical role because of its magnitude within the balance sheet. Bank`s risk policies cover the methodology and responsibilities regarding the management, control and monitor of the credit risk, and some other topics in connection with the credit risk limits.

In the paralel of Bank`s general business strategy, to determine the fundamental principles and policies concerning the risks which the Bank might experience directly or indirectly due to all credits extended or to be extended by it in favor of real or legal entities resident both in Turkey and abroad and to define the risk management applications together with the authorizations and responsibilities regarding the management of these risks, credit risk management policies are created.

The purpose of credit risk management at the Bank is not to avoid risk completely but to take manageable level risks consciously, to control the risks for their duration, and to maximize the risk sensitive returns of the Bank by managing the risks that the bank may be exposed to within limits compatible with the Bank’s risk carrying capacity.

The credit risk the Bank is exposed to is monitored and managed both at the portfolio level and isolated/singular levels both in and off the balance sheet. In an effort to keep the structure and quality of the credit portfolio of the Bank at a desired level, sector based, assurance, and credit volume distribution of the portfolio is analyzed on a regular basis. Using credit risk reduction techniques, Bank makes a point of over-collateralization especially with customers with low credibility.

Not being limited only by its credit products, the Bank conducts measurement and management of credit risks of all its products and activities.

All findings achieved as result of monitoring credits and credit risks are reported to the Board of Directors and the Senior Management regularly. Credit risk monitoring, in addition to evaluation of risk at transaction and company levels, also represents an approach to credit risk monitoring by parameters such as credit type, maturity, collateral, type of foreign currency, credit ratings, sector allowing the management of risk at the portfolio level.

All personnel being involved in the lending process are required to take all necessary precautions to help manage the process effectively. Bodies responsible for credit allocation, management, and monitoring and their responsibilities are summarized in Table below:

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ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Related Unit Process Responsibility Determination of all credit allocation authorities Board of Directors Determination of risk appetite and risk tolerance Credit Allocation and Determination of Credit Risk Management Policy Management Credit allocation, implementation of strategies, monitoring of risks, watching Credit Committee non-performing loans, loan provisioning CEO Credit allocation right received from the Board. Creating and submitting credit policies to the Board for approval Risk Committee Monitoring risks based on approved policies and strategies Creating scoring models Management Risk Policy changes due to process updates to be submitted for approval Committee Determination of risks that new products are carrying Identification, measurement, reporting and managing of credit risk Risk Management Development of risk-sensitive measurement systems Department Preparation of periodic risk reports Validation of risk measurement models Managing credit approval processes in accordance with single obligor principle Credit Allocation Credit Risk Monitoring and managing credit risks per segments Department Management Developing and implementing appropriate credit risk policies Managing credit portfolio in order to minimise loss risk Repayment performance of loans after the allocation Determination of early warning signals Starting legal follow-up actions within legislative period Credit Allocation, Risk Determination of action plan for close monitoring customers Structuring and Legal Conducting of legal and administrative processes in order to close non- Follow-up Department performing loans with lowest loss Evaluation of loans collection abilities and send corresponding action plans for approval Identification of processes for restructuring of loans and legal follow-up Taking decisions in order to manage within determined limits interest, maturity, ALCO currency, liquidity risks generated by the loan portfolio Treasury Other Base pricing for customers with allocated credit limit International Financial Allocation of limits for domestic and foreign banks Institution Financial and qualitative analyzes of respective institutions Making the necessary controls over activities in accordance with the credit Internal Control policies and procedures, reporting irregularities Control and Audit Auditing the effectiveness of the risk management and the internal control Internal Audit functions, compliance of credit processes to the laws, regulations and internal Bank procedures

In the Bank’s credit risk management, in addition to limits imposed by legislative regulations, Board of Directors defined maximum credit risk limits for risk groups and sectors are also used. These limits are determined so as not to create risk concentration.

Results of monitoring and control activities regarding credit risk management are shared with Senior Management and the committee members on a regular basis. Issues emerging from the reports are discussed at the committees and necessary actions are taken.

142 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Credit Quality of Assets

Gross carrying value in consolidated financial statements prepared in Allowances/ accordance with Turkish amortisation and Accounting Standards (TAS) impairments Net values (a+b-c) Defaulted (a) Non-defaulted (b) c d 1 Loans 553,355 10,357,918 340,586 10,570,687 2 Debt securities - 2,891,103 212,327 2,678,776 3 Off-balance sheet exposures 85,370 3,445,291 26,335 3,504,326 4 Toplam 638,725 16,694,312 579,248 16,753,789

3. Changes In Stock of Defaulted Loans And Debt Securities

Amount 1 Defaulted loans and debt securities at end of the previous reporting period 531,919 2 Loans and debt securities that have defaulted since the last reporting period 336,060 3 Receivables back to non-defaulted status - 4 Amounts written off 101,155 5 Other changes (128,099) 6 Defaulted loans and debt securities at end of the reporting period (1+2-3-4±5) 638,725

4. Qualitative requirements to be declared to public about credit risk mitigation techniques

Credit risk mitigation indicates the technique used for mitigating the credit risk amount exposed to by the Bank, and credit risk measurements are conducted in accordance with the “Regulation on Measurement and Assessment of Capital Adequacy of Banks” published in the Official Gazette no. 29511 of 23 October 2015 (legal regulation), and “Communique on Credit Risk Mitigation Techniques” (legal communique) published in the Official Gazette no. 29111 of 6 September 2014.

In this regard, the credit risk amount calculated in accordance with the legal Regulation after credit risks are mitigated for a receivable or portfolio cannot be weighed with a risk weight higher than the one applied to the credit risk amount calculated prior to credit risk mitigation.

The Bank implements one of the methods determined by legal Regulation for credit risk mitigation, and within this framework considers suitable instruments (instruments providing credit risk protection) as defined in the legal Communique and which can be used in credit risk mitigation.

Collaterals (funded instruments providing credit risk protection):

- Cash, gold, deposit, cash equivalent securities, - Securities issued by the Treasury of the Republic of Turkey, - Stocks listed on Borsa İstanbul or bonds that are convertible to stocks

Guarantees (non-funded instruments providing credit risk protection):

- Guarantees provided by the Treasury of the Republic of Turkey - Guarantees provided by regional and local governments - Guarantees provided by international institutions with 0% risk weighted receivables - Guarantees provided by banks

In credit risk mitigation, the consistency between the exchange rate and maturity information of the receivables and the instrument providing credit risk protection are checked, and in case of any difference, reductions given in the legal Communique are taken into account for calculations.

For receivables secured with real estate property mortgages, the mortgage in question is not taken as an instrument that provides credit risk protection included in credit risk mitigation, but as a security used for identifying the asset class of the related receivable. In order to use the real estate property mortgage for identifying the asset class of the related receivable, valuation of the property must be conducted by an institution accredited by BRSA or CMB, and this valuation must be renewed at least once a year if the mortgage used for security is for commercial purposes, and at least once every three years in case it is used as a residence.

143 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

5. Credit Risk Mitigation Techniques

Collateralized Collateralized Exposures Collateralized amount of amount of unsecured: amount of Exposures exposures Exposures exposures carrying Exposures exposures secured by secured by secured secured amount as per secured by secured by financial financial by credit by credit TAS collateral collateral guarantees guarantees derivatives derivatives 1 Loans 8,875,700 1,694,987 544,190 - - - - 2 Debt securities 2,678,776 ------3 Total 11,554,476 1,694,987 544,190 - - - - 4 Of which defaulted 270,758 1,046 544 - - - -

6. Qualitative disclosures on banks’ use of external credit ratings under the standardised approach for credit risk

To determine the risk weights of the risk categories as per the Article 6 of the "Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks", international rating firm Japan Credit Rating Agency (JCR) is started to be used as a result of rotation with 31 October 2016 instead Fitch Ratings` external risk ratings which had been used since 31 December 2012. In this context, the note set for Turkey's rating countries of long-term foreign currency, foreign currency bond issued by Treasury of the Republic of Turkey, all other foreign currency risk associated with the Republic of Turkey Central Government and assess to corresponding risk weights with limited to receivables the opposite side from foreign banks. Rating notes issued by JCR and corresponding Fitch Ratings are presented in the table below:

Japan Credit Rating Agency Credit Quality Level Fitch Ratings AAA to AA- 1 AAA to AA- A+ to A- 2 A+ to A- BBB+ to BBB 3 BBB+ to BBB BB+ to BB- 4 BB+ to BB- B+ to B- 5 B+ to B- CCC and lower 6 CCC+ and lower

In order to ensure that the credit risk is not concentrated on the customers whose credibility is relatively low, the credits made available to the customers are classified based on the risk rating scores of the customers utilizing such credits. The amount of the credit risk which may be taken in the certain risk degrees is limited to the definite rates of the total credits. In this frame, within risk appetite, based on external ratings country risk limits and counterparty abroad financial institution risk limits are defined.

144 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

7. Credit Risk Exposure and Credit Risk Mitigation Techniques

Exposures before CCF Exposures post-CCF and CRM and CRM RWA and RWA density On-balance sheet Off-balance On-balance sheet Off-balance Risk Classes amount sheet amount amount sheet amount RWA RWAdensity 1 Exposures to central governments or central banks 3,911,970 - 3,911,970 - 1,724,470 44.1% 2 Exposures to regional and local governments or local authorities ------3 Exposures to public sector entities - 2,373 - 1,086 1,086 100.0% 4 Exposures to multilateral development banks ------5 Exposures to international organizations ------6 Exposures to institutions 1,059,587 1,175,160 978,193 1,094,148 931,757 45.0% 7 Exposures to corporates 8,428,514 2,207,878 8,066,728 1,332,188 8,913,275 94.8% 8 Retail exposures 809,469 599,509 796,325 208,812 753,852 75.0% 9 Exposures secured by residential property 422,019 43,084 419,523 17,626 153,002 35.0% 10 Exposures secured by commercial real estate 699,888 10,406 693,834 5,361 349,597 50.0% 11 Past-due loans 212,769 - 212,409 - 202,905 95.5% 12 High risk categories by the Agency Board ------13 Exposures in the form of covered bonds ------14 Exposures to institutions and corparetes with a short term credit assessment ------15 Exposures in the form of units or shares in collective investment undertakings (CIUs) ------16 Other exposures 641,614 - 641,614 - 497,562 77.5% 17 Equity share investments ------18 Total 16,185,830 4,038,410 15,720,596 2,659,221 13,527,506 73.6%

145 ABANK 2016 ANNUAL REPORT ------1,086 212,409 641,614 437,149 699,195 Total risk risk Total 3,911,970 2,072,341 9,398,916 1,005,137 18,379,817 CCF and CRM) CCF amount (post------Others ------200% ------150% 18,101 18,101 ------1,086 100% 157,199 497,562 8,641,185 9,297,032 ------75% 1,005,137 1,005,137 ------50% 37,109 401,812 3,448,940 1,724,297 5,612,158 ------699,195 699,195 mortgage 50% secured 50% secured by real estate real estate by ------437,149 437,149 mortgage 35% secured 35% secured by real estate real estate by ------20% 348,044 355,919 703,963 ------10% ------0% 463,030 144,052 607,082 Total Past-due loans Past-due Regulatory portfolio or central governments Exposures to central banks Exposures to regional and local governments or local authorities Exposures to public sector entities Exposures to multilateral development banks Exposures to international Organizations Exposures to institutions Exposures to corporates exposures Retail propertyExposures secured byresidential real estate Exposures secured bycommercial Board the Agency by High risk categories bonds of covered Exposures in the form Exposures to institutions and corparetes with a short term credit assessment of units or shares in Exposures in the form undertakings (CIUs) investment collective Equity share investments Other exposures NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FINANCIAL UNCONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR 12 2 18 1 10 11 3 6 7 8 9 13 14 15 16 17 4 5 ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS 8. Exposures by Asset Classes and Risk Weights

146 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

The total amount of risks exposed after offsetting transactions, regardless of the effects of credit risk mitigation and the average amount for the risks separated by the different risk classes and types

The sectoral concentrations for loans are monitored closely in accordance with the Bank’s loan policy. During the Management of Risk Comittee meetings held every month, overall Bank’s risk is monitored by analyzing sectoral concentration.

All transactions are within the limits determined by the Board of Directors and being monitored on a regular basis.

All loans are revised at least once a year according to the regulations. Following the revision performed according to the Bank’s rating methodology, the credit limits are revised or additional guarantees are requested. In the same process, risk based loan loss provisions are calculated and loan pricing policies are updated according to the results. As the expected loan losses are considered as a standard cost, they are considered in the pricing process. In case of unexpected losses, economical capital values are calculated and Bank’s current capital is held within the required economical capital requirements. Incomes that are reevaluated according to the risk are monitored as a performance criteria and equity sharing with the profit centers are expected to be beneficial.

Derivatives, options and other similar contracts does not have specific provisions with specific control limits and the risk arising from these contracts are limited with the Bank’s global risk framework. Bank’s current policy indicates that such items should be fully collateralized to eliminate possible risks.

Indemnified non-cash loans are subject to the same risk weight as outstanding loans matured but not yet paid.

Rescheduled loans are monitored like other loans within the Bank’s internal rating application. Risk ratings of the borrowers are used for credit maturities.

Bank’s international banking operations and loans are with the OECD countries and when the economic conditions of these operations are found to be unimportant of a part for the credit risk.

Bank is not active in international banking market.

The accumulation of the Bank’s highest 100 cash loan clients is 57.89% (31 December 2015: 53.74%) of the overall cash loans. The accumulation of the Bank’s highest 100 non-cash loan clients is 65.34% (31 December 2015: 67.75%) of the overall non-cash loans.

The accumulation cash and non-cash receivables of the Bank’s highest 100 loan clients are 7.79% (31 December 2015: 8.03%) of the overall balance sheet and off balance sheet items.

As of 31 December 2016, the general loan loss provision is TL 52,211 (31 December 2015: TL 93,386).

147 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Current Period Risk Average Risk Group Amount (*) Risk Amount (**) Contingent and Non-Contingent Receivables from Central Governments or Central Banks 3,911,970 2,997,798 Contingent and Non-Contingent Receivables from Regional Governments or Local Authorities - - Contingent and Non-Contingent Receivables from Administrative Units and Non-commercial Enterprises 1,086 1,204 Contingent and Non-Contingent Receivables from Multilateral Development Banks - - Contingent and Non-Contingent Receivables from International Organizations - - Contingent and Non-Contingent Receivables from Banks and Intermediaries 2,072,344 2,165,685 Contingent and Non-Contingent Corporate Receivables 9,863,630 7,984,243 Contingent and Non-Contingent Retail Receivables 1,027,282 874,803 Contingent and Non-Contingent Receivables Secured by Residential Property 1,145,731 1,323,466 Non-Performing Receivables 212,769 223,360 Receivables Identified as High Risk by the Board - 12,210 Secured by Mortgages - - Securitization Positions - - Short-term Receivables frorn Banks, Brokerage Houses and Corporates - - Investrnents Similar to Collective Investrnent Funds - - Other Receivables 641,614 571,135 Total 18,876,426 16,153,904

(*) Includes the risk amounts after credit conversion. (**) Average risk amounts are calculated by the arithmetic average of the 2016 risk amounts.

1. Information on types of loans and specific provisions:

Corporate/ 31 December 2016 Commercial SME Consumer Credit Cards Total Standard Loans 7,150,897 2,562,082 183,802 37,628 9,934,409 Loans Under Close Monitoring 188,573 219,339 14,637 960 423,509 Non-performing Loans 195,459 338,518 13,848 5,530 553,355 Specific Provision (-) (144,254) (184,550) (8,344) (3,438) (340,586) Total 7,390,675 2,935,389 203,943 40,680 10,570,687

Corporate/ 31 December 2015 Commercial SME Consumer Credit Cards Total Standard Loans 5,194,781 3,205,170 194,351 59,709 8,654,011 Loans Under Close Monitoring 126,215 311,406 27,425 5,415 470,461 Non-performing Loans 192,242 254,446 23,693 5,644 476,025 Specific Provision (-) (117,677) (119,503) (14,486) (3,462) (255,128) Total 5,395,561 3,651,519 230,983 67,306 9,345,369

2. Information on loans and receivables past due but not impaired:

Corporate/ 31 December 2016 Commercial SME Consumer Credit Cards Total Past due up to 30 Days 98,948 86,300 42,772 1,918 229,938 Past due 30-60 Days 18,345 42,944 10,209 2,638 74,136 Past due 60-90 Days 27,574 61,206 3,227 683 92,690 Total 144,867 190,450 56,208 5,239 396,764

Corporate/ 31 December 2015 Commercial SME Consumer Credit Cards Total Past due up to 30 Days 98,948 86,300 4,178 705 190,131 Past due 30-60 Days 18,345 42,944 6,100 42 67,431 Past due 60-90 Days 27,574 61,206 2,921 - 91,701 Total 144,867 190,450 13,199 747 349,263

148 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3. Information on debt securities, treasury bills and other bills:

31 December 2016 Financial Assets at Available for Sale Fair Value through Financial Held to Maturity Japan JCR’s Rating P/L (Net) Assets (Net) Securities (Net) Other Bonds Net) Total BBB- (*) 526 1,994,947 - 329,027 2,324,500 Total 526 1,994,947 - 329,027 2,324,500

(*) Consists of Turkish Republic government bonds, private sector bonds and treasury bills.

31 December 2015 Financial Assets at Available for Sale Fair Value through Financial Assets Held to Maturity Fitch’s Rating P/L (Net) (Net) Securities (Net) Other Bonds Net) Total BBB- (*) 422 667,072 - 144,149 811,643 Total 422 667,072 - 144,149 811,643

(*) Consists of Turkish Republic government bonds and treasury bills.

4. Information on rating concentration:

The credit risk is evaluated according to Bank’s internal rating system. The loans rated according to probability of default, from the best rating (high standard), to the lowest rate (substandard) are presented in the below table and at the bottom of the table there is past due loans (impaired).

“High standard” category means that the debtor has a strong financial structure,"standard" category means that debtor has a good and sufficient financial structure, “substandard” category means that the debtor’s financial structure under risk in the short and medium term.

31 December 2016 31 December 2015 High Standard (A,B) 91.05% 87.01% Standard (C) 2.36% 6.89% Substandard (D) 1.52% 1.14% Impaired (E) 5.07% 4.96% Not rated - -

5. Fair value of collaterals ( loans and advances to customers):

Corporate/ 31 December 2016 Commercial SME Consumer Credit Cards Total Loans Under Close Monitoring 184,073 220,641 10,788 276 415,778 Non-performing Loans 141,558 296,528 4,077 1,796 443,959 Total 325,631 517,169 14,865 2,072 859,737

Corporate/ 31 December 2015 Commercial SME Consumer Credit Cards Total Loans Under Close Monitoring 136,451 414,886 48,627 5,686 605,650 Non-performing Loans 131,388 108,151 6,216 2,608 248,363 Total 267,839 523,037 54,843 8,294 854,013

Type of collaterals 31 December 2016 31 December 2015 Real-estate mortgage 815,248 834,715 Vehicle pledge 9,366 14,404 Cash and cash equivalents 3,858 2,365 Other 31,265 2,529 Total 859,737 854,013

149 ABANK 2016 ANNUAL REPORT - Total 17,823 378,944 119,696 751,208 166,380 475,234 16,967,141 18,876,426 ------Other Other 166,380 475,234 641,614 Receivables ------212,769 212,769 the Board Receivables Receivables High Risk by High Risk by Identified as as Identified ------Non- Performing Performing Receivables ------10,400 Property (*) 1,135,331 1,145,731 Secured by Secured by Residential Residential Receivables Receivables Contingent and and Contingent Non-Contingent Non-Contingent - - - - 45 56 44 Retail Retail Risk Categories Risk Categories 1,027,137 1,027,282 Receivables Contingent and and Contingent Non-Contingent Non-Contingent - - - - - 74,658 89,566 Corporate Corporate 9,699,406 9,863,630 Receivables Contingent and and Contingent Non-Contingent Non-Contingent - - - 17,767 979,442 293,841 119,696 661,598 2,072,344 Receivables Receivables Intermediaries Contingent and and Contingent from Banks and and from Banks Non-Contingent Non-Contingent ------1,086 1,086 Enterprises Commercial Commercial Units and Non- Administrative Administrative Contingent and and Contingent Non-Contingent Non-Contingent Receivables from from Receivables ------3,911,970 3,911,970 Receivables Receivables from Central from Central Central Banks Banks Central Contingent and and Contingent Non-Contingent Non-Contingent Governments or or Governments (***) (**) Assets and liabilities are not allocated on a consistent basis. and liabilities are not allocated on a consistent Assets OECD countries other than EU countries, USA and Canada. USA other than EU countries, OECD countries Risk categories in the Communiqué on Measurement and Assessment of Capital Adequacy of Banks. on Measurement and Assessment in the Communiqué Risk categories NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FINANCIAL UNCONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR Total ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS concentration: 6. Risk profile according to the geographical 2016 31 December Domestic EU Countries OECD Countries OECD Countries Off-Shore Banking Regions Off-Shore USA, Canada Other Countries Associates, Subsidiaries and Joint –Ventures Associates, Unallocated Assets/Liabilities Unallocated Assets/Liabilities (*) (**) (***)

150 FINANCIAL INFORMATION AND RISK MANAGEMENT - 563 Total 137,097 114,246 605,996 166,380 334,737 13,866,750 15,225,769 ------Other Other 166,380 334,737 501,117 Receivables ------220,897 220,897 the Board Receivables Receivables High Risk by High Risk by Identified as as Identified ------Non- 83,365 83,365 Performing Performing Receivables ------11,491 Property and Non- (*) 2,449,190 2,460,681 Contingent Contingent Contingent Secured by Secured by Residential Residential Receivables Receivables - - - - 10 113 158 Retail Retail and Non- 1,402,485 1,402,766 Risk Categories Risk Categories Contingent Contingent Contingent Receivables - - - - - 34,472 38,640 and Non- Corporate Corporate 6,452,294 6,525,406 Contingent Contingent Contingent Receivables - - - 563 from from 91,021 114,236 567,198 and Non- Banks and and Banks 1,112,515 1,885,533 Contingent Contingent Contingent Receivables Receivables Intermediaries ------1,310 1,310 Enterprises Commercial Commercial Units and Non- Administrative Administrative Contingent and and Contingent Non-Contingent Non-Contingent Receivables from from Receivables ------Banks Banks or Central or Central 2,144,694 2,144,694 Receivables Receivables from Central from Central Governments Governments Contingent and and Contingent Non-Contingent Non-Contingent (***) (**) Assets and liabilities are not allocated on a consistent basis. and liabilities are not allocated on a consistent Assets OECD countries other than EU countries, USA and Canada. USA other than EU countries, OECD countries Risk categories in the Communiqué on Measurement and Assessment of Capital Adequacy of Banks. on Measurement and Assessment in the Communiqué Risk categories NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FINANCIAL UNCONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS 31 December 2015 31 December Domestic EU Countries OECD Countries Off-Shore Banking Regions Off-Shore USA, Canada Other Countries Subsidiaries and Joint –Ventures Associates, Unallocated Assets/Liabilities Unallocated Assets/Liabilities (*) (**) (***) Total

151 ABANK 2016 ANNUAL REPORT Total 5,327 77,878 96,592 12,754 29,818 206,762 796,713 212,893 579,513 299,697 120,450 2,448,277 2,167,958 2,878,269 1,082,023 3,451,752 2,944,895 7,322,272 5,037,057 18,876,426 FC 98 14 7,175 9,935 97,198 26,734 33,923 559,303 157,115 357,367 248,347 693,892 1,469,138 1,321,774 2,005,172 2,125,639 2,291,296 4,793,700 3,601,160 12,845,718 TL 5,229 3,084 70,703 55,778 51,350 86,657 12,740 86,527 109,564 979,139 237,410 846,184 222,146 873,097 388,131 653,599 1,326,113 2,528,572 1,435,897 6,030,708 ------9 641,614 641,614 ------8 - 7 1 32 571 170 9,999 1,647 7,528 1,008 6,089 3,556 11,193 45,995 44,040 57,641 11,363 32,364 62,825 48,576 212,769 - 6 17 349 4,531 4,479 4,935 3,942 4,928 4,548 10,636 86,800 40,360 92,223 16,987 32,808 101,915 713,390 196,532 129,346 (*) 1,145,731 5 257 663 2,896 1,189 5,913 3,157 27,645 17,013 13,359 41,681 10,143 49,239 31,465 286,805 263,427 306,714 107,482 385,208 196,413 1,027,282 Risk Categories Risk Categories 4 133 34,509 81,735 12,091 26,474 73,074 175,271 781,534 158,603 513,295 804,355 284,604 993,883 108,541 2,028,677 1,768,266 2,985,482 2,091,659 4,604,874 9,863,630 ------3 2,072,344 2,072,344 2,072,344 ------2 2 4 1 22 460 489 597 1,086 ------1 3,911,970 3,911,970 Risk categories in the Communiqué on Measurement and Assessment of Capital Adequacy of Banks. on Measurement and Assessment in the Communiqué Risk categories NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FINANCIAL UNCONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR 1- Contingent and Non-Contingent Receivables from Central Governments or Central Banks Banks or Central Governments from Central Receivables and Non-Contingent 1- Contingent Enterprises Units and Non-Commercial from Administrative Receivables and Non-Contingent 2- Contingent and Intermediaries from Banks Receivables and Non-Contingent 3- Contingent Receivables Corporate and Non-Contingent 4- Contingent Receivables Retail and Non-Contingent 5- Contingent Property Residential Secured by Receivables and Non-Contingent 6- Contingent Receivables 7- Non-Performing the Board identified as high risk by 8- Receivables Sectors/Counterparties Agriculture ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS 7. Risk profile by Sectors or Counterparties: and Stockbreeding Farming Manufacturing Mining and Quarrying Production Gas and Water Electricity, Construction Wholesale and Retail Trade Wholesale and Retail services and Beverage Hotel, Food and Telecom Transportation Financial Institutions Services and Rental Estate Real Services Self-employment Educational Services Health and Social Services (*) 9- Other Forestry Services Other Fishery TOTAL

152 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

8. Analysis of maturity-bearing exposures according to remaining maturities:

Term To Maturity (*) Risk classifications 1 Month 1-3 Month 3-6 Month 6-12 Month Over 1 year Contingent and Non-Contingent Receivables from Central Governments or Central Banks - - - - 2,527,325 Contingent and Non-Contingent Receivables from Administrative Units and Non-Commercial Enterprises 109 - - - 977 Contingent and Non-Contingent Receivables from Banks and Intermediaries 756,192 53,400 8,050 41,556 1,213,146 Contingent and Non-Contingent Corporate Receivables 1,741,416 415,272 1,107,186 1,615,204 4,984,552 Contingent and Non-Contingent Retail Receivables 195,306 96,898 160,554 234,718 339,806 Contingent and Non-Contingent Receivables Secured by Residential Property 32,965 27,945 57,854 144,888 882,079 Non-Performing Receivables - - - - 212,769 Receivables Identified as High Risk by the Board - - - - - Other Receivables - - - - - TOTAL 2,725,988 593,515 1,333,644 2,036,366 10,160,654

(*) Risk amounting to TL 2,026,259 is on demand and not showed in the table above.

9. Exposures by risk weights:

Deductions Risk Weights 0% 10% 20% 50% 75% 100% 150% 200% 250% 1250% from Equity Amount before Credit Risk 1 Mitigation 607,082 - 712,653 6,318,092 1,027,282 9,752,732 18,101 - - - 3,699 Amount after Credit Risk 2 Mitigation 607,082 - 703,963 6,311,353 1,005,137 9,297,032 18,101 - - - 3,699

10. Information of major sectors or type of counterparties:

Major Sectors / Counterparties Loans Impaired Loans Past Due Loans Value Adjustments Provisions 1 Agriculture 2,547 25,869 - 14,167 1.1 Farming and Stockbreeding 2,420 25,656 - 14,124 1.2 Forestry - 7 - 7 1.3 Fishery 127 206 - 36 2 Manufacturing 179,271 166,485 - 99,086 2.1 Mining and Quarrying 18,617 23,081 - 12,555 2.2 Production 160,654 141,276 - 86,051 2.3 Electricity, Gas and Water - 2,128 - 480 3 Construction 75,479 77,303 - 40,646 4 Services 142,701 234,136 - 147,213 4.1 Wholesale and Retail Trade 76,203 159,293 - 101,580 4.2 Accommodation and Dining 22,406 10,686 - 1,649 4.3 Transportation and Telecom 7,220 31,476 - 22,413 4.4 Financial Institutions 383 2,592 - 2,561 4.5 Real Estate and Rental Services 145 1,475 - 308 4.6 Professional Services 33,528 23,285 - 16,998 4.7 Educational Services 98 2 - 1 4.8 Health and Social Services 2,718 5,327 - 1,703 5 Other 23,511 49,562 - 39,474 TOTAL 423,509 553,355 - 340,586

153 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

11. Information related with Value Adjustments and Change in Provisions:

Charge of the Provision Value Opening Balance Period Cancelations Adjustments Closing Balance 1 Specific Provisions 255,128 204,950 (119,492) - 340,586 2 General Provisions 93,386 35,099 (76,274) - 52,211 c. Explanations on Counterparty Credit Risk (CCR)

1. Qualitative Explanations on Counterparty Credit Risk

Main issues related to Counterparty Credit Risk management process are mentioned in the Bank’s Derivatives Policy and Credit Risk policies. Counterparty credit risk for customer derivative products are internally calculated through the use of fair value method, and standard method is used for credit valuation adjustment. For such transactions, customer-based counter-trend risks are taken into account, transaction limits required by Credit Underwriting department are determined, and necessary collaterals are taken. Limit/Risk realisations are monitored by Risk Management on a daily basis; realisations are relayed to respective business units, and credits are relayed to credit underwriting teams and operation units.

2. Counterparty Credit Risk (CCR) Approach Analysis

EEPE(Effective Alpha used Potential Expected for computing Replacement future Positive regulatory EAD cost exposure Exposure) EAD post- CRM RWA Standardised Approach-CCR (for 1 derivatives) 124,789 213,871 1.4 338,660 227,117 Internal Model Method (for derivative financial instruments, repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and 2 securities financing transactions) - - - - Simple Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities 3 financing transactions) - - Comprehensive Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities 4 financing transactions)) 110,741 31,615 Value-at-Risk (VaR) for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and 5 securities financing transactions 110,741 31,615 6 Total 258,732

154 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3. Capital Requirement For Credit Valuation Adjustment (CVA)

EAD post-CRM RWA Total portfolio value with comprehensive approach CVA capital adequacy - - 1 (i) Value at Risk component (including the 3×multiplier) - 2 (ii) Stressed Value at Risk component (including the 3×multiplier) - 3 Total portfolio value with simplified approach CVA adequacy 139,116 84,861 4 Total subject to the CVA capital obligation 139,116 84,861

4. CCR Exposures By Risk Class And Risk Weights

Total credit exposure Risk weight/ Risk classes 0% 10% 20% 50% 75% 100% 150% Diğer (*) Central governments and central banks receivables ------Local governments and municipalities receivables ------Administrative and non commercial receivables ------Multilateral Development Bank receivables ------International organizations receivables ------Banks and intermediary institutions receivables - - 248,205 218,193 - - - - 466,398 Corporate receivables - - - - - 100,072 - - 100,072 Retail receivables - - - - 14,260 - - - 14,260 Mortgage receivables ------Non performing receivables ------High risk defined receivables ------Mortgage backed securities ------Securitisation positions ------Short term credit rated banks and intermediary institutions receivables ------Collective investment undertaking investments ------Equity investments ------Other receivables ------Other assets ------Total - - 248,205 218,193 14,260 100,072 - - 580,730

(*) Total credit risk: the amount of relating to the capital adequacy calculation after applying counterparty credit risk measurement techniques

155 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

5. Collaterals for CCR

Fair value of collateral Fair value of Fair value of collateral received Fair value of collateral given received collateral given Segregated Unsegregated Segregated Unsegregated Cash-domestic currency - - - - 173,271 352,542 Cash-foreign currency - - - - 312,997 - Domestic sovereign debts ------Other sovereign debts ------Government agency debts ------Corporate debts ------Equity securities ------Other collateral ------Total - - - - 486,268 352,542

6. Credit Derivatives

Protection bought Protection sold Notionals Single-name credit default swaps - 56,307 Index credit default swaps - - Total return swaps - - Credit options - - Other credit derivatives - - Total Notionals - 56,307 Fair Values - - Positive fair values (asset) - - Negative fair values (liability) - -

7. Central counterparty risks (CCR): None d. Securitisation Explanations: None. e. Explanations on Market Risk

1. Explanations on Risk Management’s Objectives and Policies Related to Market Risk

Prepared with a view to establishing an outlook on market policy, Market Risk Management Policy defines the market risk factors which the Bank is exposed to, and presents the process, measurement methods and monitoring activities to be employed for managing such risks. The manual also offers an in-depth description of the Bank’s current strategy on market risk.

Basically, the Bank’s market risks are classified into interest rate risk, foreign exchange risk, stock price risk, option risk and commodity risk.

For the Bank’s capital adequacy ratio calculations, value at market risk is calculated by using the standard method. Moreover, daily Value at Risk is also calculated and presented as part of the Daily Risk Report prepared by Market Risk Management Unit. Currently, Value at Risk is calculated by using the historical simulation method, with 1-day lock-up period, 99% confidence interval. For Value at Risk calculations, the Bank uses its market risk software.

Market risk measurement results and limit realisations are reported daily to Treasury Management, and Treasury Management is expected to act in accordance with the limits established. Measurement and realisation results are shared with the General Manager, Board Audit Committee Chairman on a daily basis, and it is ensured that Senior Management is informed about the current market risk carried by the Bank’s Trading account portfolio.

The Bank’s risk appetite for market risk has been aligned with the market risk limits established in accordance with Risk Appetite Policy. Risks are hereby mitigated by means of sector-based, product-based and asset type-based diversification method.

156 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Measurement and monitoring activities related to market risk management are conducted by Market Risk Management Unit. Treasury Operations Unit captures the transactions, which are executed by Treasury Management, in the system upon checking the suitability. Market risk positions defined as per the Bank’s current Risk Appetite Policy and risk realisations are shared with Treasury Management on a daily basis in the “Daily Risk Report” prepared by Market Risk Management Unit. Treasury Management is notified and necessary action plans are requested in case of limit breaches. Additionally, Market Risk realisations are submitted to Assets and Liabilities Committee for discussion.

2. Market Risk -Standard Approach

RWA Outright products 1 Interest rate risk (general and specific) 32,825 2 Equity risk (general and specific) - 3 Foreign exchange risk 106,800 4 Commodity risk - Options 5 Simplified approach - 6 Delta-plus method 2,350 7 Scenario approach - 8 Securitisation - 9 Total 141,975

Bank’s risk management operations, which are determined by the Board of Directors, are in line with the “Regulation of Internal Bank Systems” and “Regulation of Capital Adequacy Measurement and Evaluation”. In order to comply with the Regulations, the Bank’s operations regarding the market risk are administrated in line with the “Regulation of Internal Bank Systems” and “Regulation of Capital Adequacy Measurement and Evaluation”.

Board of Directors monitors the efficiency of risk administration systems by evaluations of the Audit Committee, Management and Early Detection of Risk Committee as well as upper management’s opinions and other miscellaneous reports.

The Bank’s risk policies and risk administration policies for the encountered market risk are being approved by the board of directors and reviewed on a regular basis. Market risk is measured and limited in compliance with international standards and capital requirements are calculated accordingly in addition to it is managed by hedging instruments to eliminate the risk.

The market risk of portfolios held for trading is calculated using the standard method and the value at risk (“VaR”) methods. Standard method calculations are made on a monthly basis which is used for calculating the capital adequacy generally accepted three methods (variance, covariance, historical simulation, Monte Carlo).VaR calculations are performed on a daily basis using the historical simulation (EWMA) method. VaR calculations are made using the past 1 year data with 99% assurance and 1 day holding period (10 days for legal capital calculation). All positions in the trading portfolio are set a daily risk limit and nominal position limits and all these limits are monitored and reported to upper management. In addition, trading portfolio, value at risk increase and limit comply situations are reported to Active Passive Committee every two weeks and to upper management and Management and Early Detection of Risk Committee every three months. VaR model is tested on a backward basis to ensure reliability. In order to limit market risk, in addition to VaR and nominal position limits, there are stop loss limits on trading portfolio that are approved by the board of directors.

3. Information on Market Risk

31 December 2016 31 December 2015 (I) Capital Requirement Against General Market Risk – Standard Method 2,618 1,728 (II) Capital Requirement Against Specific Risk – Standard Method 8 7 Capital Requirement Specific Risk Related to Securitization Positions-Standard Method - - (III) Capital Requirement Against Currency Risk – Standard Method 8,732 2,185 (IV) Capital Requirement Against Commodity Risk – Standard Method - - (V) Capital Requirement Against Exchange Risk – Standard Method - - (VI) Capital Requirement Against Market Risk of Options – Standard Method - - (VII) Capital Requirement Against Counterparty Credit Risk-Standard Method - 629 (VIII) Capital Requirement Against Market Risks of Banks Applying Risk Measurement Models - - (IX) Total Capital Requirement Against Market Risk (I+II+III+IV+V+VI) 11,358 4,549 (X) Amount Subject to Market Risk (12.5 x VIII) or (12.5 x IX) 141,975 56,863

157 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

4. Average Market Risk Table of Calculated Market Risk During the Period at Month Ends:

31 December 2016 31 December 2015 Average Maximum Minimum Average Maximum Minimum Interest Rate Risk 2,417 4,250 1,325 1,329 3,039 323 Common Stock Risk ------Currency Risk 4,725 8,544 1,127 1,697 3,062 129 Commodity Risk ------Exchange Risk ------Counterparty Credit Risk - - - 88 218 2 Option Risk 123 288 13 805 1,327 378 Total Value at Risk 92,206 149,250 34,250 48,990 95,569 10,397

5. Information on Counterparty Credit Risk:

In order to calculate the counterparty credit risk the “Fair Value” method is used which is determined by (Appendix 2) of “Regulation on Measurement and Assessment of Capital Adequacy of Banks,” published in 28 June 2012. In accordance with the before-mentioned method, potential credit risk value is calculated and added to the renewal costs of the agreements with positive values.

For derivative transactions, sum of revaluation costs and accumulation of potential credit risk is considered to be the risk amount. Revaluation costs are calculated by valuation of the contract with its fair value and by multiplication of contract amount with the loan conversion rate.

6. Quantitative Information on Counterparty Risk (Annualy):

31 December 2016 Interest Rate Contracts 1,851,947 Foreign Exchange Rate Contracts 6,493,108 Commodity Contracts - Equity Shares Related Contracts - Other - Gross Positive Fair Values 588,516 Netting Benefits - Net Current Exposure Amount 588,516 Collaterals Received - Net Derivative Position 588,516 f. Explanations on Operational Risk

The Bank calculated the operational risk using the “Basic Indicator Method”. Amount subject to operational risk is calculated once a year in accordance with the “Regulation for Measuring and Evaluating Capital Adequacy of Banks” published in 28 June 2012 Official Gazette No.28337 using the gross income balances of last three years; 2015, 2014 and 2013 respectively. The risk amount calculated using the “Capital Adequcy Standard Ratio” indicated in the disclosure I of the section 4 amounts to TL 855,053.

The annual gross income is calculated sum of net values of interest and non-interest income by deducting the profit/loss that is generated from available for sale and held to maturity and extraordinary income, operating expense for support services and amount collected from insurances.

1. In the case of using the basic indicator method (Annual) :

Total Number 31 December 31 December 31 December of Positive 2013 2014 2015 Year Ratio (%) Total Gross Income 381,041 460,489 526,555 456.028 15 68,404 Amount Subject to Operational Risk (Total*12,5) - - - - - 855,053

158 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VIII. Explanation Regarding the Presentation of Financial Assets and Liabilities at Their Fair values a. Financial Assets and Liabilities at their fair values:

The fair values of held-to-maturity assets are determined based on market prices or when this price is not available, based on market prices quoted for other securities subject to the same redemption qualifications in terms of interest, maturity and other similar conditions.

The expected fair value of the demand placements and deposits represents the amount to be paid upon request. The expected fair value of the fixed rate deposits is determined by calculating the discounted cash flow using the Bank’s current interest rates as of balance sheet date.

The expected fair value of loans and receivables are determined by calculating the discounted cash flows using the Bank’s current interest rates for fixed interest loans. For the loans with floating interest rates, it is assumed that the book value reflects the fair value.

The expected fair value of bank placements, money market placements and bank deposits are determined by calculating the discounted cash flows using the current market interest rates of similar assets and liabilities.

The following table summarizes the carrying values and fair values of some financial assets and liabilities.

Carrying Value Fair Value 31 December 2016 31 December 2015 31 December 2016 31 December 2015 Financial Assets 13,789,860 11,122,858 14,376,175 11,964,188 Money Market Placements 350,081 350,105 350,081 350,105 Banks 540,397 611,442 540,397 611,442 Financial Assets Available-for-Sale 2,328,695 815,942 2,328,695 815,942 Held-to-maturity Investments - - - - Loans 10,570,687 9,345,369 11,157,002 10,186,699 Financial Liabilities 14,959,764 11,847,469 15,545,845 12,295,587 Bank Deposits 673,421 555,277 673,421 555,277 Other Deposits 8,235,225 5,732,843 8,819,003 6,177,146 Funds Borrowed From Other Financial Institutions 4,504,761 4,261,828 4,504,761 4,261,828 Marketable Securities Issued 889,656 735,736 891,959 739,551 Funds Provided Under Repurchase Agreements 486,394 358,023 486,394 358,023 Miscellaneous Payables 170,307 203,762 170,307 203,762 b. Fair value hierarchy:

TFRS 7 sets a hierarchy of valuation techniques according to the observability of data used in valuation techniques, which establish basis for fair value calculations.

Aforesaid fair value hierarchy is determined as follows a) Quoted market prices (non-adjusted) (1st level); b) Directly (by way of prices) or indirectly (derived from prices) data for the assets or liabilities, other than quoted prices in the 1st level (2nd level); c) Data not based on observable data regarding assets or liabilities (3rd level).

159 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Fair value hierarchy of the financial assets and liabilities of the Bank carried at fair value according to the foregoing principles is given in the table below:

31 December 2016 1st Level 2nd Level 3rd Level Total Financial Assets at Fair Value Through Profit or Loss 526 61,424 - 61,950 Government Debt Securities 526 - - 526 Share Certificates - - - - Trading Derivative Financial Assets - 61,424 - 61,424 Available for Sale Assets 2,298,569 30,126 - 2,328,695 Share Certificates 4,721 - - 4,721 Government Debt Securities 1,994,947 - - 1,994,947 Other Marketable Securities 298,901 30,126 - 329,027 Hedging Derivative Financial Assets - 57,201 - 57,201 Total Assets 2,299,095 148,751 - 2,447,846

Trading Derivative Financial Liabilities - 68,012 - 68,012 Hedging Derivative Financial Liabilities - 404 - 404 Total Liabilities - 68,416 - 68,416

31 December 2015 1st Level 2nd Level 3rd Level Total Financial Assets at Fair Value Through Profit or Loss 422 27,240 - 27,662 Government Debt Securities 422 - - 422 Share Certificates - - - - Trading Derivative Financial Assets - 27,240 - 27,240 Available for Sale Assets 784,626 31,316 - 815,942 Share Certificates 4,721 - - 4,721 Government Debt Securities 643,794 23,278 - 667,072 Other Marketable Securities 136,111 8,038 - 144,149 Hedging Derivative Financial Assets - 97,427 - 97,427 Total Assets 785,048 155,983 - 941,031

Trading Derivative Financial Liabilities - 13,396 - 13,396 Hedging Derivative Financial Liabilities - 113 - - Total Liabilities - 13,396 - 13,396

There are no transfers between the 1st and 2nd rank in the current year.

IX. Explanation on Hedge Accounting

The Bank uses “Fair Value Hedge Accounting” from the beginning of 24 March 2014 as of balance sheet date.

Derivative financial instruments is used as hedging instruments are interest swap transactions.

31 December 2016 Principal (*) Asset Liability Derivative Financial Instruments Interest Swap Transactions 220,000 - 404 Total 220,000 - 404

(*) Total of purchase and sale notional amounts.

160 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

The fair valuation methodology of the derivatives presented in the above table is disclosed in the accounting principles section of these financial statements in Section III. Note IV.

Starting from 24 March 2014, the Bank has hedged the fair value effects of changes in libor interest rates, fixed interest rate loans amounting TL 20,547 with maturity 3 years and TL 36,654 with maturity 5 years funding by using interest rate swaps. The both nominal value of interest rate swaps is TL 55,000 with maturity 3 years and 5 years respectively.

The following table summarizes the effects of Fair Value Hedge Accounting.

Fair value difference/ Hedged item (assets adjustment of the Net fair value of Hedging Instrument and liabilities) Hedged risks hedged item hedging instrument Asset Liability Fixed rate equal installments Interest swap paid commercial Fixed interest transactions installment loans rate risk 1,052 - 404

The Bank evaluates the method of hedge whether to be effective on the expected changes in fair values in this process or not or each result of hedge effectiveness whether to be between the range of 80% and 125%.

Changes in fair values of derivative transactions determined as hedge for fair value are recorded in profit or loss together with changes in hedging asset or liability. The difference in current values of derivative transactions fair value hedge is shown in “Trading Gains/ Losses on derivative financial instruments” account. In the balance sheet, change in fair value of hedge asset or liability during the hedge accounting to be effective is shown with the related asset or liability. If the underlying hedge does not conform to the hedge accounting requirements, according to the adjustments made to the carrying value (amortised cost) of the hedged item, for which the risk is hedged by a portfolio hedge, are amortized with the straight line method within the time to maturity and recognized under the “Trading gains / losses on derivative financial instruments” account.

161 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION FIVE

EXPLANATIONS AND NOTES ON THE UNCONSOLIDATED FINANCIAL STATEMENTS

I. Explanations and Notes on Assets a. Information on cash and balances with the Central Bank of Republic of Turkey (“CBRT”)

1. Information on cash and the account of the CBRT

31 December 2016 31 December 2015 TL FC TL FC Cash/Foreign Currency 30,131 71,916 28,459 51,946 CBRT 119,209 1,748,932 23,074 1,441,984 Other - - 35 - Total 149,340 1,820,848 51,568 1,493,930

2. Information on the account of the CBRT

31 December 2016 31 December 2015 TL FC TL FC Demand Unrestricted Amount (*) 119,209 362,532 23,074 221,770 Time Restricted Amount - - - - Reserve Requirement - 1,386,400 - 1,220,214 Total 119,209 1,748,932 23,074 1,441,984

(*) The reserve requirement hold as average has been classified under “Central Bank Demand Unrestricted Account” pursuant to the correspondence with BRSA as of 3 January 2008.

3. Information on reserve requirements

The banks which are established in Turkey or operates in Turkey through opening a branch shall be subjected to T.C. Central Bank’s No. 2005/1 Regulation Required Reserves. The amount includes the amount that is going to found with deducting the items that stated in the Communiqué from the banks total domestic liabilities and branches abroad on behalf of the deposits accepted from Turkey liabilities subject to reserve requirements.

The required reserves may keep in reserve in Central Bank of Turkey as Turkish Lira, USD and/or Euro and standard gold. As of 31 December 2016, the Turkish lira required reserve ratios are determined to be within the range of 4%-10.5% depending on the maturity structure of deposits denominated in Turkish Lira (31 December 2015: 5%-11.5% for all Turkish lira liabilities), and the required reserve ratios for foreign currency deposits within the range of 9%-13% (31 December 2015: 9%-13% for all foreign currency deposits) and other foreign currency liabilities within the range of 5%-25% (31 December 2015: 5%-25% for all foreign currency liabilities).

CBRT started to pay interest for the Turkish Lira reserve since 5 November 2014. CBRT also started to pay interest for the Foreign Currency reserve since 5 May 2015. b. Information about financial assets at fair value through profit or loss

1. As of 31 December 2016, the Bank have no financial assets at fair value through profit/loss subject to repo transactions (31 December 2015: None) and have no financial assets at fair value through profit and loss given as collateral/blocked amount (31 December 2015: None).

162 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Positive differences related to trading derivative financial assets

31 December 2016 31 December 2015 TL FC TL FC Forward Transactions 134 3,413 3,181 420 Swap Transactions 26,489 20,252 19,421 3,699 Options 50 11,086 22 497 Total 26,673 34,751 22,624 4,616 c. Information on banks

1. Information on banks

31 December 2016 31 December 2015 TL FC TL FC Banks Domestic 120,814 396,812 267,591 176,318 Foreign - 22,771 22,007 145,526 Total 120,814 419,583 289,598 321,844

2. Information on foreign banks:

Unrestricted Amount Restricted Amount 31 December 2016 31 December 2015 31 December 2016 31 December 2015 EU Countries 14,351 28,984 - - USD, Canada 7,846 134,938 - - OECD Countries (*) 455 596 - - Off-Shore Banking Region - - - - Other 119 3,015 - - Total 22,771 167,533 - -

(*) OECD countries other than the EU countries, USA and Canada. d. Information on available-for-sale financial asset

1. Characteristics and carrying values of available-for-sale financial assets given as collateral

As of 31 December 2016, there are available-for-sale financial assets amounting TL 507,730 given as collateral/blocked (31 December 2015: TL 347,792) and those subject to repurchase agreements amounts to TL 578,986 (31 December 2015: TL 379,683). As of 31 December 2016, except the available-for-sale financial assets given as collateral/blocked and those subject to repurchase agreements, there are unrestricted amount is TL 1,237,258 (31 December 2015: TL 83,746).

2. Information on available-for-sale financial assets

31 December 2016 31 December 2015 Debt Securities 2,536,301 840,174 Quoted on Stock Exchange 2,188,096 816,829 Not Quoted 348,205 23,345 Share Certificates 4,721 4,721 Quoted on Stock Exchange 1 1 Not Quoted (*) 4,720 4,720 Impairment Provision (-) 212,327 28,953 Total 2,328,695 815,942

(*) In 9 April 2015, 1.6949% of Kredi Garanti Fonu A.Ş. share amounting to TL 4,720 is acquired.

163 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) e. Explanations on loans

1. Information on all types of loan or advance balances given to shareholders and employees of the Bank

31 December 2016 31 December 2015 Cash Non-cash Cash Non-cash Direct Loans Granted To Shareholders - 80,452 79,726 53,526 Corporate Shareholders - 80,452 79,604 53,047 Real Person Shareholders - - 122 479 Indirect Loans Granted To Shareholders 18,795 - 130,282 26,379 Loans Granted To Employees 6,654 - 4,397 - Total 25,449 80,452 214,405 79,905

2. Information on the first and second group loans and other receivables including loans that have been restructured or rescheduled and other receivables

Loans and Other Receivables Standard Loans and Other Receivables Under Close Monitoring Loans Loans and Other Amendments on and Other Amendments on Receivables Conditions of Contract Receivables Conditions of Contract Amendments Amendments Related to the Related to the Extention of Extention of Payment Plan Other Payment Plan Other Non-Specialized Loans 9,926,059 8,349 - 95,704 327,806 - Loans Given to Enterprises ------Export Loans 469,914 - - 15,490 6,935 - Import Loans ------Loans Given to Financial Sector 672,355 - - 378 - - Consumer Loans 183,802 - - 12,477 2,160 - Credit Cards 37,628 - - 960 - - Other 8,562,360 8,349 - 66,399 318,711 - Specialized Loans ------Other Receivables ------Total 9,926,059 8,349 - 95,704 327,806 -

Standard Loans and Other Loans and Other Receivables Number of Amendments Related to the Extention of Payment Plan Receivables Under Close Monitoring 1 or 2 Times 8,349 327,806 3,4 or 5 Times - - Over 5 Times - -

Standard Loans and Other Loans and Other Receivables Time Extended Via the Amendment on Payment Plan Receivables Under Close Monitoring 0 – 6 Month - 627 6 Month – 12 Month - 7,123 1 – 2 Years 31 42,242 2 – 5 Years 25 189,460 5 Years and Over 8,293 88,354

164 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3. Loans according to their maturity structure

Standard Loans and Other Loans and Other Receivables Receivables Under Close Monitoring Loans and Other Restructured or Loans and Other Restructured or Receivables Rescheduled Receivables Rescheduled Short-term Loans and Other Receivables 3,490,130 869 23,718 13,912 Non-specialised Loans 3,483,455 869 23,377 13,912 Specialised Loans 6,675 - 341 - Other Receivables - - - - Medium and Long-Term Loans and Other Receivables 6,435,929 7,480 71,986 313,894 Non-specialised Loans 6,435,555 7,480 71,986 313,894 Specialised Loans 374 - - - Other Receivables - - - - Total 9,926,059 8,349 95,704 327,806

4. Information on consumer loans, individual credit cards, personnel loans and personnel credit cards

Medium and Short-term Long-term Total Consumer Loans-TL 11,747 178,643 190,390 Real Estate Loans 174 120,720 120,894 Automotive Loans - 1,146 1,146 Consumer Loans 11,573 56,777 68,350 Other - - - Consumer Loans-FC Indexed - - - Real Estate Loans - - - Automotive Loans - - - Consumer Loans - - - Other - - - Consumer Loans-FC - - - Real Estate Loans - - - Automotive Loans - - - Consumer Loans - - - Other - - - Individual Credit Cards-TL 7,125 - 7,125 With Installments 2,417 - 2,417 Without Installments 4,708 - 4,708 Individual Credit Cards- FC 5 - 5 With Installments - - - Without Installments 5 - 5 Personnel Loans-TL 288 4,138 4,426 Real Estate Loans - - - Automotive Loans - - - Consumer Loans 288 4,138 4,426 Other - - - Personnel Loans-FC Indexed - - - Real Estate Loans - - - Automotive Loans - - - Consumer Loans - - - Other - - - Personnel Loans-FC - - - Real Estate Loans - - - Automotive Loans - - - Consumer Loans - - - Other - - - Personnel Credit Cards-TL 2,083 - 2,083 With Installments 802 - 802 Without Installments 1,281 - 1,281 Personnel Credit Cards-FC - - - With Installments - - - Without Installments - - - Credit Deposit Account-TL (Individuals) (*) 3,623 - 3,623 Credit Deposit Account-FC (Individuals) - - - Total 24,871 182,781 207,652

(*) TL 146 of the credit deposit account personnel loans (31 December 2015: TL 176).

165 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

5. Information on commercial installment loans and corporate credit cards

Medium and Short-term long-term Total Commercial Installments Loans-TL 64,904 1,207,862 1,272,766 Real Estate Loans - 935 935 Automotive Loans - 55,912 55,912 Consumer Loans 64,904 1,151,015 1,215,919 Other - - - Commercial Installments Loans-FC Indexed 3,249 403,387 406,636 Real Estate Loans - 341,307 341,307 Automotive Loans - 43,453 43,453 Consumer Loans 3,249 18,627 21,876 Other - - - Commercial Installments Loans-FC 3,988 1,342,226 1,346,214 Real Estate Loans - - - Automotive Loans - - - Consumer Loans 3,988 1,342,226 1,346,214 Other - - - Corporate Credit Cards-TL 29,375 - 29,375 With Installment 2,793 - 2,793 Without Installment 26,582 - 26,582 Corporate Credit Cards-FC - - - With Installment - - - Without Installment - - - Credit Deposit Account-TL (Legal Person) 73,116 - 73,116 Credit Deposit Account-FC (Legal Person) - - - Total 174,632 2,953,475 3,128,107

6. Loans according to types of borrowers

31 December 2016 31 December 2015 Public 24,084 - Private 10,333,834 9,124,472 Total 10,357,918 9,124,472

7. Distribution of domestic and foreign loans:

Related loans are classified according to the location of the customers

31 December 2016 31 December 2015 Domestic Loans 10,189,181 9,085,078 Foreign Loans 168,737 39,394 Total 10,357,918 9,124,472

8. Loans given to investments in associates and subsidiaries

As of 31 December 2016, there are loans granted to associates and subsidiaries amount to TL 102,576 (31 December 2015: TL 55,395).

166 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

9. Specific provisions provided against loans

31 December 2016 31 December 2015 Loans and Other Receivables with Limited Collectability 8,368 13,208 Loans and Other Receivables with Doubtful Collectability 40,842 45,896 Uncollectible Loans and Other Receivables 291,376 196,024 Total 340,586 255,128

10. Information on non-performing loans (Net)

10.(i). Information on non-performing loans restructured or rescheduled and other receivables

The Bank has no non-performing loans restructured or rescheduled and other receivables as of 31 December 2016 (31 December 2015: None).

10.(ii). Information on the movement of total non-performing loans

III. Group IV. Group V. Group Loans and other Loans and other Uncollectible receivables with receivables with loans and other limited collectability doubtful collectability receivables 31 December 2015 100,490 119,858 255,677 Addition (+) 275,552 1,334 5,594 Transfers from Other Categories of Non- performing Loans (+) - 302,821 270,406 Transfers to Other Categories of Non- performing Loans (-) (302,821) (270,406) - Collections (-) (2,419) (35,241) (66,335) Write-offs (-)(*) - - (101,155) Corporate and Commercial Loans - - (91,031) Consumer Loans - - (9,596) Credit Cards - - (528) 31 December 2016 70,802 118,366 364,187 Specific Provision (-) (8,368) (40,842) (291,376) Net Balance on Balance Sheet 62,434 77,524 72,811

(*) The Bank has written-off of non-performing loans under the collections campaign of TL 1,759 with a net book value of TL 74 and provision amounting to TL 1,685 in May and has sold non-performing loans of TL 99,396 with a net book value of TL 179 and provision amounting to TL 99,217 to Turk Asset Varlık Yönetim A.Ş. on August 17, 2016 for TL 2,000.

10.(iii). Information on non-performing loans granted as foreign currency loans

As at the balance sheet date there are no non-performing loans denominated in foreign currencies (31 December 2015: None).

167 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

10.(iv). Information on non-performing loans based on types of borrowers

III. Group IV. Group V. Group Loans and other Loans and other Uncollectible loans receivables with receivables with and other limited collectability doubtful collectability receivables 31 December 2016 (Net) Loans to Real Persons and Legal Entities (Gross) 70,802 118,366 364,187 Specific Provision Amount (-) (8,368) (40,842) (291,376) Loans to Real Persons and Legal Entities (Net) 62,434 77,524 72,811 Banks (Gross) - - - Specific Provision Amount (-) - - - Banks (Net) - - - Other Loans and Receivables (Gross) - - - Specific Provision Amount (-) - - - Other Loans and Receivables (Net) - - - 31 December 2015 (Net) Loans to Real Persons and Legal Entities (Gross) 100,490 119,858 255,677 Specific Provision Amount (-) (13,208) (45,896) (196,024) Loans to Real Persons and Legal Entities (Net) 87,282 73,962 59,653 Banks (Gross) - - - Specific Provision Amount (-) - - - Banks (Net) - - - Other Loans and Receivables (Gross) - - - Specific Provision Amount (-) - - - Other Loans and Receivables (Net) - - -

11. Explanation on liquditation policy for uncollectible loan and receivable

Collection of uncollectible loans and other receivables is collected through the liquidation of collaterals and by legal procedures.

12. Explanations on write-off policy

Uncollectible loans and other receivables are recovered through legal proceedings and liquidation of collaterals or they are written off with Board decision in accordance with the Tax Procedural Law.

The Bank has written-off of non-performing loans under the collections campaign of TL 1,759 with a net book value of TL 74 and provision amounting to TL 1,685 in May and has sold non-performing loans of TL 99,396 with a net book value of TL 179 and provision amounting to TL 99,217 to Turk Asset Varlık Yönetim A.Ş. on August 17, 2016 for TL 2,000.

168 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

13. The Bank's provision movement for loans and other receivables during the period:

Corporate/ Commercial Loans SME Consumer Loans Total 1 January 2016 120,921 118,688 15,519 255,128 Made during the period 62,483 136,923 5,544 204,950 Cancelled during the period (-) (15,875) (2,054) (661) (18,590) Collections (21,771) (69,007) (10,124) (100,902) 31 December 2016 145,758 184,550 10,278 340,586

Corporate/ Commercial Loans SME Consumer Loans Total 1 January 2015 149,725 78,033 9,042 236,800 Made During the Period 41,324 108,303 13,935 163,562 Cancelled During the Period (-) (10,929) (4,893) (629) (16,451) Collections (59,199) (62,755) (6,829) (128,783) 31 December 2015 120,921 118,688 15,519 255,128 f. Information on held-to-maturity investments

1. Information on held to maturity debt securities

The Bank has no held to maturity debt securities as of 31 December 2016 (31 December 2015: None).

2. Information on held to maturity investments

The Bank has no held to maturity investments as of 31 December 2016 (31 December 2015: None).

3. Movement of held-to-maturity investment

The Bank has no held to maturity investments as of 31 December 2016 (31 December 2015: None).

4. Characteristics and carrying values of held-to-maturity investments given as collateral

As of 31 December 2016 there are no held-to-maturity investments given as collateral (31 December 2015: None). g. Information on investments in associates (Net)

The Bank has no investments in associates as of 31 December 2016 (31 December 2015: None).

169 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) h. Information on subsidiaries (Net)

1. Information on shareholders’ equity of the significant subsidiaries

There is no deficit of regulatory limits on capital structure of the subsidiaries which are included in the consolidated capital adequacy ratio calculation in accordance with the capital adequacy ratio limits. The information on the shareholders’ equity of these subsidiaries is shown below:

Alternatif Finansal Alternatif Menkul Kiralama A.Ş. Değerler A.Ş. (*) Core Capital 134,924 19,671 Paid-in Capital 35,920 14,154 Share Premium - - Share Cancellation Profits - - Reserves 27,569 14,220 Current Period’s Profit and Prior Period’s Profit 72,042 -8,545 Current Period’s Losses and Prior Period’s Losses - - Leasehold Improvements on Operational Leases (-) - 79 Intangible Assets (-) 607 79 Supplementary Capital - - Deductions From Capital - - Total Shareholders Equity 134,924 19,671

(*) "Alternatif Yatırım A.Ş."s title changed as "Alternatif Menkul Değerler A.Ş." and the company name registered as "A Menkul" instead of "A Yatırım" as at 19 April 2016, with the decision of General Assembly meeting, dated 7 April 2016.

According to the conclusion of there will be no benefits by the continuing activities of Alternatif Portföy Yönetimi A.Ş. which is owned 100% by Alternatif Yatırım A.Ş., liquidation procedures has begun after the decision of board of Alternatif Portföy Yönetimi A.Ş. dated 27 August 2014. By the same date, application made to the Capital Markets Board. Operating licence and portfolio management certificate of the Alternatif Portföy Yönetimi A.Ş. is cancelled on 5 December 2014 and its title has changed as Elmadağ Dış Ticaret A.Ş. on 6 March 2015. The liquidation is approved on 23 February 2016.

2. Information on subsidiaries

Bank’s share percentage, if Address (City/ different voting Bank’s Risk Group No Title Country) percentage (%) Share (%) 1 Alternatif Menkul Değerler A.Ş. İstanbul/Türkiye 100.00 100.00 2 Alternatif Finansal Kiralama A.Ş. İstanbul/Türkiye 99.99 99.99

Main financial figures of the consolidated subsidiaries in the order of the above table

Income from Marketable Current Shareholders’ Total Fixed Interest Securities Period Profit Prior Period No Total Assets Equity Assets Income Portfolio / Loss Profit / Loss Fair value 1 (*) 61,259 19,829 375 2,841 - (982) (7,564) - 2 (*) 1,393,478 135,531 1,071 88,895 - 22,543 49,499 -

(*) The above mentioned subsidiaries’ financial data are taken from the financial statements prepared for the BRSA as of 31 December 2016.

170 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3. The movement of the subsidiaries

31 December 2016 31 December 2015 Balance at the Beginning of the Period 166,380 145,923 Movements During the Period - 20,457 Purchases - 21,537 Transfers - - Bonus Shares Obtained - - Share in Current Year Income - - Sales - (900) Revaluation (Decrease) / Increase - - Provision for Impairment - (180) Balance at the End of the Period 166,380 166,380 Capital Commitments - - Share Percentage at the End of the Period (%) 100 100

4. Sectoral information on financial subsidiaries and the related carrying amounts

Subsidiaries 31 December 2016 31 December 2015 Banks - - Insurance Companies - - Factoring Companies - - Leasing Companies 142,165 142,165 Finance Companies - - Other Financial Subsidiaries 24,215 24,215

5. Subsidiaries quoted on stock exchange

There are no subsidiaries quoted on stock exchange (31 December 2015: None). i. Information on joint ventures

There are no joint ventures (31 December 2015: None). j. Information on lease receivables (net)

There are no receivables from lease transactions (31 December 2015: None). k. Information on hedging derivative financial assets

There are no hedging derivative financial assets (31 December 2015: None).

171 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) l. Information on property and equipment (Net)

Motor Other 31 December 2016 Vehicles Tangible Assets Total Cost 28 95,137 95,165 Accumulated Depreciation (-) 28 67,322 67,350 Net Book Value - 27,815 27,815 31 December 2016 Net Book Value at Beginning of the Period - 27,815 27,815 Additions - 18,323 18,323 Disposals (-), (net) - 7,615 7,615 Disposals Depreciation (-) - - - Depreciation (-) - 8,495 8,495 Cost at Period End 28 104,116 104,144 Accumulated Depreciation at Period End (-) 28 68,202 68,230 Closing Net Book Value at Period End - 35,914 35,914

Other 31 December 2015 Motor Vehicles Tangible Assets Total Cost 28 92,771 92,799 Accumulated Depreciation (-) 28 63,958 63,986 Net Book Value - 28,813 28,813 31 December 2015 Net Book Value at Beginning of the Period - 28,813 28,813 Additions - 10,230 10,230 Disposals (-), (net) - 7,864 7,864 Disposals Depreciation (-) - 4,992 4,992 Depreciation (-) - 8,356 8,356 Cost at Period End 28 95,137 95,165 Accumulated Depreciation at Period End (-) 28 67,322 67,350 Closing Net Book Value at Period End - 27,815 27,815 m. Information on the intangible assets

1. Gross carrying value and accumulated depreciation at the beginning and at the end of the period

31 December 2016 31 December 2015 Gross Carrying Value 80,860 71,395 Accumulated Depreciation (-) 46,113 40,763 Net Carrying Value 34,747 30,632

2. Information on movements between the beginning and end of the period

31 December 2016 31 December 2015 Beginning of the Period 30,632 22,320 Internally Generated Amounts - - Additions due to Mergers, Transfers and Acquisitions 9,464 11,778 Disposals - - Amount Accounted under Revaluation Reserve - - Impairment - - Impairment Reversal - - Amortisation (-) 5,349 3,466 Net Foreign Currency Difference From Foreign Investments in Associates - - Other Changes in Book Value - - End of the Period 34,747 30,632

172 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) n. Information on investment property

There is no investment property (31 December 2015: None). o. Movement of assets held for resale and discontinued operations

There is no assets held for sale and discontinued operations (31 December 2015: None). p. Information on other assets

1. The distribution of other assets:

31 December 2016 31 December 2015 Assets Held for Sale 95,663 50,449 Receivables from Clearing 31,874 54,327 Pos Receivables 43,201 27,394 Colleterals Given for Derivative Transactions 125,834 35,989 Prepaid Expenses 35,824 27,649 Colleterals Given 247 4,192 Other 26,551 24,012 Total 359,194 224,012

31 December 2016 31 December 2015 Disposals of Property and Equipment Beginning of Period 50,449 69,243 Disposals (-) (28,114) (62,145) Additions 74,290 44,286 Depreciation of Current Period 962 785 Provisions for Losses - (150) End of Period 95,663 50,449

2. Other assets in the balance sheet, balance sheet excluding off-balance sheet commitments exceed 10% of the total while at least 20% of their name and the amount of sub-accounts:

None (31 December 2015: None).

173 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

II. Explanations and Notes on Liabilities a. Information on deposits

1. Information on maturity structure of deposits/the funds collected

1.(i). 31 December 2016:

With 7 days Up to 1-3 3-6 6 months - 1 year and Accumulated Demand notifications 1 month months months 1 year over Deposits Total Saving Deposits 52,408 - 172,606 1,574,267 11,590 4,335 2,250 213 1,817,669 Foreign Currency Deposits 195,689 - 303,633 2,581,798 471,686 33,902 15,933 - 3,602,641 Residents in Turkey 180,503 - 297,636 2,557,000 471,686 30,614 15,925 - 3,553,364 Residents Abroad 15,186 - 5,997 24,798 - 3,288 8 - 49,277 Public Sector Deposits 5,768 ------5,768 Commercial Deposits 89,737 - 636,365 1,851,049 113,124 18,350 8,439 - 2,717,064 Other Institutions Deposits 1,576 - 7,730 56,691 773 - 19,556 - 86,326 Precious Metal Deposits 2,170 - 83 2,159 176 269 900 - 5,757 Bank Deposits 24,581 - 137,909 318,016 - - 192,915 - 673,421 The CBRT ------Domestic Banks 392 - 127,239 - - - - - 127,631 Foreign Banks 23,600 - 10,670 318,016 - - 192,915 - 545,201 Participation Banks 589 ------589 Other ------Total 371,929 - 1,258,326 6,383,980 597,349 56,856 239,993 213 8,908,646

174 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

1.(ii). 31 December 2015:

With 7 days Up to 1-3 3-6 6 months - 1 year and Accumulated Demand notifications 1 month months months 1 year over Deposits Total Saving Deposits 52,036 - 56,362 1,718,980 48,754 13,078 14,985 129 1,904,324 Foreign Currency Deposits 201,932 - 175,647 1,819,601 77,905 21,342 13,276 - 2,309,703 Residents in Turkey 195,145 - 175,647 1,628,266 75,792 18,912 13,156 - 2,106,918 Residents Abroad 6,787 - - 191,335 2,113 2,430 120 - 202,785 Public Sector Deposits 17,161 ------17,161 Commercial Deposits 96,610 - 691,403 545,952 25,682 74,137 19,717 - 1,453,501 Other Institutions Deposits 1,722 - 6,854 17,082 9 42 19,275 - 44,984 Precious Metal Deposits 1,400 - - 205,125 584 127 774 - 208,010 Bank Deposits 485 - 198,500 119,549 31,903 - - - 350,437 The CBRT ------Domestic Banks 125 - 175,123 87,682 - - - - 262,930 Foreign Banks 360 - 23,377 31,867 31,903 - - - 87,507 Participation Banks ------Other ------Total 371,346 - 1,128,766 4,426,289 184,837 108,726 68,027 129 6,288,120

2. Information on saving deposits insurance

2.(i). Information on saving deposits under the guarantee of the saving deposits insurance fund and exceeding the limit of deposit insurance fund

Under the Guarantee Exceeding Limit of Saving Deposits of Deposit Insurance the Deposit Insurance 31 December 2016 31 December 2015 31 December 2016 31 December 2015 Saving Deposits (*) 491,538 601,328 1,326,678 1,303,676 Foreign Currency Savings Deposit 98,266 106,436 989,867 978,404 Other Deposits in the Form of Savings Deposits - - - - Foreign Branches’ Deposits Under Foreign Authorities’ Insurance - - - - Off-shore Banking Regions’ Deposits Under Foreign Authorities’ Insurance - - - -

(*) Related savings deposits include the amount of TL 547 straight rediscount-internal efficiency difference (31 December 2015: TL 680).

175 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2.(ii).Saving deposits which are not under the guarantee of saving deposit insurance fund

31 December 2016 31 December 2015 Deposits and Other Accounts in Foreign Branches - - Deposits and Other Accounts of Main Shareholders and their Families - - Deposits and Other Accounts of President of Board of Directors, Members of Board of Directors, Vice General Managers and Their Families 5,188 87,258 Deposits and Other Accounts of Property Assets Value due to Crime Which is in the Scope of Article 282 of Numbered 5237 “TCL” Dated 26/9/2004 - - Deposits in Banks Incorporated in Turkey Exclusively for Off-shore Banking Operations - - b. Information on trading derivative financial liabilities

31 December 2016 31 December 2015 TL FC TL FC Forward Transactions 778 714 529 3,237 Swap Transactions 48,495 11,412 564 8,588 Futures Transactions - - - - Options 14 6,599 - 478 Other - - - - Total 49,287 18,725 1,093 12,303 c. Information on borrowings

1. Information on borrowings

31 December 2016 31 December 2015 TL FC TL FC The CBRT Borrowings - - - - From Domestic Banks and Institutions 11,925 90,163 20,510 136,205 From Foreign Banks, Institutions and Funds 198 2,897,782 354 3,337,201 Total 12,123 2,987,945 20,864 3,473,406

2. Information on maturity profile of borrowings

31 December 2016 31 December 2015 TL FC TL FC Short-term 12,123 517,646 20,864 862,125 Medium and Long-term - 2,470,299 - 2,611,281 Total 12,123 2,987,945 20,864 3,473,406 d. Information on other liabilities

As of 31 December 2016, other foreign liabilities do not exceed 10% of the total balance sheet. e. Information on financial lease agreements

None (31 December 2015: None).

176 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) f. Information on hedging derivative financial liabilities

31 December 2016 31 December 2015 TL FC TL FC Fair Value Hedge Risk (*) 404 - 113 - Cash Flow Hedge - - - - Hedge of Net Investments in Foreign Operations - - - - Total 404 - 113 -

(*) Explained in Section Four Note VIII. g. Information on provisions

1. Information on general provisions

31 December 2016 31 December 2015 Provisions for Group I Loans and Receivables 33,909 61,137 Additional Provision for Loans and Receivables with Extended Maturities - 1,406 Provisions for Group II Loans and Receivables 4,279 3,645 Additıonal Provision for Loans and Receivables with Extended Maturities - 15,487 Provisions for Non-Cash Loans 7,896 8,571 Other 6,127 3,140 Total 52,211 93,386

In accordance with the amendment made on 14 December 2016 in the “Regulation on Procedures And Principles For Determination Of Qualifications Of Loans And Other Receivables By Banks And Provisions To Be Set Aside”, published on the Official Gazette numbered 26333 dated 1 November 2006, the cancellation of the provision has been realized in the current period.

2. Information on reserve for employment termination benefits

In accordance with Turkish Labour Law, the reserve has been calculated by estimating the present value of the future probable obligation of the Bank arising from the retirement of its employees. According the TAS 19, actuarial valuation methods are required to calculate the company’s liabilities.

Actuarial losses net of deferred tax amounting to TL 1,711 is accounted for under the equity according to the revised TAS 19 stardard as of 31 December 2016 (31 December 2015: TL 1,475 losses).

Following actuarial assumptions were used in the calculation of total liabilities.

31 December 2016 31 December 2015 Discount Rate (%) 4.72 3.18 Ratio Used for Probability of Pension (%) 83.33 83.33

The principal actuarial assumption is that the maximum liability will increase in line with inflation. Thus, the discount rate applied represents the expected real rate after adjusting for the effects of future inflation.

177 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Movement of employment termination benefits liability in the balance sheet

31 December 2016 31 December 2015 Prior Period Ending Balance 5,841 4,353 Current Period Service Cost 594 430 Interest Cost 581 512 Paid Compensation (5,171) (4,890) Pay/Benefit Reductions/Gains or Losses Due to Dismissals 3,034 3,593 Actuarial Gain/(Loss) 2,139 1,843 Balance at the End of the Period 7,018 5,841

In addition, the Bank has accounted retirement pay provision amounting to TL 7,018 (31 December 2015: TL 5,841) and for unused vacation rights provision amounting to TL 2,310 as of 31 December 2016 (31 December 2015: TL 2,555).

3. Other provisions

31 December 2016 31 December 2015 Specific Provision for Unindemnified Non-cash Loan 26,335 20,098 Bonus Provision 10,000 8,000 Provision for the Impairment due Settlement Date - 4 Other (*) 13,158 7,180 Total 49,493 35,282

(*) Other line consists of TL 13,150 amounted provision for litigation and claims provision (31 December 2015: TL 7,176) and TL 8 amounted other provision (31 December 2015: TL 4).

4. Information on Provisions Related with the Foreign Currency Difference of Foreign Indexed Loans

As of 31 December 2016, the provision related to the foreign currency difference of foreign currency indexed loans amounts to TL 16,433 (31 December 2015: TL 7,630) are netted with loans in the financial statements. h. Information on taxes payable

Information on current tax liability

As of 31 December 2016, there is no current tax liability (31 December 2015: TL 6,069).

(i) Information on taxes payable

31 December 2016 31 December 2015 Corporate Tax Payable - 6,069 Taxation of Marketable Securities 8,258 8,291 Property Tax 179 236 Banking Insurance Transaction Tax (BITT) 5,474 6,548 Foreign Exchange Transaction Tax - - Value Added Tax Payable 337 518 Other 2,960 2,866 Total 17,208 24,528

178 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

(ii) Information on premium payables

31 December 2016 31 December 2015 Social Security Premiums-Employee 1,683 886 Social Security Premiums-Employer 2,464 1,297 Bank Pension Fund Premiums-Employee - - Bank Pension Fund Premiums-Employer - - Pension Fund Deposit and Provisions-Employee - - Pension Fund Deposit and Provisions-Employer - - Unemployment Insurance-Employee 120 63 Unemployment Insurance-Employer 240 127 Other 68 43 Total 4,575 2,416 i. Explanations about deferred tax provision

As of 31 December 2016, the Bank has deferred tax asset amounting to TL 46,524 (31 December 2015: TL 4,806 defered tax asset) in the financial statements.

As of 31 December 2016 and 31 December 2015, the details of temporary differences and deferred tax assets and liabilities are presented below:

31 December 2016 31 December 2015 Deferred Tax Assets Tangible Assets Base Differences (1,241) (506) Provisions 4,496 3,106 Valuation of Financial Assets 39,221 (395) Commission Deferral 4,048 2,601 Net Deferred Tax Assets 46,524 4,806 j. Information on subordinated loans

1. Detailed explanation on subordinated loans including quantity, maturity, interest rate, issuing institution, option to be converted into stock certificate

Issuing Institution Amount (‘000) Opening Date Maturity Interest Rate (%) The Commercial Bank (P.S.Q.C.) United Arab Bank, National Bank of Oman USD 125,000 30 June 2015 10 years+1 day Libor + 6.00 Foreign Capital Market Investors USD 300,000 15 April 2016 10 years+1 day 8.75

TL equivalent of the subordinated loan is TL 1,504,693 (31 December 2015: TL 767,558).

The subordinated loan does not have the option to be converted into stock certificate. The Bank has the option to pay back the loan at the end of the fifth year.

179 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Information on subordinated loan

31 December 2016 31 December 2015 TL FC TL FC Domestic Banks - - - - Other Domestic - - - - Foreign Banks - 1,504,693 - 452,505 Other Foreign Institutions (*) - - - 315,053 Total - 1,504,693 - 767,558

(*) According to the temporary article 4 clause c of Regulation on the Changes on the Equity of Banks dated 20 January 2016 no.29599 the loans which do not carry the points of subordinated loans are transfered to borrowings. k. Information on shareholders’ equity

1. Presentation of paid-in capital (As of nominal; non-adjusted amounts according to inflation)

31 December 2016 31 December 2015 Common Stock (*) 980,000 620,000 Preferred Stock - -

(*) It refers to the nominal capital.

2. Paid-in capital amount, explanation as to whether the registered share capital system is applied and if so, amount of registered share capital ceiling (As of nominal; non-adjusted amounts according to inflation):

The Bank applies principal capital system.

3. Information about the share capital increases and their sources in the current period.

It is decided to increase the capital in cash by TL 150,000 with the decision of Board of Directors as of 21 January 2016, after the approval of BRSA the paid in capital is increased TL 150,000 to TL 770,000 as of 14 April 2016. With the decision of number 166 of the Board of Directors dated on 19 December 2016 and with the approval of BRSA dated on 29 December 2016, decided to increase the capital from TL 770,000 to TL 980,000. In this respect, The Commercial Bank (P.S.Q.C.) was included in the capital increase with TL 210,000. Registration process is continuing.

4. Information on additions from revaluation reserves to capital in the current period : None.

5. Information on capital commitments up until the end of the fiscal year and the subsequent interim period : None.

6. Information on prior period’s indicators on the Bank’s income, profitability and liquidity, and possible effects of these future assumptions on the Bank’s equity due to uncertainties of these indicators:

The interest, liquidity, and foreign exchange risk on on-balance sheet and off-balance sheet assets and liabilities are managed by the Bank within several risk limits and legal limits.

7. There is no privileges given to shares representing the capital

8. Information on marketable securities valuation reserve

31 December 2016 31 December 2015 TL FC TL FC From Investments in Associates, Subsidiaries, and Joint Ventures - - - - Valuation Difference (15,303) (150,809) (16,041) (11,396) Foreign Currency Difference - - - - Total (15,303) (150,809) (16,041) (11,396)

180 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

9. Information of the previous year profit distribution

According to the decision taken in the General Assembly of the Bank dated 31 March 2016, distributable profit of 2015 amounting to TL 65,228 is distributed as TL 3,261 to legal reserves and the rest amounting to TL 61,967 is distributed as extraordinary reserves.

III. Explanations and Notes on Off-Balance Sheet Accounts a. Information on off balance sheet commitments

1. The amount and type of irrevocable commitments

According to Direct Debiting System, there is TL 191,311 irrevocable loan commitments as of 31 December 2016 (31 December 2015: TL 228,546).

2. Type and amount of probable losses and obligations arising from off-balance sheet items

There are no probable losses and obligations arising from off-balance sheet items. Obligations arising from off-balance sheet are disclosed in “Off-Balance Sheet Commitments”.

2.(i). Non-cash loans including guarantees, bank avalized and acceptance loans, collaterals that are accepted as financial guarantees and other letters of credit

31 December 2016 31 December 2015 Guarantees and Colleterals 591,883 551,332 Bank Acceptance Loans 3,885 35,849 Letter of Credits 268,437 345,843 Total 864,205 933,024

2.(ii).Guarantees, sureties and other similar guarantees

31 December 2016 31 December 2015 Temporary Letter of Guarantees 48,342 59,692 Definite Letter of Guarantees 1,712,135 1,955,045 Advance Letter of Guarantee 218,345 87,614 Letter of Guarantees Given to Customs 107,565 126,668 Total 2,086,387 2,229,019

3.(i). Total amount of non-cash loans

31 December 2016 31 December 2015 Non-cash Loans Given Against Cash Loans 441,797 424,226 With Original Maturity of 1 Year or Less than 1 Year 441,797 424,226 With Original Maturity of More than 1 Year - - Other Non-cash Loans 2,508,795 2,737,817 Total 2,950,592 3,162,043

181 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3.(ii). Information on concentration of non-cash loans

31 December 2016 31 December 2015 TL (%) FC (%) TL (%) FC (%) Agricultural 5,158 0.49 2,643 0.14 11,155 0.93 9,638 0.50 Farming and Livestock 4,507 0.43 352 0.02 10,046 0.83 9,638 0.50 Forestry 301 0.03 - - 803 0.07 - - Fishing 350 0.03 2,291 0.12 306 0.03 - - Manufacturing 183,252 17.57 654,585 34.31 261,376 21.50 542,470 27.86 Mining 5,793 0.56 6,551 0.34 8,026 0.66 28,315 1.45 Production 141,514 13.57 580,926 30.45 227,003 18.67 471,878 24.24 Electric, Gas, Water 35,945 3.45 67,108 3.52 26,347 2.17 42,277 2.17 Construction 207,562 19.90 304,657 15.97 298,331 24.54 349,250 17.94 Services 622,004 59.65 943,357 49.45 588,043 48.38 912,820 18.59 Wholesale and Retail Trade 159,674 15.31 111,519 5.85 199,074 16.38 161,545 8.30 Hotel and Food Services 5,635 0.54 775 0.04 10,066 0.83 1,926 0.10 Transportation and Telecommunication 53,234 5.10 37,066 1.94 67,366 5.54 114,091 5.86 Financial Institutions 259,448 24.88 696,544 36.51 162,719 13.39 570,795 1.01 Real Estate and Leasing Ser. 9,690 0.93 64,170 3.36 567 0.05 520 0.03 Professional Services 120,092 11.52 25,150 1.32 144,463 11.88 63,370 3.26 Education Services 350 0.03 - - 589 0.05 - - Health and Social Services 13,881 1.33 8,133 0.43 3,199 0.26 573 0.03 Other 24,813 2.38 2,561 0.13 56,688 4.65 132,272 35.11 Total 1,042,789 100.00 1,907,803 100.00 1,215,593 100.00 1,946,450 100.00

3(iii). Information on non-cash loans classified in Group I and Group II

31 December 2016 Group I Group II TL FC TL FC Non-Cash Loans (*) Letters of Guarantee 976,132 1,029,257 64,997 16,001 Bank Acceptances - 3,885 - - Letters of Credit 1,660 266,777 - - Endorsements - - - - Underwriting Commitments - - - - Factoring Guarantees - - - - Other Commitments and Contingencies - 591,883 - - Total 977,792 1,891,802 64,997 16,001

31 December 2015 Group I Group II TL FC TL FC Non-Cash Loans (*) Letters of Guarantee 1,151,685 1,000,895 63,908 12,531 Bank Acceptances - 35,849 - - Letters of Credit - 345,843 - - Endorsements - - - - Underwriting Commitments - - - - Factoring Guarantees - - - - Other Commitments and Contingencies - 551,332 - - Total 1,151,685 1,933,919 63,908 12,531

(*) The amount of non-cash loans of customers which were classified as non-performing receivables is TL 41,143 (31 December 2015: TL 42,735).

182 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Information on derivative financial instruments

31 December 2016 31 December 2015 Types of Trading Transactions Foreign Currency Related Derivative Transactions (I) 15,315,530 9,334,449 Currency Forward Transactions 377,711 334,900 Currency Swap Transactions 12,625,738 7,659,775 Futures Transactions - - Options 2,312,081 1,339,774 Securities Options - - Interest Related Derivative Transactions (II) 768,496 1,119,428 Forward Rate Agreements - - Interest Rate Swaps - - Interest Rate Options 768,496 1,119,428 Interest Rate Futures - - Other Trading Transactions (III) 56,307 46,690 A. Total Trading Derivative Transactions (I+II+III) 16,140,333 10,500,567 Types of Hedging Transactions Fair Value Hedges 220,000 220,000 Cash Flow Hedges - - Foreign Currency Investment Hedges - - B. Total Hedging Derivatives 220,000 220,000 Total Derivative Transactions (A+B) 16,360,333 10,720,567 c. Investment Funds

None. d. Information on contingent liabilities

Outstanding legal claims against the Bank have been considered as contingent liabilities amounting to TL 25,048 and TL 13,150 provisions is provided against these legal cases (31 December 2015: Contingent liability: TL 11,738, Provision: TL 7,176).

IV. Explanations And Notes on Income Statement a. Information on interest income

1. Information on interest income on loans

31 December 2016 31 December 2015 TL FC TL FC Short-term Loans 392,542 34,158 541,037 49,979 Medium/Long-term Loans 219,140 206,374 198,405 168,304 Interest on Loans Under Follow-up 12,860 - 9,353 - Premiums Received from Resource Utilisation Support Fund - - - - Total (*) 624,542 240,532 748,795 218,283

(*) Includes fee and commission income received for cash loans.

183 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Information on interest income on banks

31 December 2016 31 December 2015 TL FC TL FC From the CBRT (*) 2,713 6,127 1,461 1,733 From Domestic Banks 14,532 646 8,224 225 From Foreign Banks 1,730 564 766 136 Headquarters and Branches Abroad - - - - Total 18,975 7,337 10,451 2,094

(*) Interest incomes from Turkish Lira and Foreign Currency reserves, unrestricted accounts and reserve options which provided by CBRT has shown in “From the CBRT” line.

3. Information on interest income on marketable securities

31 December 2016 31 December 2015 TL FC TL FC From Trading Financial Assets 407 364 450 18 From Financial Assets At Fair Value Through Profit or Loss - - - - From Available-for-Sale Financial Assets 31,957 66,318 42,940 17,051 From Held-to-Maturity Investments - - - - Total 32,364 66,682 43,390 17,069

4. Information on interest income received from investments in associates and subsidiaries

31 December 2016 31 December 2015 Interest Received from Associates and Subsidiaries 4,098 1,542 b. Information on interest expense

1. Information on interest expense on borrowings

31 December 2016 31 December 2015 TL FC TL FC Banks 1,181 112,967 1,895 67,060 CBRT - - - - Domestic Banks 1,181 2,562 1,866 3,263 Foreign Banks - 110,405 29 63,797 Headquarters and Branches Abroad - - - - Other Institutions - 48,503 - 24,869 Total (*) 1,181 161,470 1,895 91,929

(*) Includes fee and commission expense related with cash loans.

184 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Information on interest expense given to investments in associates and subsidiaries

31 December 2016 31 December 2015 Interest Paid to Associates and Subsidiaries 4,168 5,671

3. Information on interest expense to marketable securities issued

31 December 2016 31 December 2015 Information on Interest Expense to Marketable Securities Issued 25,851 23,461

4. Information on interest rate and maturity structure of deposits

Demand Deposit Time Deposit Up to 1 Up to 3 Up to 6 Up to Over Accumulated Months Months Months 1 Year 1 Year Deposit Total Turkish Lira Bank Deposits - 939 - - - - - 939 Savings Deposits - 11,225 191,599 3,949 2,059 1,106 15 209,953 Public Deposits ------Commercial Deposits - 34,808 144,708 7,696 6,360 1,251 - 194,823 Other Deposits - 854 7,163 8 4 1 - 8,030 Deposit with 7 Days Notification ------Precious Metal Deposits - 81 1,335 1 1 - - 1,418 Total - 47,907 344,805 11,654 8,424 2,358 15 415,163 Foreign Currency Foreign Currency Account - 3,488 66,980 5,041 772 341 - 76,622 Bank Deposits - 2,694 - - - - - 2,694 Deposit with 7 Days Notification ------Precious Metal Deposits ------Total - 6,182 66,980 5,041 772 341 - 79,316 Grand Total - 54,089 411,785 16,695 9,196 2,699 15 494,479 c. Information on dividend income

There is no dividend income as of 31 December 2016 (31 December 2015: None). d. Information on trading income/loss (Net)

31 December 2016 31 December 2015 Income 10,084,491 10,691,157 Income from Capital Market Transactions 38,261 6,401 Derivative Financial Transactions 716,372 723,988 Foreign Exchange Gains 9,329,858 9,960,768 Loss (-) 10,024,542 10,731,321 Loss from Capital Market Transactions 12,375 1,922 Derivative Financial Transactions 775,548 652,355 Foreign Exchange Loss 9,236,619 10,077,044 Net Income/(Loss) 59,949 (40,164)

185 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) e. Explanations about other operating income

31 December 2016 31 December 2015 Reversal of Specific Loan Provisions (*) 167,454 145,434 Gain on Sale of Property, Plant and Equipment 3,289 14,159 Provision for Communication Costs Received from Customers 1,207 1,981 Provision for the Expenses Recovered from Customers 822 3,303 Cancellation of Provisions for Real Estates to be Disposed 356 - Commissions Received from Subsidiaries - 210 Other 5,842 4,466 Total 178,970 169,553

(*) The Bank has written-off of non-performing loans under the collections campaign of TL 1,759 with a net book value of TL 74 and provision amounting to TL 1,685 in May and has sold non-performing loans of TL 99,396 with a net book value of TL 179 and provision amounting to TL 99,217 to Turk Asset Varlık Yönetim A.Ş. on August 17, 2016 for TL 2,000. f. Provision expenses related to loans and other receivables

31 December 2016 31 December 2015 Specific Provisions for Loans and Other Receivables 204,950 163,562 III. Group Loans and Receivables 40,212 38,067 IV. Group Loans and Receivables 63,150 54,285 V. Group Loans and Receivables 101,588 71,210 General Provision Expenses - 30,498 General Provisions for Possible Risks - - Marketable Securities Impairment Expense 13,140 4,924 Financial Assets at Fair Value Through Profit or Loss 154 3,372 Available-for-sale Financial Assets 12,986 1,552 Investments in Associates, Subsidiaries and Held-to-Maturity Securities Value Decrease - - Investments in Associates - - Subsidiaries - - Joint Ventures - - Held-to-Maturity Investments - - Other 19,296 8,986 Total 237,386 207,970 g. Information related to other operating expenses

31 December 2016 31 December 2015 Personnel Expenses 148,033 158,318 Reserve For Employee Termination Benefits - - Unused Vacation - - Impairment Expenses of Tangible Assets - - Depreciation Expenses of Tangible Assets 8,495 8,356 Impairment Expenses of Intangible Assets - - Impairment Expense of Goodwill - - Amortisation Expenses of Intangible Assets 5,349 3,466 Impairment Expenses of Equity Participations Accounted for under Equity Method - - Impairment Expenses of Assets Held For Sale - - Depreciation Expenses of Assets Held for Sale 962 586 Impairment Expenses of Tangible Assets Held for Sale - - Other Operating Expenses 86,658 87,715 Operational Lease Expenses 29,551 31,062 Maintenance Expenses 976 1,073 Advertising Expenses 4,460 1,811 Other Expenses 51,671 53,769 Loss on Sales of Assets (**) 101,007 129,033 Other (*) 22,485 23,090 Total 372,989 410,564

(*) Other operating charges is TL 5,912 (31 December 2015: TL 5,557) and except premium of SDIF amounting to TL 16,573 and tax. (**)The Bank has written-off of non-performing loans under the collections campaign of TL 1,759 with a net book value of TL 74 and provision amounting to TL 1,685 in May and has sold non-performing loans of TL 99,396 with a net book value of TL 179 and provision amounting to TL 99,217 to Turk Asset Varlık Yönetim A.Ş. on August 17, 2016 for TL 2,000.

186 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) h. Explanations on profit and loss from continuing operations before tax

31 December 2016 31 December 2015 Net Interest Income 345,536 511,637 Net Fees And Commissions Income/Expense 27,857 62,617 Trading Income / Loss (Net) 59,949 (40,164) Other Operating Income 178,970 169,553 Provision For Loan Losses And Other Receivables (-) (237,386) (207,970) Other Operating Expenses (-) (372,989) (410,564) Income/ Loss Before Tax From Continuing Operations 1,937 85,109 i. Provision for taxes on income from continuing operations

As of 31 December 2016, the Bank has current tax expense amounting to TL 2,074 (31 December 2015: TL 24,664), and deferred tax income amounting to TL 8,941 (31 December 2015: TL 934 deferred tax expense). j. Information on net income/loss for the period

1) Interest income from ordinary banking transactions is TL 1,052,203 (31 December 2015: TL 1,071,060), interest expense is TL 706,667 (31 December 2015: TL 559,423).

2) Information on any change in the accounting estimates has no profit/loss effect on current period or consequent periods. k. If the other items in the income statement exceed 10% of the income statement total, accounts amounting to at least 20% of these items are shown below:

Fees and Commissions Paid-Other 31 December 2016 31 December 2015 Fees and Commissions on Foreign Currency Transactions 12,099 1,790 Debit Card Fees and Commissions 9,243 2,026 CBRT Interbank Money Market 1,330 1,278 Pos Transaction Commissions Paid 654 843 Commisions Granted to Correspondent Banks 806 797 Transfer Commissions 369 463 Commissions for Effective and Future Transactions 1,211 287 Other 2,843 4,624 Total 28,555 12,108

Fees and Commissions Received-Other 31 December 2016 31 December 2015 Credit Card Pos Commissions 16,619 7,390 Account Management Fee Commission 1,490 2,591 Transfer Commissions 1,642 1,951 Insurance Commissions 2,804 3,076 Expertise Commissions 1,836 1,839 Banking Service Income 610 1,060 Other 2,766 (*)25,287 Total 27,767 43,194

(*)Consist of other guarantee commissions amounting to TL 23,380.

V. Explanations and Notes on Changes in Shareholders’ Equity a. Information on profit distribution:

According to the decision taken in the General Assembly of the Bank dated 31 March 2016, distributable profit of 2015 amounting to TL 65,228 is distributed as TL 3,261 to legal reserves and the rest amounting to TL 61,967 is distributed as extraordinary reserves.

187 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Information on available for sale financial assets:

“Unrealised gain/loss” arising from changes in the fair value of securities classified as available-for-sale are not recognized in current year profit and loss statement but recognized in the “Marketable securities value increase fund” account under equity, until the financial assets are derecognised, sold, disposed or impaired. c. Information on increase/decrease amounts result from the merger:

None. d. Information on share issue premium:

Explained in details in note XIX of section three.

VI. Explanations And Notes on Statement Of Cash Flows a. Information on cash and cash equivalent assets:

1. Components of cash and cash equivalents and the accounting policy applied in their determination:

Cash and foreign currency together with demand deposits at banks including the CBRT are defined as “Cash”; Interbank money market and time deposits in banks with original maturities of less than three months are defined as “Cash Equivalents”.

2. Effect of a change on the accounting policies: None.

3. Reconciliation of cash and cash equivalent items with balance sheet and cash flow statements:

3 (i). Cash and cash equivalents at the beginning of period:

31 December 2016 31 December 2015 Cash 80,405 97,541 Cash Equivalents 1,205,727 352,502 CBRT 244,340 249,772 Deposits in Bank and Other Financial Inst. 611,387 102,730 Money Markets 350,000 - Total Cash and Cash Equivalents 1,286,132 450,043

The total amount from the operations occurring in the prior period is the total cash and cash equivalents amount at the beginning of the current period,

3(ii). Cash and cash equivalents at the end of the period:

31 December 2016 31 December 2015 Cash 102,047 80,405 Cash Equivalents 1,371,460 1,205,727 CBRT 481,133 244,340 Deposits in Bank and Other Financial Inst. 540,327 611,387 Money Markets 350,000 350,000 Total Cash and Cash Equivalents 1,473,507 1,286,132 b Information on cash and cash equivalents that are not in use due to legal limitations and other reasons:

TL 1,384,645 of unfixed principal amount in the account of Central Bank of Turkey is required reserve established in FX and gold, for the TRY, FX and gold liabilities of the Bank (31 December 2015: TL 1,219,327).

188 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) c.The effects of the change in foreign exchange rates on cash and cash equivalents:

Increase in “Other Account” amounting to TL 873,150 (31 December 2015: TL 803,367 increase) which is classified under “Operating profit before changes in operating assets and liabilities” basically includes Fee and Commissions, Other Operating Expenses excluding Personnel Expenses, Foreign Exchange Gains/Losses as well as Provision and Depreciation that do not create cash in/outflow.

Decrease in “Net increase/decrease in other liabilities amounting to TL 38,505 (31 December 2015: TL 86,399 decrease ) which is classified under “Operating profit before changes in operating assets and liabilities” includes changes in Miscellaneous Payables, Other Liabilities, Taxes Payable, Charges, Duties and Premiums.

The effects of the change in foreign exchange rates on cash and cash equivalents is calculated approximately TL 322,333 as of 31 December 2016 (31 December 2015: TL 341,253).

VII. Explanations and Notes on Bank’s Risk Group a. The volume of transactions relating to the Bank’s risk group, outstanding loan and deposit transactions and profit and loss of the period

1. 31 December 2016

Other real and legal persons Associates, subsidiaries and Direct and indirect that have been included in the joint ventures shareholders of the Bank risk group Bank’s Risk Group (*) (**) Cash Non-Cash Cash Non-Cash Cash Non-cash Loans and Other Receivables Balance at the Beginning of the Period 55,395 1,897 79,726 53,526 130,282 26,379 Balance at the End of the Period 102,576 6,125 - 80,452 18,795 - Interest and Commission Income Received 4,098 577 - 26 122 4

(*) Defined in the 49th article of paragraph 2 of the Banking Act No. 5411. (**) The information in table above includes bank receivables as well as loans and receivables.

2. 31 December 2015

Other real and legal persons Associates, subsidiaries and Direct and indirect that have been included in joint ventures shareholders of the Bank the risk group Bank’s Risk Group (*) (**) Cash Non-Cash Cash Non-Cash Cash Non-cash Loans and Other Receivables Balance at the Beginning of the Period 1 2,333 28,423 74,604 57,545 70,868 Balance at the End of the Period 55,395 1,897 79,726 53,526 130,282 26,379 Interest and Commission Income Received 1,542 660 5,056 9,821 4,071 826

(*) Defined in the 49th article of paragraph 2 of the Banking Act No. 5411. (**) The information in table above includes banks as well as loans and receivables.

3. Information on deposits of the Bank’s risk group

Other real and legal persons Associates , subsidiaries and Direct and indirect that have been included in Bank’s Risk Group (*) joint ventures shareholders of the Bank the risk group 31 December 31 December 31 December 31 December 31 December 31 December Deposit 2016 2015 2016 2015 2016 2015 Beginning of the Period 49,552 22,114 256,033 944,138 94,743 291,313 End of the Period 110,659 49,552 - 256,033 21,532 94,743 Interest Expense on Deposits 4,168 5,671 28,104 59,408 1,250 23,253

(*) Defined in the 49th article of subsection 2 of the Banking Act No. 5411.

189 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

4. Information on forward and option agreements and other derivative instruments with the Bank’s risk group

Other real and legal persons Associates , subsidiaries Direct and indirect that have been included in Bank’s Risk Group (*) and joint ventures shareholders of the Bank the risk group 31 December 31 December 31 December 31 December 31 December 31 December 2016 2015 2016 2015 2016 2015 Transactions for trading purposes (**) Beginning of the Period (***) - - 13,945 5,411 - - End of the Period (***) 36,123 - - 13,945 - - Total Profit / Loss 115 240 1 1,259 - 161 Transactions for hedging purposes Beginning of the Period (***) ------End of the Period (***) ------Total Profit / Loss ------

(*) Defined in the 49th article of subsection 2 of the Banking Act No. 5411. (**) The Bank’s derivative instruments are classified as “Financial Assets at Fair Value through Profit or Loss” according to TAS 39. (***) The balances at the beginning and end of the periods are disclosed as the total of purchase and sell amounts of derivative financial instruments. b. With respect to the Bank’s risk group

1. The relations with entities that are included in the Bank’s risk group and controlled by the Bank irrespective of the relationship between the parties:

The Bank performs various transactions with group companies during its banking activities. These are commercial transactions realised with market prices.

2. The type of transaction, the amount and its ratio to total transaction volume, the amount of significant items and their ratios to total items, pricing policy and other issues

Total Risk Group Share in Financial Statements (%) Deposits 132,191 1.48% Non-cash Loans 86,577 2.93% Loans 121,371 1.17% Subordinated Loan 439,900 29.24%

These transactions are priced according to the Bank’s pricing policy and they are in line with the market prices.

3. Equity accounted transactions

None.

4. Information on transactions such as purchase-sale of immovable and other assets, purchase-sale of service, agent agreements, financial lease agreements, transfer of the information gained as a result of research and development, license agreements, financing (including loans and cash or in kind capital), guarantees, collaterals and management contracts

As of 31 December 2016, there is no financial leasing agreement between the Bank and Alternatif Finansal Kiralama A.Ş. Also the agency agreement with Alternatif Yatırım A.Ş. is cancelled on 30 June 2015. The Bank has also cost sharing agreements with Alternatif Finansal Kiralama A.Ş. and Alternatif Yatırım Menkul Değerler A.Ş.

The Bank allocates cash and non-cash loans to the risk group of the Bank within limits of Banking Laws and that amount is 1.56% of total cash and non-cash loan amount (31 December 2015: 2.83%).

190 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) c. Information regarding benefits provided to the Bank’s key management

Benefits provided to the Bank’s key management amount to TL 20,171 as of 31 December 2016 (31 December 2015: TL 18,664).

VIII. Explanations and Notes on The Domestic, Foreign, Off-Shore Branches and Foreign Representatives of The Bank a. Information on the Bank’s domestic, foreign branches and foreign representatives:

Number Number of Employees Domestic Branch 53 928 Country of Incorporation Foreign Representative Office - - - Statutory share Total Asset capital Foreign Branch - - - - - Off-Shore Banking Region Branch - - - - - b. Explanations on opening, closing of a branch or agency of the Bank or changing its organizational structure significantly

The Bank does not open any new branch in 2016.

IX. Explanations and Notes on Subsequent Events

None.

191 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE UNCONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION SIX

OTHER EXPLANATIONS

I. Other Explanations Related to Bank’s Operations

Summary information about the Bank’s rates from international credit rating agencies

Fitch Ratings: August 2016 Foreign Currency Long Term BBB (Negative) Short Term F2 Local Currency Long Term BBB (Negative) Short Term F2 National Note AAA(tur) (Stable) Support Note 2 Financial Capacity Note b+

Moody’s: September 2016 Foreign Currency Long Term Ba2 Short Term NP Local Currency Long Term Ba1 Short Term NP National Long Term Aa1.tr National Short Term TR-1 Outlook Stable

SECTION SEVEN

DISCLOSURES ON THE INDEPENDENT AUDITORS’ REPORT

I. Explanations on the Independent Auditors’ Report

The Bank’s unconsolidated financial statements and footnotes to be disclosed to public as of 31 December 2016 have been audited by Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. (the Turkish member firm of KPMG International, a Swiss cooperative) and the auditor’s report dated 31 January 2017 has been presented with the unconsolidated financial statements.

II. Explanations and Footnotes Prepared by Independent Auditor

None.

192 (Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish, See Note I in Section Three) ALTERNATIFBANK A.Ş.

Consolidated Financial Statements As of and For the Year Ended 31 December 2016 With Independent Auditors’ Report Thereon

(Convenience Translation of Consolidated Financial Statements and Related Disclosures and Footnotes Originally Issued in Turkish

31 January 2017 This report includes “Independent Auditor’s Report” comprising 1 pages and; "Consolidated Financial Statements and Related Disclosures and Footnotes” comprising 104 pages. CONVENIENCE TRANSLATION OF THE INDEPENDENT AUDITORS’ REPORT ORIGINALLY PREPARED AND ISSUED IN TURKISH TO ENGLISH (SEE NOTE I IN SECTION THREE)

To the Board of Directors of Alternatifbank Anonim Şirketi;

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements of Alternatifbank Anonim Şirketi (“the Bank”) which comprise the consolidated statement of financial position as at 31 December 2016 and the consolidated statement of income, consolidated statement of income and expense items under shareholders’ equity, consolidated statement of changes in shareholders’ equity, consolidated statement of cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the “Banking Regulation and Supervision Agency (“BRSA”) Accounting and Reporting Legislation” which includes the “Regulation on Accounting Applications for Banks and Safeguarding of Documents” published in the Official Gazette No.26333 dated 1 November 2006, and other regulations on accounting records of Banks published by Banking Regulation and Supervision Board and circulars and interpretations published by BRSA and requirements of Turkish Accounting Standards for the matters not regulated by the aforementioned legislations, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the “Regulation on Independent Audit of the Banks” published in the Official Gazette No.29314 dated 2 April 2015 by BRSA and Independent Standards on Auditing which is a component of the Turkish Auditing Standards published by the Public Oversight Accounting and Auditing Standards Authority (“POA”). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Alternatifbank Anonim Şirketi as at 31 December 2016, and its financial performance and its cash flows for the year then ended in accordance with BRSA Accounting and Reporting Legislation.

Report on Other Legal and Regulatory Requirements

1) Pursuant to the fourth paragraph of Article 402 of the Turkish Commercial Code (“TCC”) No.6102; no significant matter has come to our attention that causes us to believe that the Bank’s bookkeeping activities for the period 1 January - 31 December 2016 are not in compliance with TCC and provisions of the Bank’s articles of association in relation to financial reporting.

2) Pursuant to the fourth paragraph of Article 402 of the TCC; the Board of Directors provided us the necessary explanations and required documents in connection with the audit.

Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik Anonim Şirketi A member firm of KPMG International Cooperative

Murat Alsan Partner, SMMM

31 January 2017 İstanbul, Turkey

Additional paragraph for convenience translation to English

The accounting principles summarized in Note I Section Three, differ from the accounting principles generally accepted in countries in which the accompanying consolidated financial statements are to be distributed and International Financial Reporting Standards (“IFRS”). Accordingly, the accompanying financial statements are not intended to present the financial position and results of operations in accordance with accounting principles generally accepted in such countries of users of the consolidated financial statements and IFRS. FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. THE CONSOLIDATED FINANCIAL REPORT OF ALTERNATİFBANK A.Ş. AS OF AND FOR THE YEAR ENDED 31 DECEMBER 2016

Headquarter Address : Cumhuriyet Cad. No:46 34367 Şişli/İstanbul Telephone : 0 212 315 65 00 Fax : 0 212 225 76 15 Web site : www.abank.com.tr E-mail : [email protected]

The consolidated financial report as of and for the year ended 31 December 2016 prepared in accordance with the communiqué of “Financial Statements and Related Disclosures and Footnotes to be announced to Public by Banks” as regulated by the Banking Regulation and Supervision Agency, comprises the following sections.

• GENERAL INFORMATION ABOUT THE GROUP • CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP • EXPLANATIONS ON THE ACCOUNTING POLICIES APPLIED IN THE CURRENT PERIOD • INFORMATION ON THE FINANCIAL POSITION AND RISK MANAGEMENT OF THE GROUP • EXPLANATIONS AND NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS • OTHER EXPLANATIONS • DISCLOSURES RELATED TO INDEPENDENT AUDITORS’ REPORT

Associates, subsidiaries and special purpose entities whose financial statements have been consolidated in the consolidated financial report are as follows:

Subsidiaries:

1. Alternatif Menkul Değerler A.Ş. 2. Alternatif Finansal Kiralama A.Ş.

The accompanying consolidated financial statements and notes to these financial statements for the year ended which are expressed, unless otherwise stated, in thousands of Turkish Lira (TL) , have been prepared and presented based on the accounting books of the Bank in accordance with the Regulation on Accounting Applications for Banks and Safeguarding of Documents, Turkish Accounting Standards, Turkish Financial Reporting Standards, and related appendices and interpretations of these, and have been independently audited and presented as attached.

Omer Hussain I H Müge Öner Kağan Gündüz Alper Uzeli Al-Fardan Acting CEO Financial Control and Financial Control Chairman of the Board Planning Executive Vice Manager of Directors President

Didem Çerçi Izzat Dajani Vice-Chairlady of the Board Member of Board of of Directors and Chairlady Directors and Member of of Board Audit Committee Board Audit Committee

The authorized contact person for questions on this financial report:

Name-Surname / Title : Alper Uzeli / Financial Control Manager Telephone Number : 0 212 315 69 53 Fax Number : 0 212 226 76 15

195 SECTION ONE GENERAL INFORMATION ABOUT THE GROUP

I. The Parent Bank’s establishment date, initial status, history including the changes in the former status 197 II. Explanation on the Capital Structure, Shareholders who Directly or Indirectly, Solely or Jointly Undertake the Management and Control of the Parent Bank, any Changes in the Period, and Information on the Parent Bank’s Risk Group 197 III. Explanation on the Board of directors, members of the audit committee, president and executive vice presidents, changes in these matters (if any) and shares in the Parent Bank 198 IV. Information on the Parent Bank’s Qualified Shareholders 199 V. Summary information on the Parent bank’s activities and services 199 VI. Differences between the communique on preparation of consolidated financial statements of banks and Turkish Accounting Standarts and short explanation about the institutions subject to line-by-line method or proportional consolidated and institutions which are deducted from equity or not included in these three method 199 VII. Existing or potential, actual or legal obstacles to immediate transfer of equity, or repayment of debt between the parent bank and its subsidiaries 199

SECTION TWO CONSOLIDATED FINANCIAL STATEMENTS

I. Balance sheet (Statement of Financial Position) 200-201 II. Off-balance sheet items 202 III. Income statement 203 IV. Statement of income and income and expense items accounted under shareholders equity 204 V. Statement of changes in shareholders’ equity 205-206 VI. Statement of cash flows 207 VII. Profit Distribution statement 208

SECTION THREE EXPLANATIONS ON ACCOUNTING POLICIES

I. Basis of presentation 209 II. Strategy of using financial instruments and foreign currency transactions 209 III. Consolidated subsidiaries 209-210 IV. Forward transactions, options and derivative instruments 211 V. Interest income and expense 211 VI. Fee and commission income and expense 211-212 VII. Financial assets 212-213 VIII. Impairment of financial assets 213 IX. Offsetting financial assets 213 X. Sales and repurchase agreements and securities lending transactions 213 XI. Assets held for sale and discontinued operations 213-214 XII. Goodwill and other intangible assets 214 XIII. Property and equipment 214 XIV. Leasing transactions 215 XV. Provisions, contingent asset and liabilities 215 XVI. Obligations related to employee rights 215-216 XVII. Taxation 216 XVIII. Additional explanations on borrowings 216 XIX. Share certificates and issuance of share certificates 216 XX. Avalized drafts and acceptances 216 XXI. Government grants 216 XXII. Profit reserves and profit distribution 216 XXIII. Earnings per share 217 XXIV. Related parties 217 XXV. Cash and cash equivalents 217 XXVI. Operating segments 217-218

SECTION FOUR INFORMATION ON THE FINANCIAL POSITION OF THE GROUP

I. Information on capital adequacy ratio 219-227 II. Explanations on currency risk 227-229 III. Explanations on interest rate risk 229-233 IV. Explanations on share certificates 234 V. Explanations on liquidity risk management and liquidity coverage ratio 234-241 VI. Explanations on leverage ratio 242 VII. Explanations on the risk management 242-264 VIII. Explanations on regarding the presentation of financial assets and liabilities at their fair values 265-266 IX. Explanations on hedge accounting 267

SECTION FIVE EXPLANATIONS AND NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS

I. Explanations and notes on the assets 268-280 II. Explanations and notes on the liabilities 281-286 III. Explanations and notes on the off-balance sheet accounts 287-289 IV. Explanations and notes on the income statement 289-294 V. Explanations and notes on changes in shareholders’ equity 294 VI. Explanations and notes on statement of cash flows 295 VII. Explanations and notes on the parent banks’ risk group 295-298 VIII. Explanations and notes on the domestic,foreign, off-shore branchs and foreign representatives of the bank 298 IX. Explanations and notes on subsequent events 298

SECTION SIX OTHER EXPLANATIONS AND NOTES

I. Other explanations related to the Parent Bank’s operations 299

SECTION SEVEN DISCLOSURES ON INDEPENDENT AUDITOR’S REPORT

I. Explanations on independent auditor’s report 299 II. Explanations and footnotes prepared by independent auditor 299 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION ONE

GENERAL INFORMATION ABOUT THE GROUP

I. Explanations on the Establishment Date and Initial Status of the Parent Bank, and History Including the Changes in the Former Status

Alternatifbank A.Ş. (“the Bank” or “the Parent Bank”), was established in Istanbul on 6 November 1991 and started Banking activities on February 1992. The Bank’s ordinary shares started to be traded in Istanbul Stock Exchange on 3 July 1995. The Bank is still a privately owned commercial bank status and provides banking services through 53 (31 December 2015:59) branches.

The Parent Bank made an application to Capital Market Board and Borsa İstanbul A.Ş. about to leave the partnership and delisting the stock-exchange quotation in accordance with clauses of Capital Market Board “Squeeze-out and Sell-out Rights Communiqué” on 11 July 2014. “Capital Issue Document” prepared for the capital increase allocated to controlling shareholder Commercial Bank of Qatar in the context of the process of squeeze-out and sell-out rights from the minority in accordance with “Squeeze-out and Sell-out Rights Communiqué” has been approved by Capital Market Board on 23 July 2015. As of this date, Alternatifbank A.Ş. delisted from the stock- exchange.

II. Explanations on the Capital Structure, Shareholders who Directly or Indirectly, Solely or Jointly Undertake the Management and Control of the Parent Bank, any Changes in the Period, and Information on the Parent Bank’s Risk Group

As of 31 December 2016, 100% of the shares of the Bank are owned by The Commercial Bank (P.S.Q.C.). Shareholder’s structure of the Bank is as follows:

31 December 2016 31 December 2015 Name/Commercial Name Share Amount Share Ratio Share Amount Share Ratio The Commercial Bank (P.S.Q.C.) 980,000 100% 465,000 75.00% Anadolu Endüstri Holding A.Ş. (**) - - 106,683 17.21% Anadolu Aktif Teşebbus ve Makine Ticaret A.Ş. (**) - - 48,317 7.79% Total (*) 980,000 100% 620,000 100%

(*) It is decided to increase the capital in cash by TL 150,000 with the decision of Board of Directors as of 21 January 2016, after the approval of BRSA the paid in capital is increased TL 150,000 to TL 770,000 as of 14 April 2016. With the decision of number 166 of the Board of Directors dated on 19 December 2016 and with the approval of BRSA dated on 29 December 2016, decided to increase the capital from TL 770,000 to TL 980,000. In this respect, The Commercial Bank (P.S.Q.C.) was included in the capital increase with TL 210,000. Registration process is continuing. (**) With the decision number 166 of the Board of Directors dated on 19 December 2016 and with the approval of BRSA dated on 26 October 2016, 25% and 192.500.000 in the name of the holder shares of Anadolu Endüstri Holding A.Ş. was transferred to The Commercial Bank (P.S.Q.C.).

197 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

III. Explanation on the Board of Directors, Members of the Audit Committee, President and Executive Vice Presidents, Changes in These Matters (If Any) and Shares in the Parent Bank

Indirect Share Title Name Responsibility (*) Capital (%) Chairman of Board of Directors Omer Hussain I H Al-Fardan - -

Vice-Chairlady of the Board of Directors and Chairlady Member of Board of Directors Didem Çerçi of Board Audit Committee - Chairman of the Credit Committee, Chairman of the Executive Committee of the Board, Chairman of the Joseph Abraham Remuneration Committee - Member of the Credit Committee and the Executive Fahad Abdulrahman Badar Committee of the Board - Member of the Audit Committee and the Remuneration İzzat Dajani Committee - Mohd İsmail M Mandani Al-Emadi Alternate Member of the Audit Committee - Paul Gossiaux Member of the Credit Committee - Gerard George Rizk Member of the Audit Committee - Member of Board of Directors and Acting General Manager Müge Öner Member of the Credit Committee, The Executive Committee of the Board - Risk ve Krediler-Baş Genel Müdür Yardımcısı - Executive Vice Presidents Seher Demet Tanrıöver Çaldağ Credit Risk Management-Chief Risk Officer - Suat Çetin Operations- Consumer Relations Coordination Officer - Sezin Erken Retail Banking - Kağan Gündüz Financial Control and Planning - Mete Hakan Güner Commercial Banking - Musa Kerim Mutluay Restructuring and Legal Follow-up - Durul Selçuk Human Resources - Muzaffer Gökhan Songül Credit Allocation - Şakir Sömek Financial Institutions - Information Technologies and Operations- Tanol Türkoğlu Chief Operating Officer - Ahmet Kağan Yıldırım Chief Business Officer - Chairman of Board of Inspectors Mustafa Mutlu Çalışkan Board of Inspectors -

(*) With the decision of the Board of Directors dated on 19 December 2016, the duties and responsibilities of Risk Committee were transferred to the Audit Committee and the activities of the Risk Committee have been terminated. With the decision taken at the the Bank Ordinary General Meeting dated 31 March 2016, members of the Board of Directors Nicholas Charles Coleman, Bahattin Gürbüz, İpek Özkan and Kemal Semerciler were resigned from the Board of Directors. With the decision number 48 of the Board of Directors dated on 21 April 2016, Andrew Charles Stevens was resigned from the Board of Directors. With the decision number 179 of the Board of Directors dated on 19 December 2016, Tuncay Özilhan and Mehmet Hurşit Zorlu were resigned from the Board of Directors.

198 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

IV. Information on the Parent Bank’s Qualified Shareholders

According to the Banking Act No: 5411 regarding definition of Qualified Shares and Bank Transactions that are subject to Permission and Indirect Shareholding Regulation’s article 13, direct and indirect qualified shareholders of the Parent Bank’s Capital is as follows.

Share Amounts Paid-in Capital Name/Commercial Title (Nominal) Share Rates (Nominal) Unpaid Portion The Commercial Bank (P.S.Q.C.) 980,000 100.00% 980,000 -

V. Summary Information on the Parent Bank’s Activities and Services

The Parent Bank’s operations are extending TL and foreign currency cash and non cash loans, performing capital market transactions, opening deposit and making other banking transactions according to regulation principles given by the Bank’s Articles of Association.

As of 31 December 2016, the Parent Bank has 53 branches (31 December 2015: 59 branches) and has 928 employees (31 December 2015: 1,038 employees).

Parent Bank and its subsidiaries that are consolidated with the Parent Bank are called “Group” as a whole. As of 31 December 2016, The Group has 1,000 employees (31 December 2015: 1,107 employees).

VI. Differences Between the Communique on Preperation of Consolidated Financial Statements of Banks and Turkish Accounting Standarts and Short Explanation About the Institutions Subject to Line-by-Line Method or Proportional Consolidation and Institutions Which Are Deducted From Equity or Not Included in These Three Methods

None.

VII. Existing or Potential, Actual or Legal Obstacles to Immediate Transfer of Equity, or Repayment of Debt Between the Parent Bank and Its Subsidiaries

None.

199 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI CONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

I. BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

Note (Section Five) 31 December 2016 31 December 2015 ASSETS TL FC Total TL FC Total I. CASH AND BALANCES WITH CENTRAL BANK I-a 149,340 1,820,848 1,970,188 51,568 1,493,930 1,545,498 II. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT or LOSS (Net) I-b 26,673 35,277 61,950 22,625 5,037 27,662 2.1 Financial Assets Held for Trading 26,673 35,277 61,950 22,625 5,037 27,662 2.1.1 Public Sector Debt Securities - 526 526 1 421 422 2.1.2 Equity Securities ------2.1.3 Derivative Financial Assets Held for Trading 26,673 34,751 61,424 22,624 4,616 27,240 2.1.4 Other Marketable Securities ------2.2 Financial Assets at Fair Value through Profit and Loss ------2.2.1 Government Debt Securities ------2.2.2 Equity Securities ------2.2.3 Loans ------2.2.4 Other Marketable Securities ------III. BANKS I-c 121,348 463,587 584,935 289,918 322,078 611,996 IV. MONEY MARKETS PLACEMENTS 350,081 - 350,081 350,105 - 350,105 4.1 Interbank Money Market Placements ------4.2 Receivables from Istanbul Stock Exchange Money Market - - - 50,017 - 50,017 4.3 Receivables from Reverse Repurchase Agreements 350,081 - 350,081 300,088 - 300,088 V. FINANCIAL ASSETS AVAILABLE-FOR-SALE (Net) I-d 301,283 2,028,756 2,330,039 354,939 462,164 817,103 5.1 Share Certificates 6,065 - 6,065 5,882 - 5,882 5.2 Government Debt Securities 293,186 1,701,761 1,994,947 343,916 323,156 667,072 5.3 Other Marketable Securities 2,032 326,995 329,027 5,141 139,008 144,149 VI. LOANS I-e 5,310,753 5,178,096 10,488,849 5,112,325 4,193,337 9,305,662 6.1 Loans 5,085,781 5,169,561 10,255,342 4,884,144 4,185,677 9,069,821 6.1.1 Loans to the Bank’s Risk Group 161 18,634 18,795 15,853 194,175 210,028 6.1.2 Public Sector Debt Securities ------6.1.3 Other 5,085,620 5,150,927 10,236,547 4,868,291 3,991,502 8,859,793 6.2 Non Performing Loans 582,430 22,357 604,787 496,909 20,432 517,341 6.3 Specific Provisions (-) 357,458 13,822 371,280 268,728 12,772 281,500 VII. FACTORING RECEIVABLES ------VIII. HELD-TO-MATURITY SECURITIES (Net) I-f ------8.1 Public Sector Debt Securities ------8.2 Other Marketable Securities ------IX. INVESTMENTS IN ASSOCIATES (Net) I-g ------9.1 Accounted for under Equity Method ------9.2 Unconsolidated Associates ------9.2.1 Financial Investments ------9.2.2 Non-financial Investments ------X. INVESTMENTS IN SUBSIDIARIES (Net) I-h ------10.1 Unconsolidated Financial Subsidiaries ------10.2 Unconsolidated Non-Financial Subsidiaries ------XI. ENTITIES UNDER COMMON CONTROL (JOINT VENTURES) (Net) I-i ------11.1 Consolidated Under Equity Method ------11.2 Unconsolidated ------11.2.1 Financial Joint Ventures ------11.2.2 Non-Financial Joint Ventures ------XII. LEASE RECEIVABLES (Net) I-j 262,789 982,806 1,245,595 243,003 788,646 1,031,649 12.1 Financial Lease Receivables 318,614 1,046,585 1,365,199 287,166 885,242 1,172,408 12.2 Operational Lease Receivables ------12.3 Other 1,027 41,656 42,683 6,568 12,979 19,547 12.4 Unearned Income ( - ) 56,852 105,435 162,287 50,731 109,575 160,306 XIII. HEDGING DERIVATIVE FINANCIAL ASSETS I-k ------13.1 Fair Value Hedge ------13.2 Cash Flow Hedge ------13.3 Net Foreign Investment Hedge ------XIV. TANGIBLE ASSETS (Net) I-l 36,674 - 36,674 29,493 - 29,493 XV. INTANGIBLE ASSETS (Net) I-m 86,837 - 86,837 82,808 - 82,808 15.1 Goodwill 49,647 - 49,647 49,647 - 49,647 15.2 Other 37,190 - 37,190 33,161 - 33,161 XVI. INVESTMENT PROPERTY (Net) I-n ------XVII. TAX ASSET II-i 64,458 - 64,458 26,707 - 26,707 17.1 Current Tax Asset ------17.2 Deferred Tax Asset 64,458 - 64,458 26,707 - 26,707 XVIII. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (Net) I-o ------18.1 Assets Held for Sale ------18.2 Assets of Discontinued Operations ------XIX. OTHER ASSETS I-p 240,275 131,282 371,557 196,319 39,821 236,140 TOTAL ASSETS 6,950,511 10,640,652 17,591,163 6,759,810 7,305,013 14,064,823

The accompanying notes are an integral part of these consolidated financial statements.

200 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI CONSOLIDATED BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

I. BALANCE SHEET (STATEMENT OF FINANCIAL POSITION)

Note (Section Five) 31 December 2016 31 December 2015 LIABILITIES TL FC Total TL FC Total I. DEPOSITS II-a 4,587,476 4,210,511 8,797,987 3,410,988 2,827,495 6,238,483 1.1 Deposits from Bank’s Risk Group 740 20,792 21,532 238,127 112,564 350,691 1.2 Other 4,586,736 4,189,719 8,776,455 3,172,861 2,714,931 5,887,792 II. DERIVATIVE FINANCIAL LIABILITIES HELD FOR TRADING II-b 49,287 21,157 70,444 1,093 13,766 14,859 III. FUNDS BORROWED II-c 69,414 3,870,563 3,939,977 125,343 4,136,794 4,262,137 IV. MONEY MARKET FUNDS 213,347 313,068 526,415 242,379 116,444 358,823 4.1 Funds from Interbank Money Market ------4.2 Funds from Istanbul Stock Exchange Money Market 40,021 - 40,021 800 - 800 4.3 Funds Provided Under Repurchase Agreements 173,326 313,068 486,394 241,579 116,444 358,023 V. MARKETABLE SECURITIES ISSUED (Net) 151,924 889,656 1,041,580 142,088 735,736 877,824 5.1 Bills 151,924 889,656 1,041,580 142,088 735,736 877,824 5.2 Asset Backed Securities ------5.3 Bonds ------VI. FUNDS ------6.1 Borrower Funds ------6.2 Other ------VII. MISCELLANEOUS PAYABLES 91,400 119,061 210,461 94,534 124,914 219,448 VIII. OTHER LIABILITIES II-d 78,622 14,287 92,909 128,043 11,042 139,085 IX. FACTORING PAYABLES ------X. LEASE PAYABLES (Net) II-e ------10.1 Finance Lease Payables ------10.2 Operating Lease Payables ------10.3 Other ------10.4 Deferred Financial Lease Expenses (-) ------XI. DERIVATIVE FINANCIAL LIABILITIES FOR HEDGING PURPOSES II-f 404 - 404 113 - 113 11.1 Fair Value Hedge 404 - 404 113 - 113 11.2 Cash Flow Hedge ------11.3 Net Foreign Investment Hedge ------XII. PROVISIONS II-g 114,463 8 114,471 140,217 3 140,220 12.1 General Loan Loss Provision 52,211 - 52,211 93,386 - 93,386 12.2 Provisions for Restructuring ------12.3 Reserve for Employee Benefit 10,474 - 10,474 9,326 - 9,326 12.4 Insurance Technical Provisions (Net) ------12.5 Other Provisions 51,778 8 51,786 37,505 3 37,508 XIII. TAX LIABILITY II-h 22,230 - 22,230 28,497 - 28,497 13.1 Current Tax Liability 22,230 - 22,230 28,497 - 28,497 13.2 Deferred Tax Liability ------XIV. PAYABLES FOR ASSET-HELD-FOR-RESALE AND DISCONTINUED OPERATIONS (Net) 1,200 3,100 4,300 - 2,660 2,660 14.1 Held for Sale 1,200 3,100 4,300 - 2,660 2,660 14.2 Discontinued Operations ------XV. SUBORDINATED LOANS II-j - 1,504,693 1,504,693 - 767,558 767,558 XVI. SHAREHOLDERS' EQUITY II-k 1,416,101 (150,809) 1,265,292 1,026,512 (11,396) 1,015,116 16.1 Paid-in Capital 980,000 - 980,000 620,000 - 620,000 16.2 Capital Reserves (17,590) (150,809) (168,399) (17,511) (11,396) (28,907) 16.2.1 Share Premium 54 - 54 54 - 54 16.2.2 Share Cancellation Profits ------16.2.3 Marketable Securities Valuation Reserve (14,358) (150,809) (165,167) (16,041) (11,396) (27,437) 16.2.4 Tangible Assets Revaluation Reserve ------16.2.5 Intangible Assets Revaluation Reserve ------16.2.6 Investment Property Revaluation Reserve ------16.2.7 Bonus Shares Obtained from Investments in Associates, Subsidiaries and Joint Ventures ------16.2.8 Hedging Reserves (Effective portion) ------16.2.9 Value Differences of Assets Held for Resale and Discontinued Operations ------16.2.10 Other Capital Reserves (3,286) - (3,286) (1,524) - (1,524) 16.3 Profit Reserves 440,967 - 440,967 358,143 - 358,143 16.3.1 Legal Reserves 28,974 - 28,974 24,972 - 24,972 16.3.2 Status Reserves ------16.3.3 Extraordinary Reserves 411,993 - 411,993 333,171 - 333,171 16.3.4 Other Profit Reserves ------16.4 Profit or (Loss) 12,711 - 12,711 65,869 - 65,869 16.4.1 Prior Years’ Profit or (Loss) (17,652) - (17,652) (4,007) - (4,007) 16.4.2 Current Year Profit or (Loss) 30,363 - 30,363 69,876 - 69,876 16.5 Minority Shares II-l 13 - 13 11 - 11 TOTAL LIABILITIES 6,795,868 10,795,295 17,591,163 5,339,807 8,725,016 14,064,823

The accompanying notes are an integral part of these consolidated financial statements.

201 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI CONSOLIDATED STATEMENT OF OFF-BALANCE SHEET ITEMS AS AT 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

II. OFF - BALANCE SHEET ITEMS

Note (Section Five) 31 December 2016 31 December 2015 TL FC Total TL FC Total A OFF-BALANCE SHEET COMMITMENTS (I+II+III) 7,387,132 12,946,202 20,333,334 5,226,557 9,883,775 15,110,332 I. GUARANTEES AND WARRANTIES III-a-2 1,042,789 1,905,042 2,947,831 1,227,311 1,946,660 3,173,971 1.1 Letters of Guarantee III-a-2.ii 1,041,129 1,045,258 2,086,387 1,227,311 1,013,753 2,241,064 1.1.1 Guarantees Subject to State Tender Law 19,059 17,442 36,501 26,863 10,339 37,202 1.1.2 Guarantees Given for Foreign Trade Operations ------1.1.3 Other Letters of Guarantee 1,022,070 1,027,816 2,049,886 1,200,448 1,003,414 2,203,862 1.2 Bank Acceptances III-a-2.i - 3,885 3,885 - 35,849 35,849 1.2.1 Import Letter of Acceptance - 3,885 3,885 - 35,849 35,849 1.2.2 Other Bank Acceptances ------1.3 Letters of Credit III-a-2.i 1,660 264,016 265,676 - 345,726 345,726 1.3.1 Documentary Letters of Credit 1,660 264,016 265,676 - 345,726 345,726 1.3.2 Other Letters of Credit ------1.4 Prefinancing Given as Guarantee ------1.5 Endorsements ------1.5.1 Endorsements to the Central Bank of the Republic of Turkey ------1.5.2 Other Endorsements ------1.6 Securities Issue Purchase Guarantees ------1.7 Factoring Guarantees ------1.8 Other Guarantees III-a-2.i - 591,883 591,883 - 551,332 551,332 1.9 Other Warrantees ------II. COMMITMENTS 621,668 351,120 972,788 661,729 370,952 1,032,681 2.1 Irrevocable Commitments 604,591 252,959 857,550 642,402 303,575 945,977 2.1.1 Asset Purchase and Sales Commitments 20,846 60,548 81,394 7,151 78,176 85,327 2.1.2 Deposit Purchase and Sales Commitments - 192,411 192,411 - 204,579 204,579 2.1.3 Share Capital Commitments to Associates and Subsidiaries ------2.1.4 Commitments for Loan Limits III-a-1 191,311 - 191,311 228,546 - 228,546 2.1.5 Securities Issue Brokerage Commitments ------2.1.6 Commitments for Reserve Deposit Requirements ------2.1.7 Commitments for Cheques 218,649 - 218,649 234,439 - 234,439 2.1.8 Tax and Fund Liabilities from Export Commitments 3,738 - 3,738 3,738 - 3,738 2.1.9 Commitments for Credit Card Limits 128,405 - 128,405 125,780 - 125,780 2.1.10 Promotion Commitments for Credit Cards and Banking Services ------2.1.11 Receivables from Short Sale Commitments of Marketable Securities ------2.1.12 Payables for Short Sale Commitments of Marketable Securities ------2.1.13 Other Irrevocable Commitments 41,642 - 41,642 42,748 20,820 63,568 2.2 Revocable Commitments 17,077 98,161 115,238 19,327 67,377 86,704 2.2.1 Revocable Commitments for Loan Limits ------2.2.2 Other Revocable Commitments 17,077 98,161 115,238 19,327 67,377 86,704 III. DERIVATIVE FINANCIAL INSTRUMENTS III-b 5,722,675 10,690,040 16,412,715 3,337,517 7,566,163 10,903,680 3.1 Hedging Derivative Financial Instruments 220,000 - 220,000 220,000 - 220,000 3.1.1 Transactions for Fair Value Hedge 220,000 - 220,000 220,000 - 220,000 3.1.2 Transactions for Cash Flow Hedge ------3.1.3 Transactions for Foreign Net Investment Hedge ------3.2 Trading Derivative Financial Instruments 5,502,675 10,690,040 16,192,715 3,117,517 7,566,163 10,683,680 3.2.1 Forward Foreign Currency Buy/Sell Transactions 124,595 253,116 377,711 165,022 169,878 334,900 3.2.1.1 Forward Foreign Currency Transactions-Buy 47,584 128,590 176,174 77,419 79,246 156,665 3.2.1.2 Forward Foreign Currency Transactions-Sell 77,011 124,526 201,537 87,603 90,632 178,235 3.2.2 Swap Transactions Related to Foreign Currency and Interest Rates 4,624,187 8,053,933 12,678,120 2,842,823 5,000,065 7,842,888 3.2.2.1 Foreign Currency Swap-Buy 2,818,519 3,518,161 6,336,680 1,196,966 2,729,152 3,926,118 3.2.2.2 Foreign Currency Swap-Sell 1,805,668 4,535,772 6,341,440 1,645,857 2,270,913 3,916,770 3.2.2.3 Interest Rate Swap-Buy ------3.2.2.4 Interest Rate Swap-Sell ------3.2.3 Foreign Currency, Interest rate and Securities Options 753,893 2,326,684 3,080,577 109,672 2,349,530 2,459,202 3.2.3.1 Foreign Currency Options-Buy 310,722 849,263 1,159,985 43,385 626,975 670,360 3.2.3.2 Foreign Currency Options-Sell 443,171 708,925 1,152,096 66,287 603,127 669,414 3.2.3.3 Interest Rate Options-Buy - 384,248 384,248 - 559,714 559,714 3.2.3.4 Interest Rate Options-Sell - 384,248 384,248 - 559,714 559,714 3.2.3.5 Securities Options-Buy ------3.2.3.6 Securities Options-Sell ------3.2.4 Foreign Currency Futures ------3.2.4.1 Foreign Currency Futures-Buy ------3.2.4.2 Foreign Currency Futures-Sell ------3.2.5 Interest Rate Futures ------3.2.5.1 Interest Rate Futures-Buy ------3.2.5.2 Interest Rate Futures-Sell ------3.2.6 Other - 56,307 56,307 - 46,690 46,690 B. CUSTODY AND PLEDGES RECEIVED (IV+V+VI) 42,773,218 25,050,319 67,823,537 37,398,536 16,992,419 54,390,955 IV. ITEMS HELD IN CUSTODY 2,735,212 5,409,039 8,144,251 1,235,505 920,190 2,155,695 4.1 Customer Fund and Portfolio Balances 249,254 - 249,254 282,335 - 282,335 4.2 Investment Securities Held in Custody 456,731 40,195 496,926 440,482 17,717 458,199 4.3 Cheques Received for Collection 234,435 11,865 246,300 258,787 20,059 278,846 4.4 Commercial Notes Received for Collection 39,161 24,867 64,028 29,649 1,951 31,600 4.5 Other Assets Received for Collection ------4.6 Assets Received for Public Offering ------4.7 Other Items Under Custody 1,755,631 5,332,112 7,087,743 224,252 880,463 1,104,715 4.8 Custodians ------V. PLEDGES RECEIVED 40,022,286 19,641,088 59,663,374 36,150,274 16,072,070 52,222,344 5.1 Marketable Securities ------5.2 Guarantee Notes 27,757,789 12,345,999 40,103,788 27,224,938 10,804,073 38,029,011 5.3 Commodity 877,870 119,322 997,192 147,207 75,869 223,076 5.4 Warranty ------5.5 Immovable 9,117,030 5,392,089 14,509,119 7,260,996 4,294,007 11,555,003 5.6 Other Pledged Items 2,269,597 1,783,678 4,053,275 1,517,133 898,121 2,415,254 5.7 Pledged Items-Depository ------VI. ACCEPTED INDEPENDENT GUARANTEES AND WARRANTIES 15,720 192 15,912 12,757 159 12,916

TOTAL OFF-BALANCE SHEET COMMITMENTS (A+B) 50,160,350 37,996,521 88,156,871 42,625,093 26,876,194 69,501,287

The accompanying notes are an integral part of these consolidated financial statements.

202 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

III. INCOME STATEMENT

Note (Section 1 January 2016 – 1 January 2015 – INCOME AND EXPENSE ITEMS Five) 31 December 2016 31 December 2015 I. INTEREST INCOME IV-a 1,136,724 1,147,765 1.1 Interest on Loans 861,204 967,077 1.2 Interest Received from Reserve Requirements 8,841 3,194 1.3 Interest Received from Banks 18,398 10,474 1.4 Interest Received from Money Market Transactions 56,962 27,150 1.5 Interest Received from Marketable Securities Portfolio 99,046 60,853 1.5.1 Trading Financial Assets 771 862 1.5.2 Financial Assets at Fair Value through Profit or Loss - - 1.5.3 Available-for-sale Financial Assets 98,275 59,991 1.5.4 Held-to-maturity Investments - - 1.6 Financial Lease Income 87,455 73,121 1.7 Other Interest Income 4,818 5,896 II. INTEREST EXPENSE IV-b 751,431 601,929 2.1 Interest on Deposits 491,134 416,476 2.2 Interest on Funds Borrowed 193,829 123,113 2.3 Interest Expense on Money Market Transactions 21,697 24,364 2.4 Interest on Securities Issued 42,187 35,114 2.5 Other Interest Expenses 2,584 2,862 III. NET INTEREST INCOME (I - II) 385,293 545,836 IV. NET FEES AND COMMISSIONS INCOME/EXPENSE 28,105 64,609 4.1 Fees and Commissions Received 58,931 78,982 4.1.1 Non-cash Loans 29,153 31,862 4.1.2 Other IV-k 29,778 47,120 4.2 Fees and Commissions Paid 30,826 14,373 4.2.1 Non-cash Loans 581 506 4.2.2 Other IV-k 30,245 13,867 V. DIVIDEND INCOME IV-c - - VI. TRADING INCOME / LOSS (Net) IV-d 65,493 (39,752) 6.1 Trading Gains/Losses on Securities 25,886 4,950 6.2 Trading Gains/Losses on Derivative Financial Instruments (61,436) 67,550 6.3 Foreign Exchange Gains/Losses 101,043 (112,252) VII. OTHER OPERATING INCOME IV-e 180,643 170,094 VIII. TOTAL OPERATING INCOME (III+IV+V+VI+VII) 659,534 740,787 IX. PROVISION FOR LOAN LOSSES AND OTHER RECEIVABLES (-) IV-f 241,707 211,041 X. OTHER OPERATING EXPENSES (-) IV-g 390,585 432,137 XI. NET OPERATING INCOME/(LOSS) (VIII-IX-X) 27,242 97,609 XII. EXCESS AMOUNT RECORDED AS INCOME AFTER MERGER - - INCOME/(LOSS) FROM INVESTMENTS IN SUBSIDIARIES CONSOLIDATED BASED ON XIII. EQUITY METHOD - - XIV. INCOME/(LOSS) ON NET MONETARY POSITION - - XV. INCOME/(LOSS) BEFORE TAX FROM CONTINUING OPERATIONS (XI+…+XIV) IV-h 27,242 97,609 XVI. TAX PROVISION FOR CONTINUING OPERATIONS (±) IV-i 3,123 (27,734) 16.1 Current Tax Provision (2,074) (24,664) 16.2 Deferred Tax Provision 5,197 (3,070) XVII. NET INCOME/(LOSS) FROM CONTINUING OPERATIONS (XV± XVI) 30,365 69,875 XVIII. INCOME FROM DISCONTINUED OPERATIONS - - 18.1 Income from Non-Current Assets Held for Resale - - 18.2 Sale Income from Associates, Subsidiaries and Joint Ventures - - 18.3 Other Income from Discontinued Operations - - XIX. EXPENSES FROM DISCONTINUED OPERATIONS (-) - - 19.1 Expense from Non-Current Assets Held for Resale - - 19.2 Sale Losses from Associates, Subsidiaries and Joint Ventures - - 19.3 Other Expenses from Discontinued Operations - - XX. INCOME/(LOSS) BEFORE TAX FROM DISCONTINUED OPERATIONS (XVIII-XIX) - - XXI. TAX PROVISION FOR DISCONTINUED OPERATIONS (±) - - 21.1 Current tax provision - - 21.2 Deferred tax provision - - XXII. NET INCOME/LOSS FROM DISCONTINUED OPERATIONS (XX±XXI) - - XXIII. NET INCOME/LOSS (XVII+XXII) IV-j 30,365 69,875 23.1 Group’s Profit/Loss 30,363 69,876 23.2 Non-controlling interest (-) IV-l 2 (1) Earnings / (Loss) per share in (Full TL) 0.0417 0.1127

The accompanying notes are an integral part of these consolidated financial statements.

203 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

IV. STATEMENT OF INCOME AND EXPENSE ITEMS ACCOUNTED UNDER SHAREHOLDER’S EQUITY

1 January 2016- 1 January 2015- INCOME AND EXPENSE ITEMS ACCOUNTED IN EQUITY 31 December 2016 31 December 2015 I. ADDITIONS TO THE MARKETABLE SECURITIES VALUATION RESERVE FROM THE AVAILABLE FOR SALE FINANCIAL ASSETS (172,163) (26,604) II. REVALUATION DIFFERENCES OF TANGIBLE ASSETS - - III. REVALUATION DIFFERENCES OF INTANGIBLE ASSETS - - IV. FOREIGN EXCHANGE TRANSLATION DIFFERENCES FOR FOREIGN CURRENCY TRANSACTIONS - - V. INCOME/LOSS ON CASH FLOW HEDGE DERIVATIVE FINANCIAL ASSETS (Effective Part of Fair Value Changes) - - VI. PROFIT/LOSS FROM FOREIGN INVESTMENT HEDGE DERIVATIVE FINANCIAL ASSETS (Effective Part of Fair Value Changes) - - VII. EFFECTS OF CHANGES IN ACCOUNTING POLICY AND ERRORS - - VIII. OTHER INCOME AND EXPENSE ITEMS ACCOUNTED IN EQUITY ACCORDING TO TAS (2,203) (1,905) IX. DEFERRED TAX ON VALUATION DIFFERENCES 34,873 5,702 X. NET INCOME/LOSS ACCOUNTED DIRECTLY IN EQUITY (I+II+...+IX) (139,493) (22,807) XI. CURRENT PERIOD INCOME/LOSS 30,363 69,876 11.1 Net Change in Fair Value of Marketable Securities (Transfer to Income Statement) 20,709 3,584 11.2 Portion of Cash Flow Hedge Derivative Financial Assets Reclassified and Presented on the Income Statement - - 11.3 Portion of Foreign Investment Hedge Derivative Financial Assets Reclassified and Presented on the Income Statement - - 11.4 Other 9,654 66,292 XII. TOTAL PROFIT/LOSS RELATED TO THE CURRENT PERIOD (X±XI) (109,130) 47,069

The accompanying notes are an integral part of these consolidated financial statements.

204 FINANCIAL INFORMATION AND RISK MANAGEMENT ------Total Total 3,734 Equity 69,875 (8,606) (1,504) 972,900 (21,283) 1,015,116 Shareholders’ Shareholders’ ------11 (1) 9,214 shares (9,202) Minorty ------596 3,734 Shares 69,876 (1,504) Minority Minority 963,686 (21,283) Except for for Except 1,015,105 Total Equity Equity Total ------Valuation Valuation Difference Difference of AHS and of AHS and Operations Discontinued Discontinued ------Hedging Hedging Reserves ------Investments Bonus Shares Bonus Shares Obtained from Obtained from ------Assets Assets Reserve Intangible Intangible Revaluation Revaluation Tangible and and Tangible ------(6,154) Reserve (27,437) (21,283) Valuation Valuation Securities Securities Marketable Marketable ------596 Prior Prior 7,747 3,286 7,747 (Loss) (4,007) Income/ (15,636) Period Net Net Period ------(Loss) 69,876 69,876 Current Current 136,591 Income / / Income (136,591) (136,591) Period Net Net Period ------Other Other (1,524) (1,524) Reserves ------(1,036) 122,197 212,010 333,171 122,197 Reserves Extraordinary ------Status Status Reserves ------Legal Legal 6,647 6,647 20,052 24,972 (1,727) Reserves ------Share Share 3,296 Profits (3,296) Cancellation Cancellation ------54 20 119 (85) Share Share Premium ------Capital to Share to Share Adjustment Adjustment The accompanying notes are an integral part financial statements. of these consolidated accompanying The ------Capital Paid-in Paid-in 620,000 620,000 Note Note Five) (Section (Section 31 December 2015 31 December in the Period Changes End Balance Prior Period Increase/Decrease due to the Merger Differences Securities Valuation Marketable Hedging Reserves (Effective Portion) Foreign Investment Hedge Investment Foreign Assets Differences of Tangible Revaluation Differences of Intangible Assets Revaluation in Associates, Bonus Shares Obtained from Investments Subsidiaries and Joint Ventures Difference Exchange Foreign due to the Disposal of Assets Changes of the Assets due to the Reclassification Changes in Associates in Equity Effects of Investments of Changes Profits Share Cancellation to Share Capital Adjustment the Period for Net Profit or Loss (I+II+III+… +XVIII) End Balance Period Cash Flow Hedge Cash Flow Capital Increase Other Cash Profit Distribution Internal Resources Dividend Paid Share Premium Transfers to Reserves Transfers Other Other CONSOLIDATED STATEMENT OF CHANGES IN EQUITY IN CHANGES OF STATEMENT CONSOLIDATED 2016 DECEMBER 31 ENDED YEAR THE FOR V. STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY OF CHANGES IN SHAREHOLDERS’ STATEMENTS V. ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS I. III. 4.1 VI. VII. VIII. IX. XI. XII. XV. XVI. V. II. 12.1 IV. 4.2 X. XVIII. 12.2 XVII. 18.1 XIII. 18.2 XIV. 18.3

205 ABANK 2016 ANNUAL REPORT ------Total Total (697) Equity 30,365 30,365 (1,762) 360,000 360,000 360,000 360,000 (137,730) 1,265,292 1,015,116 1,015,116 Shareholder’ ------2 13 11 shares Minorty ------Total (697) Shares Equity Equity 30,363 30,363 (1,762) Minority Minority 360,000 360,000 360,000 360,000 Except for for Except (137,730) 1,265,279 1,265,279 1,015,105 1,015,105 ------Valuation Valuation Difference Difference of AHS and of AHS and Operations Discontinued Discontinued ------Hedging Hedging Reserves ------Investments Bonus Shares Bonus Shares Obtained from Obtained from ------Assets Assets Reserve Intangible Intangible Revaluation Revaluation Tangible and and Tangible ------Reserve (27,437) Valuation Valuation Securities Securities (165,167) (137,730) Marketable Marketable ------Prior Prior (Loss) (697) (4,007) Income/ (12,948) (17,652) (12,948) Period Net Net Period ------(Loss) Current Current 69,876 69,876 30,363 30,363 30,363 Income / / Income (69,876) (69,876) Period Net Net Period ------Other Other (1,524) (3,286) (1,762) Reserves ------78,822 78,822 78,822 78,822 Reserves 333,171 333,171 411,993 Extraordinary ------Status Status Reserves ------Legal Legal 4,002 4,002 4,002 4,002 24,972 24,972 28,974 Reserves ------Share Share Profits Cancellation Cancellation ------54 54 Share Share Premium ------Capital The accompanying notes are an integral part financial statements. of these consolidated accompanying The to Share to Share Adjustment Adjustment ------Capital Paid-in Paid-in 360,000 360,000 360,000 360,000 620,000 620,000 980,000 Note Note Five) (Section (Section Cash Internal Resources 31 December 2016 31 December in the Period Changes End Balance Prior Period Increase/Decrease due to the Merger Differences Securities Valuation Marketable Hedging Reserves (Effective Portion) Hedge Investment Foreign Assets Differences of Tangible Revaluation Differences of Intangible Assets Revaluation in Bonus Shares Obtained from Investments Subsidiaries and Joint Ventures Associates, Difference Exchange Foreign due to the Disposal of Assets Changes of the Assets due to the Reclassification Changes in in Equity Effects of Investments of Changes Associates Profits Share Cancellation to Share Capital Adjustment the Period for Net Profit or Loss (I+II+III+… +XVIII) End Balance Period Capital Increase Share Premium Cash Flow Hedge Cash Flow Other Dividend Paid Profit Distribution to Reserves Transfers Other CONSOLIDATED STATEMENT OF CHANGES IN EQUITY IN CHANGES OF STATEMENT CONSOLIDATED 2016 DECEMBER 31 ENDED YEAR THE FOR V. STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY OF CHANGES IN SHAREHOLDERS’ STATEMENTS V. 12.1 12.2 I. XII. XIV. XIII. ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS II. 4.1 X. XVI. XVII. 18.1 4.2 XVIII. 18.2 18.3 III. IV. VI. VII. VIII. IX. XI. XV. V.

206 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI CONSOLIDATED STATEMENT OF CASH FLOW FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VI. STATEMENT OF CASH FLOWS

Note (Section 1 January 2016- 1 January 2015- A. CASH FLOWS FROM BANKING OPERATIONS Five) 31 December 2016 31 December 2015 1.1 Operating Profit Before Changes in Operating Assets and Liabilities 1,136,733 1,508,867 1.1.1 Interest Received 930,393 1,106,932 1.1.2 Interest Paid (736,630) (570,645) 1.1.3 Dividend Received - - 1.1.4 Fees and Commissions Received 58,931 78,982 1.1.5 Other Income 148,682 82,590 1.1.6 Collections from Previously Written-off Loans and Other Receivables 107,440 105,729 1.1.7 Payments to Personnel and Service Suppliers (144,469) (157,199) 1.1.8 Taxes Paid (53,780) (38,140) 1.1.9 Other 826,166 900,618 1.2 Changes in Operating Assets and Liabilities (456,376) (852,230) 1.2.1 Net (Increase)/Decrease in Trading Securities (113) 35,842 1.2.2 Net (Increase)/Decrease in Fair Value through Profit/Loss Financial Assets - - 1.2.3 Net (Increase)/Decrease in due from Banks (170,177) (215,253) 1.2.4 Net (Increase)/Decrease in Loans (2,350,967) (2,818,407) 1.2.5 Net (Increase)/Decrease in Other Assets (107,328) (13,961) 1.2.6 Net Increase/(Decrease) in Bank Deposits 322,341 161,428 1.2.7 Net Increase/(Decrease) in Other Deposits 2,231,336 423,382 1.2.8 Net Increase/(Decrease) in Funds Borrowed (481,005) 1,699,716 1.2.9 Net Increase/(Decrease) in Payables - - 1.2.10 Net Increase/(Decrease) in Other Liabilities 99,537 (124,977) I. Net Cash Provided from Banking Operations 680,357 656,637 B. CASH FLOWS FROM INVESTING ACTIVITIES II. Net Cash Provided from Investing Activities (1,535,568) 72,413 2.1 Cash Paid for Acquisition of Investments, Associates and Subsidiaries - - 2.2 Cash Obtained from Disposal of Investments, Associates and subsidiaries - 900 2.3 Purchases of Property and Equipment (27,863) (27,500) 2.4 Disposals of Property and Equipment 4,580 20,008 2.5 Cash Paid for Purchase of Investments Available-for-sale (3,811,002) (1,047,154) 2.6 Cash Obtained from Sale of Investments Available-for-sale 2,298,717 1,126,159 2.7 Cash Paid for Purchase of Investment Securities - - 2.8 Cash Obtained from Sale of Investment Securities - - 2.9 Other - - C. CASH FLOWS FROM FINANCING ACTIVITIES III. Net Cash Provided from Financing Activities 1,415,541 439,727 3.1 Cash Obtained from Funds Borrowed and Securities Issued 1,055,541 644,559 3.2 Cash used for Repayment of Funds Borrowed and Securities Issued - (204,767) 3.3 Issued Capital Instruments 360,000 - 3.4 Dividends Paid - - 3.5 Payments for Finance Leases - - 3.6 Other - (65) IV. Effect of Change in Foreign Exchange Rate on Cash and Cash Equivalents (329,089) (341,282) V. Net Increase in Cash and Cash Equivalents (I+II+III+IV) 231,241 827,495 VI. Cash and Cash Equivalents at Beginning of the Period 1,286,776 459,281 VII. Cash and Cash Equivalents at End of the Period 1,518,017 1,286,776

The accompanying notes are an integral part of these consolidated financial statements.

207 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. VE FİNANSAL KURULUŞLARI STATEMENT OF PROFIT DISTRIBUTION FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VII. PROFIT DISTRIBUTION STATEMENT (*)

31 December 2016 (**) 31 December 2015 (***) I. DISTRIBUTION OF CURRENT YEAR INCOME 1.1. CURRENT YEAR INCOME 1,937 85,109 1.2. TAXES AND DUTIES PAYABLE (-) 6,867 (25,598) 1.2.1. Corporate Tax (Income tax) (2,074) (24,664) 1.2.2. Income withholding tax - - 1.2.3. Other taxes and duties (****) 8,941 (934) A. NET INCOME FOR THE YEAR (1.1-1.2) 8,804 59,511 1.3. PRIOR YEAR LOSSES (-) - - 1.4. FIRST LEGAL RESERVES (-) - 2,976 1.5. OTHER STATUTORY RESERVES (-) - - B. NET INCOME AVAILABLE FOR DISTRIBUTION [(A-(1.3+1.4+1.5)] (*) - 56,535 1.6. FIRST DIVIDEND TO SHAREHOLDERS (-) - - 1.6.1. To Owners of Ordinary Shares - - 1.6.2. To Owners of Privileged Shares - - 1.6.3. To Owners of Preferred Shares - - 1.6.4. To Profit Sharing Bonds - - 1.6.5. To Holders of Profit and Loss Sharing Certificates - - 1.7. DIVIDENDS TO PERSONNEL (-) - - 1.8. DIVIDENDS TO BOARD OF DIRECTORS (-) - - 1.9. SECOND DIVIDEND TO SHAREHOLDERS (-) - - 1.9.1. To Owners of Ordinary Shares - - 1.9.2. To Owners of Privileged Share - - 1.9.3. To Owners of Preferred Shares - - 1.9.4. To Profit Sharing Bonds - - 1.9.5. To Holders of Profit and Loss Sharing Certificates - - 1.10. SECOND LEGAL RESERVES (-) - - 1.11. STATUTORY RESERVES (-) - - 1.12. EXTRAORDINARY RESERVES - 56,535 1.13. OTHER RESERVES - - 1.14. SPECIAL FUNDS - - II. DISTRIBUTION OF RESERVES - - 2.1. APPROPRIATED RESERVES - - 2.2. SECOND LEGAL RESERVES (-) - - 2.3. DIVIDENDS TO SHAREHOLDERS (-) - - 2.3.1. To owners of ordinary shares - - 2.3.2. To owners of privileged shares - - 2.3.3. To owners of preferred shares - - 2.3.4. To profit sharing bonds - - 2.3.5. To holders of profit and loss sharing certificates - - 2.4. DIVIDENDS TO PERSONNEL (-) - - 2.5. DIVIDENDS TO BOARD OF DIRECTORS (-) - - III. EARNINGS PER SHARE (*****) 3.1. TO OWNERS OF ORDINARY SHARES 0.0121 0.091 3.2. TO OWNERS OF ORDINARY SHARES ( % ) 1.21 9.1 3.3. TO OWNERS OF PRIVILEGED SHARES - - 3.4. TO OWNERS OF PRIVILEGED SHARES ( % ) - - IV. DIVIDEND PER SHARE 4.1 TO OWNERS OF ORDINARY SHARES - - 4.2. TO OWNERS OF ORDINARY SHARES ( % ) - - 4.3. TO OWNERS OF PRIVILEGED SHARES - - 4.4. TO OWNERS OF PRIVILEGED SHARES ( % ) - -

(*) The statement of profit distribution presents the Parent Bank’s figures due to not having consolidated profit distribution. (**) Profit distribution is decided by the Board of Directors of the Parent Bank. Annual General Meeting has not been held as of reporting date. (***) Statement of profit distribution related to prior period has been approved and restated in accordance with General Assembly Decision as of 31 March 2016, after issuance of audited financial statements of 31 December 2015. (****) The amount related to the current period is deferred tax income, the amount related to the previous period is deferred tax expense. (*****) Full TL amount has been stated for each nominal amount of 1.000.

The accompanying notes are an integral part of these consolidated financial statements.

208 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION THREE

EXPLANATIONS ON ACCOUNTING POLICIES

I. Basis of Presentation

As prescribed in the Article 37 of the Banking Act No. 5411, the Bank prepares its financial statements and underlying documents in accordance with the “Regulation on the Procedures and Principles for Accounting Practices and Retention of Documents by Banks” and other regulations, explanations and circulars on accounting and financial reporting principles announced by the Banking Regulation and Supervision Agency (“BRSA”) and Turkish Accounting Standards (“TAS”) published by Public Oversight Accounting and Auditing Standards Authority (“POA”) except for BRSA regulations. TAS consists of Turkish Accounting Standards, Turkish Financial Reporting Standards and related appendices and interpretations.

The consolidated financial statements have been prepared in TL, under the historical cost basis as modified in accordance with inflation adjustments applied until 31 December 2004, except for the financial assets and liabilities carried at fair value.

The preparation of consolidated financial statements in conformity with BRSA Accounting and Reporting Legislation requires the use of certain critical accounting estimates by the Bank management to exercise its judgment on the assets and liabilities of the balance sheet and contingent issues as of the balance sheet date. These estimates are being reviewed regularly and, when necessary, suitable corrections are made and the effects of these corrections are reflected to the income statement.

The accounting policies and valuation principles applied in the preparation of these financial statements and valuation principles are defined and applied in accordance with BRSA Accounting and Reporting Legislation. Those accounting policies and valuation principles are explained in Notes II to XXVI below.

Additional paragraph for convenience translation into English

The differences between accounting principles, as described in the preceding paragraphs and accounting principles generally accepted in countries in which these consolidated financial statements are to be distributed, and International Financial Reporting Standards (“IFRS”) may have significant influence on the accompanying consolidated financial statements. Accordingly, the accompanying consolidated financial statements are not intended to present the financial position and results of operations in accordance with the accounting principles generally accepted in such countries and IFRS.

II. Strategy of Using Financial Instruments and Foreign Currency Transactions

A major portion of the Parent Bank’s funding has fixed interest rates; almost all TL placements consist of low-risk short-term transactions. Liquidity risk is monitored closely and the adequacy of available resources (which will be due within a certain period of fulfillment of obligations) are closely monitored. The maturity structure of placements isa aimed to be in line with the maturities of resources of the country to the extent permitted by current conditions.

Risk bearing short term positions of currency, interest or price movements in money and capital markets is evaluated within the trading risk. The Parent Bank evaluated the required economic capital for trading risk and based on that risk limits are determined. This portfolio, being priced by the market on a daily basis and the limits are monitored on a daily basis. Risk limits are approved by Board of Directors once a year following the approval of the budget except a revision is required due to the economic conditions.

As of 31 December 2016 and 31 December 2015, the Parent Bank does not have any investment in foreign companies.

III. Consolidated Subsidiaries

The consolidated financial statements have been prepared in accordance with the procedures listed in the “Communiqués related to the Regulation on the Preparation of the Consolidated Financial Statements of Banks” and the “Turkish Accounting Standard for Consolidated and Separate Financial Statements” (“TFRS 10”) published in the Official Gazette No. 26340 dated 8 November 2006.

The financial statements of the subsidiaries, which were prepared in accordance with the prevailing principles and rules regarding financial accounting and reporting standards according to the Turkish Commercial Code and/or Financial Leasing Law and/or communiqués of the Capital Market Board, are duly adjusted in order to present their financial statements in accordance with TAS and TFRS.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Accounting policy of the subsidiaries when different from the parent bank, differences are harmonized in the financial statements according with the principle of importance. Subsidiaries financial statements are prepared as of 31 December 2016.

Consolidation principles for subsidiaries:

Subsidiaries (including special purpose entity), in which Group has power to control the financial and operating policies for the benefit of the Parent Bank, either (a) through the power to exercise more than 50% of the voting rights relating to shares in the companies owned directly and indirectly by itself; or (b) although not having the power to exercise more than 50% of the using rights, otherwise having the power to exercise control over the financial and operating policies, have been fully consolidated.

Control is evident when the Parent Bank owns, either directly or indirectly, the majority of the share capital of the company or owns the privileged shares or owns the right of controlling the operations of the company in accordance with the agreements made with other shareholders or owns the right of appointment or the designation of the majority of the board of directors of the company.

Subsidiaries are consolidated with full consolidation method by considering the outcomes of their activities and the size of their assets and shareholders’ equity in scope of the materiality principle. Financial statements of the related subsidiaries are included in the consolidated financial statements beginning from their acquisition date. If necessary, accounting policies of subsidiaries may have been changed in order to ensure consistency with the policies adopted by the Group.

In accordance with the full consolidation method, balance sheet, income statement and off balance sheet items of the subsidiaries have been consolidated line by line with the balance sheet, income statement and off balance sheet of the Parent Bank. The book value of the investments of the Group in each subsidiary has been netted off with the portion of each subsidiary’s capital that belongs to the Group. Unrealized gains and losses and balances resulting from the transactions among the subsidiaries included in consolidation have been eliminated. In order to determine the net income of the Group, minority interest in the net income of the consolidated subsidiaries have been identified and deducted from the net income of the subsidiary. In the consolidated balance sheet, minority interest has been presented separately from the liabilities and the shares of the Group shareholders. Also, in the income statement, minority interest has been presented separately.

The subsidiaries included in consolidation, their title, their place of incorporation, their main activities and their effective shareholding rates are as follows:

Indirect Activity center Ownership Ownership Title (City/ Country) Activity rates (%) rates (%) Investment Alternatif Menkul Değerler A.Ş. İstanbul / Türkiye Management 100.00 100.00 Alternatif Finansal Kiralama A.Ş. İstanbul / Türkiye Leasing 99.99 99.99

IV. Forward Transactions, Options and Derivative Instruments

Group’s derivative transactions include foreign currency swap, interest rate swap, foreign exchange forward contracts, futures and options.

Derivatives are initially recorded with their fair values and related transaction costs as of the contract date are recorded on gain or loss. The following periods of initial reporting, they are measured with their fair values. The result of this assessment, offsetting debit and credits stemming from each contract debit and credits are reflected to the financial statements as a contract-based single asset and liability. The method of accounting gain or loss changes according to related derivative transaction whether to be held for hedges or not and to the content of hedge accounting.

The Parent Bank notifies in written the relationship between hedging instrument and related account, risk management aims of hedge and strategies and the methods using to measure of the hedge effectiveness.The Parent Bank evaluates the method of hedge whether to be effective on the expected changes in fair values in this process or not or each result of hedge effectiveness whether to be between the range of 80% and 125%.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Changes in fair values of derivative transactions determined as hedge for fair value are recorded in profit or loss together with changes in hedging asset or liability. The difference in current values of derivative transactions fair value hedge is shown in “Trading Gains/ Losses on derivative financial instruments” account. In the balance sheet, change in fair value of hedge asset or liability during the hedge accounting to be effective is shown with the related asset or liability. In case of inferring hedge accounting, corrections made to the value of hedge account using straight-line amortization method within the days to maturity are reflected to “Trading gains/losses on derivative financial instruments” account in income statement.

The Parent Bank classifies its derivative instruments except for derivatives held for cash flow hedges as “Held-for-hedging” or “Held- for-trading” in accordance with “Financial Instruments: Turkish Accounting Standard for Recognition and Measurement (“TAS 39”)”. According to this, certain derivative transactions while providing effective economic hedges under the Parent Bank’s risk management position, are recorded under the specific rules of TAS 39 and are treated as derivatives “Held-for-trading”.

V. Interest Income and Expense

Interest income and expenses are recognized in the income statement on an accrual basis by using the effective interest method (the rate that equals the future cash flows of a financial asset or liability to its presented book value) periodically.

The Group ceases accruing interest income on non-performing loans and, any interest income accruals from such loans are being reversed and no income is accounted until the collection is made according to the related regulation.

VI. Fee and Comission Income and Expense

Except for the banking services revenues are recognized as income at the time of collection, commission income related with the cash and non-cash loans are deferred and recognized as income by using with the effective interest rate method depending on nature of fees and commission income derived from agreements and asset purchases for third parties are recognized as income when realized.

Fees and commission expenses paid to the other institutions are recognized as operation cost in the prepaid expense and recorded using the effective interest rate method and reflected to expense accounts in related period according to periodicity.

VII. Financial Assets

Financial instruments comprise financial assets and liabilities and derivative instruments. Financial instruments constitutes the basis of the Group’s business activities and operations. Risks related to these activities form a significant part among total risks the Parent Bank undertakes. Financial instruments affect liquidity, market, and credit risks on the Group’s balance sheet in all respects. The Group trades these instruments on behalf of its customers and on its own behalf.

Basically, financial assets create the majority of the commercial activities of the group. These instruments expose, affect and diminish the liquidity, credit and interest risks in the financial statements.

Regular purchases and sales of financial assets are recorded based on settlement date. Settlement date of a financial asset is the date that the asset is received or delivered by the Parent Bank. Settlement date accounting requires; (a) accounting for the financial asset when the asset is received and (b) accounting of disposal of the financial asset and recording the related profit and loss when the asset is delivered. The fair value changes of an asset to be acquired between the trade date and settlement date is accounted in accordance with the basis of valuation of assets.

The purchase or sale of financial assets is a transaction based on regulation or market convention that requires delivery of assets within a defined time frame. Changes in fair value of assets to be received during the period between the trade date and the settlement date are accounted for in the same way as the acquired assets. Changes occurring in the fair value, cost or amortized cost are not recognized for the asset; fair value recognition in profit or loss in respect of a financial asset classified as the resulting gain or loss in profit or loss; the gain and loss arising in financial assets available for sale is recognized in equity.

The methods and assumptions used in determining the reasonable estimated values of all of the financial instruments are described below. a. Cash, Banks and Other Financial Institutions

Cash and cash equivalents consists of cash on hand, demand deposits, and highly liquid short-term investments, not bearing risk of significant value change, and that are readily convertible to a known amount of cash. The carrying values of these assets are their fair values.

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Financial assets which are classified as “financial assets at fair value through profit or loss”, are classified in two main topics; (i) Trading securities are securities which were either acquired for generating a profit from short-term fluctuations in price or dealer’s margin, or are securities included in a portfolio with a pattern of short-term profit taking. (ii) These are the financial assets that are classified as fair value difference profit/loss during the initial recognition performed by the Parent Bank. The Group may only use this kind of classification under allowance and in the cases which results in a better presentation of information.

Trading financial assets are initially recognized at fair value and are subsequently re-measured at their fair value. The fair values of the public interest marketable securities are being calculated by using the stock market fair values.

The differences between the costs and fair values of financial assets at fair value through profit or loss are reflected to interest income and accruals or impairment provision. All gains and losses arising from these evaluations are recognized in the income statement. Interest earned while holding financial assets is reported as interest income and dividends received are included separately in dividend income.

In 2014, the Parent Bank has sold a significant portion of its securities, classified in held to maturity portfolio as 31 December 2013 amounting TL 1,727,972 before the maturity dates of such securities. Therefore the Parent Bank will not able to classify its investments in held to maturity portfolio for two years beginning from 1 January 2015.

Interests that earned while keeping the financial assets fair value difference which are reflected to profit and loss referrals to interest income accounts, share of profits referrals to share of profit income accounts.

Available for sale assets are initially recognized at cost including the transaction costs. After initial recognition, subsequent valuation of available for sale financial assets are carried over fair value and the unrealized profit or loss arising in the changes resulting from changes in fair value and the changes between discounted value of assets is shown in”Marketable Securities Value Increase Fund” in equity. In the case that disposal of available for sale financial assets, the value gains/losses transferred to the income statement from “Marketable Securities Value Increase Fund”. c. Loans and receivables

The Parent Bank loans and receivables are carried initially at cost and subsequently recognized at the amortized cost value calculated using “effective interest rate method”. The expenses incurred for the assets received as collateral are considered as transaction costs and are not recognized in the expense accounts.

Cash loans in personal and corporate loans, according to the Uniform Chart of Accounts ("UCA") and Prospectus are recognized in accordance with their original balances in the account specified.

The foreign exchange indexed commercial and individual loans are being monitored by the exchange rate of the opening date over Turkish Lira in the TL accounts. Repayments are calculated at the exchange rate at the date of payment, the resulting exchange differences are recognized in the income and expense account.

Starting from 24 March 2014, the Bank has hedged the fair value effects of changes in libor interest rates, fixed interest rate loans amounting TL 20,547 with maturity 3 years and TL 36,654 with maturity 5 years funding by using interest rate swaps. The both nominal value of interest rate swaps is TL 55,000 with maturity 3 years and 5 years respectively. In this context, TL 1,052 which was calculated for these loans is refered to ‘Interest on Loans’.

VIII. Impairment of Financial Assets

At each balance sheet date, the Group evaluates the carrying amounts of its financial asset or a group of financial assets to determine whether there is an objective indication that those assets have suffered an impairment loss or not. If any such indication exists, the Group determines the related impairment.

A financial asset or a financial asset group incurs impairment loss only if there is an objective indicator related to the occurrence of one or more than one event (“loss event”) after the first recognition of that asset; and such loss event (or events) causes, an impairment as a result of the effect on the reliable estimate of the expected future cash flows of the related financial asset and asset group. Irrespective of high probability the expected losses caused by the future events are not recognized.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Impairment losses attributable to the held to maturity investments are measured as the difference between the present values of expected future cash flows discounted using the original interest rate of financial asset and the carrying value of asset. The related difference is recognized as a loss and it decreases the carrying value of the financial asset. At subsequent periods, if the impairment loss amount decreases, impairment loss recognized is reversed.

When impairment occurs in the fair values of the “financial assets available for sale” of which value decreases and increases are recognized in equity, the accumulated profit/loss that had been recognized directly in equity is transferred from equity to period profit or loss. If, in a subsequent period, the fair value of the related asset increases, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss.

Loans are classified and followed in line with the provisions of the “Regulation on Procedures And Principles For Determination Of Qualifications Of Loans And Other Receivables By Banks And Provisions To Be Set Aside”, published on the Official Gazette numbered 26333 dated 1 November 2006. Within the scope of the relevant legislation, until May 2014, the Bank allocated 100% of the credit amount as provisions in accordance with mentioned the minimum provision rates in the Communiqué. Provisions released in the same year, "Provision Expense" account are credited in the past years, the remaining part of the provisions in the "Other Operating Income" account transferred to and recognized.

IX. Offsetting Financial Assets

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when the Group has a legally enforceable right to offset the recognized amounts and to collect/pay related financial assets and liabilities on a net basis, or there is an intention to realize the asset and settle the liability simultaneously. Otherwise, any related financial assets and liabilities are not offset.

X. Sales and Repurchase Agreements and Securities Lending Transactions

Funds obtained by the Parent Bank from repurchase agreements (“repo”) are accounted under “Funds Provided under Repurchase Agreements” in liabilities.

The Group’s repurchase agreements are composed short-term government bonds and treasury bills. Financial assets subject to repurchase agreements, parallel to the classification of financial instruments, the fair value recognition in profit or loss, are classified as available for sale or held to maturity financial assets. Repo subjected financial assets’ income recognized in interest income, while expenses paid under repurchase agreements are recognized in interest expenses.

Funds given against securities purchased under agreements to resell (“Reverse Repo”) are accounted under “Receivables from Reverse Repurchase Agreements” on the balance sheet.

XI. Assets Held For Sale and Discontinued Operations

A tangible asset (or a group of assets to be disposed) classified as “asset held for resale” is measured at lower of carrying value and fair value less costs to sell. An asset (or a group of assets to be disposed) is regarded as “asset held for resale” only when the sale is highly probable and the asset (or a group of assets to be disposed) is available for immediate sale in its present condition. For a highly probable sale, there must be a valid plan prepared by the management for the sale of asset including identification of possible buyers and completion of sale process. Furthermore, the asset should be actively in the market at a price consistent with its fair value.

Additionally, assets that were acquired due to non-performing receivables are accounted in the financial statements in accordance with the “Communiqué Regarding the Principles and Procedures for the Disposals of Immovables and Commodities Acquired due to Receivables and for Trading of Precious Metal” published in the Official Gazette dated November 1, 2016, No. 26333 and classified as assets held for resale.

A discontinued operation is a part of the Parent Bank’s business classified as sold or held-for-sale. The operating results of the discontinued operations are disclosed separately in the income statement.

The Group has no discontinued operations.

XII. Goodwill and Other Intangible Assets

Group has TL 49,647 goodwill in consolidated financial statements as of balance sheet date (31 December 2015: TL 49,647).

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Goodwill is the amount that exceeds the cost of buying of fair value expressed as the amount of the group share in net identifiable assets of the Group's purchased subsidiaries.Annual impairment test is performed for goodwill every year and shown as deducting accumulated impairment from cost of goodwill. Provision for impairment on goodwill is not reversed.

As a result of the disposal of the business that gain or loss occurs includes the carrying amount goodwill related to disposed business.

Goodwill is distrubuted to cash generating units for impairment test. Distributions are made to benefit from the business combination in which the goodwill arose expected to cash-generating units or groups. The recoverable amount of the cash-generating unit is determined based on value in used calculations. These calculations require the use of estimetes.

The intangible assets which are purchased before 1 January 2005 have been restated fot the effects of inflation and the intangible assets after this date are presented with their purchase cost, accumulated depreciation and amortization and impairment. According to the regular amortization method, long term assets depreciate regarding to their useful lives. The amortization method and the period are reviewed in each year-end. The intangible assets are mainly consisted of software programs and rights and according to the straight line method of depreciation, they amortize in between 3 to 15 years.

XIII. Property and Equipment

Property and equipment is measured at its cost when initially recognized and any directly attributable costs of setting the asset in working order for its intended use are included in the initial measurement. Subsequently, property and equipment are carried at cost less accumulated depreciation and provision for impairment, if any.

Fixed assets are being depreciated by applying the straight-line method, in accordance with the Tax Procedure Law which estimates the useful lives.

The depreciation charge for items remaining in property and equipment for less than an accounting period at the balance sheet date is calculated in proportion to the period the item remained in property and equipment.

If fix assets’ value, adjusted for inflation (until 31 December 2004) is higher than the current value, exceeding amount is being allocated for impairment and determined amounts are reflected in the financial statements. Gain or loss resulting from disposals of the tangible fixed assets is reflected to the income statement as the difference between the net proceeds and net book value.

Expenditures for the repair and renewal of property and equipment are recognised as expense.

There are no pledges, mortgages or other restrictions on the tangible fixed assets.

XIV. Leasing Transactions

Finance leasing activities as the lessee

Tangible assets acquired through finance leasing are recognized in tangible assets and the obligations under finance leases arising from the lease contracts are presented under ‘Finance Lease Payables’ account in the financial statements. In the determination of the related asset and liability amounts,the lower of the fair value of the leased asset and the present value of leasing payments is considered. Financial costs on leasing agreements are expanded in lease periods at a fixed interest rate. If there is impairment in the value of the assets obtained through finance lease and in the expected future benefits, the leased assets are valued with net realizable value. Depreciation for assets obtained through finance lease is calculated in the same manner as tangible assets.

Finance leasing activities as the lessor

The total of minimum rent amounts are recorded at “finance lease receivables” account in gross amounts comprising the principal amounts and interests. The interest, the difference between the total of rent amounts and the cost of the fixed assets, is recorded at “unearned income” account. As the rents are collected, “finance lease receivables” account is decreased by the rent amount; and the interest component is recorded at consolidated income statement as interest income.

Operating lease transactions

Transactions regarding operational lease agreements are accounted on an accrual basis in accordance with the terms of the related contracts.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

XV. Provisions, Contingent Asset and Liabilities

Provisions and contingent liabilities except for the specific and general provisions recognized for loans and other receivables are accounted in accordance with the “Turkish Accounting Standard for Provisions, Contingent Liabilities and Contingent Assets” ( TAS 37 ).

Provisions are recognized when the Parent Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are determined by using the Parent Bank Management' s best expectation of expenses in fulfilling the obligation, and discounted to present value if material. When the amount of the obligation cannot be estimated and there is no possibility of an outflow of resources from the Parent Bank, it is considered that a “Contingent” liability exists and it is disclosed in the related notes to the financial statements.

XVI. Obligations Related To Employee Rights

Obligations related to employee termination and vacation rights are accounted in accordance with “Turkish Accounting Standard for Employee Rights” (“TAS 19”). Under the Turkish Labor Law, the Bank is required to pay a specific amount to the employees who have retired or whose employment is terminated other than for the reasons specified in the Turkish Labor Law. The reserve for employment termination benefits represents the present value of the estimated total reserve for the future probable obligation arising from this liability. Actuarial gains and losses are accounted for under equity.

XVII. Taxation a. Current tax

Corporate Tax Law No. 5520 became effective after being published in the Official Gazette dated 21 June 2006 No. 26205. According to the Tax Law, the corporate tax rate in Turkey is payable at the rate of 20%. The corporate tax rate is calculated on the total income after adjusting for certain disallowable expenses, exempt income and other allowances. No further tax is payable unless the profit is distributed.

Dividends paid to non-resident corporations, which have a place of business in Turkey or to resident corporations are not subject to withholding tax. Otherwise, dividends paid are subject to withholding tax at the rate of 15%. An increase in capital via issuing bonus shares is not considered as profit distribution and thus does not incur withholding tax.

Corporations are required to pay advance corporate tax quarterly at a rate of 20% on their corporate income. Advance tax is declared by the 15th and paid by the 17th day of the second month following each calendar quarter end. Advance tax paid by corporations which is for the current period is credited against the annual corporation tax calculated on their annual corporate income in the following year. Despite the offset, if there is temporary prepaid tax remaining, this balance can be refunded or used to offset any other financial liabilities to the government.

A 75% portion of the capital gains derived from the sale of equity investments and immovable properties held for at least two years is tax exempt, if such gains are added to paid-in capital or held in a special account under shareholder’s equity for five years.

Under the Turkish Corporate Tax Law, losses can be carried forward to offset against future taxable income for up to five years. Losses cannot be carried back to offset profits from previous periods.

In Turkey, there is no procedure for a final and definitive agreement on tax assessments. Tax returns are required to be filled and delivered to the related tax office until the evening of the 25th of the fourth month following the balance sheet date. Tax returns are open for five years from the beginning of the year following the date of filing during which period the tax authorities have the right to audit tax returns, and the related accounting records on which they are based, and may issue re-assessments based on their findings. b. Deferred tax

The Group calculates and accounts for deferred income taxes for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in these financial statements in accordance with “Turkish Accounting Standard for Income Taxes” (“TAS 12”) and the related decrees of the BRSA concerning income taxes. In the deferred tax calculation, the enacted tax rate, in accordance with the tax legislation, is used as of the balance sheet date.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Deferred tax liabilities are recognized for all resulting temporary differences whereas deferred tax assets resulting from temporary differences are recognized to the extent that it is probable that future taxable profit will be available against which the deferred tax assets can be utilized. The calculated deferred tax asset and deferred tax liability are presented as net in these financial statements.

XVIII. Additional Explanations on Borrowings

Trading and derivative financial liabilities are valued with their fair values and the other financial liabilities are carried at “amortized cost” using the “effective interest rate method” (internal rate of return).

XIX. Share Certificates and Issuance of Share Certificates

At capital increases, the Parent Bank accounts the difference between the issued value and nominal value as share issue premium under shareholders’ equity, in the case where the issued value is higher than the nominal value.

There is no decision of the Parent Bank for dividend distribution after the balance sheet date.

XX. Avalized Drafts And Acceptances

Guaranteed bills and acceptances shown as liabilities against assets are included in the “Off-balance sheet commitments”.

XXI. Government Grants

As of 31 December 2016, the Group has unusued investment incentives amounting to TL 67,505 which is investment incentive of qualifying investment allowances amount, over 40% of property value of having been leased investment.

XXII. Profit Reserves And Profit Distribution

Retained earnings as per the statutory financial statements other than legal reserves are available for distribution, subject to the legal reserve requirement referred to below. Under the Turkish Commercial Code (“TCC”) the legal reserves are composed of first and second reserves. The TCC requires first reserves to be 5% of the profit until the total reserve is equal to 20% of issued and fully paid-in share capital. Second reserves are required to be 10% of all cash profit distributions that are in excess of 5% of the issued and fully paid-in share capital. However holding companies are exempt from this application. According to the Turkish Commercial Code, legal reserves can only be used to compensate accumulated losses and cannot be used for other purposes unless they exceed 50% of paid-in capital.

XXIII. Earnings Per Share

Earnings per share disclosed in the income statement are calculated by dividing net profit/(loss) for the year to the weighted average number of shares outstanding during the period concerned.

31 December 2016 31 December 2015 Group’s Profit 30,363 69,876 Weighted Average Number of Issued Ordinary Shares (Thousand) (*) 727,796 620,000 Earnings Per Share (Disclosed in full TL) 0.0417 0.1127

(*) Weighted average number of issued ordinary shares, calculated by considering the capital increase as of 14 April 2016.

In Turkey, companies can increase their share capital by making a pro-rata distribution of shares (“bonus shares”) to existing shareholders from retained earnings. For the purpose of earnings per share computations, the weighted average number of shares outstanding during the year has been adjusted in respect of bonus shares issued without a corresponding change in resources by giving them a retroactive effect for the year in which they were issued and for each earlier period.

No bonus shares were issued as of and for the period ended 31 December 2016 (31 December 2015: None).

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

XXIV. Related Parties

For the purpose of these financial statements, shareholders, key management personnel and board members together with their families and companies controlled by/affiliated with them, and associated companies are considered and referred to as related parties in accordance with “Turkish Accounting Standard for Related Parties” (“TAS 24”). The transactions with related parties are disclosed in detail in Note V. of Section Five.

XXV. Cash and Cash Equivalents

For the purposes of preparation of the cash flow statement, “Cash” includes cash, effectives, cash in transit, purchased cheques and demand deposits including balances with the Central Bank; and “Cash equivalents” include interbank money market placements and time deposits at banks with original maturity periods of less than three months.

XXVI. Operating Segments

Information about operating segments which are determined in line with TFRS 8 “Turkish Financial Reporting Standard about Operating Segments” together with organizational and internal reporting structure of the Group. a) The Parent Bank provides basic banking services in corporate/commercial banking and treasury. b) Corporate banking services consists of automatic money transfers, current accounts, deposits, open loan transactions as well as option and other derivative instruments that are used for banking operations. c) Investment banking services consists of trading of financial instruments and fund management. d) The Parent Bank's one of the subsidiary Alternatif Yatırım A.Ş. provides capital market activities in accordance with Capital Market Law and relevant legislations. In accordance with the law and within the authorization and permits given, the Company operates in the company brokerage, portfolio management, margin trading, Short Selling and Lending and Borrowing of Securities, investment advisory , the securities exchange with buy-back sell-back commitment, intermediation for public offering , intermediation for the derivative instruments exchange.

According to the Law, the Company received a authority certificate from the Capital Market Board to create the company's portfolio, to managing and to make changes in the portfolio when it is necessary. Parent Bank's another subsidiary Alternatif Finansal Kiralama A.Ş., established in 1997 to operate in Turkey, within the framework of 3226 Financial Leasing Law, with following permission from Undersecretariat of Treasury. Company has been operating its activities within the framework of BRSA’s ‘Regulations on the Establishment and Procedures of the Financial Leasing, Factoring and Financing Company’, published in the Official Gazette No. 28627 in 24 April 2013. e) Other operations consist of subsidiaries and joint ventures, tangible assets, intangible assets, deferred tax asset and equity amounts and other income/loss accounts associated with these accounts. f) The Parent Bank’s software requirements, possible software updates and additional software requirements to compete with other firms are provided by the Parent Bank. g) According to the table provided, share of each Bank’s operating segment in the Balance sheet is as follows; corporate/retail banking 67%, investment banking 28% and other 5%.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Major balance sheet and income statement items according to operating segments

Corporate / Investment Total Operations 31 December 2016 Retail Banking Banking Other of the Group Net Interest Income 410,331 (25,038) - 385,293 Net Fees and Commissions Income and Other Operating Income 207,043 1,705 - 208,748 Trading Profit/Loss 5,546 59,947 - 65,493 Dividend Income - - - - Impairment Provision for Loans and Other Receivables (-) (241,553) (154) - (241,707) Other Operating Expenses (-) (379,184) (11,401) - (390,585) Profit Before Taxes 2,183 25,059 - 27,242 Tax Provision 3,123 Minority Shares 2 Net Profit for the Period 30,365 31 December 2016 Segment Assets 11,803,556 4,961,147 826,460 17,591,163 Investments in Associates and Subsidiaries - - - - Total Assets 11,803,556 4,961,147 826,460 17,591,163 Segment Liabilities 9,953,357 3,595,904 2,776,610 16,325,871 Shareholders’ Equity 135,530 19,829 1,109,933 1,265,292 Total Liabilities 10,088,887 3,615,733 3,886,543 17,591,163

Corporate / Investment Total Operations 31 December 2015 Retail Banking Banking Other of the Group Net Interest Income 583,964 (39,095) 967 545,836 Net Fees and Commissions Income and Other Operating Income 231,373 3,330 - 234,703 Trading Profit/Loss (199) (39,553) - (39,752) Dividend Income - - - - Impairment Provision for Loans and Other Receivables (-) (207,669) (3,372) - (211,041) Other Operating Expenses (-) (422,356) (9,781) - (432,137) Profit Before Taxes 185,113 (88,471) 967 97,609 Tax Provision (27,734) Net Profit for the Period 69,875 31 December 2015 Segment Assets 10,403,625 3,023,828 637,370 14,064,823 Investments in Associates and Subsidiaries - - - - Total Assets 10,403,625 3,023,828 637,370 14,064,823 Segment Liabilities 7,180,942 3,869,521 1,999,244 13,049,707 Shareholders’ Equity 112,989 20,612 881,515 1,015,116 Total Liabilities 7,293,931 3,890,133 2,880,759 14,064,823

218 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION FOUR

INFORMATION ON THE FINANCIAL POSITION AND RISK MANAGEMENT OF THE GROUP

I. Information on Capital Adequacy Ratio

The standard rate of the capital adequacy of the Group is 16.98% (31 December 2015: 14.16%).

The calculation of the standard rate of the capital adequacy is made within framework of the “Regulation on the Measurement and Assessment of the Capital Adequacy of Banks (Regulation)”, which was published in Official Gazette No.29111 dated 6 September 2014. a. Information about the shareholders’ equity items

Amounts related to treatment before Amount 1/1/2014 (*) COMMON EQUITY TIER 1 CAPITAL Paid-in capital following all debts in terms of claim in liquidation of the Bank 980,000 Share issue premiums 54 Reserves 440,967 Gains recognized in equity as per TAS - Profit 30,363 Current Period Profit 30,363 Prior Period Profit - Minority Shares 13 Shares acquired free of charge from subsidiaries, affiliates and jointly controlled partnerships and cannot be recognised within profit for the period - Common Equity Tier 1 Capital Before Deductions 1,451,397 Deductions from Common Equity Tier 1 Capital Valuation adjustments calculated as per the 1st clause of article 9.(i) of the Regulation on Bank Capital - - Portion of the current and prior periods’ losses which cannot be covered through reserves and losses reflected in equity in accordance with TAS (-) 186,105 - Improvement costs for operating leasing (-) 17,561 - Goodwill (net of related tax liability) 52,102 86,837 Other intangibles other than mortgage-servicing rights (net of related tax liability) - - Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) 64,458 - Differences are not recognized at the fair value of assets and liabilities subject to hedge of cash flow risk - - Communiqué Related to Principles of the amount credit risk calculated with the Internal Ratings Based Approach, total expected loss amount exceeds the total provison - - Gains arising from securitization transactions - - Unrealized gains and losses due to changes in own credit risk on fair valued liabilities - - Defined-benefit pension fund net assets - - Direct and indirect investments of the Bank in its own Common Equity - - Shares obtained contrary to the 4th clause of the 56th Article of the Law - - Portion of the total of net long positions of investments made in equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or less of the issued common share capital exceeding 10% of Common Equity of the Bank - - Portion of the total of net long positions of investments made in equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital exceeding 10% of Common Equity of the Bank - - Portion of mortgage servicing rights exceeding 10% of the Common Equity - - Portion of deferred tax assets based on temporary differences exceeding 10% of the Common Equity - - Amount exceeding 15% of the common equity as per the 2nd clause of the Provisional Article 2 of the Regulation on the Equity of Banks - - Excess amount arising from the net long positions of investments in common equity items of banks and financial institutions outside the scope of consolidation where the Bank owns 10% or more of the issued common share capital - - Excess amount arising from mortgage servicing rights - - Excess amount arising from deferred tax assets based on temporary differences - -

219 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Other items to be defined by the BRSA - - Deductions to be made from common equity due to insufficient Additional Tier I Capital or Tier II Capital - Total Deductions From Common Equity Tier 1 Capital 320,226 Total Common Equity Tier 1 Capital 1,131,171 ADDITIONAL TIER I CAPITAL Preferred Stock not Included in Common Equity and the Related Share Premiums - Debt instruments and the related issuance premiums defined by the BRSA - Debt instruments and the related issuance premiums defined by the BRSA (Covered by Temporary Article 4) - Additional Tier I Capital before Deductions - Deductions from Additional Tier I Capital Direct and indirect investments of the Bank in its own Additional Tier I Capital - - Investments of Bank to Banks that invest in Bank's additional equity and components of equity issued by financial institutions with compatible with Article 7. - - Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions where the Bank Owns 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital - - The Total of Net Long Position of the Direct or Indirect Investments in Additional Tier I Capital of Unconsolidated Banks and Financial Institutions where the Bank Owns more than 10% of the Issued Share Capital - - Other items to be defined by the BRSA (-) - - Transition from the Core Capital to Continue to deduce Components Goodwill and Other Intangible Assets and Related Deferred Taxes not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks (-) 34,735 - Net Deferred Tax Asset/Liability not deducted from Tier 1 Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks (-) - - Deductions to be made from common equity in the case that adequate Additional Tier I Capital or Tier II Capital is not available (-) - - Total Deductions From Additional Tier I Capital - Total Additional Tier I Capital - Total Tier I Capital (Tier I Capital=Common Equity Tier 1 Capital+Additional Tier I Capital) 1,096,436 TIER II CAPITAL Debt Instruments and the Related Issuance Premiums Defined by the BRSA 1,485,208 Debt Instruments and the Related Issuance Premiums Defined by the BRSA (Covered by Temporary Article 4) - Provisions (Amounts explained in the first paragraph of the article 8 of the Regulation on Bank Capital) 52,211 Tier II Capital Before Deductions 1,537,419 Deductions From Tier II Capital Direct and indirect investments of the Bank on its own Tier II Capital (-) - - Investments in Equity Instruments Issued by Banks and Financial Institutions Invested in Bank’s Tier II Capital and Having Conditions Stated in the Article 8 of the Regulation - - Total of Net Long Positions of the Investments in Equity Items of Consolidated Banks and Financial Institutions where the Bank does not own 10% or less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-) - - The Total of Net Long Position of the Direct or Indirect Investments in Additional Core Capital and Tier II Capital of Consolidated Banks and Financial Institutions where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of Tier I Capital (-) - - Other items to be defined by the BRSA (-) - - Total Deductions from Tier II Capital - - Total Tier II Capital 1,537,419 - Total Capital (The sum of Tier I Capital and Tier II Capital) 2,633,855 - Deductions from Total Capital 2,633,855 - Loans granted against the articles 50 and 51 of the banking law 355 Net book values of movables and immovables exceeding the limit defined in the Article 57, clause 1 of the Banking Law and the assets acquired against overdue receivables and held for sale but retained more than five years 3,344 Other items to be defined by the BRSA -

220 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Items to be Deducted from sum of Tier I and Tier II (Capital) during the Transition Period - - The Sum of net long positions of investments (the portion which exceeds the 10% of Banks Common Equity) in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued common share capital of the entity which will not deducted from Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital for the purposes of the first sub-paragraph of the Provisional Article 2 of the Regulation on Banks’ Own Funds - - The Sum of net long positions of investments in the Additional Tier 1 capital and Tier 2 capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued common share capital of the entity which will not deducted from Common Equity Tier 1 capital, Additional Tier 1 capital, Tier 2 capital for the purposes of the first sub-paragraph of the Provisional Article 2 of the Regulation on Banks’ Own Funds - - The Sum of net long positions of investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, where the bank does not own more than 10% of the issued common share capital of the entity, mortgage servicing rights, deferred tax assets arising from temporary differences which will not deducted from Common Eguity Tier 1 capital for the purposes of the first sub-paragraph of the Provisional Article 2 of the Regulation on Banks’ Own Funds - - TOTAL CAPITAL Total Capital (The sum of Tier I Capital and Tier II Capital) 2,630,156 2,630,156 Total risk weighted amounts 15,488,367 15,488,367 CAPITAL ADEQUACY RATIOS Core Capital Adequacy Ratio (%) 7.30% 7.08% Tier 1 Capital Adequacy Ratio (%) 7.08% 7.08% Capital Adequacy Ratio (%) 16.98% 16.98% BUFFERS Bank specific total Common Equity Tier 1 Capital requirement (%) 0.63% - Capital conservation buffer requirement (%) 0.63% - Bank specific counter-cyclical buffer requirement (%) 0.00% - The ratio of Additional Common Equity Tier 1 capital which will be calculated by the first paragraph of the Article 4 of Regulation on Capital Conservation and Countercyclical Capital buffers to Risk Weighted Assets (%) 1.08% - Amounts below the Excess Limits as per the Deduction Principles Total of net long positions of the investments in equity items of unconsolidated banks and financial institutions where the bank owns 10% or less of the issued share capital - - Total of net long positions of the investments in Tier I capital of unconsolidated banks and financial institutions where the bank owns more than 10% or less of the issued share capital - - Remaining Mortgage Servicing Rights - - Amount arising from deferred tax assets based on temporary differences - - Limits related to provisions considered in Tier II calculation General provisions for standard based receivables (before tenthousandtwentyfive limitation) 52,211 - Up to 1.25% of total risk-weighted amount of general reserves for receivables where the standard approach used 52,211 - Excess amount of total provision amount to credit risk Amount of the Internal Ratings Based Approach in accordance with the Communiqué on the Calculation - - Excess amount of total provision amount to % 0.6 of risk weighted receivables of credit risk Amount of the Internal Ratings Based Approach in accordance with the Communiqué on the Calculation - - Debt instruments subjected to Article 4 (to be implemented between 1 January 2018 and 1 January 2022) Upper limit for Additional Tier I Capital subjected to temprorary Article 4 - - Amounts Excess the Limits of Additional Tier I Capital subjected to temprorary Article 4 - - Upper limit for Additional Tier II Capital subjected to temprorary Article 4 - - Amounts Excess the Limits of Additional Tier II Capital subjected to temprorary Article 4 - -

(*) Amounts taken into consideration during the transition period.

221 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

COMMON EQUITY 31 December 2015 (*) Paid-in capital to be entitled for compensation after all creditors 620,000 Share premium 54 Share cancellation profits - Legal reserves 356,619 Other comprehensive income according to TAS Profit 65,869 Net Current Period Profit 69,876 Prior Period Profit (4,007) Provisions for possible losses - Bonus shares from associates, subsidiaries and joint-ventures not accounted in current period’s profit - Minority 11 Common Equity Before Deductions 1,042,553 Deductions From Common Equity Current and prior periods’ losses not covered by reserves, and losses accounted under equity according to TAS (-) 27,437 Leasehold improvements on operational leases (-) 12,266 Goodwill and intangible assets and related deferred tax liabilities (-) 16,562 Net deferred tax assets / liabilities (-) 4,806 Shares obtained against article 56, paragraph 4 of the Banking Law (-) - Investments in own common equity (-) - Total of Net Long Positions of the Investments in equity items of unconsolidated banks and financial institutions where the bank does not own 10% or less of the issued share capital exceeding the 10% threshold of above Tier I Capital (-) - Total of net long positions of the investments in equity items of unconsolidated banks and financial institutions where the bank owns 10% or less of the issued share capital exceeding the 10% threshold of above Tier I Capital(-) - Mortgage Servicing Rights Exceeding the 10% Threshold of Tier I Capital (-) - Net Deferred Tax Assets Arising from Temporary Differences Exceeding the 10% Threshold of Tier I Capital (-) - Amount Exceeding the 15% Threshold of Tier I Capital as per the Article 2, Clause 2 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-) - The Portion of Net Long Position of the Investments in Equity Items of Unconsolidated Banks and FinancialInstitutions Where the Bank Owns 10% or More of the Issued Share Capital Not Deducted from Tier I Capital (-) - Mortgage servicing rights not deducted (-) - Excess amount arising from deferred tax Assets from temporary differences (-) - Other items to be defined by the BRSA (-) - Deductions from Tier I Capital in cases where there are no adequate aditional Tier I or Tier II Capitals (-) - Total Regulatory Adjustments to Common Equity 61,071 Total Common Equity 981,482

222 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

ADDITIONAL TIER I CAPITAL Privileged Stock Not Included in Tier I Capital and the Related Share Premiums - Directly Issued Qualifying Additıonal Tier 1 Instruments (Approved by the Regulators) Plus Related Stock Surplus (Issued or Obtained After 1.1.2014) - Directly Issued Qualifying Additıonal Tier 1 Instruments (Approved by the Regulators) Plus Related Stock Surplus (Issued or Obtained Before 1.1.2014) - Additional Tier I Capital Before Deductions - Deductions from Additional Tier I Capital Direct and Indirect Investments of the Bank on Its Own Additıonal Core Capital (-) - Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or Less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-) - The Total of Net Long Position of the Direct or Indirect Investments in Additıonal Tier I Capital of Unconsolidated Banks and Financial Institutions Where the Bank Owns more Than 10% of the Issued Share Capital (-) - Other Items to be Defined by the BRSA (-) - Deductions from Additional Core Capital in Cases Where There are no Adequate Tier II Capital (-) - Total Deductions from Additional Tier I Capital - Total Additional Tier I Capital - Deductions from Tier I Capital Goodwill and Other Intangible Assets and Related Deferred Taxes not Deducted from Tier I Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-) 66,246 Net Deferred Tax Asset/Liability not Deducted from Tier I Capital as per the Temporary Article 2, Clause 1 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-) - Total Tier I Capital 915,236 TIER II CAPITAL Directly Issued Qualifying Tier 2 Instruments (That are Approved by the Regulator) Plus Related Stock Surplus (Issued or Obtained after 1.1.2014) - Directly Issued Qualifying Tier 2 Instruments (That are Approved by the Regulator) Plus Related Stock Surplus (Issued or Obtained before 1.1.2014) 660,989 Pledged Sources on Behalf of the Bank for the Use of Committed Share Capital Increase by Shareholders - General Provisions 93,386 Tier II Capital before Deductions 754,375 Deductions from Tier II Capital - Direct and Indirect Investments of the Bank on Its OwnTier II Capital (-) - Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or Less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital (-) - The Total of Net Long Position of the Direct or Indirect Investments in Additıonal Core Capital and Tier II Capital of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or more of the Issued Share Capital Exceeding the 10% Threshold of Tier I Capital (-) - Other Items to be Defined by the BRSA (-) - Total Deductions from Tier II Capital - Total Tier II Capital 754,375

223 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

CAPITAL Loans Granted Against the Articles 50 and 51 of the Banking Law (-) - Net Book Values of Movables and Immovables Exceeding the Limit Defined in the Article 57, Clause 1 of the Banking Law and the Assets Acquired Against Overdue Receivables and Held for Sale but Retained more than Five Years (-) 3,584 Loans to Banks, Financial Institutions (domestic/foreign) or Qualified Shareholders in the Form of Subordinated Debts or Debt Instruments Purchased from Such Parties and Qualified as Subordinated Debts (-) - Deductions as per the Article 20, Clause 2 of the Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks (-) - Other Items to be Defined by the BRSA (-) - The Portion of Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or Less of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not Deducted from Tier I Capital, Additional Core Capital or Tier II Capital as per the Temporary Article 2, Clause 1 of the Regulation (-) - The Portion of Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns more than 10% of the Issued Share Capital Exceeding the 10% Threshold of above Tier I Capital not Deducted from Additıonal Core Capital or Tier II Capital as per the Temporary Article 2, Clause 1 of the Regulation (-) - The Portion of Net Long Position of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or more of the Issued Share Capital, of the Net Deferred Tax Assets Arising from Temporary Differences and of the Mortgage Servicing Rights not Deducted from Tier I Capital as per the Temporary Article 2, Clause 2, Paragraph (1) and (2) and Temporary Article 2, Clause 1 of the Regulation (-) - SHAREHOLDERS’S EQUITY 1,666,027 Amounts lower than Excesses as per Deduction Rules Remaining Total of Net Long Positions of the Investments in Equity Items of Unconsolidated Banks and Financial Institutions Where the Bank Owns 10% or Less of the Issued Share Capital - Remaining Total of Net Long Positions of the Investments in Tier I Capital of Unconsolidated Banks and Financial Institutions Where the Bank Owns more than 10% or Less of the Tier I Capital - Remaining Mortgage Servicing Rights - Net Deferred Tax Assets Arising from Temporary Differences -

(*) Total capital has been calculated in accordance with the “Regulations regarding to changes on Regulation on Equity of Banks” effective from date 31 December 2016, the information given in the prior period column has been calculated pursuant to former regulation.

224 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Details on Subordinated Liabilities

The Commercial Bank (P.S.Q.C.), United Arab Bank, National Issuer Bank Of Oman Unique identifier (eg CUSIP, ISIN) - Governing law (s) of the instrument Regulation on Equity of Banks (Published in the Official Gazette Nr. 28756 dated 5 September 2013 Regulatory treatment Subject to 10% deduction as of 1/1/2015 No Eligible on Unconsolidated/ consolidated / both unconsolidated and consolidated Valid on Consolidated and Unconsolidated Basis Instrument type Secondary Subordinated Loan Amount recognised in regulatory capital (Currency in million TRL, as of most recent reporting date) 439,900 Par value of instrument (Million TRL) 439,900 Accounting classification 347 Original date of issuance 30.06.2015 Demand or time Time Original maturity date 10 years+ 1 day Issuer call subject to prior supervisory approval -Illegality, - After 5th year, -Taxation reason and -Depending on regulatory as a reason BRSA has the right to refund. Optional call date, contingent call dates and redemption amount - Subsequent call dates, if applicable - Coupons / dividends Fixed or floating dividend/coupon Floating Coupon rate and any related index Libor+6 Existence of a dividend stopper - Fully discretionary, partially discretionary or mandatory Mandatory Existence of step up or other incentive to redeem - Non-cumulative or cumulative Non-cumulative Convertible or non-convertible If convertible, conversion trigger (s) - If convertible, fully or partially - If convertible, conversion rate - If convertible, mandatory or optional conversion - If convertible, specify instrument type convertible into - If convertible, specify issuer of instrument it converts int - Write-down feature If write-down, write-down trigger (s) When unsustainable situation is realized, value decrement is realized. If write-down, full or partial Partial or completely value decrement is should be realized. If write-down, permanent or temporary Permanent If temporary write-down, description of write-up mechanism - Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Before core capital, after all creditors Whether conditions which stands in article of 7 and 8 of Banks’ shareholder equity law are possessed or not Possess According to article 7 and 8 of Banks' shareholders equity law that are not possesed -

225 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Issuer Alternatif Bank A.Ş. Unique identifier (eg CUSIP, ISIN) ISIN: XS1396282177 Governing law(s) of the instrument Regulation on Equity of Banks (Published in the Official Gazette Nr. 28756 dated 5 September 2013 Regulatory treatment Subject to 10% deduction as of 1/1/2015 No Eligible on Unconsolidated/ consolidated / both unconsolidated and consolidated Valid on Consolidated and Unconsolidated Basis Instrument type Secondary Subordinated Loan Amount recognised in regulatory capital (Currency in million TRL, as of most recent reporting date) 1,045,308 Par value of instrument (Million TRL) 1,045,308 Accounting classification 347 Original date of issuance 15.04.2016 Demand or time Time Original maturity date 10 years+ 1 day Issuer call subject to prior supervisory approval -Illegality, - After 5th year, -Taxation reason and -Depending on regulatory as a reason BRSA has the right to refund. Optional call date, contingent call dates and redemption amount - Subsequent call dates, if applicable - Coupons / dividends Fixed or floating dividend/coupon Fixed Coupon rate and any related index 8.75% Existence of a dividend stopper - Fully discretionary, partially discretionary or mandatory Mandatory Existence of step up or other incentive to redeem - Non-cumulative or cumulative Non-cumulative Convertible or non-convertible If convertible, conversion trigger (s) - If convertible, fully or partially - If convertible, conversion rate - If convertible, mandatory or optional conversion - If convertible, specify instrument type convertible into - If convertible, specify issuer of instrument it converts int - Write-down feature If write-down, write-down trigger(s) - If write-down, full or partial - If write-down, permanent or temporary - If temporary write-down, description of write-up mechanism - Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Before core capital, after all creditors Whether conditions which stands in article of 7 and 8 of Banks’ shareholder equity law are possessed or not Possess According to article 7 and 8 of Banks' shareholders equity law that are not possesed -

226 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

The Internal Assessment Process of Internal Capital Adequacy Regarding the Current and Future Operations

The ultimate objective of the internal assessment process of capital requirement is to sustain considering assess the capital adequacy of the Bank in line with the risk profile and risk appetite by considering the Bank’s strategies, credit growth prospects, structure of assets and liabilities, future funding sources and liquidity, and dividend distribution policy and possible fluctuations in the capital due to the economic cycle.

Within this scope, legal and internal capital requirements are assessed prospectively, along with the annual targets of the Bank, in parallel to the preparation of 3 year strategic plans. In the process of assessing internal capital requirements, the credit risk, market risk, and operational risks, in the first pillar, and the interest rate risk resulting from the Banking accounts, concentration risk, business risk, reputation risk, model risk, and exchange risk are also included.

The risks that the Bank can encounter due to its operations are being evaluated in 2016 budget works and the possible capital requirements according to The Bank’s goal and strategies are evaluated. The evaluation of legal and internal capital ratio requirements considers normal conditions as well as the stress conditions.

The stress scenarios are designed after estimation of post macroeconomic variables, the effects of these variables on the loan costs and market risk factors (exchange rate, interest rates etc.). The effects of stress scenarios on capital, income, risk weighted assets and capital requirement are calculated.

Internal assessment of internal capital requirement is considered by the Bank as an improving process and further upgrades to this method is planned for the future.

II. Explanations on Currency Risk

The difference between the Parent Bank’s foreign currency denominated and foreign currency indexed on and off-balance sheet assets and liabilities is defined as the “Net Foreign Currency Position” and it is the basis of currency risk. Another important dimension of the currency risk is the change in the exchange rates of different foreign currencies in “Net Foreign Currency Position” (cross currency risk).

The Parent Bank keeps the amount at currency risk within the legal limits and monitors the foreign currency positions daily/ momentarily. Even though the Parent Bank’s determined foreign currency limit is minimal compared to the legal limit, the positions throughout the year did not exceed the limits. Term option contracts such as swap and forward are used for hedging the currency risk. Stress tests are performed to mitigate the fluctuations of the exchange rates.

The Parent Bank’s publicly announced foreign exchange bid rates as of the date of the financial statements and for the last five days prior to that date Usd Euro Rate used: TL 3.5192 TL 3.7099 31 December 2016 Foreign Currency Bid Rate TL 3.5192 TL 3.7099 30 December 2016 Foreign Currency Bid Rate TL 3.5192 TL 3.7099 29 December 2016 Foreign Currency Bid Rate TL 3.5318 TL 3.6939 28 December 2016 Foreign Currency Bid Rate TL 3.5329 TL 3.6901 27 December 2016 Foreign Currency Bid Rate TL 3.5135 TL 3.6711

The Bank’s foreign currency bid rates for the reporting date and average of 30 days before the reporting day is as follows:

Usd: TL 3.4935 Euro: TL 3.6840

As of 31 December 2015;

Usd Euro Rate Used: TL 2.9181 TL 3.1838

227 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) a. Information on currency risk of the Group

The Group’s real foreign currency position, both in financial and economic terms, is presented in the table below:

Euro Usd Yen Other FC Total 31 December 2016 Assets Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with The Central Bank of the Republic of Turkey 37,460 1,451,772 1 331,615 1,820,848 Banks 92,622 369,274 337 1,354 463,587 Financial Assets at Fair Value Through Profit and Loss (*) 18 11,594 - - 11,612 Money Market Placements - - - - - Financial Assets Available-For-Sale - 2,028,756 - - 2,028,756 Loans (**) 3,830,836 3,422,462 - - 7,253,298 Investments in Associates, Subsidiaries and Joint Ventures - - - - - Held-to-Maturity Investments - - - - - Hedging Derivative Financial Assets - - - - - Tangible Assets - - - - - Intangible Assets - - - - - Other Assets (***) 60,869 70,385 - - 131,254 Total Assets 4,021,805 7,354,243 338 332,969 11,709,355

Liabilities Bank Deposits 89,023 66,678 - 570 156,271 Foreign Currency Deposits 1,429,996 2,104,857 338 519,049 4,054,240 Money Market Funds - 313,068 - - 313,068 Funds Borrowed From Other Financial Institutions 1,639,624 3,735,632 - - 5,375,256 Marketable Securities Issued - 889,656 - - 889,656 Miscellaneous Payables 31,481 86,039 - 1,541 119,061 Derivative Financial Liabilities For Hedging Purposes - - - - - Other Liabilities (****) 11,059 12,927 - - 23,986 Total Liabilities 3,201,183 7,208,857 338 521,160 10,931,538

Net Balance Sheet Position 820,622 145,386 - (188,191) 777,817 Net Off Balance Sheet Position (758,614) (210,483) 4 192,604 (776,489) Financial Derivative Assets 1,737,935 2,672,901 3,504 207,012 4,621,352 Financial Derivative Liabilities 2,496,549 2,883,384 3,500 14,408 5,397,841 Non-Cash Loans (*****) 753,295 1,135,648 19,188 587 1,908,718

31 December 2015 Total Assets 2,757,040 5,268,207 164 208,879 8,234,290 Total Liabilities 1,808,035 6,680,060 45 234,981 8,723,121 Net Balance Sheet Position 949,005 (1,411,853) 119 (26,102) (488,831) Net Off balance Sheet Position (950,544) 1,467,888 (123) 25,331 542,552 Financial Derivative Assets 710,406 2,758,520 242 67,758 3,536,926 Financial Derivative Liabilities 1,660,950 1,290,632 365 42,427 2,994,374 Non-Cash Loans (*****) 410,233 1,531,569 106 4,752 1,946,660

(*) Accruals of derivative assets held for trading amounting to TL 23,665 (31 December 2015: TL 4,119) have been deducted from fair value through profit and loss. (**) FC indexed loans and accruals amounting to TL 1,092,396 (31 December 2015: TL 933,448) and leasing receivables of TL 982,806 (31 December 2015: TL 788,646) are shown in loans. (***) Accruals of spot transaction amounting to TL 28 (31 December 2015: TL 52) have been deducted from other assets. (****) Accruals of derivative liabilities held for trading amounting to TL 14,558 (31 December 2015: TL 13,288) and other provisions amounting to TL 8 (31 December 2015: TL 3) have been deducted from other liabilities. (*****) No effect on net off-balance sheet position

228 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Exposure to currency risk

The table below represents the sensitivity of the Group to 10% weakening of TL against USD, EUR and other currencies and the effects on equity and income statement (without tax effect) for interim periods then ended 31 December 2016 and 2015.

Analysis are assumed with other variables especially interest rate remain stable.

31 December 2016 31 December 2015 Income statement Equity Income statement Equity Usd (6,510) (6,510) 5,604 5,604 Euro 6,201 6,201 (153) (153) Other FC 442 442 (77) (77) Total, net 133 133 5,374 5,374

The table below represents the sensitivity of the Group to 10% strenghtening of TL against below mentioned currencies and the effects on equity and income statement (without tax effect) for the year then ended 31 December 2016 and 2015.

31 December 2016 31 December 2015 Income statement Equity Income statement Equity Usd 6,510 6,510 (5,604) (5,604) Euro (6,201) (6,201) 153 153 Other FC (442) (442) 77 77 Total, net (133) (133) (5,374) (5,374)

III. Explanations on Interest Rate Risk

Assets, liabilities and off-balance sheet items’ interest rate sensitivity are measured.

The expected impact on the financial position and on the cash flow of the Group due to the fluctuations in the market interest rates are being followed within the framework of Asset-Liability management principles and also interest rate risk limits restricted on balance sheet by the Board of Directors. These limits also impose restriction to indirect profit centers can carry on maturity mismatches.

The Group has not encountered to any significant interest rate risk in the last period.

Average interest rates applied to monetary financial instruments reflect market rates.

229 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) a. Interest rate sensitivity of assets, liabilities and off-balance sheet items (based on re-pricing dates)

Up to 1-3 3-12 1-5 5 Years Non-Interest 31 December 2016 1 Month Months Months Years and Over Bearing Total

Assets Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic Turkey 1,749,540 - - - - 220,648 1,970,188 Banks 504,180 55,063 - - - 25,692 584,935 Financial Assets at Fair Value Through Profit and Loss 42,054 7,950 11,856 90 - - 61,950 Money Market Placements 350,081 - - - - - 350,081 Financial Assets Available-for-Sale 2,033 814,083 1,475,266 - 32,592 6,065 2,330,039 Loans 2,625,700 1,180,542 3,047,963 2,701,792 699,345 233,507 10,488,849 Held-to-maturity Investments ------Other Assets (*) (**) 60,379 74,803 295,243 746,824 29,553 598,319 1,805,121 Total Assets 5,333,967 2,132,441 4,830,328 3,448,706 761,490 1,084,231 17,591,163

Liabilities Bank Deposits (***) 562,825 86,015 - - - 24,581 673,421 Other Deposits 5,083,585 2,201,791 491,762 277 - 347,151 8,124,566 Money Market Funds 456,117 70,298 - - - - 526,415 Miscellaneous Payables - - - - - 210,461 210,461 Marketable Securities Issued 67,399 84,525 - 889,656 - - 1,041,580 Funds Borrowed From Other Financial Institutions 934,523 1,083,606 3,370,959 931 54,651 - 5,444,670 Other Liabilities and Shareholders’ Equity (****) 28,855 32,298 7,527 31 - 1,501,339 1,570,050 Total Liabilities 7,133,304 3,558,533 3,870,248 890,895 54,651 2,083,532 17,591,163

Balance Sheet Long Position - - 960,080 2,557,811 706,839 - 4,224,730 Balance Sheet Short Position (1,799,337) (1,426,092) - - - (999,301) (4,224,730) Off-Balance Sheet Long Position - - 9,291 27,023 - - 36,314 Off-Balance Sheet Short Position (137,337) (70,464) - (541) - - (208,342) Total Position (1,936,674) (1,496,556) 969,371 2,584,293 706,839 (999,301) (172,028)

(*) Investments in associates and subsidiaries, tangible and intangible fixed assets, miscellaneous receivables, deferred tax assets and other assets are classified as non- interest bearing assets. (**) Leasing receivables are classified to other assets. (***) Precious metal bank account is presented under Bank Deposits. (****) Taxes payable, charges, duties and premiums, provisions ve shareholders’ equity are classified as non-interest bearing liabilities.

230 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Up to 1-3 3-12 1-5 5 Years Non-Interest 31 December 2015 1 Month Months Months Years and Over Bearing Total

Assets Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic Turkey 1,442,488 - - - - 103,010 1,545,498 Banks 583,836 - - - - 28,160 611,996 Financial Assets at Fair Value Through Profit and Loss 4,295 3,507 19,860 - - - 27,662 Money Market Placements 350,105 - - - - - 350,105 Financial Assets Available-for-Sale 36,578 471,265 225,045 49,992 28,341 5,882 817,103 Loans 4,347,911 461,705 1,599,401 2,026,163 634,641 235,841 9,305,662 Held-to-Maturity Investments ------Other Assets (*) (**) 40,798 62,280 242,033 600,875 66,297 394,514 1,406,797 Total Assets 6,806,011 998,757 2,086,339 2,677,030 729,279 767,407 14,064,823

Liabilities Bank Deposits 554,792 - - - - 485 555,277 Other Deposits 3,690,259 1,494,977 122,878 7,801 - 367,291 5,683,206 Money Market Funds 265,766 93,057 - - - - 358,823 Miscellaneous Payables - - - - - 219,448 219,448 Marketable Securities Issued - - 142,088 735,736 - - 877,824 Funds Borrowed From Other Financial Institutions 1,287,641 1,219,339 2,515,176 7,539 - - 5,029,695 Other Liabilities and Shareholders’ Equity (***) 8,088 2,270 3,593 - - 1,326,599 1,340,550 Total Liabilities 5,806,546 2,809,643 2,783,735 751,076 - 1,913,823 14,064,823

Balance Sheet Long Position 999,465 - - 1,925,954 729,279 - 3,654,698 Balance Sheet Short Position - (1,810,886) (697,396) - - (1,146,416) (3,654,698) Off-balance Sheet Long Position - - 12,519 27,023 - - 39,542 Off-balance Sheet Short Position (11,262) (25,203) - - - - (36,465) Total Position 988,203 (1,836,089) (684,877) 1,952,977 729,279 (1,146,416) 3,077

(*) Investments in associates and subsidiaries, tangible and intangible fixed assets, miscellaneous receivables, deferred tax assets and other assets are classified as non- interest bearing assets. (**) Leasing receivables are classified to other assets. (***) Taxes payable, charges, duties and premiums, provisions ve shareholders’ equity are classified as non-interest bearing liabilities.

231 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Average interest rates for monetary financial instruments

The following average interest rates have been calculated by weighting the rates with their principal amounts as of the balance sheet date.

31 December 2016 (*) Euro Usd Other FC TL Assets % % % % Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic of Turkey - 0.75 - 3.31 Banks 0.01 0.79 - 8.35 Financial Assets at Fair Value Through Profit and Loss 4.64 4.71 - - Money Market Placements - - - 8.49 Financial Assets Available-for-Sale - 6.48 - 8.09 Loans 4.71 5.60 - 14.34 Held-to-Maturity Investments - - - -

Liabilities Bank Deposits 2.42 3.00 - 9.03 Other Deposits 1.53 2.81 - 11.28 Money Market Funds - 0.38 - 6.80 Miscellaneous Payables - - - - Marketable Securities Issued - 3.12 - - Funds Borrowed From Other Financial Institutions 2.05 5.08 - 7.52

(*) Represents Parent Bank’s average interest rates.

31 December 2015 (*) Euro Usd Other FC TL Assets % % % % Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic of Turkey - 0.28 - 2.78 Banks - 3.00 - 13.59 Financial Assets at Fair Value Through Profit and Loss 3.74 4.63 - 9.49 Money Market Placements - - - 12.50 Financial Assets Available-for-Sale - 4.12 - 9.38 Loans 4.43 5.32 - 16.20 Held-to-Maturity Investments - - - -

Liabilities Bank Deposits 1.08 1.00 1.75 - Other Deposits 1.40 2.27 - 12.36 Money Market Funds - 0.38 - 6.37 Miscellaneous Payables 4.46 - - - Marketable Securities Issued - 3.12 - - Funds Borrowed From Other Financial Institutions 1.77 2.54 - 7.66

(*) Represents Parent Bank’s average interest rates.

232 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) c. Interest rate risk arising from banking accounts

Interest rate risk resulting from banking accounts are evaluated in the framework of re-pricing risk, yield curve risk, base risk and option risk and interest rate risk resulting from banking accounts being managed with the international standards and with hedging transactions and limits the risk reduction.

The sensitivity of assets, liabilities and off-balance sheet items are evaluated in the Assets-Liabilities committee meetings with the developments in the market. Interest rate risk assessment process arising from banking accounts will be included interest rate position that determined as banking account by the Bank. Besides this process has been created and conducted in reference to related re-pricing and maturity data.

Due to the maturity mismatch in the balance sheet, monitoring interest rate risk exposure within the scope of duration gap, maturity gap and sensitivity analysis are used. Duration gap, maturity gap and sensitivity analysis are calculated on a two week periods to the Assets-Liabilities Committee.

In the analysis, the fair values are calculated from interest sensitive assets and liabilities at fixed interest rates through cash flow, in the variable interest rates based on the re-pricing term market interest rates, using yield curves. The terms of the demand products is settled on basing of the frequency of interest rate determination and customer behavior. These results are supported periodically by the sensitivity and scenario analysis performed to assess the effect of the market fluctuations may occur.

Interest rate risk resulting from the banking accounts is measured in accordance with "Regulation No. 28034 on Measurement and Evaluation of Interest Rate Risk resulting from Banking Accounts with Standard Shock Method", dated 23 August 2011 and legal limits based on these measurements are monitored and reported on a monthly basis.

Interest rate risk related to interest-sensitive financial instruments classified in trading portfolio is assessed within the scope of the market risk.

Branches and line of businesses, being free from the market risk, the management of market risk depends on Fund Management Group Asset and Liability Management Department (ALM) is transferred by transfer pricing system and market risk management are realized by this section centrically. ALM, in the market risk management; uses balance sheet (long-term debt) and off-balance sheet (derivatives) instruments.

Applied Shock Gains/Equity- 31 December 2016 (+/- x basis point) Gains/Losses Losses/Equity +500bps (133,927) (5.03)% 1.TRY -400 bps 80,664 3.03% +200 bps (42,694) (1.61)% 2.EURO -200 bps 42,384 1.59% +200 bps (59,404) (2.23)% 3.USD -200 bps 77,348 2.91% Total (For Negative Shocks) (236,025) (8.87)% Total (For Positive Shocks) 200,396 7.53%

Applied Shock Gains/Equity- 31 December 2015 (+/- x basis point) Gains/Losses Losses/Equity +500bps (89,877) (5.29)% 1.TRY -400 bps 83,776 4.93% +200 bps (24,403) (1.44)% 2.EURO -200 bps 19,839 1.17% +200 bps 23,165 1.36% 3.USD -200 bps (24,107) (1.42)% Total (For Negative Shocks) 79,508 4.68% Total (For Positive Shocks) (91,115) (5.37)%

233 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

IV. Explanation on share certificates

None.

V. Explanations on Liquidity Risk Management and Liquidity Coverage Ratio

There is a liquidity limit approved and monitored on a weekly basis by the Bank Risk Committee. This limit is used by the Assets- Liability Management Committee for deciding to funding sources composition and pricing policy.

Maturity and interest rate mismatches impact on profitability and capital is measured using scenario analysis.

The Bank’s most important source of liquidity is deposits denominated in TL and foreign exchange deposit accounts. In addition, there are also borrowing opportunities available from Borsa İstanbul repo market, Takas Bank and Interbank market.

In accordance with the framework of BRSA’s “Regulation on calculation of Bank’s liquidity coverage ratio”, published in Official Gazette no. 28948, dated 21 March 2014, the deposit banks are subject to set 70% and 50% liquidity ratios for Foreign Currency accordingly. The liquidity ratio is calculated by dividing the high quality liquid assets by net cash outflows.

1.a. Information on liquidity risk management regarding how to provide communication with the Board of Directors and lines of business for risk capacity of the Bank, liquidity risk, responsibility and structure of management, reporting of Bank’s liquidity risk, liquidity risk strategy, policies and practices

Liquidity risk management aims to take necessary measures in a timely manner and correct way with respect to potential liquidity shortage caused by cash flow mismatches of Bank's balance sheet structure and/or market conditions. It is on ground of the meeting the liquidity needs cash and disposable borrowing resources at specified level and time of held deposits and other liabilities creating liquidity. Bank monitors liquidity position both in terms of foreign currency and total liquidity basis.

According to the liquidity risk management about the liquidity position, necessary guidance to the line of businesses and pricing are performed by the Asset and Liability Management Department by taking into account the cash flow of the Bank with maturities. Liquidity risk informations are reported regularly to the such Asset and Liability Committee and Management Risk Committees. The liquidity risk parameters determined within the frame of liquidity risk parameters are monitored and reported to the business units by Risk Management consistently. The actions need to be taken in conditions such as convergence and excess of limits are decided by Asset-Liability Committee.

1.b. Information on the centralization degree of liquidity management and funding strategy and the operation between the Bank and the Bank's shareholders

The responsibility of liquidity risk management in accordance with the risk appetite determined by the Board of Directors belongs to the Treasury Asset-Liability Management Department. Risk Management Department is responsible for determining the level of bank-wide liquidity risk and its measurement, monitoring and reporting. Liquidity management and funding strategies of Bank and its shareholders are determined by Bank’s Asset and Liability Management Committees and monitored by the Treasury Department.

234 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

1.c. Information on the Bank's funding strategy including policies on diversity of fund terms and resources

For the Bank's effective, correct and sustainable liquidity risk management, it is provided to be followed by the relevant committees with the approval of Liquidity Management Policy Board. The Bank's core funding source has been targeted as a deposit. Non- deposit funding sources are used to provide a variety of core sources and maturities. These resources are mainly syndicated loans, subordinated loans and bond issuances. Despite term of deposits are determined by market conditions and generally on short term basis, it is aimed to collect the deposits of customers who have high stickiness to the Bank. Non-deposit sources also preferred because they are more long-term resources.

1.d. Information on liquidity management on the basis of currencies constitute the minimum five percentage of the Bank's total liabilities

Turkish Lira, US Dollars and Euros are the currencies that constitute the minimum five per cent of the Bank's liabilities. It is intended to have effective foreign currency and liquidity risk management analysing these currencies on foreign exchange and total liquidity management basis. Liquidity gap analysis are measured and managed with the same way. Deposits and other long term sources should be preffered, performing liquidity management on currency basis, in order to avoid the increase of market risk fluctuations on foreign currency positions.

1.e. Information on current liquidity risk mitigation techniques

Liquid assets as defined under Basel III are held with the intention of liquidity risk management managing the Bank’s liquidity risk. Market liquidity and maturity of liquid assets are considered as risk reduction for liquidity management. In this context, the range of liquid assets is important in the management of liquidity risk. Potential risks are minimized by avoiding concentration of liquid assets during the potential liquidity needs and the Bank’s ability to fulfill its obligations.

1.f. Information on the use of stress testing

Stress tests on the basis of the liquidity risk are performed at the beginning of the each year. The test results are presented with the details of the stress test and ICAAP report annually. The Board of Directors approve the stress test results and they are shared with the BRSA during the process. In addition to these stress tests, cash flow and liquidity position analyzes are maintained according to the Bank's internal needs.

1.g. General information about the emergency and contingency liquidity plan

Information on emergency and contingency liquidity plan is detailed in the Bank "Emergency Funding Plan Policy". Definitions regarding the liquidity crisis and actions that the Bank may take against a liquidity crisis that may occur in the market are implemented the action plan outlined. The Bank's special liquidity crisis levels set out in alarm conditions and the parameters to be monitored as an indicator are detailed. Crisis Committee members and the Committee's duties and responsibilities are determined for the Bank’s stress scenarios specific to the market and the Bank.

235 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Liquidity Coverage Ratio

The Bank’s calculated liquidity coverage ratios are presented as below pursuant to “Measurement and Assesment of the Liquidity Coverage Ratios of Banks” published in the Official Gazette on 21 March 2014 and numbered 28948. The highest and lowest values of the average of last three months unconsolidated foreign currency and total liquidity coverage ratios are as follows:

Consideration Ratio Consideration Ratio Unapplied to Total Applied to Total Value (*) Value (*) 31 December 2016 TL+FC FC TL+FC FC HIGH QUALITY LIQUID ASSETS 1 High Quality Liquid Assets 2,546,682 1,937,291 CASH OUTFLOWS 2 Retail and Small Business Customers 3,089,050 1,278,133 278,977 127,813 3 Stable Deposits 598,573 - 29,929 - 4 Less Stable Deposit 2,490,477 1,278,133 249,048 127,813 5 Unsecured Wholesale Funding 4,541,102 2,027,056 3,065,965 1,272,118 6 Operational Deposits - - - - 7 Non-operational Deposits 3,626,479 1,737,425 2,151,597 982,486 8 Other Unsecured Fundings 914,623 289,631 914,368 289,632 9 Secured Funding 108,119 108,119 10 Other Cash Outflows 29,769 231 29,769 231 11 Derivative cash outflow and liquidity needs related to market valuation changes on derivatives or other transactions 29,769 231 29,769 231 12 Obligations related to structured financial products - - - - 13 Commitments related to debts to financial markets and other off- balance sheet obligations - - - - 14 Other revocable off-balance sheet commitments and contractual obligations 2,733,603 1,302,921 396,279 169,357 15 Other irrevocable or conditionally revocable off-balance sheet obligations 588,420 588,420 29,421 29,421 16 TOTAL CASH OUTFLOWS 3,908,530 1,707,059 CASH INFLOWS 17 Secured lending 376,808 - - - 18 Unsecured lending 1,710,277 561,488 1,250,193 482,847 19 Other cash inflows 3,542 3,575 3,542 3,575 20 TOTAL CASH INFLOWS 2,090,627 565,063 1,253,735 486,422 Total Adjusted Values 21 TOTAL HIGH QUALITY ASSETS STOCKS 2,546,682 1,937,291 22 TOTAL CASH OUTFLOWS 2,654,795 1,220,637 23 LIQUIDITY COVERAGE RATIO (%) 96.77% 178.23%

(*) The average of the last three months liquidity coverage ratio calculated by monthly and weekly simple arithmetic average.

236 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Consideration Ratio Consideration Ratio Unapplied to Total Applied to Total Value (*) Value (*) 31 December 2015 TL+FC FC TL+FC FC HIGH QUALITY LIQUID ASSETS 1 High Quality Liquid Assets 1,996,311 1,424,983 CASH OUTFLOWS 2 Retail and Small Business Customers 3,322,497 1,580,197 296,272 158,020 3 Stable Deposits 719,547 - 35,977 - 4 Less Stable Deposit 2,602,950 1,580,197 260,295 158,020 5 Unsecured Wholesale Funding 3,170,862 1,635,496 2,079,596 1,125,649 6 Operational Deposits - - - - 7 Non-operational Deposits 2,481,521 1,304,708 1,390,355 794,861 8 Other Unsecured Fundings 689,341 330,788 689,241 330,788 9 Secured Funding 45,967 45,967 10 Other Cash Outflows 49,370 2,254 49,370 2,254 11 Derivative cash outflow and liquidity needs related to market valuation changes on derivatives or other transactions 49,370 2,254 49,370 2,254 12 Obligations related to structured financial products - - - - 13 Commitments related to debts to financial markets and other off- balance sheet obligations - - - - 14 Other revocable off-balance sheet commitments and contractual obligations 3,322,436 2,153,795 547,804 286,173 15 Other irrevocable or conditionally revocable off-balance sheet obligations 34,467 34,467 1,723 1,723 16 TOTAL CASH OUTFLOWS 3,020,732 1,619,786 CASH INFLOWS 17 Secured lending 345,334 - - - 18 Unsecured lending 1,533,634 390,164 1,062,944 293,113 19 Other cash inflows 150 574,985 150 574,985 20 TOTAL CASH INFLOWS 1,879,118 965,149 1,063,094 868,098 Total Adjusted Value 21 TOTAL HIGH QUALITY ASSETS STOCKS 1,996,311 1,424,983 22 TOTAL CASH OUTFLOWS 1,957,638 806,779 23 LIQUIDITY COVERAGE RATIO (%) 102% 216%

(*) The average of the last three months liquidity coverage ratio calculated by monthly and weekly simple averages.

3. Banks explanations as a minimum regarding the liquidity ratio:

3.a Important factors affected by the results of Liquidity Coverage Ratio and the change of the items taken into account in the ratio calcu- lation over time.

Despite all components have significant role, bond and reverse repurchase amounts cash outflows/unsecured debts of due to banks line, cash outflows/irrevocable commitments or revocable contingent commitments of off balance sheet liabilities, cash inflows/ unsecured receivables of due from financial institutions are high volatile assets. Related items have an effective role on variability of ratio.

237 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3.b Explanations on the components of high-quality liquid assets:

High-quality assets is generated by cash balances and Central Bank and issued debt securities by those with 0% risk weightings of credit quality level risk. The changes in the reverse repo balance at the period effects high-quality asset stock value.

3.c Funding source components and the intensity of them in all funds

Basically deposits, loans and subordinated loans as unsecured debt items have the most significant portion in Parent Bank’s funding balances. As of 31 December 2016, the proportion of total liabilities to all deposits of the bank is 50% and borrowings constitutes 22% portion whereas subordinate debt is 9%. Secured borrowings such as repo transactions has lower portion (3%). In addition, as a funding item, the Parent Bank has USD 250,000 issued securities.

3.d Information about the outflows arising from derivative transactions and the possible completing collateral transactions

Cash outflows arising from derivative product balances are occurred when the derivative products liabilities are higher than the receivables. As of 31 December 2016, net of derivative assets and liabilities amounts to TL 143. In addition, cash outflows balances are reported with calculation against the change of derivatives fair value. This calculation is performed by checking the output margin within last 24 months of the counterparty balance. The maximum value in the past 24 months is considered as cash outflow as of reporting date. In this context, according to calculations as of 31 December 2016, the liability balance is computed as TL 29,763 in case of a change in fair value of derivatives products.

3.e Counterparty and fund resources on the basis of products and concentration limits on collaterals

As of 31 December 2016, the Bank’s approximately 32.5% of time deposit cap arised from retail banking. The remaining time deposits are constituted from legal entities. Another significant funding resource of borrowings generated from foreign banks (97%). As of 31 December 2016, 30% of the subordinated loans which are subject to capital adequacy calculations provided from The Commercial Bank (P.S.Q.C.) and rest of the part has been submit in abroad by Bank of Amerika, Citibank ve Commerzbank at the end of April 2016. In addition, Bank has issued securities amounting to USD 250,000.

3.f The liquidity risk for the potential funding needs for the bank itself , the branches in foreign countries and its consolidated partners- hips with considering the operational and legal factors inhibiting the liquidity transfer

In the current position of the Bank and its consolidated subsidiaries, there are no such risks drawing attention.

3.g The information about the other cash inflows and outflows located in the liquidity leverage ratio calculation but not located in the second paragraph of disclosure template and considered as related with liquidity profile

In this context, there is no excluded cash inflow and outflow in statements on the current situation.

238 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Breakdown of assets and liabilities according to their outstanding maturities

Up to 1-3 3-12 1-5 5 Year Demand 1 Month Months Months Year and Over Unclassified (*) (**) Total 31 December 2016 Assets Cash (Cash in Vault, Effectives, Cash in Transit, Cheques Purchased) and Balances with the Central Bank of the Republic of Turkey 220,648 1,749,540 - - - - - 1,970,188 Due From Banks 25,692 504,180 55,063 - - - - 584,935 Financial Assets at Fair Value Through Profit and Loss - 42,054 7,598 11,690 184 424 - 61,950 Money Market Placements - 350,081 - - - - - 350,081 Financial Assets Available-for- Sale - - - 32,279 759,360 1,532,335 6,065 2,330,039 Loans - 1,462,433 348,769 2,879,948 3,717,760 1,846,432 233,507 10,488,849 Held-to-Maturity Investments ------Other Assets (*) (***) 587 95,821 124,545 304,495 755,959 45,936 477,778 1,805,121 Total Assets 246,927 4,204,109 535,975 3,228,412 5,233,263 3,425,127 717,350 17,591,163

Liabilities Bank Deposits (****) 24,581 562,825 86,015 - - - - 673,421 Other Deposits 347,151 5,083,585 2,201,791 491,762 277 - - 8,124,566 Funds Borrowed From Other Financial Institutions - 101,100 160,125 2,219,736 875,430 2,088,279 - 5,444,670 Money Market Funds - 456,117 70,298 - - - - 526,415 Marketable Securities Issued - 67,399 84,525 - 889,656 - - 1,041,580 Miscellaneous Payables - 39,833 - - - - 170,628 210,461 Other Liabilities (**) 2,591 119,844 32,298 7,527 31 - 1,407,759 1,570,050 Total Liabilities 374,323 6,430,703 2,635,052 2,719,025 1,765,394 2,088,279 1,578,387 17,591,163

Liquidity Gap (127,396) (2,226,594) (2,099,077) 509,387 3,467,869 1,336,848 (861,037) -

31 December 2015 Total Assets 131,425 3,522,960 835,785 3,045,037 4,207,012 1,791,164 531,440 14,064,823 Total Liabilities 370,072 4,809,783 2,093,117 2,656,885 1,488,119 1,253,634 1,393,213 14,064,823

Liquidity Gap (238,647) (1,286,823) (1,257,332) 388,152 2,718,893 537,530 (861,773) -

(*) Assets that are necessary for banking activities and that cannot be liquidated in the short-term such as fixed and intangible assets, stationary stocks, prepaid expenses and loans under follow-up, are classified in this column. (**) Shareholders’ equity is presented under “Other liabilities” item in the “Unclassified” column. (***) Leasing receivables are classified to other assets. (****) Precious Metal bank account is presented under Bank Deposits.

239 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Financial liabilities according to their remaining maturities:

In accordance with TFRS 7, the maturity distribution of the Bank's non-derivative financial liabilities shown as in the table below. The allocation table shows the undiscounted cash outflows of the Bank's financial liabilities according to the nearest possible contractual maturity.

31 December 2016 Up to 1 month 1-3 months 3-12 months 1-5 years 5 years and over Total Liabilities Bank Deposits 587,966 86,197 - - - 674,163 Other Deposits 5,557,324 2,223,524 498,580 340 - 8,279,768 Funds Borrowed From Other Financial Institutions 194,215 281,507 2,428,706 1,572,006 2,345,314 6,821,748 Money Market Funds 456,364 70,592 - - - 526,956 Marketable Securities Issued 68,399 85,431 - 891,959 - 1,045,789 Total 6,864,268 2,747,251 2,927,286 2,464,305 2,345,314 17,348,424

31 December 2015 Up to 1 month 1-3 months 3-12 months 1-5 years 5 years and over Total Liabilities Bank Deposits 441,705 646,402 31,928 - - 1,120,035 Other Deposits 1,302,659 4,277,642 339,452 51,698 5 5,971,456 Funds Borrowed From Other Financial Institutions 479,842 - 145,760 - 894,605 1,520,207 Money Market Funds 92,227 151,227 1,301,017 2,270,945 569,587 4,385,003 Marketable Securities Issued - - 145,760 725,710 - 871,470 Total 2,316,433 5,075,271 1,963,917 3,048,353 1,464,197 13,868,171

Contractual maturity analysis of the Group’s derivative instruments:

Up to 1 month 1-3 months 3-12 months 1-5 years 5 years and over Total 31 December 2016 Net Paid Hedging Derivative Financial Instruments - 110,000 - 110,000 - 220,000 Forward Foreign Exchange Transactions 206,568 91,103 80,040 - - 377,711 Money and Interest Rate Swaps 2,987,284 2,506,944 1,267,936 4,997,728 918,228 12,678,120 Options 127,700 554,304 2,390,833 7,740 - 3,080,577 Other - - - 56,307 - 56,307 Total 3,321,552 3,262,351 3,738,809 5,171,775 918,228 16,412,715

Up to 1 month 1-3 months 3-12 months 1-5 years 5 years and over Total 31 December 2015 Net Paid Hedging Derivative Financial Instruments - - - 220,000 - 220,000 Forward Foreign Exchange Transactions 128,508 115,369 91,023 - - 334,900 Money and Interest Rate Swaps 3,983,410 807,606 305,478 2,359,046 387,348 7,842,888 Options 121,350 98,995 2,238,857 - - 2,459,202 Other - - - 46,690 - 46,690 Total 4,233,268 1,021,970 2,635,358 2,625,736 387,348 10,903,680

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Collaterals in terms of Risk Groups

31 December 2016 Financial Other/ Physical Guarantees and Risk Groups Amount Guarantees (*) Guarantees Credit Derivatives 1 Contingent and Non-Contingent Receivables from Central Governments or Central Banks 3,911,970 - - - 2 Contingent and Non-Contingent Receivables from Regional Government or Domestic Government 1,086 - - - 3 Contingent and Non-Contingent Receivables from Banks and Intermediaries 2,117,263 5 - - 4 Contingent and Non-Contingent Corporate Receivables 9,989,355 485,679 - - 5 Contingent and Non-Contingent Retail Receivables 2,049,965 48,574 - - 6 Contingent and Non-Contingent Receivables Secured by Residential Property 1,145,362 10,065 - - 7 Non-Performing Receivables 233,625 360 - - 8 Other Receivables 498,907 - - - Total 19,947,533 544,683 - -

(*) The financial guarantees are reported with deducting from the risk amounts before credit risk reduction and credit conversion.

31 December 2015 Financial Other/ Physical Guarantees and Risk Groups Amount Guarantees (*) Guarantees Credit Derivatives 1 Contingent and Non-Contingent Receivables from Central Governments or Central Banks 2,144,694 - - - 2 Contingent and Non-Contingent Receivables from Regional Government or Domestic Government 1,310 - - - 3 Contingent and Non-Contingent Receivables from Banks and Intermediaries 1,887,922 23,812 - - 4 Contingent and Non-Contingent Corporate Receivables 7,187,446 390,453 - - 5 Contingent and Non-Contingent Retail Receivables 1,858,594 50,041 - - 6 Contingent and Non-Contingent Receivables Secured by Residential Property 2,465,374 26,961 - - 7 Non-Performing Receivables 236,253 86 - - 8 Receivables Identified as High Risk by the Board 83,365 3,602 - - 9 Other Receivables 366,957 - - - Total 16,231,915 494,955 - -

(*) The financial guarantees are reported with deducting from the risk amounts before credit risk reduction and credit conversion.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VI. Explanations on Leverage Ratio

Comparison Summary Table of Total Risk and Total Assets Amounts in the Consolidated Financial Statements prepared in accordance with Turkish Accounting Standards.

31 December 2016 (*) 31 December 2015 (*) 1 Total assets in consolidated financial statements prepared in accordance with Turkish Accounting Standards 16,781,989 14,292,716 2 The difference between total assets prepared in accordance with Turkish Accounting Standards (*) and total assets in consolidated financial statements prepared in accordance with the communiqué “Preparation of Consolidated Financial Statements” - - 3 The difference between the amounts of derivative financial instruments and credit derivatives in consolidated financial statements prepared in accordance with the communiqué “Preparation of Consolidated Financial Statements” and risk amounts of such instruments 364,752 14,735 4 The difference between the amounts of securities or commodity financing transactions in consolidated financial statements prepared in accordance with the communiqué “Preparation of Consolidated Financial Statements” and risk amounts of such intruments - - 5 The difference between the amounts of off-balance items in consolidated financial statements prepared in accordance with the communiqué “Preparation of Consolidated Financial Statements” and risk amounts of such items (271,121) (539,871) 6 Other differences between the amounts in consolidated financial statements prepared in accordance with the communiqué “Preparation of Consolidated Financial Statements” and risk amounts of such items 4,595,442 5,163,932 7 Total risk amount 21,471,062 18,931,512

(*) Amounts in the table are three-month average amounts.

Explanations about the aspects that cause the difference between the leverage ratios of current and prior years

The Parent Bank's leverage ratio is 4.58% calculated in compliance with "Regulation on Measurement and Evaluation of Leverage Levels of Banks' which was not consolidated. (31 December 2015: 4.90%). Changes in the leverage ratio are mainly due to the increase in the amount of assets’ risk on-balance sheet. Regulation has been arrived at a decision of the minimum leverage ratio of 3%.

31 December 2016 (*) 31 December 2015 (*) Assets in Balance Sheet 1 On-balance sheet items (excluding derivative financial instruments and credit derivatives but including collateral) 16,781,989 14,292,716 2 Assets deducted in determining Tier 1 capital (161,034) (96,271) 3 Total on-balance sheet risks (sum of lines 1 and 2) Derivative financial instruments and credit derivatives 16,620,955 14,196,445 Derivative financial instruments and credit derivatives 4 Replacement cost associated with all derivative financial instruments and credit derivatives 117,569 40,727 5 Add-on amounts for PFE associated with all derivative financial instruments and credit derivatives 364,750 14,735 6 Total risks of derivative financial instruments and credit derivatives (sum of lines 4 to 5Securities or commodity financing transactions (SCFT) 482,319 55,462 Securities or commodity financing transactions 7 Risks from SCFT assets of off-balancesheet - - 8 Risks from brokerage activities related exposures - - 9 Total risks related with securities or commodity financing transactions (sum of lines 7 to 8) Other off-balance sheet transactions - - Off-balance sheet transactions 10 Gross notional amounts of off-balance sheet transactions 4,638,908 5,219,475 11 (Adjustments for conversion to credit equivalent amounts) (271,122) (539,871) 12 Total risks of off-balance sheet items (sum of lines 10 and 11) Capital and total risks 4,367,786 4,679,604 Capital and Total Risk 13 Tier 1 capital 984,035 928,466 14 Total risks (sum of lines 3, 6, 9 and 12) Leverage ratio 21,471,060 18,931,511 Leverage ratio 15 Leverage ratio 4.58% 4.90%

(*) Amounts in the table are three-month average amounts.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VII. Explanations on the Risk Management a. Risk Management and General Information on Risk Weighted Amount

Notes and explanations in this section have been prepared in accordance with the Communiqué on Disclosures about Risk Management to Be Announced to Public by Banks that have been published in Official Gazette no. 29511 on 23 October 2015 and became effective as of 31 March 2016. According to the Communiqué these notes have to be presented on a quarterly basis. Due to usage of standard approach for the calculation of capital adequacy by the Bank, the following tables have not been presented as of 31 December 2016:

- RWA flow statements of credit risk exposures under Internal Rating Based (IRB) - RWA flow statements of CCR exposures under the Internal Model Method (IMM) - RWA flow statements of market risk exposures under an Internal Model Approach (IMA)

1. The Bank’s risk management approach

Bank`s risk management approach is defined as creating added value for shareholders, customers and employees in parallel with the Bank general business strategy by increasing the efficiency of Bank activities within the framework of risk-return relationship in accordance with the best practices and legal requirements.

The Risk Strategy and its governance are set by the Board of Directors (the Board). The Board has the ultimate responsibility for the management of all risks assumed and faced by the Bank. The Board manages risk through the Audit & Compliance; Risk; Executive Committees.

While the risk appetite at the Bank is linked to the overall risk management framework and business strategy of the Bank, the update of Risk Appetite statement approved by the Board and monitoring of the Bank`s risk profile management are provided within Risk Management Department general responsibility.

Banking risks include in general credit risk, market risk, operational risk, liquidity risk, interest rate risk in banking accounts, concentration risk, country risk, strategic risk and reputation risk and Bank risk appetite is a statement of the limits of these risks.

Risk Appetite monitoring activities are reported to the Board Risk Committee and Audit Committee. In case of any Risk Appetite threshold breach occurs, it is ensured that the risk management treatment and business controls are implemented to bring the exposure levels for each metric back within an acceptable range as approved by the BOD.

Issues related to Bank’s work programs and business objectives are discussed in the Board Risk Committee, and necessary acknowledgment, monitoring and approval processes are performed herein.

Practices of defining, measuring with analytical methods, analyzing, reporting risks and regularly monitoring the general risk levels in order to ensure systematical management of incurred consolidated and unconsolidated-based risks of the Bank and its affiliates are performed.

The Bank identifies, measures, assesses, monitors the risks it is exposed to by way of using internationally recognised quantitative and analytical techniques found suitable for the Bank in particular, and reports related results to the Top Management.

The Bank also monitors the compliance of credit facilities and treasury operations etc. with the Bank’s risk policies, administers internal reporting and monitors the results on a regular basis.

The Bank adopts an integrated approach to stress-testing and conduct stress tests on a bank-wide basis and on a consolidated basis where applicable, providing a spectrum of perspectives at portfolio and risk-specific levels.

Stress tests are conducted for key risk factors within Market Risk, Credit Risk, Operational Risk, Structural Interest Rate Risk, Concentration Risk and Liquidity Risk areas and other risks if deem material level and the impact of stress is measured on the Bank’s solvency and liquidity.

243 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Risk management model has 3 level protection strategy designed with the purpose of efficient management of the risks:

1. Protection Level (Risk-taking departments): All business units of the Bank which are directly responsible from controlling and reducing to minimum levels the risks resulting from the activities conducted by each one of the units as per the Bank standards and policies.

2. Protection Level (Risk Management): Risk Management Department which is responsible from developing risk management methodologies, instruments and guidances to be used in managing risks and the principal responsible of presenting such documents to the usage of related people. Risk Management Department is supported by specialized departments in terms of risk management such as Internal Control, Compliance, Legal, Human Resources, Information Technologies, and Financial Control. Furthermore, risk watching does also belong to this protection level in addition to provide assistance to determine the risk reducing actions.

3. Protection Level (Internal Audit), Responsibility of assessment for effectiveness and compliance of risk management framework and application of it in the whole organization belongs to Internal Audit.

2. Overview of Risk Weighted Amount

Minimum capital Risk Weighted Amount requirement 31 December 2016 31 December 2015 31 December 2016 1 Credit risk (excluding counterparty credit risk) (CCR) 14,066,204 10,714,559 1,125,296 2 Standardised approach (SA) 14,066,204 10,714,559 1,125,296 3 Internal rating-based (IRB) approach - - - 4 Counterparty credit risk 343,593 63,353 27,487 5 Standardised approach for counterparty credit risk (SA-CCR) 343,593 63,353 27,487 6 Internal model method (IMM) - - - 7 Basic risk weight approach to internal models equity position in the banking account - - - 8 Investments made in collective investment companies – look- through approach - - - 9 Investments made in collective investment companies – mandate-based approach - - - 10 Investments made in collective investment companies - %1250 weighted risk approach - - - 11 Settlement risk - - - 12 Securitization positions in banking accounts - - - 13 IRB ratings-based approach (RBA) - - - 14 IRB Supervisory Formula Approach (SFA) - - - 15 SA/simplified supervisory formula approach (SSFA) - - - 16 Market risk 153,188 51,463 12,255 17 Standardised approach (SA) 153,188 51,463 12,255 18 Internal model approaches (IMM) - - - 19 Operational Risk 925,382 938,500 74,031 20 Basic Indicator Approach 925,382 938,500 74,031 21 Standart Approach - - - 22 Advanced measurement approach - - - 23 The amount of the discount threshold under the equity (subject to a 250% risk weight) - - - 24 Floor adjustment - - - 25 Total (1+4+7+8+9+10+11+12+16+19+23+24) 15,488,367 11,767,875 1,239,069

244 FINANCIAL INFORMATION AND RISK MANAGEMENT ------404 4,300 92,909 40,147 40,147 86,837 22,230 86,837 210,461 114,471 1,041,580 1,504,693 1,265,292 3,939,977 8,797,987 17,034,451 from capital requirements or requirements or subject to deduction Not subject to capital Not subject to capital ------61,950 70,444 70,444 70,444 61,950 framework market risk market Subject to the ------framework securitisation Subject to the Subject to the Carrying values of items ------61,424 70,444 350,081 486,268 556,712 556,712 411,505 411,505 Subject to risk framework counterparty credit ------64,458 36,674 Subject 584,935 371,557 2,330,039 1,245,595 1,970,188 framework 10,488,849 17,092,295 to credit risk to credit risk 404 4,300 92,909 64,458 61,950 36,674 86,837 70,444 22,230 210,461 350,081 526,415 114,471 584,935 371,557 2,330,039 1,245,595 1,041,580 1,970,188 1,265,292 1,504,693 3,939,977 8,797,987 10,488,849 17,591,163 17,591,163 Carrying values as legal consolidation reported in published 404 4,300 92,909 64,458 61,950 36,674 86,837 70,444 22,230 210,461 350,081 526,415 114,471 584,935 371,557 2,330,039 1,245,595 1,041,580 1,970,188 1,265,292 1,504,693 3,939,977 8,797,987 10,488,849 17,591,163 17,591,163 Carrying values as financial statements reported in published Other liabilities Various debts Various Tax assets Tax Equity Tax liability Tax Provisions Financial assets held for trading Financial assets held for from money markets Receivables sale financial assets (net) for Available and receivables Loans receivables Leasing assets (net) Tangible Intangible assets (net) trading financial liabilities held for Derivative Debt to money markets Debt securities in issue Cash and balances at central bank at central Cash and balances hedges financial liabilities held for Derivative Liabilities included in disposal groups classified as held for sale (net) Liabilities included in disposal groups classified as held for Subordinated debts Banks Banks Other assets Loans Deposits NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL CONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR Assets ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS between financial statements and regulatory Linkages exposures b. between accounting and regulatory1. Differences scopes of consolidation and mapping financial statement categories with regulatory risk categories liabilities Total

Total assets Total Liabilities

245 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Main sources of differences between regulatory exposure amounts and carrying values in financial statements

Items subject Items subject to Items subject to Items subject to credit risk counterparty credit securitisation to market risk Total framework risk framework framework framework 1 Asset carrying value amount under scope of regulatory consolidation 17,591,163 17,092,295 411,505 - 61,950 2 Liabilities carrying value amount under regulatory scope of consolidation 17,591,163 - 556,712 - 70,444 3 Total net amount under regulatory scope of consolidation 17,591,163 17,092,295 968,217 - 132,394 4 Off-balance sheet amounts 20,333,334 2,266,721 477,776 - 14,995,368 5 Exposure amounts considered for regulatory purposes - 19,359,016 588,517 - 153,188 c. Explanations on Credit Risk

1. General qualitative information about credit risk

Credit risk is one of the most important risks that banks may expose and described as the potential loss that the Bank may suffer due to partial or complete failure of the credit customer in fulfilling his/her liabilities as per the credit contract entered. It is not described only as one of the most important risks of a Bank but managing the credit risk plays a critical role because of its magnitude within the balance sheet. Bank`s risk policies cover the methodology and responsibilities regarding the management, control and monitor of the credit risk, and some other topics in connection with the credit risk limits.

In the paralel of Bank`s general business strategy, to determine the fundamental principles and policies concerning the risks which the Bank might experience directly or indirectly due to all credits extended or to be extended by it in favor of real or legal entities resident both in Turkey and abroad and to define the risk management applications together with the authorizations and responsibilities regarding the management of these risks, credit risk management policies are created.

The purpose of credit risk management at the Bank is not to avoid risk completely but to take manageable level risks consciously, to control the risks for their duration, and to maximize the risk sensitive returns of the Bank by managing the risks that the bank may be exposed to within limits compatible with the Bank’s risk carrying capacity.

The credit risk the Bank is exposed to is monitored and managed both at the portfolio level and isolated/singular levels both in and off the balance sheet. In an effort to keep the structure and quality of the credit portfolio of the Bank at a desired level, sector based, assurance, and credit volume distribution of the portfolio is analyzed on a regular basis. Using credit risk reduction techniques, Bank makes a point of over-collateralization especially with customers with low credibility.

Not being limited only by its credit products, the Bank conducts measurement and management of credit risks of all its products and activities.

All findings achieved as result of monitoring credits and credit risks are reported to the Board of Directors and the Senior Management regularly. Credit risk monitoring, in addition to evaluation of risk at transaction and company levels, also represents an approach to credit risk monitoring by parameters such as credit type, maturity, collateral, type of foreign currency, credit ratings, sector allowing the management of risk at the portfolio level.

All personnel being involved in the lending process are required to take all necessary precautions to help manage the process effectively. Bodies responsible for credit allocation, management, and monitoring and their responsibilities are summarized in Table

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) below:

Related Unit Process Responsibility Board of Directors > Determination of all credit allocation authorities > Determination of risk appetite and risk tolerance Credit Allocation and > Determination of Credit Risk Management Policy Credit Committee Management > Credit allocation, implementation of strategies, monitoring of risks, watching non-performing loans, loan provisioning CEO > Credit allocation right received from the Board. Board Risk Committee > Creating and submitting credit policies to the Board for approval > Monitoring risks based on approved policies and strategies Management Risk Committee > Creating scoring models > Policy changes due to process updates to be submitted for approval > Determination of risks that new products are carrying Risk Management Department > Identification, measurement, reporting and managing of credit risk > Development of risk-sensitive measurement systems > Preparation of periodic risk reports > Validation of risk measurement models Credit Allocation Department > Managing credit approval processes in accordance with single obligor principle Credit Risk Management > Monitoring and managing credit risks per segments > Developing and implementing appropriate credit risk policies > Managing credit portfolio in order to minimise loss risk Credit Allocation, Risk Structuring > Repayment performance of loans after the allocation and Legal Follow-up Department > Determination of early warning signals > Starting legal follow-up actions within legislative period > Determination of action plan for close monitoring customers > Conducting of legal and administrative processes in order to close non- performing loans with lowest loss > Evaluation of loans collection abilities and send corresponding action plans for approval > Identification of processes for restructuring of loans and legal follow-up ALCO > Taking decisions in order to manage within determined limits interest, maturity, currency, liquidity risks generated by the loan portfolio Treasury Other > Base pricing for customers with allocated credit limit International Financial Institution > Allocation of limits for domestic and foreign banks > Financial and qualitative analyzes of respective institutions Internal Control > Making the necessary controls over activities in accordance with the credit policies and procedures, reporting irregularities Internal Audit Control and Audit > Auditing the effectiveness of the risk management and the internal control functions, compliance of credit processes to the laws, regulations and internal Bank procedures

In the Bank’s credit risk management, in addition to limits imposed by legislative regulations, Board of Directors defined maximum credit risk limits for risk groups and sectors are also used. These limits are determined so as not to create risk concentration.

Results of monitoring and control activities regarding credit risk management are shared with Senior Management and the committee members on a regular basis. Issues emerging from the reports are discussed at the committees and necessary actions are taken.

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ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Credit Quality of Assets

Gross carrying value in consolidated financial statements prepared in Allowances/ accordance with Turkish Accounting amortisation Net values Standards (TAS) and impairments (a+b-c) Defaulted (a) Non-defaulted (b) c d 1 Loans 604,787 11,500,937 371,280 11,734,444 2 Debt securities - 2,891,103 212,327 2,678,776 3 Off-balance sheet exposures 85,370 3,445,291 24,332 3,506,329 4 Toplam 690,157 17,837,331 607,939 17,919,549

3. Changes In Stock of Defaulted Loans And Debt Securities

Amount 1 Defaulted loans and debt securities at end of the previous reporting period 573,284 2 Loans and debt securities that have defaulted since the last reporting period 353,920 3 Receivables back to non-defaulted status - 4 Amounts written off 101,155 5 Other changes (135,892) 6 Defaulted loans and debt securities at end of the reporting period (1+2-3-4±5) 690,157

4. Qualitative requirements to be declared to public about credit risk mitigation techniques

Credit risk mitigation indicates the technique used for mitigating the credit risk amount exposed to by the Bank, and credit risk measurements are conducted in accordance with the “Regulation on Measurement and Assessment of Capital Adequacy of Banks” published in the Official Gazette no. 29511 of 23 October 2015 (legal regulation), and “Communique on Credit Risk Mitigation Techniques” (legal communique) published in the Official Gazette no. 29111 of 06 September 2014.

In this regard, the credit risk amount calculated in accordance with the legal Regulation after credit risks are mitigated for a receivable or portfolio cannot be weighed with a risk weight higher than the one applied to the credit risk amount calculated prior to credit risk mitigation.

The Bank implements one of the methods determined by legal Regulation for credit risk mitigation, and within this framework considers suitable instruments (instruments providing credit risk protection) as defined in the legal Communique and which can be used in credit risk mitigation.

Collaterals (funded instruments providing credit risk protection):

- Cash, gold, deposit, cash equivalent securities, - Securities issued by the Treasury of the Republic of Turkey, - Stocks listed on Borsa İstanbul or bonds that are convertible to stocks

Guarantees (non-funded instruments providing credit risk protection):

- Guarantees provided by the Treasury of the Republic of Turkey - Guarantees provided by regional and local governments - Guarantees provided by international institutions with 0% risk weighted receivables - Guarantees provided by banks

In credit risk mitigation, the consistency between the exchange rate and maturity information of the receivables and the instrument providing credit risk protection are checked, and in case of any difference, reductions given in the legal Communique are taken into account for calculations.

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For receivables secured with real estate property mortgages, the mortgage in question is not taken as an instrument that provides credit risk protection included in credit risk mitigation, but as a security used for identifying the asset class of the related receivable. In order to use the real estate property mortgage for identifying the asset class of the related receivable, valuation of the property must be conducted by an institution accredited by BRSA or CMB, and this valuation must be renewed at least once a year if the mortgage used for security is for commercial purposes, and at least once every three years in case it is used as a residence.

5. Credit Risk Mitigation Techniques

Collateralized Collateralized Exposures Collateralized amount of amount of unsecured: amount of Exposures exposures Exposures exposures carrying Exposures exposures secured by secured by secured secured amount secured by secured by financial financial by credit by credit as per TAS collateral collateral guarantees guarantees derivatives derivatives 1 Loans 10,102,174 1,632,270 544,139 - - - - 2 Debt securities 2,678,776 ------3 Total 12,780,950 1,632,270 544,139 - - - - 4 Of which defaulted 293,500 1,045 544 - - - -

6. Qualitative disclosures on banks’ use of external credit ratings under the standardised approach for credit risk

To determine the risk weights of the risk categories as per the Article 6 of the "Regulation on Measurement and Assessment of Capital Adequacy Ratios of Banks", international rating firm Japan Credit Rating Agency (JCR) is started to be used as a result of rotation with 31 October 2016 instead Fitch Ratings` external risk ratings which had been used since 31 December 2012. In this context, the note set for Turkey's rating countries of long-term foreign currency, foreign currency bond issued by Treasury of the Republic of Turkey, all other foreign currency risk associated with the Republic of Turkey Central Government and assess to corresponding risk weights with limited to receivables the opposite side from foreign banks. Rating notes issued by JCR and corresponding Fitch Ratings are presented in the table below:

Japan Credit Rating Agency Credit Quality Level Fitch Ratings AAA to AA- 1 AAA to AA- A+ to A- 2 A+ to A- BBB+ to BBB 3 BBB+ to BBB BB+ to BB- 4 BB+ to BB- B+ to B- 5 B+ to B- CCC and lower 6 CCC+ and lower

In order to ensure that the credit risk is not concentrated on the customers whose credibility is relatively low, the credits made available to the customers are classified based on the risk rating scores of the customers utilizing such credits. The amount of the credit risk which may be taken in the certain risk degrees is limited to the definite rates of the total credits. In this frame, within risk appetite, based on external ratings country risk limits and counterparty abroad financial institution risk limits are defined.

249 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

7. Consolidated Credit Risk Exposure and Credit Risk Mitigation Techniques

Exposures before CCF Exposures post-CCF RWA and and CRM and CRM RWA density On-balance Off-balance On-balance Off-balance Risk Classes sheet amount sheet amount sheet amount sheet amount RWA RWA density 1 Exposures to central governments or central banks 3,911,970 - 3,911,970 - 1,724,470 44.1% 2 Exposures to regional and local governments or local authorities ------3 Exposures to public sector entities - 2,373 - 1,086 1,086 100.0% 4 Exposures to multilateral development banks ------5 Exposures to international organizations ------6 Exposures to institutions 1,160,814 1,118,852 1,079,420 1,037,840 954,217 45.1% 7 Exposures to corporates 8,628,497 2,204,515 8,272,246 1,264,196 9,144,381 95.9% 8 Retail exposures 1,752,929 742,781 1,734,302 281,765 1,512,050 75.0% 9 Exposures secured by residential property 421,696 42,986 419,199 17,581 152,873 35.0% 10 Exposures secured by commercial real estate 699,888 10,406 693,834 5,362 349,597 50.0% 11 Past-due loans 233,626 (1) 233,266 (1) 234,189 100.4% 12 High risk categories by the Agency Board ------13 Exposures in the form of covered bonds ------14 Exposures to institutions and corparetes with a short term credit assessment ------15 Exposures in the form of units or shares in collective investment undertakings (CIUs) ------16 Other exposures 498,907 - 498,907 - 336,935 67.5% 17 Investments in equities ------18 Total 17,308,327 4,121,912 16,843,144 2,607,829 14,409,798 74.1%

250 FINANCIAL INFORMATION AND RISK MANAGEMENT ------1,086 1,086 amount amount 436,780 436,780 699,196 233,265 498,907 498,907 Total risk risk Total and CRM) (post-CCF (post-CCF 2,117,260 2,117,260 3,911,970 3,911,970 9,536,442 9,536,442 2,016,067 2,016,067 19,450,973 19,450,973 ------Others ------200% ------150% 38,956 38,956 38,956 38,956 ------100% 1,086 1,086 336,934 336,934 157,200 157,200 8,965,872 8,965,872 9,461,092 9,461,092 ------75% 2,016,067 2,016,067 2,016,067 2,016,067 ------50% 37,109 37,109 214,651 214,651 1,769,216 1,769,216 3,448,940 3,448,940 5,469,916 5,469,916 ------50% 50% 699,196 699,196 699,196 699,196 mortgage real estate real estate secured by secured by ------35% 35% 436,780 436,780 436,780 436,780 mortgage real estate real estate secured by secured by ------20% 348,044 348,044 355,919 703,963 703,963 ------10% ------0% 463,030 463,030 161,973 625,003 625,003 Regulatory portfolio banks or central governments Exposures to central or local Exposures to regional and local governments authorities Exposures to public sector entities banks Exposures to multilateral development Exposures to international organizations Exposures to institutions Exposures to corporates exposures Retail residential propertyExposures secured by real estate commercial Exposures secured by loans Past-due Board the Agency by High risk categories bonds of covered Exposures in the form with a shortExposures to institutions and corparetes term credit assessment of units or shares in collective Exposures in the form undertakings (CIUs) investment in equities Investments Other exposures Total NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL CONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS Exposures by Asset Classes and Risk Weights 8. Consolidated 7 2 1 5 6 10 11 12 13 14 15 16 17 8 9 3 18 4

251 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

The total amount of risks exposed after offsetting transactions, regardless of the effects of credit risk mitigation and the average amount for the risks separated by the different risk classes and types

The sectoral concentrations for loans are monitored closely in accordance with the Bank’s loan policy. During the Management of Risk Comittee meetings held every month, overall Bank’s risk is monitored by analyzing sectoral concentration.

All transactions are within the limits determined by the Board of Directors and being monitored on a regular basis.

All loans are revised at least once a year according to the regulations. Following the revision performed according to the Bank’s rating methodology, the credit limits are revised or additional guarantees are requested. In the same process, risk based loan loss provisions are calculated and loan pricing policies are updated according to the results. As the expected loan losses are considered as a standard cost, they are considered in the pricing process. In case of unexpected losses, economical capital values are calculated and Bank’s current capital is held within the required economical capital requirements. Incomes that are reevaluated according to the risk are monitored as a performance criteria and equity sharing with the profit centers are expected to be beneficial.

Derivatives, options and other similar contracts does not have specific provisions with specific control limits and the risk arising from these contracts are limited with the Bank’s global risk framework. Bank’s current policy indicates that such items should be fully collateralized to eliminate possible risks.

Indemnified non-cash loans are subject to the same risk weight as outstanding loans matured but not yet paid.

Rescheduled loans are monitored like other loans within the Bank’s internal rating application. Risk ratings of the borrowers are used for credit maturities.

Bank’s international banking operations and loans are with the OECD countries and when the economic conditions of these operations are found to be unimportant of a part for the credit risk.

Bank is not active in international banking market.

The accumulation of the Parent Bank’s highest 100 cash loan clients is 57.89% (31 December 2015: 53.74%) of the overall cash loans.

The accumulation of the Parent Bank’s highest 100 non-cash loan clients is 65.34% (31 December 2015: 67.75%) of the overall non- cash loans.

The accumulation cash and non-cash receivables of the Parent Bank’s highest 100 loan clients are 7.79% (31 December 2015: 8.03%) of the overall balance sheet and off balance sheet items.

As of 31 December 2016, the general loan loss provision is TL 52,211 (31 December 2015: TL 93,386).

252 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Current Period Average Risk Risk Group Risk Amount (*) Amount (**) Contingent and Non-Contingent Receivables from Central Governments or Central Banks 3,911,970 2,997,613 Contingent and Non-Contingent Receivables from Regional Governments or Local Authorities - - Contingent and Non-Contingent Receivables from Administrative Units and Non- commercial Enterprises 1,086 1,204 Contingent and Non-Contingent Receivables from Multilateral Development Banks - - Contingent and Non-Contingent Receivables from International organizations - - Contingent and Non-Contingent Receivables from banks and Intermediaries 2,117,263 2,126,892 Contingent and Non-Contingent Corporate Receivables 9,989,355 8,403,359 Contingent and Non-Contingent Retail Receivables 2,049,965 1,574,882 Contingent and Non-Contingent Receivables Secured by Residential Property 1,145,362 1,325,134 Non-Performing Receivables 233,625 242,336 Receivables Identified as High Risk by the Board - 12,210 Secured by Mortgages - - Securitization Positions - - Short-term Receivables frorn Banks, Brokerage Houses and Corporates - - Investrnents Similar to Collective Investrnent Funds - - Other Receivables 498,907 431,930 Total 19,947,533 17,115,560

(*) Includes the risk amounts after credit conversion. (**) Average risk amounts are calculated by the arithmetic average of the July-December periods risk amounts.

1. Information on types of loans and specific provisions:

Corporate/ 31 December 2016 Commercial SME Consumer Credit Cards Total Standard Loans 7,048,321 2,562,082 183,802 37,628 9,831,833 Loans under Close Monitoring 188,573 219,339 14,637 960 423,509 Non-performing Loans 195,459 380,653 23,145 5,530 604,787 Specific Provision (-) (144,254) (208,301) (15,287) (3,438) (371,280) Total 7,288,099 2,953,773 206,297 40,680 10,488,849

Corporate/ 31 December 2015 Commercial SME Consumer Credit Cards Total Standard Loans 5,140,130 3,205,170 194,351 59,709 8,599,360 Loans under Close Monitoring 126,215 311,406 27,425 5,415 470,461 Non-performing Loans 192,242 286,807 32,648 5,644 517,341 Specific Provision (-) (117,677) (139,660) (20,701) (3,462) (281,500) Total 5,340,910 3,663,723 233,723 67,306 9,305,662

253 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Information on loans and receivables past due but not impaired:

Corporate/ 31 December 2016 Commercial SME Consumer Credit Cards Total Past due up to 30 Days 98,948 256,648 4,178 705 360,479 Past due 30-60 Days 18,345 75,004 6,100 42 99,491 Past due 60-90 Days 27,574 76,627 2,921 - 107,122 Total 144,867 408,279 13,199 747 567,092

Corporate/ 31 December 2015 Commercial SME Consumer Credit Cards Total Past due up to 30 Days 67,106 155,807 69,763 7,623 300,299 Past due 30-60 Days 106,484 229,247 21,043 4,143 360,917 Past due 60-90 Days 19,731 82,159 6,382 1,272 109,544 Total 193,321 467,213 97,188 13,038 770,760

3. Information on debt securities, treasury bills and other bills:

Financial Assets Available for 31 December 2016 at Fair Value Sale Financial Held to Maturity Other Japan JCR’s Rating through P/L (Net) Assets (Net) Securities (Net) Bonds (Net) Total BBB- (*) 526 1,994,947 - 329,027 2,324,500 Total 526 1,994,947 - 329,027 2,324,500

(*) Consists of Turkish Republic government bonds, private sector bonds and treasury bills.

Financial Assets Available for 31 December 2015 at Fair Value Sale Financial Held to Maturity Other Fitch’s Rating through P/L (Net) Assets (Net) Securities (Net) Bonds (Net) Total BB+ (*) 422 667,072 - 144,149 811,643 Total 422 667,072 - 144,149 811,643

(*) Consists of Turkish Republic government bonds and treasury bills.

4. Information on rating concentration:

The credit risk is evaluated according to the Parent Bank’s internal rating system. The loans rated according to probability of default, from the best rating (high standard), to the lowest rate (substandard) are presented in the below table and at the bottom of the table there is past due loans (impaired).

254 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

“Above standard” category means that the debtor has a strong financial structure,"standard" category means that debtor has a good and sufficient financial structure, “substandard” category means that the debtor’s financial structure under risk in the short and medium term.

31 December 2016 31 December 2015 High Standard (A,B) 88.75% 86.56% Standard (C) 4.15% 6.90% Substandard (D) 1.64% 1.14% Impaired (E) 5.46% 5.40% Not rated - -

5. Fair value of collaterals (loans and advances to customers):

Corporate/ 31 December 2016 Commercial SME Consumer Credit Cards Total Loans under Close Monitoring 184,073 220,641 10,788 276 415,778 Non-performing Loans 141,558 304,491 7,239 1,796 455,084 Total 325,631 525,132 18,027 2,072 870,862

Corporate/ 31 December 2015 Commercial SME Consumer Credit Cards Total Loans under Close Monitoring 136,451 414,886 48,627 5,686 605,650 Non-performing Loans 131,388 120,557 10,675 2,608 265,228 Total 267,839 535,443 59,302 8,294 870,878

Type of Collaterals 31 December 2016 31 December 2015 Real-estate Mortgage 821,146 843,272 Vehicle Pledge 12,437 16,480 Cash and Cash Equivalents 3,858 2,365 Other 33,421 8,761 Total 870,862 870,878

255 ABANK 2016 ANNUAL REPORT - - Total 17,823 751,209 378,944 119,696 498,907 18,180,954 19,947,533 ------Other Other 498,907 498,907 Receivables ------the Board Receivables Receivables High Risk by High Risk by Identified as as Identified ------Non- 233,625 233,625 Performing Performing Receivables ------10,400 Property 1,134,962 1,145,362 Secured by Secured by Residential Residential Receivables Receivables Contingent and and Contingent Non-Contingent Non-Contingent (*) - - - 1 45 56 44 Retail Retail 2,049,819 2,049,965 Receivables Contingent and and Contingent Non-Contingent Non-Contingent Risk Categories Risk Categories - - - - - 74,658 89,566 Corporate Corporate 9,825,131 9,989,355 Receivables Contingent and and Contingent Non-Contingent Non-Contingent - - - 17,767 293,841 119,695 661,599 1,024,361 2,117,263 Receivables Receivables Intermediaries Contingent and and Contingent from Banks and and from Banks Non-Contingent Non-Contingent ------1,086 1,086 Enterprises Commercial Commercial Units and Non- Administrative Administrative Contingent and and Contingent Non-Contingent Non-Contingent Receivables from from Receivables ------3,911,970 3,911,970 Receivables Receivables from Central from Central Central Banks Banks Central Contingent and and Contingent Non-Contingent Non-Contingent Governments or or Governments (**) (***) Risk profile according to the geographical concentration Risk profile according to the geographical Assets and liabilities are not allocated on a consistent basis. and liabilities are not allocated on a consistent Assets OECD countries other than EU countries, USA and Canada. USA other than EU countries, OECD countries Risk categories in the Communiqué on Measurement and Assessment of Capital Adequacy of Banks. on Measurement and Assessment in the Communiqué Risk categories NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL CONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS 6. 2016 31 December Domestic EU Countries OECD Countries Banking Off-Shore Regions USA, Canada Other Countries Subsidiaries Associates, and Joint –Ventures Unallocated Assets Liabilities (*) (**) (***) Total

256 FINANCIAL INFORMATION AND RISK MANAGEMENT - - 563 Total 114,246 137,097 605,996 366,957 15,007,056 16,231,915 ------Other Other 366,957 366,957 Receivables ------83,365 83,365 the Board Receivables Receivables High Risk by High Risk by Identified as as Identified ------Non- 236,253 236,253 Performing Performing Receivables ------11,491 Property 2,453,883 2,465,374 Secured by Secured by Residential Residential Receivables Receivables Contingent and and Contingent Non-Contingent Non-Contingent (*) - - - - 10 113 158 Retail 1,858,313 1,858,594 Receivables Contingent and and Contingent Non-Contingent Non-Contingent Risk Categories Risk Categories - - - - - 34,472 38,640 Corporate Corporate 7,114,334 7,187,446 Receivables Contingent and and Contingent Non-Contingent Non-Contingent - - - 563 91,021 114,236 567,198 1,114,904 1,887,922 Receivables Receivables Intermediaries Contingent and and Contingent from Banks and and from Banks Non-Contingent Non-Contingent ------1,310 1,310 Enterprises Commercial Commercial Units and Non- Administrative Administrative Contingent and and Contingent Non-Contingent Non-Contingent Receivables from from Receivables ------2,144,694 2,144,694 Receivables Receivables from Central from Central Central Banks Banks Central Contingent and and Contingent Non-Contingent Non-Contingent Governments or or Governments (**) (***) Assets and liabilities are not allocated on a consistent basis. basis. and liabilities are not allocated on a consistent Assets OECD countries other than EU countries, USA and Canada. USA other than EU countries, OECD countries Risk categories in the Communiqué on Measurement and Assessment of Capital Adequacy of Banks. on Measurement and Assessment in the Communiqué Risk categories NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL CONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS 2015 31 December Domestic EU Countries OECD Countries Banking Off-Shore Regions USA, Canada Other Countries Subsidiaries Associates, and Joint –Ventures Unallocated Assets Liabilities (*) (**) (***) Total

257 ABANK 2016 ANNUAL REPORT Total 5,327 14,211 30,923 120,544 803,684 233,478 213,078 328,979 116,131 617,562 165,678 2,820,614 2,267,744 1,090,113 3,089,578 4,126,740 3,202,268 4,993,299 7,459,548 19,947,533 FC 98 14 45,934 22,936 27,838 73,786 566,273 114,216 157,115 273,428 695,573 387,521 1,947,515 1,419,494 2,000,750 2,681,239 2,439,018 3,679,897 4,903,680 13,777,620 TL 5,229 3,085 74,610 55,963 55,551 93,195 14,197 91,892 873,099 237,411 119,262 848,250 394,540 230,041 763,250 1,088,828 1,445,501 1,313,402 2,555,868 6,169,913 ------9 498,907 498,907 ------8 - 7 1 32 571 170 (*) 1,647 1,008 6,089 3,556 9,817 13,149 10,512 44,110 56,036 13,319 68,195 38,320 48,607 65,184 233,625 - 6 17 348 4,479 4,531 3,942 4,929 4,935 4,548 10,636 92,224 40,360 32,807 16,987 86,431 101,546 713,390 129,346 196,532 1,145,362 Risk Categories Risk Categories 5 258 3,067 4,392 4,252 4,262 47,162 37,899 19,676 29,721 88,805 16,864 67,584 46,413 343,715 790,211 840,440 328,415 263,682 571,015 2,049,965 4 132 9,959 64,965 90,322 26,474 171,325 788,334 152,471 294,308 962,408 523,152 698,579 101,398 140,190 1,787,693 2,156,900 3,116,559 2,122,143 4,509,065 9,989,355 ------3 2,117,263 2,117,263 2,117,263 ------2 2 4 1 22 460 597 489 1,086 ------1 3,911,970 3,911,970 Farming and Stockbreeding Farming Mining and Quarrying Gas and Water Electricity, Trade Wholesale and Retail Services and Beverage Hotel, Food and Telecom Transportation Financial Institutions Services and Rental Estate Real Services Self-employment Educational Services Health and Social Services Forestry Production Fishery of Capital Adequacy of Banks. on Measurement and Assessment in the Communiqué Risk categories NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL CONSOLIDATED THE TO NOTES 2016 DECEMBER 31 ENDED YEAR THE FOR 1- Contingent and Non-Contingent Receivables from Central Governments or Central Banks Banks or Central Governments from Central Receivables and Non-Contingent 1- Contingent Enterprises Units and Non-Commercial from Administrative Receivables and Non-Contingent 2- Contingent and Intermediaries from Banks Receivables and Non-Contingent 3- Contingent Receivables Corporate and Non-Contingent 4- Contingent Receivables Retail and Non-Contingent 5- Contingent Property Residential Secured by Receivables and Non-Contingent 6- Contingent Receivables 7- Non-Performing the Board identified as high risk by 8- Receivables ALTERNATİFBANK A.Ş. ALTERNATİFBANK STATED.) OTHERWISE UNLESS (“TL”) LIRA TURKISH OF THOUSANDS IN EXPRESSED (AMOUNTS 7. Risk profile by Sectors or Counterparties: Sectors/Counterparties Agriculture Manufacturing Construction (*) 9- Other Services Other TOTAL

258 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

8. Analysis of maturity-bearing exposures according to remaining maturities:

Term To Maturity (*) Risk classifications 1 Month 1-3 Month 3-6 Month 6-12 Month Over 1 year Contingent and Non-Contingent Receivables from Central Governments or Central Banks - - - - 2,527,325 Contingent and Non-Contingent Receivables from Administrative Units and Non-commercial Enterprises 109 - - - 977 Contingent and Non-Contingent Receivables from Banks and Intermediaries 801,111 53,400 8,050 41,556 1,213,146 Contingent and Non-Contingent Corporate Receivables 1,695,086 387,409 990,927 1,488,578 5,427,355 Contingent and Non-Contingent Retail Receivables 289,540 126,924 229,121 354,062 1,050,318 Contingent and Non-Contingent Receivables Secured by Residential Property 32,965 27,668 57,701 144,952 882,076 Non-Performing Receivables - - - - 233,625 Receivables Identified as High Risk by the Board - - - - - Other Receivables - - - - - TOTAL 2,818,811 595,401 1,285,799 2,029,148 11,334,822

(*) Risk amounting to TL 1,883,553 is on demand and not showed on the table above.

9. Exposures by risk weights:

Deductions Risk Weights 0% 10% 20% 50% 75% 100% 150% 200% 250% 1250% from Equity 1 Amount before Credit Risk Mitigation 625,003 - 712,653 6,175,201 2,049,965 9,905,640 38,956 - - - 3,699 2 Amount after Credit Risk Mitigation 625,003 - 703,963 6,169,112 2,016,067 9,461,092 38,956 - - - 3,699

10. Information of major sectors or type of counterparties

Major Sectors / Counterparties Loans Impaired Loans Past Due Loans Value Adjustments Provisions 1 Agriculture 2,547 32,804 - 19,151 1.1 Farming and Stockbreeding 2,420 32,591 - 19,108 1.2 Forestry - 7 - 7 1.3 Fishery 127 206 - 36 2 Manufacturing 179,271 182,843 - 107,531 2.1 Mining and Quarrying 18,617 23,850 - 12,811 2.2 Production 160,654 156,609 - 93,984 2.3 Electricity, Gas and Water - 2,384 - 736 3 Construction 75,479 91,847 - 49,244 4 Services 142,701 240,325 - 151,131 4.1 Wholesale and Retail Trade 76,203 159,525 - 101,743 4.2 Accommodation and Dining 22,406 10,686 - 1,649 4.3 Transportation and Telecom 7,220 35,293 - 24,046 4.4 Financial Institutions 383 2,592 - 2,561 4.5 Real Estate and Rental Services 145 1,475 - 308 4.6 Professional Services 33,528 23,285 - 16,998 4.7 Educational Services 98 2 - 1 4.8 Health and Social Services 2,718 7,467 - 3,825 5 Other 23,511 56,968 - 44,223 Total 423,509 604,787 - 371,280

259 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

11. Information Related with Value Adjustments and Change in Provisions:

Opening Charge of Provision Value Closing Balance the Period Cancelations Adjustments Balance 1 Specific Provisions 281,500 210,718 (120,938) - 371,280 2 General Provisions 93,386 35,099 (76,274) - 52,211 d. Explanations on Counterparty Credit Risk (CCR)

1. Qualitative Explanations on Counterparty Credit Risk

Main issues related to Counterparty Credit Risk management process are mentioned in the Bank’s Derivatives Policy and Credit Risk policies. Counterparty credit risk for customer derivative products are internally calculated through the use of fair value method, and standard method is used for credit valuation adjustment. For such transactions, customer-based counter-trend risks are taken into account, transaction limits required by Credit Allocation department are determined, and necessary collaterals are taken. Limit/Risk realisations are monitored by Risk Management on a daily basis; realisations are relayed to respective business units, and credits are relayed to credit allocation teams and operation units.

2. Consolidated Counterparty Credit Risk (CCR) Approach Analysis

Potential EEPE (Effective Alpha used Replacement future Expected Positive for computing EAD post- cost exposure Exposure) regulatory EAD CRM RWA 1 Standardised Approach -CCR (for derivatives) 124,789 213,871 1.4 338,660 227,117 2 Internal Model Method (for derivative financial instruments, repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) - - - - 3 Simple Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions) - - 4 Comprehensive Approach for credit risk mitigation (for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions)) 110,741 31,615 5 Value-at-Risk (VaR) for repo transactions, securities or commodity lending or borrowing transactions, long settlement transactions and securities financing transactions 110,741 31,615 6 Total 258,732

3. Consolidated Capital Requirement For Credit Valuation Adjustment (CVA)

EAD post-CRM RWA Total portfolio value with comprehensive approach CVA capital adequacy - - 1 (i) Value at Risk component (including the 3×multiplier) - 2 (ii) Stressed Value at Risk component (including the 3×multiplier) - 3 Total portfolio value with simplified approach CVA adequacy 139,116 84,861 4 Total subject to the CVA capital obligation 139,116 84,861

260 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

4. Consolidated CCR Exposures By Risk Class And Risk Weights

Total credit Risk weight/ Risk classes %0 %10 %20 %50 %75 %100 %150 Other exposure (*) Central governments and central banks receivables ------Local governments and municipalities receivables ------Administrative and non commercial receivables ------Multilateral Development Bank receivables ------International organizations receivables ------Banks and intermediary institutions receivables - - 122,071 287,403 - - - - 409,474 Corporate receivables - - - - - 164,784 - - 164,784 Retail receivables - - - - 14,260 - - - 14,260 Mortgage receivables ------Non performing receivables ------High risk defined receivables ------Mortgage backed securities ------Securitisation positions ------Short term credit rated banks and intermediary institutions receivables ------Collective investment undertaking investments ------Equity investments ------Other receivables ------Other assets ------Total - - 122,071 287,403 14,260 164,784 - - 588,518

(*) Total credit risk: the amount of relating to the capital adequacy calculation after applying counterparty credit risk measurement techniques

5. Collaterals for Consolidated CCR

Fair value of Fair value of collateral received collateral given Fair value of Fair value of Segregated Unsegregated Segregated Unsegregated collateral received collateral given Cash-domestic currency - - - - 173,271 352,542 Cash-foreign currency - - - - 312,997 - Domestic sovereign debts ------Other sovereign debts ------Government agency debts ------Corporate debts ------Equity securities ------Other collateral ------Total - - - - 486,268 352,542

261 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

6. Consolidated Credit Derivatives

Protection bought Protection sold Notionals Single-name credit default swaps - 56,307 Index credit default swaps - - Total return swaps - - Credit options - - Other credit derivatives - - Total Notionals - 56,307 Fair Values - - Positive fair values (asset) - - Negative fair values (liability) - -

7. Central counterparty risks (CCR): None e. Securitisation Explanations: None. f. Explanations on Market Risk

1. Explanations on Risk Management’s Objectives and Policies Related to Market Risk

Prepared with a view to establishing an outlook on market policy, Market Risk Management Policy defines the market risk factors which the Bank is exposed to, and presents the process, measurement methods and monitoring activities to be employed for managing such risks. The manual also offers an in-depth description of the Bank’s current strategy on market risk.

Basically, the Bank’s market risks are classified into interest rate risk, foreign exchange risk, stock price risk, option risk and commodity risk.

For the Bank’s capital adequacy ratio calculations, value at market risk is calculated by using the standard method. Moreover, daily Value at Risk is also calculated and presented as part of the Daily Risk Report prepared by Market Risk Management Unit. Currently, Value at Risk is calculated by using the historical simulation method, with 1-day lock-up period, 99% confidence interval. For Value at Risk calculations, the Bank uses its market risk software.

Market risk measurement results and limit realisations are reported daily to Treasury Management, and Treasury Management is expected to act in accordance with the limits established. Measurement and realisation results are shared with the General Manager, Board Audit Committee Chairman on a daily basis, and it is ensured that Senior Management is informed about the current market risk carried by the Bank’s Trading account portfolio.

The Bank’s risk appetite for market risk has been aligned with the market risk limits established in accordance with Risk Appetite Policy. Risks are hereby mitigated by means of sector-based, product-based and asset type-based diversification method.

Measurement and monitoring activities related to market risk management are conducted by Market Risk Management Unit. Treasury Operations Unit captures the transactions, which are executed by Treasury Management, in the system upon checking the suitability. Market risk positions defined as per the Bank’s current Risk Appetite Policy and risk realisations are shared with Treasury Management on a daily basis in the “Daily Risk Report” prepared by Market Risk Management Unit. Treasury Management is notified and necessary action plans are requested in case of limit breaches. Additionally, Market Risk realisations are submitted to Assets and Liabilities Committee for discussion.

262 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Consolidated Market Risk -Standard Approach

RWA Outright products 1 Interest rate risk (general and specific) 32,825 2 Equity risk (general and specific) - 3 Foreign exchange risk 118,013 4 Commodity risk - Options 5 Simplified approach - 6 Delta-plus method 2,350 7 Scenario approach - 8 Securitisation - 9 Total 153,188

Bank’s risk management operations, which are determined by the Board of Directors, are in line with the “Regulation of Internal Bank Systems” and “Regulation of Capital Adequacy Measurement and Evaluation”. In order to comply with the Regulations, the Bank’s operations regarding the market risk are administrated in line with the “Regulation of Internal Bank Systems” and “Regulation of Capital Adequacy Measurement and Evaluation”.

Board of Directors monitors the efficiency of risk administration systems by evaluations of the Audit Committee, Management and Early Detection of Risk Committee as well as upper management’s opinions and other miscellaneous reports.

The Parent Bank’s risk policies and risk administration policies for the encountered market risk are being approved by the board of directors and reviewed on a regular basis. Market risk is measured and limited in compliance with international standards and capital requirements are calculated accordingly in addition to it is managed by hedging instruments to eliminate the risk.

The market risk of portfolios held for trading is calculated using the standard method and the value at risk (“VaR”) methods. Standard method calculations are made on a monthly basis which is used for calculating the capital adequacy generally accepted three methods (variance, covariance, historical simulation, Monte Carlo).VaR calculations are performed on a daily basis using the historical simulation (EWMA) method. VaR calculations are made using the past 1 year data with 99% assurance and 1 day holding period (10 days for legal capital calculation). All positions in the trading portfolio are set a daily risk limit and nominal position limits and all these limits are monitored and reported to upper management. In addition, trading portfolio, value at risk increase and limit comply situations are reported to Active Passive Committee every two weeks and to upper management and Management and Early Detection of Risk Committee every three months. VaR model is tested on a backward basis to ensure reliability. In order to limit market risk, in addition to VaR and nominal position limits, there are stop loss limits on trading portfolio that are approved by the board of directors.

3. Information on Market Risk

31 December 2016 31 December 2015 (I) Capital Requirement Against General Market Risk – Standard Method 2,618 1,728 (II) Capital Requirement Against Specific Risk – Standard Method 8 7 Capital Requirement Specific Risk Related to Securitization Positions-Standard Method - - (III) Capital Requirement Against Currency Risk – Standard Method 9,629 1,753 (IV) Capital Requirement Against Commodity Risk – Standard Method - - (V) Capital Requirement Against Exchange Risk – Standard Method - - (VI) Capital Requirement Against Market Risk of Options – Standard Method - - (VII) Capital Requirement Against Counterparty Credit Risk-Standard Method - 629 (VIII) Capital Requirement Against Market Risks of Banks Applying Risk Measurement Models - - (IX) Total Capital Requirement Against Market Risk (I+II+III+IV+V+VI) 12,255 4,117 (X) Amount Subject to Market Risk (12.5 x VIII) or (12.5 x IX) 153,188 51,463

263 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

4. Average Market Risk Table of Calculated Market Risk during the Period at Month Ends:

31 December 2016 31 December 2015 Average Maximum Minimum Average Maximum Minimum Interest Rate Risk 2,417 4,250 1,325 1,329 3,039 323 Common Stock Risk ------Currency Risk 5,213 10,989 1,858 1,697 3,062 129 Commodity Risk ------Exchange Risk ------Option Risk - - - 88 218 2 Counterparty Credit Risk 123 288 13 805 1,327 378 Total Value at Risk 98,302 167,600 43,388 48,990 95,569 10,397

5. Information on Counterparty Credit Risk:

In order to calculate the counterparty credit risk the “Fair Value” method is used which is determined by (Appendix 2) of “Regulation on Measurement and Assessment of Capital Adequacy of Banks,” published in 28 June 2012 is taken into consideration. In accordance with the before-mentioned method, potential credit risk value is calculated and added to the renewal costs of the agreements with positive values.

For derivative transactions, sum of revaluation costs and accumulation of potential credit risk is considered to be the risk amount. Revaluation costs are calculated by valuation of the contract with its fair value and by multiplication of contract amount with the loan conversion rate.

6. Quantitative Information on Counterparty Risk (Annualy):

31 December 2016 Interest Rate Contracts 1,851,947 Foreign Exchange Rate Contracts 6,493,108 Commodity Contracts - Equity Shares Related Contracts - Other - Gross Positive Fair Values 588,516 Netting Benefits - Net Current Exposure Amount 588,516 Collaterals Received - Net Derivative Position 588,516 g. Explanations on Operational Risk:

The Parent Bank calculated the operational risk using the “Basic Indicator Method”. Amount subject to operational risk is calculated once a year in accordance with the “Regulation for Measuring and Evaluating Capital Adequacy of Banks” published in 28 June 2012 Official Gazette No.28337 using the gross income balances of last three years; 2015, 2014 and 2013 respectively. The risk amount calculated using the “Capital Adequcy Standard Ratio” indicated in the disclosure I of the Section Four amounts to TL 925,382.

The annual gross income is calculated over sum of net values of interest and non-interest income by deducting the profit/loss that is generated from available for sale and held to maturity and extraordinary income, operating expense for support services and amount collected from insurances.

1. In the case of using the basic indicator method (Annual) :

Total Number of 31 December 2013 31 December 2014 31 December 2015 Positive Year Ratio (%) Total Gross Income 415,242 502,617 562,752 493,537 15 74,031 Amount Subject to Operational Risk (Total*12,5) - - - - - 925,382

264 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VIII. Explanation Regarding the Presentation of Financial Assets and Liabilities at Their Fair Values: a. Financial Assets and Liabilities at their fair values:

The fair values of held-to-maturity assets are determined based on market prices or when this price is not available, based on market prices quoted for other securities subject to the same redemption qualifications in terms of interest, maturity and other similar conditions.

The expected fair value of the demand placements and deposits represents the amount to be paid upon request. The expected fair value of the fixed rate deposits is determined by calculating the discounted cash flow using the Parent Bank’s current interest rates as of balance sheet date.

The expected fair value of loans and receivables are determined by calculating the discounted cash flows using the Bank’s current interest rates for fixed interest loans. For the loans with floating interest rates, it is assumed that the book value reflects the fair value. The expected fair value of bank placements, money market placements and bank deposits are determined by calculating the discounted cash flows using the current market interest rates of similar assets and liabilities.The following table summarizes the carrying values and fair values of some financial assets and liabilities of the group.

Carrying Value Fair Value 31 December 2016 31 December 2015 31 December 2016 31 December 2015 Financial Assets 13,753,904 11,084,866 14,335,414 11,927,672 Money Market Placements 350,081 350,105 350,081 350,105 Banks 584,935 611,996 584,935 612,300 Financial Assets Available-for-Sale 2,330,039 817,103 2,328,695 815,942 Held-to-maturity Investments - - - - Loans 10,488,849 9,305,662 11,071,703 10,149,324

Financial Liabilities 15,981,092 12,723,473 15,484,536 13,727,962 Bank Deposits 673,421 555,277 673,421 555,277 Other Deposits 8,124,566 5,683,206 8,708,346 6,127,509 Funds Borrowed From Other Financial Institutions 5,444,670 5,029,695 4,402,185 5,586,061 Marketable Securities Issued 1,041,580 877,824 1,043,883 881,639 Funds Provided Under Repurchase Agreements 486,394 358,023 486,394 373,714 Miscellaneous Payables 210,461 219,448 170,307 203,762 b. Fair value hierarchy:

TFRS 7 sets a hierarchy of valuation techniques according to the observability of data used in valuation techniques, which establish basis for fair value calculations.

Aforesaid fair value hierarchy is determined as follows a) Quoted market prices (non-adjusted) (1st level); b) Directly (by way of prices) or indirectly (derived from prices) data for the assets or liabilities, other than quoted prices in the 1st level (2nd level); c) Data not based on observable data regarding assets or liabilities (3rd level).

265 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Fair value hierarchy of the financial assets and liabilities of the Group carried at fair value according to the foregoing principles is given in the table below:

31 December 2016 1st Level 2nd Level 3rd Level Total

Financial Assets at Fair Value Through Profit or Loss 526 61,424 - 61,950 Government Debt Securities 526 - - 526 Share Certificates - - - - Trading Derivative Financial Assets - 61,424 - 61,424 Available for Sale Assets 2,299,913 30,126 - 2,330,039 Share Certificates 6,065 - - 6,065 Government Debt Securities 1,994,947 - - 1,994,947 Other Marketable Securities 298,901 30,126 - 329,027 Hedging Derivative Financial Assets - 57,201 - 57,201 Total Assets 2,300,439 148,751 - 2,449,190

Trading Derivative Financial Liabilities - 70,444 - 70,444 Hedging Derivative Financial Liabilities - 404 - 404 Total Liabilities - 70,848 - 70,848

31 December 2015 1st Level 2nd Level 3rd Level Total

Financial Assets at Fair Value Through Profit or Loss 422 27,240 - 27,662 Government Debt Securities 422 - - 422 Share Certificates - - - - Trading Derivative Financial Assets - 27,240 - 27,240 Available for Sale Financial Assets 785,787 31,316 - 817,103 Share Certificates 5,882 - - 5,882 Government Debt Securities 643,794 23,278 - 667,072 Other Marketable Securities 136,111 8,038 - 144,149 Hedging Derivative Financial Assets - 97,427 - 97,427 Total Assets 786,209 155,983 - 942,192

Trading Derivative Financial Liabilities - 14,859 - 14,859 Hedging Derivative Financial Liabilities - 113 - 113 Total Liabilities - 14,972 - 14,972

There are no transfers between the 1st and the 2nd levels in the current year.

266 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

IX. Explanation on Hedge Accounting

The Bank uses “Fair Value Hedge Accounting” from the beginning of 24 March 2014 as of balance sheet date.

Derivative financial instruments is used as hedging instruments are interest swap transactions.

31 December 2016 Principal (*) Asset Liability Derivative Financial Instruments Interest Swap Transactions 220,000 - 404 Total 220,000 - 404

(*) Total of purchase and sale notional amounts.

The fair valuation methodology of the derivatives presented in the above table is disclosed in the accounting principles section of these financial statements in Section III. Note IV.

Starting from 24 March 2014, the Bank has hedged the fair value effects of changes in libor interest rates, fixed interest rate loans amounting TL 20,547 with maturity 3 years and TL 36,654 with maturity 5 years funding by using interest rate swaps. The both nominal value of interest rate swaps is TL 55,000 with maturity 3 years and 5 years respectively.

The following table summarizes the effects of Fair Value Hedge Accounting.

31 December 2016 Hedged item Fair value difference/ Net fair value of Hedging Instrument (assets and liabilities) Hedged risks adjustment of the hedged item hedging instrument Asset Liability Interest swap Fixed rate equal installments paid Fixed interest transactions commercial installment loans rate risk 1,052 - 404

The Bank evaluates the method of hedge whether to be effective on the expected changes in fair values in this process or not or each result of hedge effectiveness whether to be between the range of 80% and 125%.

Changes in fair values of derivative transactions determined as hedge for fair value are recorded in profit or loss together with changes in hedging asset or liability. The difference in current values of derivative transactions fair value hedge is shown in “Trading Gains/ Losses on derivative financial instruments” account. In the balance sheet, change in fair value of hedge asset or liability during the hedge accounting to be effective is shown with the related asset or liability. If the underlying hedge does not conform to the hedge accounting requirements, according to the adjustments made to the carrying value (amortised cost) of the hedged item, for which the risk is hedged by a portfolio hedge, are amortized with the straight line method within the time to maturity and recognized under the “Trading gains / losses on derivative financial instruments” account.

267 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION FIVE

EXPLANATIONS AND NOTES ON THE CONSOLIDATED FINANCIAL STATEMENTS

I. Explanations and Notes on Assets a. Information on Cash and Balances with the Central Bank of Republic of Turkey (“CBRT”)

1. Information on cash and the account of the CBRT

31 December 2016 31 December 2015 TL FC TL FC Cash/Foreign Currency 30,131 71,916 28,459 51,946 CBRT 119,209 1,748,932 23,074 1,441,984 Other - - 35 - Total 149,340 1,820,848 51,568 1,493,930

2. Information on the account of the CBRT

31 December 2016 31 December 2015 TL FC TL FC Demand Unrestricted Amount (*) 119,209 362,532 23,074 221,770 Time Unrestricted Amount - - - - Time Restricted Amount - - - - Reserve Requirement - 1,386,400 - 1,220,214 Total 119,209 1,748,932 23,074 1,441,984

(*) The reserve requirement hold as average has been classified under “Central Bank Demand Unrestricted Account” pursuant to the correspondence with BRSA as of 3 January 2008.

3. Information on reserve requirements

The banks which are established in Turkey or operates in Turkey through opening a branch shall be subjected to T.C. Central Bank’s No. 2005/1 Regulation Required Reserves. The amount includes the amount that is going to found with deducting the items that stated in the Communiqué from the banks total domestic liabilities and branches abroad on behalf of the deposits accepted from Turkey liabilities subject to reserve requirements.

The required reserves may keep in reserve in Central Bank of Turkey as Turkish Lira, USD and/or Euro and standard gold. As of 30 September 2016, the Turkish lira required reserve ratios are determined to be within the range of 4% - 10.5% depending on the maturity structure of deposits denominated in Turkish Lira (31 December 2015: 5%-11.5% for all Turkish lira liabilities), and the required reserve ratios for foreign currency deposits within the range of 9% - 13% (31 December 2015: 9%- 13% for all foreign currency deposits) and other foreign currency liabilities within the range of 5%-25% (31 December 2015: 5%-25% for all foreign currency liabilities).

CBRT started to pay interest for the Turkish Lira reserve since 5 November 2014. CBRT also started to pay interest for the Foreign Currency reserve since 5 May 2015. b. Information About Financial Assets at Fair Value Through Profit or Loss

1. As of 31 December 2016, the Bank have no financial assets at fair value through profit/loss subject to repo transactions (31 December 2015: None) and have no financial assets at fair value through profit and loss given as collateral/blocked amount (31 December 2015: None).

268 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Positive differences related to trading derivative financial assets

31 December 2016 31 December 2015 TL FC TL FC Forward Transactions 134 3,413 3,181 420 Swap Transactions 26,489 20,252 19,421 3,699 Options 50 11,086 22 497 Total 26,673 34,751 22,624 4,616 c. Information on banks

1. Information on banks

31 December 2016 31 December 2015 TL FC TL FC Banks Domestic 121,348 440,816 267,911 176,552 Foreign - 22,771 22,007 145,526 Total 121,348 463,587 289,918 322,078

2. Information on foreign banks:

Unrestricted Amount Restricted Amount 31 December 2016 31 December 2015 31 December 2016 31 December 2015 EU Countries 14,351 28,984 - - USA and Canada 7,846 134,938 - - OECD Countries (*) 455 596 - - Other 119 3,015 - - Total 22,771 167,533 - -

(*) OECD countries other than the EU countries, USA and Canada. d. Information on available-for-sale financial assets

1. Characteristics and carrying values of available-for-sale financial assets given as collateral

As of 31 December 2016, there are available-for-sale financial assets TL 507,730 amounting given as collateral/blocked (31 December 2015: TL 347,792) and those subject to repurchase agreements amounts to TL 578,986 (31 December 2015: TL 379,683). As of 31 December 2016, except the available-for-sale financial assets given as collateral/blocked and those subject to repurchase agreements, there are unrestricted amount is TL 1,237,258 (31 December 2015: TL 83,746).

2. Information on available-for-sale financial assets

31 December 2016 31 December 2015 Debt Securities 2,536,301 840,174 Quoted on Stock Exchange 2,188,096 832,176 Not Quoted 348,205 8,038 Share Certificates 6,065 5,882 Quoted on Stock Exchange 1 1 Not Quoted (*) 6,064 5,881 Impairment Provision (-) 212,327 28,953 Total 2,330,039 817,103

(*) In 9 April 2015, 1.6949 % of Kredi Garanti Fonu A.Ş. share amounting to TL 4,720 is acquired.

269 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) e. Explanations on loans

1. Information on all types of loan or advance balances given to shareholders and employees of the Parent Bank

31 December 2016 31 December 2015 Cash Non-cash Cash Non-cash Direct Loans Granted To Shareholders - 80,452 79,746 53,526 Corporate Shareholders - 80,452 79,624 53,047 Real Person Shareholders - - 122 479 Indirect Loans Granted To Shareholders 18,795 - 130,262 26,379 Loans Granted To Employees 6,654 - 4,397 - Total 25,449 80,452 214,405 79,905

2. Information on the first and second group loans and other receivables including loans that have been restructured or rescheduled and other receivables

Loans and Other Receivables Under Standard Loans and Other Receivables Close Monitoring Loans Loans and Other Amendments on and Other Amendments on Receivables Conditions of Contract Receivables Conditions of Contract Amendments Amendments Related to the Related to the Extention of Extention of Payment Plan Other Payment Plan Other Non-Specialized Loans 9,823,483 8,349 - 95,704 327,806 - Corporate Loans ------Export Loans 469,914 - - 15,490 6,935 - Import Loans ------Loans Given to Financial Sector 569,779 - - 378 - - Consumer Loans 183,802 - - 12,477 2,160 - Credit Cards 37,628 - - 960 - - Other 8,562,360 8,349 - 66,399 318,711 - Specialized Loans ------Other Receivables ------Total 9,823,483 8,349 - 95,704 327,806 -

270 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Standard Loans and Loans and Other Receivables Number of Amendments Related to the Extention of Payment Plan Other Receivables Under Close Monitoring 1 or 2 Times 8,349 327,806 3, 4 or 5 Times - - Over 5 Times - -

Standard Loans and Loans and Other Receivables Time Extended Via the Amendment on Payment Plan Other Receivables Under Close Monitoring 0 – 6 Month - 627 6 Month – 12 Month - 7,123 1 – 2 Years 31 42,242 2 – 5 Years 25 189,460 5 Years and Over 8,293 88,354

3. Loans according to their maturity structure

Standart Loans and Loans and Other Receivables Other Receivables Under Close Monitoring Loans and Other Restructured or Loans and Other Restructured or Receivables Rescheduled Receivables Rescheduled Short-term Loans and Other Receivables 3,387,554 869 23,718 13,912 Non-specialised Loans 3,380,879 869 23,377 13,912 Specialised Loans 6,675 - 341 - Other Receivables - - - - Medium and Long-Term Loans and Other Receivables 6,435,929 7,480 71,986 313,894 Non-specialised Loans 6,435,555 7,480 71,986 313,894 Specialised Loans 374 - - - Other Receivables - - - - Total 9,823,483 8,349 95,704 327,806

271 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

4. Information on consumer loans, individual credit cards, personnel loans and personnel credit cards

Short-term Medium and Long-term Total Consumer Loans-TL 11,747 178,643 190,390 Real Estate Loans 174 120,720 120,894 Automotive Loans - 1,146 1,146 Consumer Loans 11,573 56,777 68,350 Other - - - Consumer Loans-FC Indexed - - - Real Estate Loans - - - Automotive Loans - - - Consumer Loans - - - Other - - - Consumer Loans-FC - - - Real Estate Loans - - - Automotive Loans - - - Consumer Loans - - - Other - - - Individual Credit Cards-TL 7,125 - 7,125 With Installments 2,417 - 2,417 Without Installments 4,708 - 4,708 Individual Credit Cards- FC 5 - 5 With Installments - - - Without Installments 5 - 5 Personnel Loans-TL 288 4,138 4,426 Real Estate Loans - - - Automotive Loans - - - Consumer Loans 288 4,138 4,426 Other - - - Personnel Loans-FC Indexed - - - Real Estate Loans - - - Automotive Loans - - - Consumer Loans - - - Other - - - Personnel Loans-FC - - - Real Estate Loans - - - Automotive Loans - - - Consumer Loans - - - Other - - - Personnel Credit Cards-TL 2,083 - 2,083 With Installments 802 - 802 Without Installments 1,281 - 1,281 Personnel Credit Cards-FC - - - With Installments - - - Without Installments - - - Credit Deposit Account-TL (Individuals) (*) 3,623 - 3,623 Credit Deposit Account-FC (Individuals) - - - Total 24,871 182,781 207,652

(*) TL 146 of the credit deposit account personnel loans (31 December 2015: TL 176).

272 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

5. Information on commercial installment loans and corporate credit cards

Short-term Medium and long-term Total Commercial Loans With Installments-TL 64,904 1,207,862 1,272,766 Real Estate Loans - 935 935 Automotive Loans - 55,912 55,912 Consumer Loans 64,904 1,151,015 1,215,919 Other - - - Commercial Loans With Installment-FC Indexed 3,249 403,387 406,636 Real Estate Loans - 341,307 341,307 Automotive Loans - 43,453 43,453 Consumer Loans 3,249 18,627 21,876 Other - - - Commercial Loans With Installment-FC 3,988 1,342,226 1,346,214 Real Estate Loans - - - Automotive Loans - - - Consumer Loans 3,988 1,342,226 1,346,214 Other - - - Corporate Credit Cards-TL 29,375 - 29,375 With Installment 2,793 - 2,793 Without Installment 26,582 - 26,582 Corporate Credit Cards-FC - - - With Installment - - - Without Installment - - - Overdraft Accounts – TL(Corporate) 73,116 - 73,116 Overdraft Accounts – FC (Corporate) - - - Total 174,632 2,953,475 3,128,107

6. Loans according to types of borrowers

31 December 2016 31 December 2015 Public 24,084 - Private 10,231,258 9,069,821 Total 10,255,342 9,069,821

7. Distribution of domestic and foreign loans

Related loans are classified according to the location of the customers.

31 December 2016 31 December 2015 Domestic Loans 10,086,605 9,030,427 Foreign Loans 168,737 39,394 Total 10,255,342 9,069,821

8. Loans given to investments in associates and subsidiaries

As of 31 December 2016, there are loans granted to associates and subsidiaries amount to TL 102,576 (31 December 2015: 55,395).

273 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

9. Specific provisions provided against loans

31 December 2016 31 December 2015 Loans and Other Receivables with Limited Collectability 9,527 14,376 Loans and Other Receivables with Doubtful Collectability 42,209 47,781 Uncollectible Loans and Other Receivables 319,544 219,343 Total 371,280 281,500

10. Information on non-performing loans (Net)

10.(i). Information on non-performing loans restructured or rescheduled and other receivables

Group has no non-performing loans restructured or rescheduled and other receivables as of 31 December 2016 (31 December 2015: None).

10.(ii). Information on the movement of total non-performing loans

III. Group IV. Group V. Group Loans and other Loans and other Uncollectible receivables with receivables with loans and other limited collectability doubtful collectability receivables 31 December 2015 105,538 122,980 288,824 Addition (+) 298,106 (7,735) 5,595 Transfers from Other Categories of Non-performing Loans (+) - 302,821 277,421 Transfers to Other Categories of Non-performing Loans (-) (309,836) (270,406) - Collections (-) (14,915) (22,745) (69,780) Write-offs (-) (*) - - (101,081) Corporate and Commercial Loans - - (90,957) Consumer Loans - - (9,596) Credit Cards - - (528) Other - - - 31 December 2016 78,893 124,915 400,979 Specific Provision (-) (9,527) (42,209) (319,544) Net Balance on Balance Sheet 69,366 82,706 81,435

(*) The Group has written-off of non-performing loans under the collections campaign of TL 1,759 with a net book value of TL 74 and provision amounting to TL 1,685 in May and has sold non-performing loans of TL 99,396 with a net book value of TL 179 and provision TL 99,217 to Turk Asset Varlık Yönetim A.Ş. on August 17, 2016 for TL 2,000.

10.(iii). Information on non-performing loans granted as foreign currency loans

The Group has TL 22,357 non-performing loans denominated in foreign currency loans as at the balance sheet date (31 December 2015: TL 20,432).

274 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

10.(iv). Information on non-performing loans based on types of borrowers

III. Group IV. Group V. Group Loans and other Loans and other Uncollectible receivables with receivables with loans and other limited collectability doubtful collectability receivables 31 December 2016 (Net) Loans to Real Persons and Legal Entities (Gross) 78,893 124,915 400,979 Specific Provision Amount (-) (9,527) (42,209) (319,544) Loans to Real Persons and Legal Entities (Net) 69,366 82,706 81,435 Banks (Gross) - - - Specific Provision Amount (-) - - - Banks (Net) - - - Other Loans and Receivables (Gross) - - - Specific Provision Amount (-) - - - Other Loans and Receivables (Net) - - - 31 December 2015 (Net) Loans to Real Persons and Legal Entities (Gross) 105,538 122,980 288,824 Specific Provision Amount (-) (14,376) (47,781) (219,343) Loans to Real Persons and Legal Entities (Net) 91,161 75,199 69,481 Banks (Gross) - - - Specific Provision Amount (-) - - - Banks (Net) - - - Other Loans and Receivables (Gross) - - - Specific Provision Amount (-) - - - Other Loans and Receivables (Net) - - -

11. Explanation on liquditation policy for uncollectible loan and receivable

Collection of uncollectible loans and other receivables is collected through the liquidation of collaterals and by legal procedures.

12. Explanations on write-off policy

Uncollectible loans and other receivables are recovered through legal proceedings and liquidation of collaterals or they are written off with Board decision in accordance with the Tax Procedural Law.

The Group has written-off of non-performing loans under the collections campaign of TL 1,759 with a net book value of TL 74 and provision amounting to TL 1,685 in May and has sold non-performing loans of TL 99,396 with a net book value of TL 179 and provision TL 99,217 to Turk Asset Varlık Yönetim A.Ş. on August 17, 2016 for TL 2,000.

13. The Parent Bank's provision movement for loans and other receivables during the period:

Corporate/ Commercial Loans SME Consumer Loans Total 1 January 2016 120,921 145,060 15,519 281,500 Made during the Period 69,426 135,748 5,544 210,718 Cancelled during the Period (-) (15,875) (3,500) (661) (20,036) Collections (21,771) (69,007) (10,124) (100,902) 31 December 2016 152,701 208,301 10,278 371,280

275 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Corporate/ Commercial Loans SME Consumer Loans Total 1 January 2015 149,725 110,476 9,042 269,243 Made during the Period 41,324 111,374 13,935 166,633 Cancelled during the Period (-) (10,929) (4,893) (629) (16,451) Collections (59,199) (71,897) (6,829) (137,925) 31 December 2015 120,921 145,060 15,519 281,500 f. Information on held-to-maturity investments:

1. Information on held to maturity debt securities

Group has no held to maturity debt securities as of 31 December 2016 (31 December 2015: None).

2. Information on held to maturity investments

Group has no held to maturity investments as of 31 December 2016 (31 December 2015: None).

3. Movement of investments held-to-maturity:

Group has no investment held to maturity as of 31 December 2016 (31 December 2015: None).

4. Characteristics and carrying values of held-to-maturity investments given as collateral

As of 31 December 2016 there is no held-to-maturity investment given as collateral (31 December 2015: None). g. Information on investments in associates (Net)

Group has no associates as of 31 December 2016 (31 December 2015: None). h. Information on subsidiaries (Net)

1. Information on shareholders’ equity of the significant subsidiaries

There is no deficit of regulatory limits on capital structure of the subsidiaries which are included in the consolidated capital adequacy ratio calculation in accordance with the capital adequacy ratio limits. The information on the shareholders’ equity of these subsidiaries is shown below:

Alternatif Finansal Kiralama A.Ş. Alternatif Menkul Değerler A.Ş (*) Core Capital 143,461 19,224 Paid-in Capital 50,000 13,309 Share Premium - - Share Cancellation Profits Profits - - Reserves 27,569 14,111 Current Period’s Profit and Prior Period’s Profit 66,384 - Current Period’s Losses and Prior Period’s Losses - (8,074) Leasehold Improvements on Operational Leases (-) - 13 Intangible Assets (-) 492 109 Tier II Capital - - Deductions From Capital - - Total Shareholders Equity 143,461 19,224

(*) "Alternatif Yatırım A.Ş."s title changed as "Alternatif Menkul Değerler A.Ş." and the company name registered as "A Menkul" instead of "A Yatırım" as at 19 April 2016, with the decision of General Assembly meeting, dated 7 April 2016.

276 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

According to the conclusion of there will be no benefits by the continuing activities of Alternatif Portföy Yönetimi A.Ş. which is owned 100% by Alternatif Menkul Değerler A.Ş., liquidation procedures has begun after the decision of board of Alternatif Portföy Yönetimi A.Ş. dated 27 August 2014. By the same date, application made to the Capital Markets Board. Operating licence and portfolio management certificate of the Alternatif Portföy Yönetimi A.Ş. is cancelled on 5 December 2014 and its title has changed as Elmadağ Dış Ticaret A.Ş. on 6 March 2015. The liquidation is approved on 23 February 2016.

2. Information on unconsolidated subsidiaries:

There is no unconsolidated subsidiaries (31 December 2015: None).

3. Information on consolidated subsidiaries

Address Bank’s share percentage, if Bank’s Risk Group No Title (City/ Country) different voting percentage (%) Share (%) 1 Alternatif Yatırım A.Ş. İstanbul/Türkiye 100.00 100.00 2 Alternatif Finansal Kiralama A.Ş. İstanbul/Türkiye 99.99 99.99

Main financial figures of the consolidated subsidiaries in the order of the above table

Shareholders’ Total Fixed Interest Income from Marketable Current Period Prior Period Fair No Total Assets Equity Assets Income Securities Portfolio Profit / Loss Profit / Loss Value 1 (*) 61,259 19,828 375 2,841 - (982) (7,564) - 2 (*) 1,393,478 135,531 1,071 88,895 - 22,543 49,499 -

(*) The above mentioned subsidiaries' current year information is based on 31 December 2016 BRSA financials.

4. The movement of the subsidiaries

31 December 2016 31 December 2015 Balance at the beginning of the period 166,380 146,323 Movements during the period - 20,057 Purchases - 21,137 Transfers - - Bonus Shares Obtained - - Share in Current Year Income - - Sales - (900) Revaluation (Decrease) / Increase - - Provision for Impairment - (180) Balance at the End of the Period 166,380 166,380 Capital Commitments - - Share Percentage at the End of the Period (%) 100 100

5. Sectoral information on financial subsidiaries and the related carrying amounts

Subsidiaries 31 December 2016 31 December 2015 Banks - - Insurance Companies - - Factoring Companies - - Leasing Companies 142,165 142,165 Finance Companies - - Other Financial Subsidiaries 24,215 24,215

277 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

6. Valuation of investments in consolidated subsidiaries

31 December 2016 31 December 2015 Cost Value Method 166,380 166,380 Fair Value Method - - Equity Method - - Total 166,380 166,380

7. Quoted subsidiaries: None. i. Information on joint ventures

There are no joint ventures (31 December 2015: None). j. Information on finance lease receivables (net)

Finance lease receivable of the Group is amounting to TL 1,245,595 (31 December 2015: TL 1,031,649). k. Information on hedging derivative financial assets

There are no differences related with hedging derivative financial assets (31 December 2015: None). l. Information on property and equipment

Other 31 December 2016 Real Estates Motor Vehicles Tangible Assets Total

Cost 1,074 28 104,169 105,271 Accumulated Depreciation (-) (16) (28) (75,734) (75,778) Net Book Value 1,058 - 28,435 29,493 31 December 2016 Net Book Value at Beginning of the Period 1,058 - 28,435 29,493 Additions (133) - 18,223 18,090 Disposals Cost 900 - 9,381 10,281 Disposals Depreciation (-) - - (7,615) (7,615) Impairment - - - - Depreciation (-) 9 - (8,252) (8,243) Cost at Period End 41 28 113,011 113,080 Accumulated Depreciation at Period End (-) (7) (28) (76,371) (76,406) Closing Net Book Value at Period End 34 - 36,640 36,674

Other 31 December 2015 Real Estates Motor Vehicles Tangible Assets Total

Cost 1,710 28 101,758 103,496 Accumulated Depreciation (-) 16 28 71,851 71,895 Net Book Value 1,694 - 29,907 31,601 31 December 2015 Net Book Value at Beginning of the Period 1,694 - 29,907 31,601 Additions 180 - 10,232 10,412 Disposals Cost 816 - 7,819 8,635 Disposals Depreciation (-) - - 4,992 4,992 Impairment - - - - Depreciation (-) - - 8,876 8,876 Cost at Period End 1,074 28 104,169 105,271 Accumulated Depreciation at Period End (-) 16 28 75,734 75,778 Closing Net Book Value at Period End 1,058 - 28,435 29,493

278 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) m. Information on the goodwill and intangible assets

1. Book value and accumulated depreciation of the goodwill at the beginning and at the end of the period

Current Period Prior period Gross Value at the Beginning of the Period 49,647 49,647 Accumulated Depreciation (-) - - Impairment Provision (-) - - Movement During the Period - - Addition Goodwill - - Assets and Liabilities Arising from Changes in Value of Correction - - During the Period Discontinue an Operation and Goodwill Partially or Completely Removed from an Asset (-) - - Depreciation (-) - - Impairment Provision (-) - - Reversal of Impairment Provision (-) - - Book Value Occuring Other Changes - - Gross Value at the End of the Period 49,647 49,647 Accumulated Depreciation (-) - - Impairment Provision (-) - - Net Book Value at the End of the Period 49,647 49,647

In accordance with the Share Transfer Agreement signed between Anadolu Endüstri Holding A.Ş (AEH) and Alternatifbank A.Ş. and the Banking Regulation and Supervision Agency’s authorization numbered 5558 dated 24 October 2013, Alternatifbank A.Ş. purchased 2.727.259.500 shares which is 95.80% of Alternatif Finansal Kiralama (“A Lease”), the associate of AEH, with a consideration amount of TL 115,585 and 115.488.748 shares from other shareholders with a consideration amount of TL 4,894. The positive difference between TL 120,601 purchase price and TL 69,189 the net amount of identifiable assets was reflected as TL 49,647 goodwill and TL 1,757 intangible assets on this transaction.

The valuation of the fair value of the equity of A Lease is made by Parent Bank. Discounted cash flow method was used for determining fair value 3 year business plan prepared by management of the company is used valuation. Growing the business plan of the A Lease stems from the company's opportunities in the sector in which it operates and new customer acquisitions. The important assumptions about the calculating recovable amount is discount rates and terminal growth rates. The discount rate used in the calculation is 15.5% and terminal growth rate is 13.6%. As of 21 December 2015 the Company’s capital has increased by TL 21,537,500 (Full TL) by cash.

1. Carrying value and accumulated depreciation of the goodwill at the beginning and at the end of the period

Any impairment loss was recorded because recoverable value is higher than carrying value of the A Lease.

Information on the goodwill calculation relating to acquisition is as follows:

31 October 2013 Fair value Fair Value of the Equity Shares Subject to Change at the Acquisition Date 120,629 The Fair Value of the Identifiable Net Assets of the Alternatif Finansal Kiralama A.Ş. (69,225) Brand Value 1,757 Goodwill 49,647

As of 8 November 2013 fair values of net indentifiable assets of Alternatif Finansal Kiralama A.Ş. has calculated as below;

2. Gross carrying value and accumulated depreciation values at the beginning and end of the period

31 December 2016 31 December 2015 Gross Carrying Value 86,772 77,266 Accumulated Depreciation (-) 49,582 44,105 Net Book Value 37,190 33,161

279 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3. Information on movements between the beginning and end of the period

31 December 2016 31 December 2015 Beginning of the Period 33,161 24,911 Internally Generated Amounts 297 246 Additions due to Mergers, Transfers and Acquisitions 9,476 11,888 Disposals - - Amount Accounted under Revaluation Reserve - - Impairment - - Impairment Reversal - - Amortisation (-) 5,744 3,884 Net Foreign Currency Difference From Foreign Investments in Associates - - Other Changes in Book Value - - End of the Period 37,190 33,161 n. Information on investment property

There is no investment property (31 December 2015: None). o. Movement of assets held for resale and discontinued operations

There is no assets held for sale and discontinued operations (31 December 2015: None). p. Information on other assets

1. The distribution of other assets:

31 December 2016 31 December 2015 Colleterals Given for Derivative Transactions 126,215 37,825 Assets Held for Sale 95,663 50,449 Prepaid Expenses 43,202 33,917 Pos Receivables 43,201 27,394 Receivables from Clearing 31,874 54,327 Other 31,155 28,036 Colleterals Given 247 4,192 Total 371,557 236,140

31 December 2016 31 December 2015 Assets Held for Sale Beginning of the Period 50,449 69,243 Disposal (-) (28,320) (62,145) Additions 74,290 44,286 Depreciation for the Period 756 785 Impairment Provision - (150) End of the Period 95,663 50,449

2. Other assets in the balance sheet, balance sheet excluding off-balance sheet commitments exceed 10% of the total while at least 20% of their name and the amount of sub-accounts:

None (31 December 2015: None).

280 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

II. Explanations and Notes on Liabilities a. Information on deposits

1. Information on maturity structure of deposits/the funds collected

1 (i) 31 December 2016:

With 7 days Up to 1-3 3-6 6 months - 1 year and Accumulated Demand notifications 1 month months months 1 year over Deposits Total Saving Deposits 52,408 - 172,606 1,574,267 11,590 4,335 2,250 213 1,817,669 Foreign Currency Deposits 195,539 - 249,035 2,581,798 471,686 33,902 15,932 - 3,547,892 Residents in Turkey 180,353 - 243,038 2,557,000 471,686 30,614 15,924 - 3,498,615 Residents Abroad 15,186 - 5,997 24,798 - 3,288 8 - 49,277 Public Sector Deposits 5,768 ------5,768 Commercial Deposits 89,690 - 580,502 1,851,049 113,124 18,350 8,439 - 2,661,154 Other Institutions Deposits 1,576 - 7,730 56,691 773 - 19,556 - 86,326 Precious Metal Deposits 2,170 - 83 2,159 176 269 900 - 5,757 Bank Deposits 24,581 - 137,909 318,016 - - 192,915 - 673,421 The CBRT ------Domestic Banks 392 - 127,239 - - - - - 127,631 Foreign Banks 23,600 - 10,670 318,016 - - 192,915 - 545,201 Participation Banks 589 ------589 Other ------Total 371,732 - 1,147,865 6,383,980 597,349 56,856 239,992 213 8,797,987

1(ii). 31 December 2015:

With 7 days Up to 1-3 3-6 6 months - 1 year and Accummulated Demand notifications 1 month months months 1 year over Deposits Total Saving Deposits 52,036 - 56,362 1,718,980 48,754 13,078 14,985 129 1,904,324 Foreign Currency Deposits 201,788 - 152,270 1,819,601 77,905 21,342 13,276 - 2,286,182 Residents in Turkey 195,001 - 152,270 1,628,266 75,792 18,912 13,156 - 2,083,397 Residents Abroad 6,787 - - 191,335 2,113 2,430 120 - 202,785 Public Sector Deposits 17,162 ------17,162 Commercial Deposits 93,185 - 668,712 545,953 25,682 74,137 19,718 - 1,427,387 Other Institutions Deposits 1,722 - 6,855 17,082 8 42 19,275 - 44,984 Precious Metal Deposits 1,399 - - 205,124 585 126 774 - 208,008 Bank Deposits 484 - 198,500 119,549 31,903 - - - 350,436 The CBRT ------Domestic Banks 124 - 175,123 87,682 - - - - 262,929 Foreign Banks 360 - 23,377 31,867 31,903 - - - 87,507 Participation Banks ------Other ------Total 367,776 - 1,082,699 4,426,289 184,837 108,725 68,028 129 6,238,483

281 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Information on saving deposits insurance

2(i). Information on saving deposits under the guarantee of the saving deposits insurance fund and exceeding the limit of deposit insurance fund

Saving Deposits Under the Guarantee of Deposit Insurance Exceeding Limit of the Deposit Insurance 31 December 2016 31 December 2015 31 December 2016 31 December 2015 Saving Deposits (*) 491,538 601,328 1,326,678 1,303,676 Foreign Currency Savings Deposit 98,266 106,436 989,867 978,404 Other Deposits in the Form of Savings Deposits - - - - Foreign Branches’ Deposits Under Foreign Authorities’ Insurance - - - - Off-shore Banking Regions’ Deposits Under Foreign Authorities’ Insurance - - - -

(*) Related savings deposits include TL 547 straight rediscount - internal efficiency difference.

2(ii). Saving deposits which are not under the guarantee of saving deposit insurance fund

31 December 2016 31 December 2015 Deposits and Other Accounts in Foreign Branches - - Deposits and Other Accounts of Main Shareholders and their Families - - Deposits and Other Accounts of President of Board of Directors, Members of Board of Directors, Vice General Managers and Their Families 5,188 87,258 Deposits and Other Accounts of Property Assets Value due to Crime which is in the Scope of Article 282 of Numbered 5237 “TCL” Dated 26/9/2004 - - Deposits in Banks Incorporated in Turkey Exclusively for Off-shore Banking Operations - - b. Information on trading derivative financial liabilities

31 December 2016 31 December 2015 TL FC TL FC Forward Transactions 778 714 529 3,237 Swap Transactions 48,495 13,844 564 10,051 Futures Transactions - - - - Options 14 6,599 - 478 Other - - - - Total 49,287 21,157 1,093 13,766 c. Information on borrowings

1. Information on borrowing

31 December 2016 31 December 2015 TL FC TL FC From Domestic Banks and Institutions 56,604 640,458 124,989 507,120 From Foreign Banks, Institutions and Funds 12,810 3,230,105 354 3,629,674 Total 69,414 3,870,563 125,343 4,136,794

282 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Information on maturity profile of borrowings

31 December 2016 31 December 2015 TL FC TL FC Short-term 69,414 1,111,950 125,343 1,388,203 Medium and Long-term - 2,758,613 - 2,748,591 Total 69,414 3,870,563 125,343 4,136,794 d. Information on other foreign liabilities

As of 31 December 2016 other foreign liabilities do not exceed 10% of the total balance sheet. e. Information on financial lease agreements

None (31 December 2015: None). f. Information on hedging derivative financial liabilities

31 December 2016 31 December 2015 TL FC TL FC Fair Value Hedge Risk (*) 404 - 113 - Cash Flow Hedge - - - - Hedge of Net Investments in Foreign Operations - - - - Total 404 - 113 -

(*) Explained in Section Four Note VIII. g. Information on provisions

1. Information on general provisions

31 December 2016 31 December 2015 Provisions for Group I Loans and Receivables 33,910 61,137 Additional Provision for Loans and Receivables with Extended Maturities - 1,406 Provisions for Group II Loans and Receivables 4,279 3,645 Additional Provision for Loans and Receivables with Extended Maturities - 15,487 Provisions for Non-Cash Loans 7,896 8,571 Other 6,126 3,140 Total 52,211 93,386

In accordance with the amendment made on 14 December 2016 in the “Regulation on Procedures And Principles For Determination Of Qualifications Of Loans And Other Receivables By Banks And Provisions To Be Set Aside”, published on the Official Gazette numbered 26333 dated 1 November 2006, the cancellation of the provision has been realized in the current period.

2. Information on reserve for employment termination benefits

In accordance with Turkish Labour Law, the reserve has been calculated by estimating the present value of the future probable obligation of the Bank arising from the retirement of its employees. According the TAS 19, actuarial valuation methods are required to calculate the company’s liabilities.

Actuarial losses net of deferred tax amounting to TL 1,762 is accounted for under the equity according to the revised TAS 19 stardard as of 31 December 2016 (31 December 2015: TL 1,524 losses).

283 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

Following actuarial assumptions were used in the calculation of total liabilities.

31 December 2016 31 December 2015 Discount Rate (%) 4.72 3.18 Ratio used for Probability of Pension (%) 83.33 83.33

The principal actuarial assumption is that the maximum liability will increase in line with inflation. Thus, the discount rate applied represents the expected real rate after adjusting for the effects of future inflation.

Movement of employment termination benefits liability in the balance sheet

31 December 2016 31 December 2015 Prior Period Ending Balance 6,365 4,864 Current Period Service Cost 748 599 Interest Cost 605 548 Paid Compensation (5,285) (5,262) Pay/Benefit Reductions/Gains or Losses Due to Dismissals 3,086 3,712 Actuarial Gain/(Loss) 2,203 1,904 Balance at the End of the Period 7,722 6,365

In addition, the Group has accounted retirement pay provision amounting to TL 7,722 (31 December 2015: TL 6,365) and for unused vacation rights provision amounting to TL 2,752 as 31 December 2016 (31 December 2015: TL 2,961).

3. Other provisions

31 December 2016 31 December 2015 Specific Provision for Unindemnified Non-cash Loan 26,336 20,098 Bonus Provision 11,560 9,560 Provision for the Impairment due Settlement Date - - Other (*) 13,890 7,850 Total 51,786 37,508

(*) Other line consist of TL 13,727 litigation and claims (31 December 2015: TL 7,780) and TL 163 (31 December 2015: TL 70) amounted other provisions.

4. Information on Provisions Related with the Foreign Currency Difference of Foreign Indexed Loans

As of 31 December 2016, the provision related to the foreign currency differences on foreign indexed loans amounts to TL 16,433 (31 December 2015: TL 7,630) are netted with loans in the financial statements. h. Information on taxes payable

Information on current tax liability

As of 31 December 2016, there is no current tax liability (31 December 2015: TL 6,069).

(i) Information on taxes payable

31 December 2016 31 December 2015 Corporate Tax Payable - 6,069 Taxation of Marketable Securities 8,270 8,309 Property Tax 179 236 Banking Insurance Transaction Tax (BITT) 5,478 6,553 Foreign Exchange Transaction Tax - - Value Added Tax Payable 370 1,737 Other 3,199 3,048 Total 17,496 25,952

284 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

(ii) Information on premium payables

31 December 2016 31 December 2015 Social Security Premiums - Employee 1,737 931 Social Security Premiums - Employer 2,541 1,360 Bank Pension Fund Premiums - Employee - - Bank Pension Fund Premiums - Employer - - Pension Fund Deposit and Provisions - Employee - - Pension Fund Deposit and Provisions - Employer - - Unemployment Insurance - Employee 125 67 Unemployment Insurance - Employer 263 145 Other 68 42 Total 4,734 2,545 i. Explanations about deferred tax provision

As of 31 December 2016, the Parent Bank has calculated deferred tax asset of TL 64,458 (31 December 2015: TL 26,707) in the financial statements.

As of 31 December 2016 and 31 December 2015, the details of accumulated temporary differences and deferred tax assets and liabilities are presented below:

31 December 2016 31 December 2015 Deferred Tax Assets Tangible Assets Base Differences (1,312) (589) Provisions 10,269 8,045 Valuation of Financial Assets 42,060 1,436 Commission Deferral 4,048 2,601 Investment Incentive 8,313 14,120 Financial Losses 1,080 1,094 Net Deferred Tax Assets 64,458 26,707 j. Information on subordinated loans

1. Group’s detailed explanation on subordinated loans including quantity, maturity, interest rate, issuing institution, option to be converted into stock certificate

Issuing Institution Amount (‘000) Opening Date Maturity Interest Rate (%) The Commercial Bank (P.S.Q.C.) USD 125,000 30 June 2015 10 years+1 day Libor + 6.00 Foreign Capital Market Investors USD 300,000 15 April 2016 10 years+1 day 8.75

TL equivalent of the subordinated loan is TL 1,504,693 (31 December 2015: TL 767,558).

The subordinated loan does not have the option to be converted into stock certificate. The Bank has the option to pay back the loan at the end of the fifth year.

2. Information on subordinated loans

31 December 2016 31 December 2015 TL FC TL FC Domestic Banks - - - - Other Domestic - - - - Foreign Banks - 1,504,693 - 452,505 Other Foreign Institutions(*) - - - 315,053 Total - 1,504,693 - 767,558

(*) According to the temporary article 4 clause c of Regulation on the Changes on the Equity of Banks dated 20 January 2016 no.29599 the loans which do not carry the points of subordinated loans are transfered to borrowings.

285 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) k. Information on shareholders’ equity

1. Presentation of paid-in capital (As of nominal; non-adjusted amounts according to inflation)

31 December 2016 31 December 2015 Common Stock (*) 980,000 620,000 Preferred Stock - -

(*) It refers to the nominal capital.

2. Paid-in capital amount, explanation as to whether the registered share capital system is applied and if so, amount of registered share capital ceiling (As of nominal; non-adjusted amounts according to inflation):

The Parent Bank applies principal capital system.

3. Information about the share capital increases and their sources in the current period.

It is decided to increase the capital in cash by TL 150,000 with the decision of Board of Directors as of 21 January 2016, after the approval of BRSA the paid in capital is increased TL 150,000 to TL 770,000 as of 14 April 2016. With the decision of number 166 of the Board of Directors dated on 19 December 2016 and with the approval of BRSA dated on 29 December 2016, decided to increase the capital from TL 770,000 to TL 980,000. In this respect, The Commercial Bank (P.S.Q.C.) was included in the capital increase with TL 210,000. Registration process is continuing.

4. Information on additions from revaluation reserves to capital in the current period: None.

5. Information on capital increases from capital reserves during the current period: None.

6. Information on prior period’s indicators on the Group’s income, profitability and liquidity, and possible effects of these future assumptions on the Group’s equity due to uncertainties of these indicators

The interest, liquidity, and foreign exchange risk on on-balance sheet and off-balance sheet assets and liabilities are managed by the Parent Bank within several risk limits and legal limits.

7. Information on privileges given to shares representing the capital: None.

8. Information on marketable securities valuation reserve

31 December 2016 31 December 2015 TL FC TL FC From Investments in Associates, Subsidiaries, and Joint Ventures - - - - Valuation Difference (14,358) (150,809) (16,041) (11,396) Foreign Currency Difference - - - - Total (14,358) (150,809) (16,041) (11,396)

9. Information of the previous year profit distribution

According to the decision taken in the General Assembly of the Bank dated 31 March 2016, distributable profit of 2015 amounting to TL 65,228 is distributed as TL 3,261 to legal reserves and the rest amounting to TL 61,967 is distributed as extraordinary reserves. l. Information on minority interests

31 December 2016 31 December 2015 Balance at the Beginning of the Period 11 9,214 Current Year Income 2 (1) Dividends Paid - - Purchase from Minority Interests - - Other - (9,202) Balance at the End of the Period 13 11

286 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

III. Explanations and Notes on Off-Balance Sheet Accounts a. Information on off balance sheet commitments

1. The amount and type of irrevocable commitments

According to Direct Debiting System, there is TL 191,311 irrevocable loan commitments as of 31 December 2016 (31 December 2015: TL 228,546).

2. Type and amount of probable losses and obligations arising from off-balance sheet items

There are no probable losses and obligations arising from off-balance sheet items. Obligations arising from off-balance sheet are disclosed in “Off-Balance Sheet Commitments”.

2.(i). Non-cash loans including guarantees, the Parent Bank avalized and acceptance loans, collaterals that are accepted as financial guarantees and other letters of credit

31 December 2016 31 December 2015 Guarantees and Colleterals 591,883 551,332 Bank Acceptance Loans 3,885 35,849 Letter of Credits 265,676 345,726 Total 861,444 932,907

2.(ii). Guarantees, sureties and other similar guarantees

31 December 2016 31 December 2015 Temporary Letter of Guarantees 48,342 59,692 Definite Letter of Guarantees 1,712,135 1,967,090 Advance Letter of Guarantee 218,345 87,614 Letter of Guarantees Given to Customs 107,565 126,668 Total 2,086,387 2,241,064

3.(i). Total amount of non-cash loans

31 December 2016 31 December 2015 Non-cash Loans Given Against Cash Loans 439,036 424,226 With Original Maturity of 1 Year or Less than 1 Year 439,036 424,226 With Original Maturity of More than 1 Year - - Other Non-cash Loans 2,508,795 2,749,745 Total 2,947,831 3,173,971

287 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

3.(ii). Information on concentration of non-cash loans

31 December 2016 31 December 2015 TL (%) FC (%) TL (%) FC (%) Agricultural 5,158 0.49 2,643 0.14 11,155 0.91 9,638 0.50 Farming and Livestock 4,507 0.43 352 0.02 10,046 0.82 9,638 0.50 Forestry 301 0.03 - 0.00 803 0.07 - - Fishing 350 0.03 2,291 0.12 306 0.02 - - Manufacturing 183,252 17.57 654,585 34.36 261,376 21.30 542,470 27.87 Mining 5,793 0.56 6,551 0.34 8,026 0.65 28,315 1.45 Production 141,514 13.57 580,926 30.49 227,003 18.50 471,878 24.24 Electric, Gas, Water 35,945 3.45 67,108 3.52 26,347 2.15 42,277 2.17 Construction 207,562 19.90 304,657 15.99 298,331 24.31 349,250 17.94 Services 622,004 59.65 943,357 49.52 599,761 48.87 361,971 18.59 Wholesale and Retail Trade 159,674 15.31 111,519 5.85 199,074 16.22 161,545 8.30 Hotel and Food Services 5,635 0.54 775 0.04 10,066 0.82 1,926 0.10 Transportation and Telecommunication 53,234 5.10 37,066 1.95 67,366 5.49 114,091 5.86 Financial Institutions 259,448 24.88 696,544 36.56 174,437 14.21 19,946 1.02 Real Estate and Leasing Ser. 9,690 0.93 64,170 3.37 567 0.05 520 0.03 Professional Services 120,092 11.52 25,150 1.32 144,463 11.77 63,370 3.26 Education Services 350 0.03 - 0.00 589 0.05 - - Health and Social Services 13,881 1.33 8,133 0.43 3,199 0.26 573 0.03 Other 24,813 2.38 (200) (0.01) 56,688 4.61 683,331 35.10 Total 1,042,789 100.00 1,905,042 100.00 1,227,311 100.00 1,946,660 100.00

3.(iii). Information on non-cash loans classified in Group I and Group II

31 December 2016 Group I Group II TL FC TL FC Non-Cash Loans Letters of Guarantee (*) 976,132 1,029,257 64,997 16,001 Bank Acceptances - 3,885 - - Letters of Credit 1,660 264,016 - - Endorsements - - - - Underwriting Commitments - - - - Factoring Guarantees - - - - Other Commitments and Contingencies - 591,883 - - Total 977,792 1,889,041 64,997 16,001

31 December 2015 Group I Group II TL FC TL FC Non-Cash Loans Letters of Guarantee (*) 1,163,403 1,001,222 63,908 12,531 Bank Acceptances - 35,849 - - Letters of Credit - 345,726 - - Endorsements - - - - Underwriting Commitments - - - - Factoring Guarantees - - - - Other Commitments and Contingencies - 551,332 - - Total 1,163,403 1,934,129 63,908 12,531

(*) The amount of non-cash loans of customers which were classified as non-performing receivables is TL 41,143 (31 December 2015: TL 42,735) and TL 26,336 provision is provided against these loans (31 December 2015: TL 20,098).

288 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) b. Information on derivative financial instruments

31 December 2016 31 December 2015 Types of Trading Transactions Foreign Currency Related Derivative Transactions (I) 15,367,912 9,517,562 Currency Forward Transactions 377,711 334,900 Currency Swap Transactions 12,678,120 7,842,888 Futures Transactions - - Options 2,312,081 1,339,774 Securities Options - Interest Related Derivative Transactions (II) 768,496 1,119,428 Forward Rate Agreements - - Interest Rate Swaps - - Interest Rate Options 768,496 1,119,428 Interest Rate Futures - - Other Trading Derivative Transactions (III) 56,307 46,690 A. Total Trading Derivative Transactions (I+II+III) 16,192,715 10,683,680

Types of Hedging Transactions Fair Value Hedges 220,000 220,000 Cash Flow Hedges - - Foreign Currency Investment Hedges - - B. Total Hedging Derivatives 220,000 220,000 Total Derivative Transactions (A+B) 16,412,715 10,903,680 c. Investment Funds

None. d. Information on contingent liabilities

As of 31 December 2016, outstanding legal claims against the group have been considered as contingent liabilities amounting to TL 25,184 and TL 13,727 provision is provided against these legal cases (31 December 2015: Contingent Liability: TL 13,760 Provision: TL 7,780). e. Expalanations related to transactions made on behalf of others and transaction based on trust

The Parent Bank's custody or placement activities on behalf of real and legal persons are immaterial.

IV. Explanations and Notes on Income Statement a. Information on interest income

1. Information on interest income on loans

31 December 31 December 2016 2015 TL FC TL FC Short-term Loans 388,672 34,158 541,036 49,979 Medium/Long-term Loans 219,140 206,374 198,405 168,304 Interest on Loans Under Follow-up 12,860 - 9,353 - Premiums Received from Resource Utilization Support Fund - - - - Total (*) 620,672 240,532 748,794 218,283

(*) Includes fee and commission income related with cash loans.

289 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

2. Information on interest income on banks

31 December 2016 31 December 2015 TL FC TL FC From the CBRT (*) 2,713 6,127 1,461 1,733 From Domestic Banks 14,570 1,535 8,813 759 From Foreign Banks 1,730 564 766 136 Headquarters and Branches Abroad - - - - Total 19,013 8,226 11,040 2,628

(*) Interest incomes from Turkish Lira and Foreign Currency reserves, unrestricted accounts and reserve options which provided by CBRT has shown in “From the CBRT” line.

3. Information on interest income on marketable securities

31 December 2016 31 December 2015 TL FC TL FC From Trading Financial Assets 407 364 844 18 From Financial Assets At Fair Value Through Profit or Loss - - - - From Available-for-Sale Financial Assets 31,957 66,318 42,940 17,051 From Held-to-Maturity Investments - - - - Total 32,364 66,682 43,784 17,069

4. Information on interest income received from investments in associates and subsidiaries:

None (31 December 2015:None). b. Information on interest expense

1. Information on interest expense on borrowings

31 December 2016 31 December 2015 TL FC TL FC Banks 2,446 142,880 17,037 81,207 CBRT - - - - Domestic Banks 2,446 32,475 17,008 17,410 Foreign Banks - 110,405 29 63,797 Headquarters and Branches Abroad - - - - Other Institutions - 48,503 - 24,869 Total (*) 2,446 191,383 17,037 106,076

(*) Includes fee and commission expense related with cash loans.

2. Information on interest expense given to investments in associates and subsidiaries

None (31 December 2015: None).

3. Information on interest expense to marketable securities issued

31 December 2016 31 December 2015 Information on Interest Expense to Marketable Securities Issued 42,187 35,114

290 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

4. Information on interest rate and maturity structure of deposits

Demand Deposit Time Deposit Up to 1 Up to 3 Up to 6 Accummulated Months Months Months Up to 1 Year Over 1 Year Deposit Total Turkish Lira Bank Deposits - 939 - - - - - 939 Savings Deposits - 11,225 191,599 3,949 2,059 1,106 15 209,953 Public Deposits ------Commercial Deposits - 31,463 144,708 7,696 6,360 1,251 - 191,478 Other Deposits - 854 7,163 8 4 1 - 8,030 Deposit with 7 days notification ------Precious Metal Deposits - 81 1,335 1 1 - - 1,418 Total - 44,562 344,805 11,654 8,424 2,358 15 411,818 Foreign Currency Foreign Currency Account - 3,488 66,980 5,041 772 341 - 76,622 Bank Deposits - 2,694 - - - - - 2,694 Deposit with 7 days notification ------Precious Metal Deposits ------Total - 6,182 66,980 5,041 772 341 - 79,316 Grand Total - 50,744 411,785 16,695 9,196 2,699 15 491,134 c. Information on dividend income

The Group has no dividend income as of 31 December 2016 (31 December 2015: None) . d. Information on trading income/loss (Net)

31 December 2016 31 December 2015 Income 10,389,616 10,952,956 Income from Capital Market Transactions 38,261 6,887 Derivative Financial Transactions 719,244 723,988 Foreign Exchange Gains 9,632,111 10,222,081 Loss (-) 10,324,123 10,992,708 Loss from Capital Market Transactions 12,375 1,937 Derivative Financial Transactions 780,680 656,438 Foreign Exchange Loss 9,531,068 10,334,333 Net Income/(Loss) 65,493 (39,752)

291 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) e. Explanations about other operating income

31 December 2016 31 December 2015 Reversal of Specific Loan Provisions (*) 167,454 145,434 Gain on Sale of Property, Plant and Equipment 3,289 14,159 Provision for Communication Costs Received from Customers 1,207 3,303 Provision for the Expenses Recovered from Customers 822 1,981 Cancellation of Provisions for Real Estates to be Disposed 356 - Reversal of Provision Possible Risks - 1,371 Other 7,515 3,846 Total 180,643 170,094

(*) The Group has written-off of non-performing loans under the collections campaign of TL 1,759 with a net book value of TL 74 and provision amounting to TL 1,685 in May and has sold non-performing loans of TL 99,396 with a net book value of TL 179 and provision TL 99,217 to Turk Asset Varlık Yönetim A.Ş. on August 17, 2016 for TL 2,000. f. Provision expenses related to loans and other receivables

31 December 2016 31 December 2015 Specific Provisions for Loans and Other Receivables 210,718 166,633 III. Group Loans and Receivables 40,212 38,067 IV. Group Loans and Receivables 63,150 54,285 V. Group Loans and Receivables 107,356 74,281 General Provision Expenses - 30,498 Provision Expense for Possible Risks - - Marketable Securities Impairment Expense 13,140 4,924 Financial Assets at Fair Value Through Profit or Loss 154 3,372 Available-for-sale Financial Assets 12,986 1,552 Investments in Associates, Subsidiaries and Held-to-Maturity Securities Value Decrease - - Investments in Associates - - Subsidiaries - - Joint Ventures - - Held-to-Maturity Investments - - Other 17,849 8,986 Total 241,707 211,041

292 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) g. Information related to other operating expenses

31 December 2016 31 December 2015 Personnel Expenses 158,499 170,507 Reserve For Employee Termination Benefits 251 430 Unused Vacation 119 - Bank Social Aid Pension Fund Deficit Provision - - Impairment Expenses of Tangible Assets - - Depreciation Expenses of Tangible Assets 9,129 8,876 Impairment Expenses of Intangible Assets - - Impairment Expense of Goodwill - - Amortisation Expenses of Intangible Assets 5,744 3,884 Impairment Expenses of Equity Participations Accounted for under Equity Method - - Impairment Expenses of Assets Held For Sale - - Depreciation Expenses of Assets Held for Sale 962 586 Impairment Expenses of Tangible Assets Held for Sale - - Other Operating Expenses 92,024 94,511 Operational Lease Expenses 30,405 32,062 Maintenance Expenses 1,131 1,335 Advertising Expenses 4,472 1,818 Other Expenses 56,016 59,296 Loss on Sales of Assets (**) 101,029 129,033 Other (*) 22,828 24,310 Total 390,585 432,137

(*) Other operating charges are TL 6,254 (31 December 2015: TL 6,664) and except premium of SDIF amounting to TL 11,197 and tax. (**) The Group has written-off of non-performing loans under the collections campaign of TL 1,759 with a net book value of TL 74 and provision amounting to TL 1,685 in May and has sold non-performing loans of TL 99,396 with a net book value of TL 179 and provision TL 99,217 to Turk Asset Varlık Yönetim A.Ş. on August 17, 2016 for TL 2,000. h. Explanations on profit and loss from continuing operations before tax

31 December 2016 31 December 2015 Net Interest Income 385,293 545,836 Net Fees And Commissions Income/Expense 28,105 64,609 Trading Income / Loss (Net) 65,493 (39,752) Other Operating Income 180,643 170,094 Provision For Loan Losses And Other Receivables (-) 241,707 211,041 Other Operating Expenses (-) 390,585 432,137 Income/ Loss Before Tax From Continuing Operations 27,242 97,609 i. Provision for taxes on income from continuing operations

As of 31 December 2016, the Group has current tax expense amounting to TL 2,074 (31 December 2015: TL 24,664) and deferred tax income amounting to TL 5,197 (31 December 2015: TL 3,070 deferred tax expense). j. Information on net income/loss for the period

1) Interest income from ordinary banking transactions is TL 1,136,724 (31 December 2015: TL 1,147,765), interest expense is TL 751,431 (31 December 2015: TL 601,929).

2) Information on any change in the accounting estimates has no profit/loss effect on current period or consequent periods.

293 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) k. If the other items in the income statement exceed 10% of the income statement total, accounts amounting to at least 20% of these items are shown below:

Fees and Commissions Paid - Other 31 December 2016 31 December 2015 Fees and Commissions on Foreign Currency Transactions 12,099 - Debit Card Fees and Commissions 1,991 - CBRT Interbank Money Market 1,330 1,278 Pos Transaction Commissions Paid 654 - Commisions Granted to Correspondent Banks 806 797 Transfer Commissions 369 463 Commissions for Effective and Future Transactions 1,211 287 Other 11,785 11,042 Total 30,245 13,867 Fees and Commissions Received - Other 31 December 2016 31 December 2015 Credit Card Pos Commissions 16,619 - Account Management Fee Commission 1,490 2,591 Transfer Commissions 1,642 1,951 Insurance Commissions 2,804 3,076 Expertise Commissions 1,836 1,839 Banking Service Income 610 - Other 4,777 37,663 Total 29,778 47,120 l. Profit or loss attributable to minority shares

31 December 2016 31 December 2015 Profit/Loss Attributable to Minority Shares 2 (1)

V. Explanations and Notes on Changes in Shareholders’ Equity a. Information on profit distribution:

According to the decision taken in the General Assembly of the Bank dated 31 March 2016, distributable profit of 2015 amounting to TL 65,228 is distributed as TL 3,261 to legal reserves and the rest amounting to TL 61,967 is distributed as extraordinary reserves. b. Information on available for sale financial assets:

“Unrealised gain/loss” arising from changes in the fair value of securities classified as available-for-sale are not recognized in current year profit and loss statement but recognized in the “Marketable securities value increase fund” account under equity, until the financial assets are derecognised, sold, disposed or impaired. c. Information on increase/decrease amounts result from the merger:

None. d. Information on share issue premium:

Explained in details in note XIX of Section Three.

294 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VI. Explanations and Notes on Statement of Cash Flows a. Information on cash and cash equivalent assets:

1. Components of cash and cash equivalents and the accounting policy applied in their determination:

Cash and foreign currency together with demand deposits at banks including the CBRT are defined as “Cash”; Interbank money market and time deposits in banks with original maturities of less than three months are defined as “Cash Equivalents”.

2. Effect of a change on the accounting policies: None.

3. Reconciliation of cash and cash equivalent items with balance sheet and cash flow statements:

3.(i). Cash and cash equivalents at the beginning of period:

31 December 2016 31 December 2015 Cash 80,441 97,541 Cash Equivalents 1,206,335 361,740 CBRT 244,340 249,772 Banks and Other Financial Institutions 611,890 105,194 Money Markets 350,105 6,774 Total Cash and Cash Equivalents 1,286,776 459,281

The total amount from the operations occurring in the prior period is the total cash and cash equivalents amount at the beginning of the current period.

3.(ii). Cash and cash equivalents at the end of the period:

31 December 2016 31 December 2015 Cash 102,047 80,441 Cash Equivalents 1,415,970 1,206,335 CBRT 481,133 244,340 Deposits in Banks and other financial institutions 584,837 611,890 Money Markets 350,000 350,105 Total Cash and Cash Equivalents 1,518,017 1,286,776 b. Information on cash and cash equivalents that are not in use due to legal limitations and other reasons:

TL 1,384,645 of unfixed principal amount in the account of Central Bank of Turkey is required reserve established in FX and gold, for the TRY, FX and gold liabilities of the Group (31 December 2015: TL 1,219,327). c. The effects of the change in foreign exchange rates on cash and cash equivalents:

Increase in “Other Account” amounting to TL 826,166 (31 December 2015: TL 900,618 increase) which is classified under “Operating profit before changes in operating assets and liabilities” basically includes Fee and Commissions, Other Operating Expenses excluding Personnel Expenses, Foreign Exchange Gains/Losses as well as Provision and Depreciation that do not create cash in/outflow.

Decrease in “Net increase/decrease in other liabilities amounting to TL 99,537 (31 December 2015: TL 124,977 decrease) which is classified under “Operating profit before changes in operating assets and liabilities” includes changes in Miscellaneous Payables, Other Liabilities, Taxes Payable, Charges, Duties and Premiums.

The effects of the change in foreign exchange rates on cash and cash equivalents are calculated approximately TL 329,089 as of 31 December 2016 (31 December 2015: TL 341,282).

295 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

VII. Explanations and Notes on the Parent Bank’s Risk Group a. The volume of transactions relating to the Group’s risk group, outstanding loan and deposit transactions and profit and loss of the period

1. 31 December 2016

Other real and legal Associates, subsidiaries and Direct and indirect persons that have been joint ventures shareholders of the Bank included in the risk group Group’s Risk Group (*) (**) Cash Non-Cash Cash Non-Cash Cash Non-cash Loans and Other Receivables ------Balance at the Beginning of the Period - - 79,746 53,526 130,282 26,379 Balance at the End of the Period - - - 80,452 18,795 - Interest and Commission Income Received - - - 26 122 4

(*) Defined in the 49th article of paragraph 2 of the Banking Act No. 5411. (**) The information in table above includes banks as well as loans and receivables.

2. 31 December 2015

Other real and legal Associates, subsidiaries Direct and indirect persons that have been and joint ventures shareholders of the Bank included in the risk group Group’s Risk Group (*)(**) Cash Non-Cash Cash Non-Cash Cash Non-cash Loans and Other Receivables ------Balance at the Beginning of the Period - - 28,423 74,604 57,545 70,868 Balance at the End of the Period - - 79,746 53,526 130,282 26,379 Interest and Commission Income Received - - 5,056 9,821 4,071 826

(*) As described in the Article 49 of Banking Law No 5411. (**) The information in table above includes banks as well as loans and receivables.

3. Information on deposits of the Group’s risk group

Other real and legal Associates , subsidiaries Direct and indirect persons that have been Group’s Risk Group (*) and joint ventures shareholders of the Bank included in the risk group 31 December 31 December 31 December 31 December 31 December 31 December Deposit 2016 2015 2016 2015 2016 2015 Beginning of the Period - - 255,948 921,622 94,743 291,313 End of the Period - - - 255,948 21,532 94,743 Interest Expense on Deposits - - 28,104 59,408 1,250 23,253

(*) As described in the Article 49 of Banking Law No 5411.

296 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

4. Information on forward and option agreements and other derivative instruments with the Parent Bank’s risk group

Other real and legal Group’s Risk Group Associates , subsidiaries Direct and indirect persons that have been (*) and joint ventures shareholders of the Bank included in the risk group 31 December 31 December 31 December 31 December 31 December 31 December 2016 2015 2016 2015 2016 2015 Transactions for Trading Purposes (**) Beginning of the Period (***) - - 13,945 5,411 - - End of the Period (***) - - - 13,945 - - Total Profit / Loss - - 1 1,259 - 161 Transactions for Hedging Purposes Beginning of the Period (***) ------End of the Period (***) ------Total Profit / Loss ------

(*) As described in the Article 49 of Banking Law No 5411. (**) The Bank’s derivative instruments are classified as “Financial Assets at Fair Value through Profit or Loss” according to TAS 39. (***) The balances at the beginning and end of the periods are disclosed as the total of purchase and sell amounts of derivative financial instruments. b. With respect to the Parent Bank’s risk group

1. The relations with entities that are included in the Group’s risk group and controlled by the Parent Bank irrespective of the relationship between the parties:

The Parent Bank performs various transactions with group companies during its banking activities. These are commercial transactions realised with market prices.

2. The type of transaction, the amount and its ratio to total transaction volume, the amount of significant items and their ratios to total items, pricing policy and other issues

Share in Financial Total Risk Group Statements (%) Deposit 21,532 0.24% Non-cash Loans 86,577 2.93% Loans 18,795 0.18% Subordinated Loans 439,900 29.24%

These transactions are priced according to the Bank’s pricing policy and they are in line with the market prices.

3. Equity accounted transactions:

None.

4. Information on transactions such as purchase-sale of immovable and other assets, purchase-sale of service, agent agreements, financial lease agreements, transfer of the information gained as a result of research and development, license agreements, financing (including loans and cash or in kind capital), guarantees, collaterals and management contracts:

As of 31 December 2016, there is no financial leasing agreement between the Parent Bank and Alternatif Finansal Kiralama A.Ş. Also the agency agreement with Alternatif Menkul Değerler A.Ş. is cancelled on 30 June 2015. The Parent Bank also has cost sharing agreements with Alternatif Finansal Kiralama A.Ş. and Alternatif Menkul Değerler A.Ş.

The bank allocate cash and non-cash loans to risk group of the Bank in limit of Bank Law and that amount is 0.18 % of total cash and non-cash loan amount (31 December 2015: 2.32%).

297 ABANK 2016 ANNUAL REPORT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.) c. Information regarding benefits provided to the Group’s key management

Benefits provided to the Group’s key management amount to TL 22,736 as of 31 December 2016 (31 December 2015: TL 21,586).

VIII. Explanations and notes on the domestic,foreign,off-shore branches and foreign represantatives of the bank a. Information on domestic, foreign branches and foreign representatives:

Number of Number Employees Domestic Branch 53 928 Country of Incorporation Foreign Representative - - - Statutory share Total Asset capital Foreign Branch - - - - -

Off-Shore Banking Region Branch - - - - - b. Explanations on Branch and Agency Openings or Closings of the Parent Bank:

The Parent Bank does not open any new branches in 2016.

IX. Explanations and Notes on Subsequent Events

None.

298 FINANCIAL INFORMATION AND RISK MANAGEMENT

ALTERNATİFBANK A.Ş. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (AMOUNTS EXPRESSED IN THOUSANDS OF TURKISH LIRA (“TL”) UNLESS OTHERWISE STATED.)

SECTION SIX

OTHER EXPLANATIONS AND NOTES

I. Other Explanations Related To The Parent Bank’s Operations

Summaries about the Parent Bank’s rates from international credit rating agencies

Fitch Ratings: August 2016 Foreign Currency Long Term BBB (Negative) Short Term F2 Local Currency Long Term BBB (Negative) Short Term F2 National Note AAA(tur) (Stable) Support Note 2 Financial Capacity Note b+

Moody’s: September 2016 Foreign Currency Long Term Ba2 Short Term NP Local Currency Long Term Ba1 Short Term NP National Long Term Aa1.tr National Short Term TR-1 Outlook Stable

SECTION SEVEN

DISCLOSURES ON INDEPENDENT AUDITORS’ REPORT

I. Explanations on Independent Auditors’ Report

Group’s consolidated financial statements and footnotes to be disclosed to public as of 31 December 2016 have been audited by Akis Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. (the Turkish member firm of KPMG International, a Swiss cooperative) and the auditor’s report dated 31 January 2017 has been presented with the consolidated financial statements.

II. Explanations and Footnotes Prepared by Independent Auditor

None.

299 ABANK 2016 ANNUAL REPORT Contact Information for Head Office and BRANCHES

ABank operates in Turkey as a deposit bank backed by private capital.

Head Office Address: Cumhuriyet Cad. No: 46, 34367 Şişli - Istanbul / TURKEY Phone: +90 212 315 65 00 Fax: +90 212 225 76 15 Website address: www.abank.com.tr Email address: [email protected] Trade Registry Number: 280445-228027

Contact information for our branches are accessible on the Bank’s website, under “Our Branches and ATMs” within the “About Us” section.

300 CONTENTS

PRESENTATION 75 Internal Audit 04 Our Vision, Mission and Strategy 75 Summary Board of Directors Report Submitted to the 06 Agenda for the Annual General Meeting General Assembly 07 Shares, if any, Held in the Bank by the Chairman and 76 Organisational Structure Members of the Board of Directors, Members of the Board 78 Explanations and Notes about the Bank’s Risk Group of Auditors, Chief Executive Officer and Executive Vice 78 Dividend Policy Presidents 79 Grants and Charitable Donations Made and Expenses 08 Capital and Shareholder Structure Incurred in Conjunction with Social Responsibility Projects 09 The Commercial Bank in Brief in 2016 10 ABank’s History & Market Position 79 Remuneration Paid to the Board of Directors and Senior 11 Financial Indicators Management 14 Milestones in the History of ABank 80 Managers of Internal Systems 18 2016 Highlights 80 Affiliated Companies Report 20 Message from the Chairman 81 Outsourced Services Pursuant to the Regulation on Banks’ 22 Message from the CEO Procurement of Support Services 28 2016 Activities 83 Annual Report Compliance Opinion 28 Corporate Banking 84 Statement of Responsibility for 2016 Annual Report 30 Commercial Banking 85 If an Ordinary General Assembly Was Held during the Year, 33 Retail Banking Information on the Assembly, Including the Date of the 36 Treasury Group Meeting, Decisions Reached, and Actions Taken in Due 38 Financial Institutions Course 41 Operations 42 Human Resources FINANCIAL INFORMATION AND RISK MANAGEMENT 46 Information Technology 85 Financial Position, Profitability and Solvency 51 ABank’s Financial Subsidiaries 86 Evaluation of the Bank’s Capital Strength and Board of MANAGEMENT AND CORPORATE GOVERNANCE Directors’ Assessments PRACTICES 86 Achievement of Targets Set in Previous Periods, Implementation of General Assembly Resolutions, 54 Corporate Governance Any Reasons for Failure to Meet Targets or Implement 59 Names, Terms of Office, Responsibilities, Educational Resolutions, and Assessments Background and Professional Experience of the Chairman 87 Information on Special and Public Audits during the Fiscal and Members of the Board of Directors, Members of the Year Board Audit Committee, Chief Executive Officer, Executive 87 Administrative or Judicial Sanctions Imposed on the Bank Vice Presidents, and Managers of International Systems and the Members of the Board of Directors due to Actions Units in Violation of Applicable Laws 61 Terms of Office and Professional Experience of Auditors 88 Lawsuits Filed against the Bank with a Potential Impact on 62 Activities of the Board Credit Committee and the the Bank’s Financial Standing and Operations, and Their Committees Reporting to, or Set Up to Assist the Board of Possible Outcomes Directors under the Risk Management Systems Pursuant to 88 Credit Ratings Assigned to ABank and Related Explanations the Regulation on the Internal Systems of Banks, Names 89 Financial Highlights and Key Ratios for the Five-Year Period and Principal Duties of the Chairmen and Members Serving 90 Contact Information for Head Office and Branches on Such Committees 65 Risk Management Policies by Risk Type 68 Senior Management 73 Regulatory and Compliance 74 Internal Control 1991 being... 2016 ABANK 2016 ANNUAL REPORT

Cumhuriyet Cad. No:46 Şişli 34367 Istanbul T: +90 212 315 65 00 www.abank.com.tr 2016 ANNUAL REPORT

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