2005 Annual Report Contents Annual Report 2005 SECTION I: INTRODUCTION 4 About Garanti 6 Key Financial Highlights 8 Garanti Financial Services Group Companies 10 Our Vision, Mission, Core Values and Strategy 12 Our Main Competitive Advantages and Market Shares 14 2005 Developments at Garanti 16 2005 Awards 18 Chairman’s Message 22 CEO’s Message 26 Garanti’s New Strategic Partner 27 2005 Business Review 27 Corporate Banking 29 Commercial Banking 31 SME Banking 35 Retail Banking 38 Garanti Masters Affluent Banking 39 Payment Systems - Credit and Bank Cards 44 Banking Through Alternative Delivery Channels 47 International Banking 48 Money and Capital Markets 50 Project Finance 51 Asset Management Services 52 Custody and Clearing Services 53 Technology and ABACUS 55 Human Resources 57 Corporate Citizenship 60 Garanti Financial Services Group Companies 72 2005 Developments in Turkey SECTION II: MANAGEMENT AND CORPORATE GOVERNANCE APPLICATIONS 76 Board of Directors and Auditors 78 Senior Management 80 Ensuring the Basis for Effective Corporate Governance 82 Information about Risk Management Policies 87 Assessment regarding Internal Control, Internal Audit, and Risk Management Systems SECTION III: FINANCIALS 90 IFRS Financial Results - Segment Reporting 93 Independent Auditors’ Report 96 Consolidated Financial Statements as of and for the Year Ended 31 December 2005 100 Notes to Consolidated Financial Statements as of and for the Year Ended 31 December 2005 145 Garanti’s Credit Ratings and Garanti according to Rating Agencies 146 Analysts Say 147 Garanti Share Performance 148 Corporate Information Addresses SECTION I INTRODUCTION About Garanti Corporate Profile Founded in Ankara in 1946, Garanti is the third largest privately-owned bank in Turkey. With more than 9,000 employees, 427 branches in Turkey, international branches in Cyprus, Luxembourg, and Malta, and representative offices in Dusseldorf, Geneva, London, Moscow, and Shanghai, Garanti provides multidimensional and high-quality financial services to its corporate, commercial, SME, and retail customers. With a portfolio of ten financial service subsidiaries, Garanti offers fully-integrated services. Among the Bank’s subsidiaries are GarantiBank International NV (the Netherlands) and GarantiBank Moscow (Russia). At end-2005, Garanti had US$ 30.9 billion in assets and US$ 19.0 billion in customer deposits on a consolidated IFRS basis. As of the same date, loans and advances to customers were US$ 14.4 billion on a consolidated IFRS basis. Garanti offers its customers innovative products and services. Basing its growth strategy on retail and SME banking, Garanti takes a customer-focused approach to provide a steady stream of new and creative products and services. The Bank has a well-established history of “firsts” not just in Turkey, but also worldwide. Garanti’s credit card success story is a model for the world. Garanti has had the greatest success in the credit card business. In the five years since its inception, Bonus Card, Turkey’s first chip-based, multi-branded credit and loyalty card program, has become a success story that is held in high esteem around the world and is pointed to as a model to be followed. Garanti continuously enlarges the scope of its alternative delivery channel services. Alternative delivery channel (ADC) utilization is highest at Garanti with 77% of all its banking transactions being handled via alternative channels. Garanti’s call center is among Turkey’s biggest and its internet bank has received international recognition as the best internet bank in Turkey for many consecutive years. Effective use of ADCs is just one of the reasons behind Garanti’s high productivity and profitability. Garanti also contributes towards enhancing the quality of social life. Realizing its social responsibilities, Garanti is committed to “continuously increase the value it creates for society and the environment”. To this end, the Bank sponsors activities related to culture, the arts, education, sports, and the environment. Its support of culture and the arts extends to international platforms. Garanti has created its own institutions to ensure that its efforts in this direction are sustained and effective. Garanti Bank’s shares are traded on the ‹stanbul Stock Exchange (ISE) under the symbol “GARAN.IS” as well as on the London Stock Exchange. See page 147 regarding stock performance. Annual Report 2005 Milestones in Garanti’s Corporate History Founded in Ankara in 1946, Garanti: - Joins the Do¤ufl Group, a privately held diversified conglomerate active in financial services, industry, and services sectors in 1983. - Makes its initial public offering and its shares begin trading on the ‹stanbul Stock Exchange in 1990. - Becomes the first company in Turkey to float its shares internationally in 1993. - Merges with Ottoman Bank, another Do¤ufl Group financial services company, in 2001. - Changes its partnership structure when GE Consumer Finance, a unit of General Electric Company, acquires a stake in the Bank. As one of Turkey’s leading banks, Garanti will continue to create value for its shareholders, customers, and employees in the years to come. Garanti’s Shareholder Structure GE Araflt›rma ve Müflavirlik Ltd, a GE-owned research house and consultancy firm, acquired 25.50% of Garanti shares from the Do¤ufl Group in 2005. The Bank’s shareholder structure as of the beginning and end of the year is shown below. 31 December 2004 Shareholder Number of Shares Nominal (YTL) Share (%) Do¤ufl Holding A.fi. 1,233,968,305,716 616,984,152.86 51.42 Do¤ufl ‹nflaat ve Tic. A.fi. 93,717,050,934 46,858,525.47 3.91 Somtafl Tar›m ve Tic. A.fi. 91,084,418,072 45,542,209.04 3.80 Do¤ufl Yap› San. A.fi. 1,319,998,614 659,999.31 0.05 Do¤ufl Nakliyat ve Tic. A.fi. 1,319,998,614 659,999.31 0.05 Do¤ufl Group Total 1,421,409,771,950 710,704,885.98 59.23 Others 978,590,228,050 489,295,114.02 40.77 Grand Total 2,400,000,000,000 1,200,000,000.00 100.00 31 December 2005 Shareholder Number of Shares Nominal (YTL) Share (%) Do¤ufl Holding A.fi. 49,740,054,236 497,400,542.36 23.69 Do¤ufl ‹nflaat ve Tic. A.fi. 7,977,711,856 79,777,118.56 3.80 Do¤ufl Nakliyat ve Tic. A.fi. 115,499,879 1,154,998.79 0.05 Do¤ufl Group Total 57,833,265,971 578,332,659.71 27.54 GE Araflt›rma ve Müflavirlik Ltd. fiti. 53,550,000,000 535,500,000.00 25.50 Others 98,616,734,029 986,167,340.29 46.96 Grand Total 210,000,000,000 2,100,000,000.00 100.00 5 Key Financial Highlights Composition of Assets TL Loans FC Loans** % YTL million US$ million Other* Tangible Assets Loans to Customers Loans to Banks Securities Focusing on real banking, Garanti Cash Equivalents 6,890 steadily increased the share of 10,016 4.7 3.3 lending on its balance sheet while 6.4 3.0 reducing its overall dependence on its securities portfolio. 39.4 46.6 4,794 A strong 76% year-on-year rise in 5.7 5.3 5,700 Turkish lira lending resulted in rapid 34.7 31.3 growth in the share of TL loans on the Bank’s balance sheet pointing further evidence of Garanti’s 9.1 10.5 continued support for real-sector 2004 2005 2004 2005 2004 2005 activities. *Other assets include intangible assets, **Foreign currency, not inflation adjusted investments in equity participations, deferred tax assets and other assets Composition of Liabilities and TL Deposits FC Deposits** Shareholders’ Equity YTL million US$ million % Shareholders’ Equity Other Funds Borrowed Repos Deposits from Customers Deposits from Banks 12,797 10,249 11.0 9.8 9,293 4.1 4.0 13.0 16.2 3.0 5.7 8,574 64.9 61.7 With the highest demand deposit level among the banks in the Turkish banking sector, Garanti continued to increase demand 3.7 2.6 deposit to total deposit ratio in 2004 2005 2004 2005 2004 2005 2005. **Foreign currency, not inflation adjusted Ordinary Banking Net Fees and Commissions/ Net Fees Commissions/ Income of the Average Assets Operating Expenses Banking Segment % % YTL million Net Trading Income Net Fees&Commissions Adjusted NII 50.0 2.21 2.05 45.6 2,588 777 2,168 108 617 In line with its goal of achieving sustainable profitability, Garanti raised the level of ordinary banking revenues generated by its customer 1,443 1,809 focused strategy 19.4% to YTL 2.6 2004 2005 2004 2005 2004 2005 billion in 2005. Annual Report 2005 Garanti in 2005 - The Bank continued to grow in all lines of business, particularly in retail banking, credit cards, and SME banking. - Garanti increased its market shares, customer numbers, and penetration in different business lines while remaining an effective and influential player in money and capital markets. - In loan syndications and structured finance deals conducted during the year, Garanti secured the most favorable terms of any Turkish bank while also reinforcing its benchmark status for negotiating the best terms. - The Bank’s credit card business continued to grow strongly. Innovative products and services were introduced throughout the year to further increase customer satisfaction. The Bonus Card program that was launched in 2000 registered its fifth successful consecutive year. - The effectiveness of the Bank’s alternative delivery channels was increased. Garanti’s innovative applications, especially in ATMs, were widely applauded and admired. Financial Highlights* US$ million 2004 2005 Total Assets 22,339 30,883 Loans and Advances to Customers 8,803 14,398 Contingencies 5,203 6,306 Deposits from Customers 14,490 19,047 Shareholders' Equity 2,468 3,022 Paid-in Share Capital 1,885 2,284 Total Operating Income 1,904 2,450 Net Income 260 523 Return on Average Assets (%) 1.18% 1.91% Return on Average Shareholders' Equity (%) 10.91% 18.51% Cost/Income Ratio (%) 61.40% 57.78% US$ = YTL 1.334 as of December 2005 US$ = YTL 1.360 as of December 2004 * Based on consolidated financial statements pursuant to IFRS Cost/Income ROAA ROAE Ratio % % % Within the framework of accommodating itself to the 1.91 61.40 18.51 disinflationary environment, 57.78 Garanti outperformed the sector by continuously increasing its sources of sustainable, high-quality 1.18 revenues and improving its 10.91 operational productivity.