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The Bank’s credit monitoring department provides monthly reports to the Bank’s board of directors detailing all aspects of its credit activity, including the number of new problem loans, the status of existing non-performing loans and collections. The Bank’s senior management pays close attention to the timeliness of debt repayments and the classified loans and contingent liabilities. Prompt action is taken by the appropriate departments having responsibility for supervising and monitoring loan repayments if any principal or accrued interest repayment problems arise. Any overall deterioration in the quality of the Group’s loan portfolio or increased exposure relating to off-balance sheet contingent liabilities is brought to the attention of the Bank’s board of directors.

The determination of whether a repayment problem has arisen is based upon a number of objective and subjective criteria, including changes to the borrower’s turnover in accounts held by the Group, changes to the borrower’s economic and financial activity giving rise to the suspicion that a loan is not being used for its original purpose, applications to change credit terms, failure of the borrower to fulfill the terms and conditions of its loan agreement and refusal of a borrower to cooperate in supplying current information.

The Group classifies its loan portfolio in accordance with current Turkish banking regulations in its BRSA Financial Statements. See “Turkish Regulatory Environment.” In accordance with the applicable regulations, the Group makes specific allowances for possible loan losses. These specific allowances are increased gradually so that the reserves reach a ceiling level of 100% of the non-performing loan, depending upon the type of collateral securing such loan. As noted above, a loan is categorized as non-performing when interest, fees or principal remain unpaid 90 days after the due date.

The entire principal amount of non-performing loans is added to provisions. The Group generally does not write-off non-performing loans, regardless of the amount of time they have been outstanding. When a loan is placed on non- performing status, interest income ceases to accrue. A non-performing loan is restored to accrual status when all arrears have been paid and it is considered likely that the customer will continue timely performance. A non-performing loan may also be restored to accrual status if it is determined that the repayment of principal and interest is reasonably assured on collection, such as in the case when all amounts due under a loan are fully collateralized by cash or marketable securities and actions have commenced to foreclose on the collateral; however, more typically the Group seeks to collect on non-performing loans and close its commitments.

As of December 31, 2012, the Turkish banking regulations required Turkish banks to provide a general reserve, excluding loans in arrears, calculated as 1.0% of the performing cash loans portfolio plus 0.2% of the performing non-cash loans portfolio plus 2.0% of the portfolio of cash loans performing but under close watch plus 0.4% of the portfolio of non- cash loans performing but under close watch. These ratios continue as of the date of this Base Prospectus.

The Group’s non-performing loans amounted to TL 2,925,315 thousand, TL 2,220,838 thousand and TL 2,427,742 thousand as of December 31, 2012, 2011 and 2010, respectively. The Group’s ratios of non-performing loans to total cash loans and to total cash and non-cash loans were 4.2% and 3.4%, 3.8% and 3.0% and 5.4% and 4.3%, respectively, as of December 31, 2012, 2011 and 2010. The Group’s ratio of allowances for possible loan losses as a percentage of non- performing loans excluding allowances made on a portfolio basis to cover any inherent risk of loss was 78.6%, 79.8% and 96.0% as of December 31, 2012, 2011 and 2010, respectively.

Analysis of the Allowance for Loan Losses

The following table sets forth an analysis of the movements in the allowance for possible losses on loans for the Group for each year indicated below:

2010 2011 2012

(TL thousands)

Balances at beginning of year ... 2,171,275 2,330,316 2,109,487 Recoveries... (584,148) (574,404) (430,467)

Adjustment for currency translation... (26) (2,119) (644)

Provision released ... 809,371 355,550 1,071,971

Provision, net of recoveries... 2,396,472 2,113,581 2,750,347

Loans written-off during the year ... (66,156) (4,094) (11,899)

Balances at end of year... 2,330,316 2,109,487 2,738,448

The following table sets out certain information relating to the Group’s provisions for losses on cash and non-cash credit exposure as of the dates indicated:

As of December 31,

2010 2011 2012

(TL thousands)

Cash ... 2,396,472 2,113,581 2,750,347

Non-cash commitments and contingencies... 92,704 67,937 36,173

Total ... 2,489,176 2,181,518 2,786,520

The following table sets out certain information relating to the Bank’s non-performing loans and related provisions based upon the consolidated BRSA Financial Statements as of the dates indicated.

As of December 31, 2010 2011 2012 NPLs Total Provision % Reserved NPLs Total Provision % Reserved NPLs Total Provision % Reserved Risk Category Doubtful ... 219,301 219,301 100% 176,438 176,438 100% 520,449 519,895 100% Substantial... 92,051 67,426 73% 157,613 48,991 31% 370,402 76,679 21% Loss ... 2,031,625 2,028,979 100% 1,877,232 1,874,503 100% 1,925,976 1,912,454 99% Total loans classified ... 2,342,977 2,315,706 99% 2,211,283 2,099,932 95% 2,816,827 2,509,028 89% Gross loans... 44,616,242 58,168,853 69,316,699

Cash loans, net.. 44,588,971 58,057,502 69,008,900

IFRS Provisioning

For the purposes of IFRS, the Group makes specific allowances for possible loan losses on a case-by-case basis and actual allowances established take into account the value of any collateral or third party guarantees. Allowances for possible loan losses are defined as the difference between the carrying amounts and the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted at the original effective interest rate of the loan. The allowances are based upon the Group’s own loss experience and management’s judgment as to the level of losses that will most likely be recognized from assets in each credit risk category by reference to the debt service capability and repayment history of the borrower. The allowances for possible loan losses in the IFRS Financial Statements are also determined on the basis of existing economic and political conditions. The Bank is not in a position to predict what changes in conditions will take place in Turkey and what effect such changes might have on the adequacy of the Group’s allowances for possible loan losses in future periods.

individually significant, and groups of assets that are individually significant but that were not found to be individually impaired. A collective allowance for groups of homogeneous loans is established using statistical methods such as roll rate methodology or, for small portfolios with insufficient information, a formula approach based upon historic loss rate experience. The roll rate methodology uses statistical analysis of historical data on delinquency to estimate the amount of loss. The estimate of loss arrived at on the basis of historical information is then reviewed to ensure that it appropriately reflects the economic conditions and product mix at the reporting date.

V. Deposits

The Group’s deposits consist of demand deposits (current accounts) and time deposits from customers and banks. As of December 31, 2012, the Group’s major source of funds for its lending and investment activities were deposits from non- bank customers, which accounted for approximately 67.6% of the Group’s total liabilities (down from 70.2% on December 31, 2010, which increased from 68.0% on December 31, 2010). Loans and advances from banks excluding subordinated liabilities accounted for 8.6% of the Group’s total liabilities as of December 31, 2012, compared to 10.8% as of December 31, 2011 and 10.0% as of December 31, 2010. Other sources of funding include (inter alia) deposits from banks, obligations under repurchase agreements and, to a lesser extent, overnight bank deposits.

The following table sets out the Group’s deposits and other sources of funding as of the dates indicated:

As of December 31,

2010 2011 2012

(TL thousands, except percentages)

Deposits from customers ... 45,975,514 68.0% 58,263,128 70.2% 64,219,035 67.6%

Deposits from banks... 1,990,343 2.9% 3,504,446 4.2% 4,244,689 4.5%

Obligations under repurchase agreements. 8,213,632 12.2% 5,981,675 7.2% 8,490,891 8.9%

Funds borrowed... 6,748,206 10.0% 8,952,996 10.8% 8,132,349 8.6%

Debt securities issued ... – – 493,000 0.6% 2,372,748 2.5%

Subordinated Liabilities ... – – – – 1,630,188 1.7%

Other liabilities... 4,698,225 6.9% 5,815,062 7.0% 5,923,290 6.2%

Total ... 67,625,920 100.0% 83,010,307 100.0% 95,013,190 100.0%

The following table sets out certain information relating to the Group’s deposits in Turkish currency and foreign currency as of the dates indicated:

As of December 31,

2010 2011 2012

(TL thousands, except percentages)

TL deposits ... 35,615,414 74.3% 44,102,407 71.4% 50,916,322 74.4%

Foreign currency deposits(1)... 12,350,443 25.7% 17,665,167 28.6% 17,547,402 25.6%

Total ... 47,965,857 100.0% 61,767,574 100.0% 68,463,724 100.0%

(1) Foreign currency risk-bearing deposits.

In recent years, the foreign currency distribution of deposits has trended in favor of Turkish Lira as a result of lower inflation, reduced exchange rate fluctuation and the significant decline in interest rates.

Deposits from Customers

Customer current accounts generally bear no interest and can be withdrawn upon demand. For customer time deposits, different interest rates are paid on the various types of account offered by the Group. The Group’s deposits from customers mainly are comprised of savings deposits, commercial deposits, foreign currency deposits and obligations under repurchase agreements.

their cash in accounts at T.C. Merkez Bankası, Ziraat, Halkbank or the Bank. As of December 31, 2012, approximately 33.04% of the Bank’s deposits had been made by such entities and by state-owned enterprises, compared with 30.5% as of December 31, 2011 and 31.3% as of December 31, 2010. See also “The Group and its Business – Operations – Deposits.” The Bank believes that it provides such entities with banking services competitive both in price and quality with private sector banks. Nevertheless, the Bank believes that it needs to diversify further its deposit base to reduce reliance upon deposits by state-controlled entities. See “Risk Factors-Risks relating to the Group and it Business – Liquidity Risk and Deposit Concentration Risk.”

The following table sets out a breakdown of the Group’s deposits from customers and financial institutions by composition as of the dates indicated:

As of December 31,

2010 2011 2012

(TL thousands)

Savings and certificate of deposit(1)... 12,413,894 15,030,549 17,090,977

Demand deposits ... 1,460,236 1,671,682 2,046,323

Time deposits ... 10,953,658 13,358,867 15,044,654

Public, commercial and other(2)... 21,219,514 27,210,452 30,988,699

Demand deposits ... 4,715,479 5,884,372 7,099,585 Time deposits ... 16,504,035 21,326,180 23,889,114 Interbank... 1,990,343 3,504,446 4,244,689 Demand deposits ... 12,578 34,116 15,263 Time deposits ... 1,977,765 3,470,330 4,229,426 Foreign currency ... 12,342,106 16,022,027 16,139,359 Demand deposits ... 1,077,084 1,593,129 1,900,858 Time deposits ... 11,265,022 14,428,898 14,238,501 Total... 47,965,857 61,767,574 68,463,724

(1) Represents TL deposits taken from retail customers.

(2) Represents TL deposits taken from government-related corporates, SMEs and other entities that are not individuals.

In 2012, the average effective interest rates applied to customer deposits were 3.15% for US Dollars, 3.26% for euros and 8.79% for Turkish Lira. For additional information on average rates paid on deposits, see I. (Distribution of Assets,

Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential) above.

The following table sets out a breakdown of the Group’s demand and time deposits from customers as of the dates indicated (deposits from banks are not included):

As of December 31,

2010 2011 2012

(TL thousands)

Demand deposits ... 7,252,799 9,149,183 11,046,766

TL deposits... 6,175,715 7,556,054 9,145,908

Foreign currency deposits ... 1,077,084 1,593,129 1,900,858

Time deposits ... 38,722,715 49,113,945 53,172,269

TL deposits... 27,457,693 34,685,047 38,933,768

Foreign currency deposits ... 11,265,022 14,428,898 14,238,501

Total... 45,975,514 58,263,128 64,219,035 Deposits from Banks

The Group’s deposits from banks increased by 21.1% to TL 4,244,689 thousand as of December 31, 2012 from TL 3,504,446 thousand as of December 31, 2011 (itself an increase of 76.1% from TL 1,990,343 thousand as of December 31, 2010).

The following table sets out a breakdown of the Group’s demand and time deposits from banks as of the dates indicated: As of December 31, 2010 2011 2012 (TL thousands) Demand deposits ... 12,578 34,116 15,263 Time deposits ... 1,977,765 3,470,330 4,229,426 Total ... 1,990,343 3,504,446 4,244,689 VI. Return on Equity and Assets

The following table sets out certain of the Group’s selected financial ratios and other data for the periods indicated:

2010 2011 2012

(TL thousands, except percentages) Net income ... 1,297,045 1,594,720 1,594,102 Average total assets(1)... 72,095,704 85,163,439 100,711,109 Average shareholders’ equity(1)... 8,627,744 9,845,325 11,699,360

Average shareholders’ equity as a percentage of average total assets... 12.0% 11.6% 11.6%

Return on average total assets(2)... 1.8% 1.9% 1.6%

Return on average shareholders’ equity(3)... 15.0% 16.2% 13.6%

Equity to assets ratio(4)... 12.0% 11.6% 11.6% (1) Averages are calculated as the average of the opening and December 31 balances for the applicable year.

(2) Net income for the period as a percentage of average total assets. (3) Net income as a percentage of average shareholders’ equity. (4) Average shareholders’ equity as a percentage of average total assets.

VII. Borrowings and Certain Other Liabilities