Turkish Banking Sector and Turkish Banks November 2008 Sadrettin Bagci Tel : Fax:

2 TURKISH BANKING SECTOR Past Performance Recent Trends Outlook

3 BANKING SECTOR – Continous Growth since 2002 Source: The Banks Association of Turkey CAGR: 38.4% CAGR: 20.9% CAGR: 21.2% CAGR: 21.9% 1

4 BANKING SECTOR – Penetration Improved as well Source: The Banks Association of Turkey and the Central Bank of Turkey Significant growth performance over the last six years, beating the 19.2% CAGR in Nominal GDP 2

5 BANKING SECTOR – Main Drivers of the Loan Growth post 2002 Source: The Banks Association of Turkey and the State Planning Organization While Pent-up demand during the crisis period in 2001 and Gradual decline in interest rates have helped for increasing loan demand after 2002, Easing public sector borrowing requirement due to falling domestic debt stock has enabled banks to shift their focus from domestic borrowing instruments to loans 3

6 BANKING SECTOR – Share of Foreign Banks has Increased Meanwhile the Turkish Banking Sector has attracted the interest of foreing banks thanks to the Strong growth potential backed by the favorable population dynamics, strengthening economic activity and of course with the EU accession progress. The share of foreign banks in the Turkish Banking Sector has significantly increased from a mere 3% at end 2002 to around 26% as of June Source: Banking Regulation and Supervision Agency 4

7 BANKING SECTOR – Players w.r.to Ownership 5

8 BANKING SECTOR – Recent Growth Trends 6

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10 BANKING SECTOR – Composition of Assets & Funding Source: Banking Regulation and Supervision Agency While loans are the main placement item with 53% share in total assets as of August 2008, The funding side is mainly composed of deposits with 61% share 7

11 BANKING SECTOR – Composition of Loans Source: The Central Bank of Turkey 8

12 BANKING SECTOR – Interest Rates Source: The Central Bank of Turkey and Istanbul Stock Exchange Source: The Turkish Treasury and the Central Bank of Turkey 9

13 BANKING SECTOR – Liquidity Ratios have Diminished but Still at Comfortable Levels Source: Banking Regulation and Supervision Agency – Monthly Bulletin Compared to a year ago the 1 Week and 1 Month Liquidity ratios have been following a declining path, but we believe these levels are still strong for our banking sector 10

14 BANKING SECTOR – Capital Strength is Fair Enough Source: Banking Regulation and Supervision Agency – Monthly Bulletin The sector’s Capital Adequacy Ratio (CAR) stood at 17.7% in August 2008, indicating a 123bps decline with respect to December 2007 and a 96bps decline from August The inclusion of operational risk since June 2007 and the increasing risk weighting of non-cash loans since January 2008 all played a role in the decline in CAR rates in

15 BANKING SECTOR – Comparison of Capital Strength Source: IMF Global Financial Stability Report – October

16 BANKING SECTOR – Comparison of NPLs may become a Major Problem Source: Banking Regulation and Supervision Agency – Monthly Bulletin Though we still feel confident about the NPL ratio of the sector, which is 3.2% as end of August 2008, the possibility of further slow-down in Euro Zone economy may pave for a rise. Given that our exports to Euro Zone constitutes almost half of the total exports of Turkey, the importance of the Euro area economic growth becomes more significant. 13

17 BANKING SECTOR – Comparison of NPLs Source: IMF Global Financial Stability Report – October

18 BANKING SECTOR – Short FX Positions were Cut Recently Source: Banking Regulation and Supervision Agency – Weekly Bulletin We had observed that banks reduced their on balance short FX positions from over US$14bn in mid August 2008 to around US$5.2bn by end of October Although the on balance short FX positions are mostly hedged (net short FX position of the system is US$1.3bn as of 31 October 2008), we still harbour some doubts regarding the quality of the hedging. 15

19 BANKING SECTOR – Profitability has slowed down Source: Banking Regulation and Supervision Agency – Monthly Bulletin We haven’t observed that a severe deterioration in the top-line growth yet but especially the increasing provisioning and the higher OPEX growth compared to the overall revenue growth, we face with a decline in the profitability ratios. We are almost sure that the economic imbalances will result in a further slow down in the profitability ratios in the following three to nine months time. 17

20 BANKING SECTOR – Satisfactory Top-Line Growth Source: Banking Regulation and Supervision Agency – Monthly Bulletin As Spread and Net Interest Margin (NIM), we have observed a slow-down in the pace of top-line (Net Interest Income) growth. It is lightly above 20% YoY, but the growth level was higher in early Although we think the growth pace is adequate at the moment, due to the sudden jump in the interest rates started late in September 2008 is expected to further put pressure on spread and margins. 18

21 BANKING SECTOR – Comparison of Profitability Source: IMF Global Financial Stability Report – October

22 BANKING SECTOR – Consumer Confidence Source: The Central Bank of Turkey The latest survey is as of September 2008, a lot has changed since then. But we belive the consumer confidence should be knocked-out for the time being, given the strong relationship between the exchange rate and the consumer confidence. On top of that the ongoing interest rates in the market limits the borrowing possibility. 20

23 BANKING SECTOR – Portfolio Preferences Foreign investors have more faith in the Turkish Capital Markets 21

24 BANKING SECTOR – Outlook Short-Term Outlook Going forward we expect the high interest rate environment to prevail during the rest of Banks are likely to end up the year with around 35% YoY loan growth. We expect deposit growth to be around 25% YoY in Long-Term Outlook Security portfolio build up will gain some pace and the structure of the securities is expected to turn out to be floating rate rather than fixed rate securities. We forecast the loan growth at 16% in 2009 and deposit growth at around 20%. Thanks to the postponement of Basel-II, which would be in effect starting from 2009 according to the previous plans, banks will be able to meet the necessary capital requirements. Syndication roll-overs will not be a major problem for Turkish banks in our view. We expect the banks providing the four main criteria to outperform the market going forward. These are: Sufficient liquidity Wide funding base Strong capitalization Low OPEX 22

25 BANKING SECTOR – ISE Total vs ISE Listed Banks Source: Istanbul Stock Exchange There are 17 banks listed on the ISE as of today with total market capitalization of TRY62bn (US$41bn) While banks constitute 35% of the total market capitalization of the ISE total, the trading volume of banks is more significant at slightly over 50% in

26 BANKING SECTOR – ISE Banks’ Performance in the last one year Source: FinansInvest Research Banking sector index has fallen by almost 60% compared to a year ago. Banks have also underperformed the ISE-100 by 15% in the last one year. 24

27 BANKING SECTOR – Trading at their historical lows Source: FinansInvest Research Forecasts The banks in our coverage are trading very close to their historical low P/E and P/BV multiples. 25