REHBER jntEa i A lIANCEF INDEPENDENT ERMS 0, I > 1\ A tefers to thenetwoikofmember ns of iJfÅA!haicn ofrndependnmrhm eachone REHBER BACUMSIZ DENETIM ve YEMINLi MALI MO5AVIRLIK A4. of whkhi s;epareaadindependen;ege¢entity iller Bankasi A.5. Financial Statements As at and for the year ended 31 December 20 17 With Independent Auditors' Report Thereon Reliber Independent Auditing & Chartered Accountants Inc. 15 May 2018 This repon contains 3 pages of independent auditors' report and 34 pages of financial stalemenis and notes to the financial statements. Turan Günes§BulvaniGalip Erdern Caddesi No: 43 06550 Yldizevler Oran- Çankaya /ANKA RA Tel: (+90.312) 490 61 62 (pbx) - Faks: (+90.312) 490 61 64 rehber@rehbercon.sulting.com - wwwrehberconsulting.corn Segmnenler V.D. 734 005 5266 Tic. Slc. 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L F;+��i� �� � qvj � _ '+°- ``°- � � � r�''� �> � �[ и CJ 4 V �:'i �"' � L7� u,J гfr ' �� а Е Е N �` Е Е ° в' � а� � с7С � ,�r [/� г, t-. ,� д О �� � С О � �4 р�[} М с �ry С С '1,J• � G С_ � С/� � a�i �' � а и Е �' _ . � (д `� �7 > . У у �r :� :6 % > и й � � � С и' � и � ` � eui � гл � �,л ьi. !J .`r�' V � [I� � w a�i � e�i �, г, ^�... к СС! � С� с`i � С � 4-. �.. "Э г г �. � Е '� _ � r г= ,с г_ 'л Е �г� .. � Q R1 S ^ i Q л 4�, G �.,,'''j г�Э м .-. ` О. � � ,. i� �' г6 м � � 4] F--� � G� С с L'.. L го л G� � cG иЭ С" �.,n го Е ., " " . . Е Е � � � г.�J fl . L .:у О у `� � , _ :i г.i G О ' О '��.' '6 . С �e�.�i . , Г_у � S G 4 � � 4 � ,J � ` fJ :.J V �� � V у .�J j ^ U FjЧ а? L а :а sa � :сз дf Н � = `, b :е :а �- � :s `п �° '� G � � � :д 4 J J С � F i�.. � � � :д :б С V '.�� Э - i.�- � .3 .f .�., и г�. �. т . z. � ; ^ � ^^ х - 1 N - � � :, iLLER BANKAS] A.$. Staterrient of Cash Flows For the Year Ended 31 Decernber 2017 Wurrenc-Y -Thousands qjYm-kish Liras (7'R))) 2017 2016 Cash flows froin operating activities Interest received 1,469,042 1,189,078 Interest paid (29,869) (338) Fee and commissions received 14,579 13,854 Trading incorne 142,948 91,305 Advance payments to personnel and suppliers (287,930) (265,967) Incorne taxes paid (15,007) (6,892) Other (207,356) (184,552) Cash flows frorn operating activities before changes in operating assets and liabilities 1,086,408 836,488 Changes in operating assets and liabilities Due frorn banks 12 24 Loans and advances given (5,909,275) (3,3 50,272) Other assets (205,115) (111,081) Loans received 464,936 359,141 Other liabilities and provisions 444,252 1,158,565 Net cash provided by / (used in)_ opcra activities (4,118,7U2 1,107,135) Cash flows from investing activities Purchases of tangible assets 17 (139,505) (208,464) Proceeds frorn the sales of tangible and intangible assets 240,261 282,517 Net cash usedjn irivesting_activities 100,756 74,053 Cash flows from finance activities Other (Capital) 1,050,024 864,812 Net cash provided by finance activities 1,050,024 864,812 Net increase in cash and cash equiva lcnts (2,968,002) (168,270) Effect of exchange rate fluctuations oil cash and cash equ ivalents held 3,087 11,773 Cash and cash equivalents at I January 26 4,741,770 4,898,267 Cash and cash equivalents at 31 Decernbe-r 26 1,776,855 4,741,770 BER U LT I N G R F r EP Ab .Z DENF vT-Y -MjNL MAL $AviRV-1K A-S, The accompanying notes Eire an integral part of these financial statements. ILLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated linancial Statements (CurencY -Thousands ?f Titrkish Iras OIR) 1. General Information about Bank iller Bankasi A.$. ("the Bank") was originally incorporated as "Belediyeler Bankasi" (Municipalities Bank) under Law no: 2301 on I June 1933. The Bank was reincorporated under Statute 4759 concerning Iller Bank dated 13 June 1945 with its new name "iller Bankasi" ("Provinces Bank"), which also reflected its expanded duties, authorities, and responsibilities. With the Law no: 6107 governing iller Bankasi A.$. (the Bank's governing statute) that went into force upon its publication in the Official Gazette issue 27840 dated 8 February 2011, it was reincorporated into a joint stock company while its duties, authorities and responsibilities were maintained and the name of the bank was changed as iller Bankasi Anonim $irketi (AS). The aim of iler Bankasi A.$., * To supply the financial needs of' special provinCial adin Il istrations, municipalities and subsidiaries. and local administrative Un ions that are members of these, * To develop projects regarding local common services of the public living in the border of these adin in istrations, * To give consulting service to these administrations and to help establishing technical municipal projects and infrastructure and superstructure works, * To fulfil development and investment bank functions. As of December 31, 2017; Bank gives service with 2,532 personnel with 18 regional Office operating im rural area and 17 head of department and attorneyship, research and development committee, board of directors and audit committee bureau directorate, private secretariat, press and public relations directorate and community facilities and day care center directorate. Board of Directors of Iler Bankasi A.$. Experience in Name Surname Title Date of Nomination Banking Business Mticahit DEMIRTAS 19Yer Chairman of the Board 29 September 2016 Years Refik TUZCUOOLU Vice Chairman 29 September 2016 18 Years Yusuf BUYUK Member -General Manager 08 August 2016 20 ears Felimi lUsrev KUTLU Member 22 May 2014 3 Years Mehmet YEREBAKAN Member 22 May 2014 22 Years Veli BOKE Member 29 September 2016 19 Years Yusuf DAGCAN Member 05 May 2017 38 Years DENETiM Wi:VF1NL9~Ad) MUAVjRUK A-5S ILLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Currency -Thousands of Turkish Lras b TRas 2. Basis of preparation 2.1 Statement of compliance The financial statements have been prepared iin accordance with International Financial Reporting Standards (IFRS) and its interpretations adopted by the International Accounting Standards Board (IASB), 2.2 Basis of valuation 'Tle accompanying financial statements have been prepared on a cost basis except for those financial assets held for trading that are measured at fair value, 2.3 Functional and presentation currency The accompanying financial statements are presented ini Turkish Lira ("TRY") except trading securities which are carried at fair value, which is the Bank's functional currency. Except as otherwise indicated, financial information presented in TRY has been rounded to the nearest thousand. The restatement for the changes in the general purchasing power of TRY until 31 December 2005 is based on IAS 29 ("Financial Reporting in Hyperinflationary Economies"). lAS 29 requires that financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date and the corresponding figures for previous year be restated in the same terms. IAS 29 describes characteristics that may indicate that an economy is hyperinflationary. However, it concludes that it is a matter of judgement when restatement of financial statements becomes necessary. After experiencing hyperinflation in Turkey for many years. as a result of the new economic program, which was launched in late 2001, the three-year cumulative inflation rate dropped below 100% in October 2004. Based on these considerations, resta:ement pursuant to IAS 29 has been applied until 31 December 2005 and Turkey ceased to be hyperinflationary effective from I January 2006. Restatement of statement of financial position and statement of comprehensive income items through the use of a general price index and relevant conversion factors does not necessarily mean that the Bank could realise or settle the same values of assets and liabilities as indicated in the statement of financial position. Similarly, it does not necessarily mean that the Bank could return or settle the same values of equity to its shareholders, 2.4 Use of estimates and judgements The preparation of the financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amoint recognised in the financial statements are described in notes 4 and 5. F 0 MEI I ER ly MANLMA U LK\NG N L MLrM5f6 ILLER 13ANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (CurrencY -Thousands of hrkish Liras (TR)) 2. Basis of preparation (continued) 2.5 Comparative information and restatement of prior year's financial statements The accompanying financial statements are presented comparatively to give a true and fair view of inancial position, financial and cash flow performance of the Company. When presentation and classification of financial statements change, financial statements of prior period are changed too in accordance with this new case in order to make comparison easier and these issues are explained properly. 2.6 Standards, amendments and interpretations not yet effective as of December 31, 2017: TFRS 15 Revenue arising from agreements made with customers. The new standard pLiblislied by the KGK in September 2016 which introduces a new control-based model for contracts that done customers, changing the guidance contained in present TFRS's. This new standard estimates new guidance in accounting for revenue by separating and spreading the goods and services that are included in the contract and estimating the revenue as the amount that the Company expects not to deserve, rather than the fair value. This change will be valid the accounting term to stail on after January 1, 2018. TFRS 9 Financial Instruments The TFRS 9 Financial Instruments Standard issued by the KGK in January 2017 amends the existing guidance in TAS 39 Financial Instruments: Recognition and Measurement, This version includes updated applications for the classification and measurement of financial instruments, including new forward-looking credit impairment models for the calculation of impairment in financial assets and for new general hedge accounting requirements, including guidance issued in earlier versions. In the new version of TFRS 9, applications related to the accounting and de-balance sheet of financial instruments included in TAS 39 are also carried to the new standard. TFRS 9 standard is effective for annual periods beginning on or after I JanUary 2018. IAS 7 Cash Flow Tables- Changes-Explanation As part of the [ASB's comprehensive disclosure initiative, changes have been made to the TAS 7 Cash Flow Tables standard to improve the presentation and disclosure of financial statements.With this amendment, it will be possible for the users of the financial statements to evaluate the cash-based and non-cash changes in the financing activities. This change will be valid the accounting term to start on after January 1, 2017. IAS 12 Income Taxes: Accounting oflthe Deferred Tax Assets for Unrealized Losses The amendments clarify whether a reducible temporary difference is a matter of concern only if the entity is subject to a comparison of the net book valUe and the tax base at the end of the reporting period and that the net book value of the related asset will not be affected by possible future changes or estinated recoveries,This change will be valid the accounting term to start on after January 1, 2017. BER ULT \ N G R P1R BA AS)Z DEENETIM V YEM Li MALI MUsAVIRLIK A.$ 7A7 iLLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Currency -Thousands of Turkish Liris (TRY)) 2. Basis of preparation (coninued) 2.6 Standards, amendments and interpretations not yet effective as of Decernber 31, 2016: (continued) IFRS 2 Changes of Share-Based Payment Processes- Classification and Measurement of Share Based Payment Processes Changes in the IFRS 2 Share Based Payments standard have been made by the IASB to increase the consistency in accounting practices related to share based payments and to remove some uncertainties. With this change; the accounting for the measurement of share-based cash payments, the classification of share-based payments made by netting withholding tax and the changes in share- based payments that have been converted into cash, which are paid in cash as a vehicle based on equity is clarified. Thus, the same approach used to measure stock-based payments based on equity was adopted in the measurement of cash-based share-based payments. Stock-based payments, net of withholding tax, will be recognized as payments made by giving financial instruments based on equity if certain conditions are met. This change will be valid the accounting term to start on after January 1, 2018. The Company assesses the possible eflects of tlie adoption of this amendment on TFRS 2 on the financial statements.UFRS'deki iyiletirmeler Uygulaniadaki standartlar iyin yayinlanan "UFRS'de YiIlik lyileptirmeler / 2014-2016 DOnemi" a agida sunulmutur. UFRS 12'deki degi5iklikler I Ocak 2017 tarihinden itibaren, diger degi iklikler ise I Ocak 2018 tarihinden itibaren gegerli olup erken uygularnaya izin verilnektedir. Annual improvements - Period 2014-2016 IFRS I "First Application of Iniernational Financial Reporting Standards" Explanations on financial instruments for those who will apply IFRS for the first time, benefits provided to employees and the elimination of short-term exemptions provided for the consolidation of investment enterprises under the 201 2-2014 annual improvements. IFRS 12 "Explanations on Investments in Other Businesses" In order to clarify the scope of IFRS 12, an entity shall disclose the summary financial information required to be made pursuant to IFRS 12 in the event that an investment in an associate, joint venture or associate is classified as held for sale in accordance with IFRS 5 (included in the derecognized asset group) addition of not necessary. IAS 28 "Investments in Associates and Joint Ventures" If investments in associates or joint ventures are owned directly or indirectly by entities such as venture capital funds, investment funds, securities or investment-purpose insurance funds, the ability to apply the fair value method in accordance with IFRS 9 for investments in associates or joint ventures. IAS 40 Transfer of Investment Properties Amendments to IAS 40 Amendments to Investment Property have been published by the IASB to provide solution for the uncertainty about the events that provide evidence of transfers from investment property to other asset groups and from other asset groups to investment property groups. With this amendment, it has been clarified that the management's intention of the changing the use of the asset does not constitute evidence the use of the asset has changed. This change has to be supported by evidence. Therefore, when an entity decides to exclude an investment property from development, the property is continued to be treated as an investment property until the financial statement is excluded (from the financial statements) and is not reclassified as a stock. Similarly, when the entity begins to restructure its existing investment property to continue to be used in the same manner in the future, it will continue to be classified as investment property and will not be classified as real estate used by its owner during the restructuring. This change will be valid the accounting term to start on after January 1, 2018. 0E3EN REH #MDA , E4 DENETIM VE Y _M1NL MAL MAVIRUK A. ILLER BANKASI A.$. As of 3 1 December 2017 Notes to the Non-consolidated Financial Statements (Currency -Thousands of Turkish Liras (TRY)) 2. Basis of preparation (continued) 2.6 Standards, amendments and interpretations not yet effective as of December 31, 2016: (continued) IFRS Interpretation 22 - Foreign Currency Transactions and Advance Amounts This interpretation. issUed by the K(K in December 2017, is applicable to assets or liabilitics that are accountcd for by the entitics as prepaid expenses or ad\ance receipts in the non-monetary item and denominated in loreign currencies The date of transaction \\ ill he the date of initial recognition ol an asset relating to prepa\iment or n obligation related to dleferred income in deterimining the date on which the exchange rate is to be used. If there is more than one ad\ ance Li\ei or taken in advance, a separate transaction date ImIust he specilled Ior each advance ameouInt. Tie elective date of IFRS Comment 22 is the reporting periods beginning after I January 2018. IFRS 16 Leasing Transactions The new IFRS 16 Leasing Transactions Standard was issued by the IASB on January 13, These standard leases are subject to amendments to the existing lAS 17 Leases, IFRS Comment 4 Determination of whether a settlement includes lease and IAS 15 Operating Leases - Incentives standards and interpretations, and to amendments to lAS 40 Property of Investment Property, in which the recognition of such leases is entered. IFRS 16 removes the dual accounting model for leaseholders from the existing practice of leasing transactions in the balance sheet and the operating lease transactions are shown off balance sheet. Instead, a single balance sheet-based accounting model is presented similar to existing leasing accounting. Recognition for leaseholders continues to be similar to existing practices. The amendment will be effective for annual periods beginning on or after I January 2019 and early application is permitted for entities applying the IFRS 15 Customer Contracts Revenue standard. IFRIC 23 Uncertainties regarding Income Tax Transactions On 17 June 2017,an Interpretation of Uncertainties Regarding the Operations of Income Tax IFRIC 23 by the IASB published to determine how the uncertainties related to the calculation of income taxes would be reflected in the financial statements. There may be uncertainties as to how tax regulations will be applied to a particular transaction or situation, or whether the tax authority will accept tax transactions from a company. IAS 12 "Income Taxes" provides guidance on how to account for current and deferred tax, but does not provide guidance on how to account for the effects of these uncertainties on the financial statements. IFRIC 23 introduces additional requirements to the provisions of IAS 12 by clarifying how the effects of the uncertainty about income taxes in accounting for income taxes will be reflected in the financial statements. Effective date of this Interpretation is permitted, with allowing periods starting on after i January 2019. 3. Significant accounting policies The accounting policies set out below have been applied constantly to all periods presented in these financial statements and have been applied consistently by the Bank. RE t DA s.N.TInM VEf MI MAIj U AVIRUKA.$ 9 ILLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Currency -Thousands of Turkish Liras (TR/II? 3. Significant accounting policies (conliwed) 3.1 Foreign currency transactions Transactions in foreign currencies are translated into the respective functional currency of the Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. All foreign currency differences are recognised in profit or loss. Foreign currency translation rates used by the Bank are as follows: EUR / TRY USD / TRY 100 Japan Yen fullu) (fu ll) (full) 31 December2017 4,5478 3,8104 3.3694 31 December2016 3.6939 3.53 18 3.0264 3.2 Interest income and expense Interest income and expense are recognised in the profit or loss using the effective interest method, The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Bank estimates future cash flows considering all contractual terms of financial instrument, but not future credit losses. The calculation of the effective interest rate includes all fees and points paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue ofa financial asset or liability Interest income and expense presented in the statement of comprehensive income statement include; * the interest on financial assets and liabilities at amortised cost on an effective interest rate basis 3.3 Fees and commission Fees and commission income, including account servicing fees. investment management fees, sales commission and placement fees are recognised as the related services are performed. 3.4 Net trading profit Net trading profit comprises all realised and unrealised foreign exchange differences. 3.5 Dividends Dividend income is recognised when the right to receive the payments is established. 3.6 Leasing payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. BER ***LT IN.G REH F A I DENETIM IE YE N AL_ U UAVIRLiK A.t 10 iLLER BIANKASI A.S. As of 31 December 2017 Notes to the Non-consolidated Financial Statements ICurrencyi- -Thousands o' Turkish Lras (TRY)) 3. Significant accounting policies (continued) 3.7 Income tax expense Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to items recognised directly in equity or other comprehensive income. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and deferred tax liabilities are offset if there is a legally enforceable right to offset current tax liabilities against current tax assets, and they relate to income taxes levied by the same authority on the same taxable entity. A deferred tax asset is recognised for unused tax loss, and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 3.8 Financial assets and liabilities Recognition The Bank initially recognises cash and balances with Central Bank, due from banks, interbank noney market placements, loans and advances and funds borrowed on the date at which they are originated. Regular way purchases and sales of financial assets are recognised on the trade date at which the Bank commits to purchase or sell the asset. All other financial assets and liabilities (including assets and liabilities designated at fair value through profit or loss) are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is initially measured at fair value plus (for an item not subsequently measured at fair value through profit or loss) transaction costs that are directly attributable to its acquisition or issue. Classification See accounting policies 3.9, 3.10, 3.11, 3.12 and 3.17. Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Bank is recognised as a separate asset or liability. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. .0H NR O[F. )NFTIM vi Nil,A I MAL AOAVROK I I iLLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (CurrencY -Thousands tf Turkish Iras TR (TM 3. Significant accounting policies (continued) 3.8 Financial assets and liabilities (continued) Offetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Bank has a legal right to set off the recognised amounts and it intends to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted Under IFRSs, or for gains and losses arising from a group of similar transactions stich as in the Bank's trading activity. Amortised cost measureient The amortised cost of a Financial asset or liability is the arnount at which the Financial asset or liability is measured at initial recognition. minus principal repayments, plus or minUs the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Fair value measurement Fair value is the amount for which an asset could be exchanged, or liability settled, between knowledgeable, willing parties in an arm's length transaction on the measurement date. When available, the Bank neasUres the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis. If a market for a Financial instrument in not active, the Bank establishes fair value using a valuation technique. Valuation techniques include net present value techniques, the discounted cash flow method, comparison to similar instrtIments for which market observable prices exist, and valuation models. Identification and measurement ofin/)airment At each reporting date, the Baik assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. 3.9 Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, Unrestricted balances held with Central Bank and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitnients. Cash and cash equivalents are carried at amortised cost in the statement of financial position. 3.10 Due from banks and interbank money market placements Due from banks and interbank money market placements are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Due from banks and interbank money market placenents are initially measured at fair value plus incremental direct transaction costs, and subseqUently measured at their amortised cost using the effective interest method. VE FE MAI MOJ$AVIRUK A.$ 12 ILLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Currency -7housands of Turkish Liras 0TR)) 3. Significant accounting policies (continued) 3.11 Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Bank does not intend to sell immediately or in the near term. In connection with the establishment law of the Bank, only local administrations can use loans. Collaterals of the loans are retaining potable water, terminal, rental, etc. income of municipalities as well as the Bank transferred shares of general budget tax income for distribution to municipalities as warranties. 3.12 Investment securities Investment securities are initially measured at fair value plus, in case of investment securities not at fair value through profit or loss, incremental direct transaction costs, and subsequently accounted for depending on their classification as either held-to-maturity, fair value through profit or loss, or available-for-sale. (i) Held-to -maturitV As at 31 December 2016 and 2015, the Bank does not have any investment securities held-to-maturity. fli) Fair value thiough profit or loss Trading securities Trading securities that the Bank acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets are initially recognised and subsequently measured at fair value in the statement of financial position, with transaction costs recognised in profit or loss. (i) Available-for-sale Available-for-sale investments are non-derivative investments that are designated as available-for-sale or are not classified as another category of financial assets. Unquoted equity securities whose fair value cannot reliably be measured are carried at cost less impairment losses. All other available-for- sale investments are carried at fair value. 3.13 Tangible Assets Recognition and measu-ement Tangible assets, that are bought before January 01, 2006, will be reflected from December 31, 2005 inflation adjusted cost value, and tangible assets that are bought after January 01,2006 will be reflected by decreasing accumulated depreciation and permanent loss in value from cost of purchasing. Cost includes expenditures that are directly attributable to the acquisition of the asset. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and are recognised net within other operating income in profit or loss. Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. R M BER F1 E R G61 Z DENETIM VE VyMI Nti AiLMU$AiKA 1 3 ILLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Currency -Thousands of Turkish Lirs (Ti))) 3. Significant accounting policies (continued) 3.13 Tangible assets (continued) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets under finance leases are depreciated over the shorter of the lease terri and their useful lives. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Motor vehicles 5 years Furniture and fixtures 3-10 years Buildings 50 years Depreciation methods and useful lives are reassessed at each financial year-end and adjusted if appropriate. 3.14 Investment property investment property is property held either to earn rental income or for capital appreciation or both, but not for sale in the ordinary course of business, use in production or supply of goods or services or for administrative purposes. Investment property is measured at cost, less accumulated depreciation and impairment losses, The estimated Useful life for investment property is 50 years. 3.15 Intangible assets Intangible assets, that are bought before January 01, 2006, will be reflected from December 31, 2005 inflation adjusted cost value, and intangible assets that are bought after January 01, 2006 will be reflected by decreasing accuIulated amortisation and depreciation and permanent loss in value from cost of purchasing. Intangible assets comprise purchased software. Amortisation is recognised inl profit or loss on a straight-line basis over the estimated useful life of the software, from the date that it is available for Use since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives of software are four to fifteen years. Arnortisation methods and useful lives are reassessed at each financial year-end and adjusted if appropriate. 3.16 Impairment of non-financial assets The carrying amounts of the Bank's non-financial assets, other than investment property and deferred tax assets are reviewed on each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset's recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in profit or loss. 4BEM 'IF. MnI AL- A V VA$1 iLLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Currencv - Thousands of"Turkish Lras T10 3. Significant accounting policies (conthined 3.16 Impairment of non-financial assets (continued) An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 3.17 Funds Funds are the Bank's sources of debt funding. Funds are initially measured at fair value plus incremental direct transaction costs. 3.18 Provisions A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. A provision for onerous contracts is recognised when the expected benefits to be derived by the Bank from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Bank recognises any impairment loss on the assets associated with that contract. 3.19 Employee benefits The Bank has both certain benefit and certain contribution plans as mentioned below: a. Defined benefit plans According to the applicable laws in Turkey, the Bank should pay collective seniority compensation to the workers, who had completed one year within the structure and whose employment contract is terminated due to reasons other than retirement or resignation or performance of inappropriate actions. Seniority compensation covers are being allotted under the structure of the Bank to personnel with current worker status on the basis of actuarial calculations. 'he Bank pays the severance pay to the relevant personnel for the term of employment that passes from the signing of the contract within the frame of the Statute 6107. These kinds of benefit plans are not subjected to a funding. Supply costs of benefits under benefit plan are calculated with deducting via using interest rates of state bonds on the date of the statement of financial position by using actuarial method under IAS 19 "Employee Benefits". b. Defined contribution plans The Bank obligatorily pays contributions to Social Security Funds, operated by state, for certain contribution plans. After payment of contributions, the Bank has no other liability. Contribution shares are written as expenses on the date, when they are obliged to be paid as benefits to workers expense. REP/P N IMbLDENE-TIM 1 VILMALI MOAVjptjK A5 15 iLLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Curency -iousands ofjTurkish Liras (TR)) 4. Financial risk management a) Introduction and overview The Bank has exposure to the following risks from Financial instruments: * credit risk * liquidity risk * market risks * operational risks This note presents information about the Bank's exposure to each of the above risks, the Bank's objectives, policies and processes for measuring and managing risk, and the Bank's management of capital. b) Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty fails to meet its contractual obligations, and arises principally from the Bank's loans and advances to customers and other banks. Credit risk management The Bank, activating under 77' article of 5411 numbered Banking Law, is not subject to the general credit limitations, referred Under 54"' article of Banking Law. Besides, it is granting credit lines to Municipalities and City Private Administrations against showing municipal income as securities in connection with the Law on Share Granting from General Budget Tax Income Ratio of first 100 and 200 cash loans, granted by the Bank, to total loans is 75.62% (31 December 2016: 75.83%) and %86.53. ( 31 December 2016: %86.69) Ratio of First 100 and 200 non-cash loans, granted by the Bank, to total loans is 92.3 1% (3 1 December 2016: 91.33%) and %98.60. ( 31 December 2016: %98.33) When the cash and non-cash loans are evaluated in terms of their sizes, the share of the first 100 and 200 customers in the sum of total and total assets and non-cash loans is 67.38%. (31 December 2016: 56.34%) According to (1) subparagraph of 168"' article of 5411 numbered Banking Law, the Bank has no liability to allot cover against its credits. Credit risk subjected amounts: Due from banks Loans As of 31 December Notes 2017 2016 2017 2016 Book Value 13,14 1,779,190 4,747,198 22,409,958 16,227,751 Individually impaired - Non- erformin financial assets -- -- 555 555 Gross amount -- 555 555 Allowance for impairment (555) (555) Book Value --- -- -- Neither past due nor im paired 1,779,190 4,747,198 22,409,958 16,227,751 Gross amount 1,779,190 4,747,198 22,409,958 16,227,751 Book amount 1,779,190 4,747,198 22,409,958 16,227,751 Book amount (amortised cost)1314 1,779,190 4,747,198 22,409,958 16,227,751 LT I N G16 VEf- INt AJIMU$AVRL ILLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements ('urirencv -Thousands of Turkish tros (TRY)) 4. Financial risk management (continued) In connection with the establishment law of the Bank, only Local Administrations caii use loans. Collaterals of the loans are retaining potable water, terminal, rental, etc. income of municipalities as well as Bank transferred shares of general budget tax income for distribution to municipalities as warranties. Due to being a development and investment bank, the Bank is not accepting deposits, so it is not being subjected to a liquidity crisis on the basis of deposits. Liquidity risk management in the Bank is being implemented via cash flow tables, prepared for longer periods besides daily and weekly liquid management. These tables are being used for the purpose of determining liquidity need (if available), to be required in the future and / or extraordinary conditions and usable alternative liquidity resources and placement areas by this way. While estimating the possible cash flows on next term's projections, liquidity risk, to which the Bank might be subjected to under certain possibilities, is being measured with using different scenarios. Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. More Less than 3 months than 5 2017 Book value Demand one month 1-3 months to I year 1-5 years years Assets Cash and balances with Central Bank 275 275 -- -- -- -- Due from banks 1.779190 34,599 1.744.59 -- -- -- -- Trading securities -- -- .. Loans and advances given 22.409,958 10.844 1,824,391 476007 2.202.958 9.192.451 8.703.307 24,189,423 45,718 3.568.982 476.007 2,202,958 9,192,451 8,703,307 Liabilities Loans received and funds 7,787,092 6,021,235 19,865 53.011 133,784 482,384 1,076,813 7,787,092 6,021,235 19,865 53,011 133,784 482,384 1,076,813 16,402331 (5,975,517) 3,549,117 422,996 2,069,174 8,710,067 7,626,494 11ore Less than 3 monis than 5 2016 Book valu Demand one month 1-3 nionihs to I vear 1-5 years years Assets Cash and balances with Central 295 295 Bank Due from banks 4.747,198 62,987 4,684,211 -- -- -- Trading securities -- -- -- .. -. . Loans and advances given 16,227.751 -- 2.397,176 398.625 1.662.297 6,179,187 5,590,466 20,975,244 63,282 7,081,387 398,625 1.662,297 6,179,187 5,590,466 Liabilities Loans received and Funds 7.076.952 -- 3,536,872-- 90684 2.734,338 715,058 7.076,952 -- 3,536,872 - 90,684 2,734,338 715,058 13,898,292 63,282 3,544,515 398,625 1,571,613 3,444,849 4,875,408 ERAGI DE17 VE/EMIIJtlMAL(MUAVMdLK A-$ M 17 ILLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (OurrencY -Thousands of Turkish Liras tTRY)) 4. Financial risk management (continued) d) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Bank's income or value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. iller Bankasi A$ does not accept deposits. Its banking functions, which are governed by article 77 of the Banking Law no 5411, consist firstly of extending cash and non-cash credit to municipalities and to special provincial authorities (which are the Bank's shareholders) against allotments of general budget revenues and collateral consisting of municipal revenues, both of which are transferred to the Bank, and secondly of niediating insurance. The interest rates on such transactions are determined by the Bank's Board of Directors in accordance with current conditions. Currency risk Currency risk is mentioning the potential damages, caused to banks due to negative fluctuations on foreign exchange rates. Currency risks that are given to municipalities through the Bank by World Bank and JICA; belong to municipalities regarding sub credit agreements. Foreign exchange differences belong to credits that Bank used Under the name of "Corporate Capacity Empowerment" belong to Bank. Asset and liability account items appearing at the ends of reporting periods are converted to TRY at Central Bank of Turkey (TCMB) rates. The concentrations of assets and liabilities are as follows: 2017 EUR USD Yen Total Due from banks -- -- 39,332 39,332 Loans and advances given 1,148,069 -- 502,893 1,650,962 Other assets - -- 1,511 1,511 Loans received and funds (1,148,003) -- (539,218) (1 687,221) Other liabilities -- (10) (3,251) (3,261) Net balance sheet position 66 (10) 1,267 1,323 2016 EUR U SI) Y en Total Due from banks 37,226 -- 22,960 60,186 Loans and advances given 918,180 -- 244,903 1,163,083 Other assets 2,611 2,305 1,312 6,228 Loans received and funds (956,492) -- (265,794) (1,222,286) Other liabilities (2,159) (2,315) (2,387) (6,861) Net balance sheet position (634) (10) 994 350 R BE18 V ~YEM1N ii MAL JAVRK A. 18 iLLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements ((urrencv -Thousands of Turkish Liras (TR)) 4. Financial risk management (continued) d) Market risk (continued) Sensitivity analysis A 10 percent weakening of TRY against the foreign currencies at 31 December 2017 and 2015 would have decreased equity and profit or loss by the amounts shown below. 2017 2016 ,_Equity(*)__ Profit or loss Equity(* Profit or loss Euro 6,6 6,6 (63) (63) USD (1,0) (1,0) (1) (1) Other 127 127 99 99 Total 132 132 35 35 " Equity effect also includes profit or loss effect of 10% devaluation of TRY against related currencies. The effect of a 10% increase in value of TRY against foreign currencies at December 31, 2017 and December 31, 2016, would have increased equity and profit or loss by the amounts shown below. (except for tax effect). 2017 2016 Egqu! ityk j Profit or loss Equity(*) Profit or loss Euro (6,6) (6,6) 63 63 USD 1.0 1,0 1 1 Other (127) (127) (99) (99) Total(12(12 0-)35 Equity effect also includes profit or loss effect of 10% devaluation of TRY against related currencies. Interest rate risk As the Bank is not implementing any banking transactions, other than credit facilitating to local administrations (municipalities and city private administrations), asset, liability and off-balance sheet items have no sensitivity for interest. e) Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes ssociated with the Bank's processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Bank's operations and are faced by all business entities. The operational risk items in the Bank are determined in accordance with the definition of operational risk by considering the whole processes, products and departments. The control areas are set for operational risks within the Bank and all operational risks are followed by assigning the risks to these control areas. In this context, appropriate monitoring methodology is developed for each control area that covers all operational risks and control frequencies are determined. The Bank calculated the value at operational risk in accordance with the "Computation of Value of Operational Risk" that is dated I June 2007 and 4"' part of the "Regulation Regarding Measurement and Assessment of Capital Adequacy Ratios of Banks" published in the Official Gazette dated 1 November 2006, using gross profit of the last three years, 2016, 2015 and 2014. The amount calculated as 2,164,916 TRY as at 31 December 2017 (31 December 2016: 1,857,359 TRY) represents the operational risk that the Bank may expose and the amount of minimum capital requirement to eliminate this risk. ER9 CO uLTN. G REI E A& '1Z DENFTIMA Va MINI MALIMOSAVIRLIK A.Q ILLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Currency -Thousands Tourzkish L.iras (It RY 4. Financial risk management (rowniiued) e) Operational risk (continued) 2017 2 PP 1 PP CP Total/Pozitive Ratio(%) Total Amount Amount Amount years average number Gross Income 1.018.416 1.129,068 1,316,383 1.1 54,622 15 173,193 Amount Subject to Operational Risk (Total*12,5) 2,164,916 2016 2 PP I PP CP Total/Pozitive Ratio(%) Total Amount Amount Amount years average number Gross Income 840.671 1.11.442 1.119.662 990,592 15 148.589 Amount Subject to Operational Risk (Total* 12,5) 1,857,359 f) Capital management Banking Regulation and Supervision Agency ("BRSA"), the regulator body of the banking industry, sets and monitors capital requirements for the Bank, In implementing current capital requirements, BRSA requires the banks to maintain a prescribed ratio of minimum 8% of total capital to total risk- weighted assets. The Bank is regulatory capital is analysed into two tiers: * Principle capital; capital is composed of the total amount of paid tip capital, legal, voluntary and extra reserves, profits for the period after tax provisions and profits for previous years. The total amount of banks' losses for the period and losses for previous years is taken into account as a deduction item, in the calculation of Principle capital. * Supplementary capital; is composed of the total amount of general provisions for credits, fixed assets revaluation fund, revaluation of available-for-sale financial assets and equity investments, subordinated loans received, free reserves set aside for contingencies and the fund for increase in the value of securities. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. Operational risk capital requirement is calculated using Basic Indicator Approach and included in the capital adequacy calculations. The Bank has complied with externally imposed capital requirements throughout the period. There has been no material changes in the Bank's management of capital during the period. BER 00~ U LT I N.G BAG. ,Z DENETIM VE EMINI MAL MOSAVIRUK A $ 20 iLLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (CurrencY -Thosands of T7rkish Liras (TR?) 4. Financial risk management (continued) 1) Capital management (continued) The Bank's capital position at 31 December 2017 and 2016 is as follows: 2017 2016 Principle capital 15,913,395 14,036,297 Supplementary capital -- -- Deductions from capital _ -- Total capital 15,913,395 14,036,297 Risk-weighted assets 31,114,010 26,430,024 Value at market risk 0 0 Operational risk 2,164,916 1,857,359 Capital adequacy ratios The ratio of total equity to sum of the risk weighted assets, the market risk based amount and the operational risk. 47.82 49.62 The ratio of principal capital to sum of risk weighted assets, market risk based amount and operational risk. 47.82 49.62 5. Accounting estimations Management decides to the development, selection and disclosure of the Bank's critical accounting policies and estimates, and the application of these policies and estiiates. These disclosures supplement the commentary on financial risk management (see note 4). 6. Net fee and commission income 2017 2016 Fee and commission income Fee and commission income on non-cash loans 9,557 10,131 Other 5,022 3,723 Money Order Commission 4,316 2,949 Insurance Coninission(*) 706 774 Total fee and commission income 14,579 13,854 Fee and commission expense Other (884) (857) Total fee and commission expense 8(884) 57 Net fee and commission expense 13,695 12,997 (*)tller Bank A.*., in its capacity of Group A incidental to Groupama Sigorta A.$., GOne§ Sigorta A.$. and Ankara Sigorta A5., mediates insurance operations to local governments, bank personnel and other individual and firms' facilities, vehicles and materials and buildings, has earned 706 commission income by issueing 3,456 policies in 2017. Vf%OvlftiMALt~vR Q 27. Commitments and contingencies (continue) The gUarantee and loan agreements signed ol December 26th. 2016 within the scope of " Sustainable Cities Project " with the World Banik, amotCd to TRY 549,8! 5 (3 1 December 2016: TRY 507,833). Loans to be provided to niediuim-sized municipalities, which have been committed to the Bank tinder the gUarantee ard loan agIeemcnts sIgned o 22 Jnje 201] with in the scope of " Municipal Sewerage and Wastewater Treatmet inIproement Pro/c1 " 1 ith apan International Cooperation Agency (JICA), amounted to TRY 1 h8,961 and within the scope of the project "Local Authorities hfrastructure Iagroveemet Projec", tie credits to be Used for local governments and the guarantees and loan agreements signed on May 15, 20Q15, wh ich were effiectUated onl 14 AuIgUst 2015, were TRY 1,3 15,3 15 and TRY 1,434,276 in total (31 December 2016 w TRY 1,498,077) Within the context of "Urban Infiastructure Projects" with the European Investment Bank, the total of the loans to be used for the MU 7icipalities which are committed to guarantee and loan agreements signed on 28 JUne 2012 is TRY 682,70 and vithin the context of "Urban Transport and Environment Loan", the total amIounlt Of loan1S to be used for the MUnicipalities which are reqUired to be proCUred tinder the guarantee protocol signed on 6 October 2015 is TRY 1,w136950 TRY 1,819,120 in total. (31 December 2016: 1,477,560 TRY). Within the context of "Urban Transportation Projects" with the Islamic Development Bank, the total aiount of loans to be used for the Municipalities that are committed to guarantee and loan agreement is signed on AugUst 29, 2016 isTRY 582,813 (31 December 2016: TRY 554,085). The sun of committed loans for subcontracting and SUbcontracting services of banking municipalities is TRY 9,892,67 (31 December 2016: TRY 11,832,004). Total loan commitments of the Bank amounted to TRY 14,278,697 (3 1 December 2016: TRY 15,869,559). 28. Related parties Related parties of the Bank are the local administratiots according to establishnent law of the Bank. The Bank's capital is composed of the shares of administrative income from bUdgets. The Bank is performing whole banking transactions with related parties, local administrationsb 29. Credit Ratings of Bank from Credit Raing Agencies Within the scope of agreement signed between International credit rating agency Fitch ard Batk in 2013, The credit rating of the Batik was made by an international credit rating agency for the first timne. For the year 2015, making purchase ofservices related to the Credit Rating with a Credit Rating Agency established in TUrkey and a rating uency aufhorized by the Capital Markets Board was decided with the decision of thle Board of Directors dated FebrUary 25th, 2015 and numFIbered 5/77. A two-year contract has been signed on 08 April 2016 between Kobirate International Credit Rating and Corporate Governance Services Inc. to receive cred it rating services for the years 2016-2017. In the report has been prepared and presented to the Bank by the company as of the date of 28 August 201 7, there has been stated that our credit ratings of the year 2017, are revised as presented below. U~ T I N G REH A6& SIZ 8DENETIM va- Y/MlNL MAU MU$AVIRIK A.$ 33 iLLER BANKASI A.$. As of 31 December 2017 Notes to the Non-consolidated Financial Statements (Currency -Thousands of Turkish Lras TRl)) 29. Credit Ratings of Bank from Credit Rating Agencies (conlinhed) Credit ratings are as follows; Kobirate International Rating Outlook Explanation Credit Rating and Corporate Governance Services Inc. Specifics the average credit quality according to debts Long Term Foreign Currency 111 Slable and other debts of the debtor and the debtors. Meeting Credit Rating financial liabilities is high. the risk of being influenced by negative economic conditions is more. Long'Term National Credit The highest credit quality according to the debts and Rating KR AAA Stable other debts of the debtor and the debtors: specifies that teeting fnancial liabilities is very high. Short Term National Credit Stb States that the debts and debtors rated are utmost quality Rating K A S b. comparison to other debts and debtors. The probabilit\ of the bank to be supported is very high. The possessor of the support has the hibhest credit rate Support Note KRD-1 - and has a high supporting capacity,. The supporting capacity and tendency to support sector totally, of the local authorities is at top level. 30. Events After Reporting Period 1- As of December 31th, 2017, the company calculated the provisions of severance payments as 4.732,48 TRY. However, this maximum value was increased to 5.001,76 TRY as of'01.01.2018. 2- The corporate tax rate was to% 22 as of January Ist, 2018 LTIN.G REH E AG ZDENETIM yr vWiL MAL MU5AViRLiK A.$ 34