TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND IT’S SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2020 TOGETHER WITH INDEPENDENT AUDITOR’S REPORT . INDEPENDENT AUDITOR’S REPORT To the General Assembly of Türkiye Vakıflar Bankası T.A.O. Our qualified opinion In our opinion, except for the effect of the matter on the consolidated financial statements described in the Basis for qualified opinion section of our report, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Türkiye Vakıflar Bankası T.A.O. (the “Bank”) and its subsidiaries (collectively referred to as the “Group”) as at 31 December 2020, and their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”) . What we have audited The Group’s consolidated financial statements comprise: • the consolidated statement of financial position as at 31 December 2020; • the consolidated statement of income for the year then ended; • the consolidated statement of comprehensive income for the year then ended; • the consolidated statement of changes in shareholder’s equity for the year then ended; • the consolidated statement of cash flows for the year then ended; and • the notes to the consolidated financial statements, which include significant accounting policies. Basis for qualified opinion As explained in Note 22 of the accompanying consolidated financial statements as of 31 December 2020 include a free provision amounting to TL 1,072,000 thousand which consist of TL 852,000 thousand provided in prior years and TL 220,000 thousand recognized in the current year by the Bank management considering the negative circumstances that may arise from possible changes in the economy and market conditions. Thus, the amount of free provision in the accompanying consolidated financial statements which does not meet the recognition criteria of IAS 37 “Provisions, contingent liabilities and contingent assets” is TL 1,072,000 thousand with its related deferred tax amounting to TL 214,400 thousand as at 31 December 2020. We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion. PwC Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. BJK Plaza, Süleyman Seba Caddesi No:48 B Blok Kat:9 Akaretler Beşiktaş 34357 İstanbul -Turkey T: +90 212 326 6060, F: +90 212 326 6050, www.pwc.com.tr Mersis Numaramız: 0-1460-0224-0500015 Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA Code”) and “Independence Audit by - Law” published by the Public Oversight Accounting and Auditing Standards Authority (“POA”), independent auditing requirements referred to in Article 400 of the Turkish Commercial Code (“TCC”), “Regulation on Independent Audit of Banks” published by the Turkish Banking Regulation and Supervision Agency on the Official Gazette No.29314 dated 2 April 2015 and Communiqué S eries: X No: 22 on “Principles Regarding Independent Auditing Standards in the Capital Markets” (collectively referred to as “Turkish Local Independence Rules”). We have fulfilled our other ethical responsibilities in accordance with these requirements. Our audit approach As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the financial services industry in which the Group operates. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Basis for qualified opinion section we have determined the matters described below to be key audit matters to be communicated in our report. How Our Audit Addressed the Key Audit Key Audit Matters Matter Expected Credit Losses for Loans and Receivables in Accordance with IFRS 9 “Financial Instruments Standard” (“IFRS 9”) The Group has total expected credit losses of With respect to stage classification of loans and TL 22,144,605 thousands in respect to loans and receivables and calculation of expected credit losses receivables of TL 447,014,486 thousands which in accordance with IFRS 9 considering also the represent a significant portion of the Group’s impacts of COVID-19, we have assessed policy, total assets in its consolidated financial procedure and management principles of the Group statements as at 31 December 2020. within the scope of our audit. We assessed the Explanations and notes related to provision for design and the operating effectiveness of relevant impairment of loans are presented in Notes 2 controls implemented in accordance with these and 10 in the accompanying consolidated principles. financial statements as at 31 December 2020. Within the framework of the policies and procedures The Group recognizes provision for impairment applied by the Group, together with our financial of loans in accordance with “IFRS 9 Financial risk experts, we have checked and assessed the Instruments” expected credit loss model. The appropriateness of the methods used in the model Group exercises significant decisions using developed for staging of loans and calculation of subjective judgement, interpretation and expected credit losses in accordance with IFRS 9. assumptions over when and how much to record For forward looking assumptions (including macro- as loan impairment. The Group determines economic factors) made by the Group’s management staging of credit identifying significant increase in its expected credit loss calculation, we held in credit risk with assessments and default discussions with management and evaluated the events presented Note 2 in the accompanying assumptions using publicly available information consolidated financial statements. As of 31 that includes the impacts of COVID-19. We have December 2020, the impacts of COVID-19 global tested model calculations through re-performance pandemic have increased the importance of the together with our modelling specialists on a sample estimations and assumptions used by the Group selection basis. management in determination of the expected credit loan loss provision. The uncertainties arising from these impacts have been evaluated by the management in their judgements and estimations. How Our Audit Addressed the Key Audit Key Audit Matters Matter Expected Credit Loss in Accordance With IFRS 9 “Financial Instruments Standard” (“IFRS 9”) (Continued) Our audit processes also include the following procedures: The Group uses complex models, that requires data to be derived from multiple systems for • Together with our financial risk experts, we determining significant increase in credit risk evaluated and tested reasonableness of the and calculation of IFRS 9 expected credit losses. changes in the expected credit loss allowance Information used in the expected credit loss methodology and the performance of the assessment such as historical loss experiences, impairment models used. current conditions and macroeconomic • The basic and important estimates and the expectations should be supportable and assumptions related to macroeconomic appropriate. variables, significant increase in credit risk in the calculation of expected credit losses, Our audit was focused on this area due to default definition, probability of default and existence of complex estimates and information loss given default were assessed and tested used in the impairment assessment such as with the help of our financial risk experts. macro-economic expectations, current • For selected sample we have checked expected conditions, historical loss experiences; the credit losses determined based on individual significance of the loan and receivable balances; assessment per Group’s policy by means of the classification of loans and receivables as per supporting data and evaluated via inquiries their credit risk (staging) and the importance of with management appropriateness of determination of the associated expected credit estimations and judgements made including loss. Timely and correct identification of default areas affected by the uncertainties caused by event and significant increase in credit risk and COVID-19. level of judgements and estimations made by the • We checked sources for data used in expected management have significant impacts on the credit losses calculations. We assessed amount of impairment provisions for loans. reliability and completeness of the data used in Therefore, this area is considered as key audit expected credit losses calculations with our matter. information systems specialists. • We checked accuracy of resultant expected credit losses calculations on a sample basis. • To assess appropriateness of the Group’s determination of staging for credit risk, identification of impairment and timely and appropriate provisioning for impairment under IFRS 9, we have performed loan review procedures based on a selected sample. • We assessed the accuracy and completeness of the disclosures made within the IFRS 9 framework in the consolidated financial statements the Group presented with respect to loans and receivables and related expected credit losses. How Our Audit Addressed the Key Audit Key Audit Matters Matter Valuation of Pension Fund Obligations Explanations on Valuation of Pension Within our audit procedures, we tested on a sample Obligations are presented in Note 2 paragraph basis the accuracy of the employee data supplied by (n) in the accompanying consolidated financial the Group management to the external actuary firm statements as at 31 December 2020. for the purpose of evaluation pension obligation. In addition, we verified the existence and values of the “Türkiye Vakıflar Bankası Türk Anonim Ortaklığı Pension Fund assets on a sample basis. Memur ve Hizmetlileri Emekli ve Sağlık Yardım Sandığı Vakfı” (“the Fund”) is established in We examined whether significant changes in accordance with the Social Security Law actuarial assumptions used in calculation, employee numbered 506 article No 20 and is within the benefits in the period, plan assets and liabilities, scope of Funds to be transferred to the Social and regulations related to valuations exist, and Security Institution (SSI). The president of tested significant changes. republic is authorized to determine the transfer date. The total obligation of the fund is estimated Through use of our actuarial specialist, we assessed using separate methods and assumption for the reasonableness of assumptions and evaluation benefits to be transferred and for non- made by the external actuaries in the calculation of transferrable benefits. The valuations of the the liability. pension obligations require significant judgement and technical expertise in choosing In addition to the above procedures, we have appropriate assumptions. Evaluation of Pension reviewed disclosures made with respect to pension Fund liabilities include uncertainty of estimates funds in the consolidated financial statements. and assumptions such as transferrable social benefits, discount rates, salary increases, economic and demographic assumptions. The Group’s management uses external actuaries for the purpose of valuations of pension obligations. During our audit, above mentioned fundamental assumption and estimates used in calculations of pension fund obligations, uncertainty of the transfer date, technical interest rate determined by the law and significant impact from differentiation of these assumptions were taken into consideration, and this area is considered as key audit matter. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. PwC Bağımsız Denetim ve Serbest Muhasebeci Mali Müşavirlik A.Ş. Halûk Yalçın, SMMM Partner Istanbul, 20 May 2021 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2020 CONTENTS PAGE CONSOLIDATED STATEMENT OF FINANCIAL POSITION............................................ 1 CONSOLIDATED STATEMENT OF INCOME ...................................................................... 2 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ................................ 3 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY ......... 4-5 CONSOLIDATED STATEMENT OF CASH FLOWS ............................................................ 6 EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS...................................................................................................... 7-87 NOTE 1 GENERAL INFORMATION..................................................................................................................... 7-11 NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .................................................................. 12-41 NOTE 3 FINANCIAL RISK MANAGEMENT ....................................................................................................... 42-59 NOTE 4 INSURANCE RISK MANAGEMENT...................................................................................................... 60-61 NOTE 5 SEGMENT REPORTING .......................................................................................................................... 62-64 NOTE 6 CASH AND BALANCES WITH CENTRAL BANKS ............................................................................ 65 NOTE 7 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS............................................. 65-67 NOTE 8 OBLIGATIONS UNDER REPURCHASE AGREEMENTS..................................................................... 68 NOTE 9 LOANS AND ADVANCES TO BANKS .................................................................................................. 68 NOTE 10 LOANS AND ADVANCES TO CUSTOMERS........................................................................................ 69-70 NOTE 11 INVESTMENT SECURITIES .................................................................................................................. 71-72 NOTE 12 INVESTMENTS IN ASSOCIATES .......................................................................................................... 73 NOTE 13 PROPERTY AND EQUİPMENT AND INTANGIBLE ASSETS............................................................. 73-74 NOTE 14 ASSETS CLASSIFIED AS HELD FOR SALE ......................................................................................... 75 NOTE 15 OTHER ASSETS ....................................................................................................................................... 76 NOTE 16 TRADING LIABILITIES........................................................................................................................... 76 NOTE 17 DEPOSITS FROM BANKS....................................................................................................................... 77 NOTE 18 DEPOSITS FROM CUSTOMERS............................................................................................................. 77 NOTE 19 FUNDS BORROWED ............................................................................................................................... 77-78 NOTE 20 DEBT SECURITIES ISSUED ................................................................................................................... 78 NOTE 21 SUBORDINATED DEBTS........................................................................................................................ 79 NOTE 22 OTHER LIABILITIES AND PROVISIONS ............................................................................................. 79-80 NOTE 23 TAXATION ............................................................................................................................................... 80-81 NOTE 24 EARNINGS PER SHARE.......................................................................................................................... 82 NOTE 25 EQUITY ..................................................................................................................................................... 82-83 NOTE 26 RELATED PARTY TRANSACTIONS..................................................................................................... 84 NOTE 27 FEE AND COMMISSION INCOME......................................................................................................... 84 NOTE 28 OTHER INCOME ...................................................................................................................................... 85 NOTE 29 SALARIES AND EMPLOYEE BENEFITS .............................................................................................. 85 NOTE 30 OTHER EXPENSES .................................................................................................................................. 86 NOTE 31 COMMITMENTS AND CONTINGENCIES ............................................................................................ 86-87 NOTE 32 SUBSEQUENT EVENTS .......................................................................................................................... 87 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) Current Period Prior Period Notes December 31, 2020 December 31, 2019 ASSETS Cash and balances with Central Banks 6 96,503,879 42,384,491 Financial assets at fair value through profit or loss (“FVPL”) 7 16,199,275 6,815,205 - Securities 7 7,458,290 2,307,977 - Derivative Financial Instruments 7 8,740,985 4,507,228 Financial assets at fair value through other comprehensive income 85,007,132 26,584,063 (“FVOCI”) - Debt Securities 83,909,766 25,782,244 - Equity Securities 1,097,366 801,819 Financial assets at amortised cost (“AC”) 486,469,939 331,215,903 - Loans and advances to banks 9 2,859,402 1,265,675 - Loans and advances to customers 10 424,869,881 282,940,649 - Debt securities 58,740,656 47,009,579 Investments accounted for using the equity method 538,516 456,087 Current tax assets 3,090 2,861 Deferred tax assets 23 1,454,935 975,365 Property, plant and equipment 13 5,007,371 3,136,367 Intangible assets 13 371,942 341,777 Assets classified as held for sale 14 1,256,254 7,690,615 Other assets 15 19,500,813 13,638,342 Total assets 712,313,146 433,241,076 LIABILITIES AND EQUITY Financial liabilities at fair value through profit or loss 6,083,301 3,311,997 - Derivative financial instruments 16 6,083,301 3,311,997 Financial liabilities at amortised cost 635,894,015 372,899,372 - Deposits from banks 17 23,033,197 9,231,640 - Deposits from customers 18 394,243,244 244,683,418 - Obligations under repurchase agreements 8 101,312,205 25,424,068 - Funds borrowed 19 51,692,048 45,066,737 - Debt securities issued 20 46,154,523 29,248,056 - Subordinated debts 21 19,458,798 19,245,453 Current tax liabilities 23 955,837 1,143,074 Deferred tax liabilities 23 57,628 31,609 Liabilities directly associated with assets classified as held for sale 14 - 5,378,292 Other liabilities and provisions 22 21,759,880 16,566,107 Total liabilities 664,750,661 399,330,451 Equity attributable to owners of the parent Share capital 25 4,705,768 3,300,146 Share premium 6,300,980 721,594 Revaluation surplus 3,087,838 2,604,125 Reserves 2,776,999 2,557,712 Retained earnings 29,755,015 23,613,291 Total equity attributable to owners of the parent 46,626,600 32,796,868 Non-controlling interests 25 935,885 1,113,757 Total equity 47,562,485 33,910,625 Total liabilities and equity 712,313,146 433,241,076 Commitments and contingencies 216,928,292 161,250,728 The notes on pages 7 to 87 are an integral part of these consolidated financial statements 1 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) Current Period Prior Period Notes December 31, 2020 December 31, 2019 Interest income Interest on loans measured at AC 37,070,419 35,176,932 Interest on securities 10,414,784 7,045,289 - Measured at FVPL (Trading financial assets) 115,374 111,381 - Measured at FVOCI (Available-for-sale financial assets) 4,407,480 2,211,420 - Measured at AC (Held-to-maturity investments) 5,891,930 4,722,488 Interest on deposits at banks 81,021 289,191 Interest on money market placements 3,388 4,532 Other interest income 435,092 562,598 . Total interest income 48,004,704 43,078,542 . Interest expense Interest on deposits (16,446,255) (17,945,995) Interest on money market deposits (4,552,830) (5,140,630) Interest on funds borrowed (1,508,717) (1,810,958) Interest expense on securities issued (4,601,930) (4,150,779) Other interest expense (478,762) (207,654) . Total interest expense (27,588,494) (29,256,016) . Net interest income 20,416,210 13,822,526 . Fee and commission income 3,843,383 4,517,283 Fee and commission expense (859,303) (1,118,168) . Net fee and commission income 27 2,984,080 3,399,115 . Operating income Net trading income 58,345 (3,161,071) Net foreign exchange gains (2,387,572) 669,123 Other income 28 8,106,424 6,602,790 . Total operating income 5,777,197 4,110,842 . Operating expenses Salaries and employee benefit expenses 29 (3,483,392) (3,149,658) Provision expenses for loan and receivables impairment (11,617,157) (8,356,813) Depreciation and amortisation (502,591) (500,588) Taxes other than on income (357,752) (294,783) Other expenses 30 (5,273,293) (4,556,645) . Total operating expenses (21,234,185) (16,858,487) . Share of profit of associates accounted for using the equity method 61,796 61,872 . Profit before income tax 8,005,098 4,535,868 . Income tax expense 23 (1,536,117) (1,033,209) . Profit for the period 6,468,981 3,502,659 . Attributable to: Owners of the Parent 6,392,954 3,363,189 Non-controlling interest 25 76,027 139,470 Basic and diluted earnings per 100 share on profit for the year 24 1.9134 1.3453 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 2 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) Current Period Prior Period Notes December 31, 2020 December 31, 2019 . Profit for the period 6,468,981 3,502,659 Other comprehensive income Items that will not be classified to profit or loss: Re-measurement of post - employment benefit obligation (95,895) (93,644) Revaluation of property, plant and equipment 216,117 117,879 Other accumulated comprehensive income that will not be reclassified in profit or loss 191,803 1,653 Related tax 23 (11,050) (5,178) Items that will be reclassified subsequently to profit or loss: Foreign currency translation differences 259,352 62,080 Net change in fair value of financial assets at fair value through other comprehensive income 59,032 1,427,269 Income (Loss) Related with Hedges of Net Investments in Foreign Operations (141,050) (43,358) Other items - (162,523) Income tax related to items that will be reclassified subsequently to profit or loss 23 (10,851) (252,949) Other comprehensive income for the year, net of income tax 467,458 1,051,229 . Total comprehensive income for the year 6,936,439 4,553,888 . Total comprehensive income attributable to: Owners of the Parent 6,924,393 4,287,500 Non-controlling interest 12,046 266,388 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 3 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) Attributable to Owners of the Parent Revaluation Surplus Non- Share Share Fair value Revaluation Retained Total Other Reserves Total controlling Capital premium reserves Fund earnings equity interest Prior Period End Balance 3,300,146 721,594 1,547,161 757,641 299,323 2,557,712 23,613,291 32,796,868 1,113,757 33,910,625 . First time adoption impact of IFRS, net - - - - - - - - - - . Profit for the Period - - - - - - 6,392,954 6,392,954 76,027 6,468,981 . Other comprehensive income Re-measurements of defined benefit plans - - - - - - (75,803) (75,803) (507) (76,310) Change in revaluation surplus - - - 193,130 - - - 193,130 1,319 194,449 Foreign currency translation differences - - - - 324,145 - - 324,145 (64,793) 259,352 Net change in fair value of financial assets at fair value through - - 231,017 - - - - 231,017 - 231,017 other comprehensive income, net of tax Other items - - - - (141,050) - - (141,050) - (141,050) Total other comprehensive income - - 231,017 193,130 183,095 - (75,803) 531,439 (63,981) 467,458 . Total comprehensive income for the period - - 231,017 193,130 183,095 - 6,317,151 6,924,393 12,046 6,936,439 . Transfer to reserves - - - - - 291,093 (291,093) - - - Dividends paid - - - - - - - - - - Capital Increase 1,405,622 5,579,386 - - - - - 6,985,008 - 6,985,008 Other items - - (123,529) - - (71,806) 115,666 (79,669) (189,918) (269,587) Total contributions by and distributions to owners of the 1,405,622 5,579,386 (123,529) - - 219,287 (175,427) 6,905,339 (189,918) 6,715,421 parent, recognized directly in equity . Balances at December 31, 2020 4,705,768 6,300,980 1,654,649 950,771 482,418 2,776,999 29,755,015 46,626,600 935,885 47,562,485 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 4 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 31 DECEMBER 2019 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) . Attributable to Owners of the Parent . Revaluation Surplus Non- Share Fair value Revaluation Retained Total . Share Capital Other Reserves Total controlling premium reserves Fund earnings equity interest Prior Period End Balance 3,300,146 721,908 315,654 795,918 289,392 2,098,451 21,082,815 28,604,284 885,564 29,489,848 . First time adoption impact of IFRS, net . Profit for the Period - - - - - - 3,363,189 3,363,189 139,470 3,502,659 Other comprehensive income Re-measurements of defined benefit plans - - - - - (70,466) (70,466) (4,449) (74,915) Change in revaluation surplus - - - (38,277) - - (38,277) 132,580 94,303 Foreign currency translation differences - - - - 9,931 - - 9,931 8,791 18,722 Net change in fair value of financial assets at fair value through other comprehensive income, net of tax - - 1,177,207 - - - (25,388) 1,151,819 (10,004) 1,141,815 Other items - 54,300 - - - (182,996) (128,696) - (128,696) . Total other comprehensive income - - 1,231,507 (38,277) 9,931 - (278,850) 924,311 126,918 1,051,229 . Total comprehensive income for the period - - 1,231,507 (38,277) 9,931 - 3,084,339 4,287,500 266,388 4,553,888 . Transfer to reserves - - - - - 459,261 (451,177) 8,084 (8,084) - Dividends paid - - - - - - - - - - Other items - (314) - - - - (102,686) (103,000) (30,111) (133,111) . Total contributions by and distributions to owners of the parent, recognized directly in equity - (314) - - - 459,261 (553,863) (94,916) (38,195) (133,111) . Balances at December 31, 2019 3,300,146 721,594 1,547,161 757,641 299,323 2,557,712 23,613,291 32,796,868 1,113,757 33,910,625 The notes on pages 7 to 87 are an integral part of these consolidated financial statements. 5 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) Current Period Prior Period Notes December 31, 2020 December 31, 2019 Profit for the year 6,468,981 3,502,659 Adjustments for: Income tax expense 23 2,040,485 1,880,222 Provision for incurred loan losses 11,610,657 8,362,433 Depreciation and amortization 13 425,783 448,563 Provision for short term employee benefits 227,920 89,324 Provision for retirement pay liability and unused vacations 474,312 328,419 Unearned premium reserve 97,692 472,055 Change in provision for outstanding claims 30 33,203 83,015 Derivative financial instruments (1,462,453) 665,904 Other provision expenses 30 293,224 57,270 Net interest income (28,569,723) (17,007,263) Share of profit of equity-accounted investees (61,796) (61,872) Currency translation differences (42,045) (53,289) Gain on sale of subsidiaries (804,835) - Other non-cash adjustments (2,382,891) (1,337,977) . (11,651,486) (2,570,537) . Loans and advances to banks (1,597,667) 585,369 Reserve deposits (28,590,543) 4,937,268 Financial assets at fair value through profit or loss (5,150,313) (2,690,190) Loans and advances to customers (150,829,269) (65,227,967) Other assets (5,862,471) (927,759) Deposits from banks 8,432,229 2,150,508 Deposits from customers 154,947,146 69,019,735 Obligation under repurchase agreements 75,775,230 (3,644,480) Other liabilities and provisions 4,024,625 277,902 Interest received 48,004,704 43,078,542 Interest paid (27,588,494) (29,256,016) Taxes paid (2,231,192) (1,611,247) Cash (used in)/provided by operating activities 57,682,499 14,121,128 . Cash flows from investing activities: Dividends received 28 17,633 8,682 Acquisition of property and equipment (1,694,221) (657,398) Proceeds from the sale of property and equipment 580,116 736,940 Acquisition of intangible assets (77,171) (59,738) Proceeds from the sale of intangible assets 2,639 638 Acquisition of investment securities (89,569,548) (29,568,603) Proceeds from sale of investment securities 28,040,172 13,408,120 Other cash inflow/(outflow) from investing activities (935,335) - Cash used in by investing activities (63,635,715) (16,131,359) . Cash flows from financing activities: . Proceeds from issue of debt securities and subordinated liabilities 36,292,714 28,370,533 Repayments of debt securities and subordinated liabilities (19,071,449) (16,104,002) Repayments of funds borrowed (24,408,154) (25,320,158) Proceeds from funds borrowed 31,110,252 25,052,970 Proceeds from issues of shares and other equity securities 7,000,000 - Share issue cost (15,016) - Dividends paid - - Financial lease payments (377,295) (355,852) Cash provided by financing activities 30,531,052 11,643,491 . Effect of foreign exchange rate fluctuations on cash and cash equivalents 25,608 545,639 Net (decrease)/ increase in cash and cash equivalents 24,603,444 10,178,899 Cash and cash equivalents at the beginning of the year 6 31,066,571 20,887,672 Cash and cash equivalents at the end of the year 6 55,670,015 31,066,571 The notes on pages 7 to 87 are an integral part of these consolidated financial statements 6 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 1. GENERAL INFORMATION Türkiye Vakıflar Bankası Türk Anonim Ortaklığı (“The Bank” or “The Parent”) was established under the authorization of special law numbered 6219, called “The Law of Türkiye Vakıflar Bankası Türk Anonim Ortaklığı”, on 11 January 1954 within the framework of the authority granted to the General Directorate of the Foundations of Turkish Republic (The General Directorate of the Foundations). Operational activities of the Bank as stated at its Articles of Association are as follows: • Lending loans by obtaining securities and real estate as collateral, • Establishing or participating in all kinds of insurance corporations, • Trading real estate, • Providing all banking operations and services, • Investing in various corporations handed over by the foundations and the General Directorate of the Foundations in accordance with conditions stipulated by agreements if signed, • To render banking services to the foundations and carry out cashier transactions of the General Directorate of Foundations in compliance with the agreements signed by the General Directorate of the Foundations. The Bank provides corporate, commercial and retail banking services through a network of 933 domestic branches and 3 foreign branches in New York, Bahrain and Iraq, in total 936 branches (December 31, 2019: 940 domestic, 3 foreign, in total 943 branches). As at December 31, 2020, the Bank has 16,748 (December 31, 2019: 16,835) employees. Additionally, the Bank has a subsidiary in banking sector in Austria, titled as Vakıfbank International AG. The Bank’s head office is located at Saray Mahallesi, Dr.Adnan Büyükdeniz Caddesi, No:7/A-B, Ümraniye - İstanbul. The shareholder having control over the shares of The Parent Bank is the Republic of Turkey Ministry of Treasury and Finance. As at December 31, 2020, the Parent Bank’s paid-in capital is TL 3,905,622 TL (December 31, 2019: TL 2,500,000) divided into 390,562,248,996 shares with each has a nominal value of Kr 1.(December 31, 2019: TL 250,000,000,000) 7 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 1. GENERAL INFORMATION(Continued) The Parent Bank’s shareholders structure as at December 31, 2020 and December 31, 2019 is stated below: Nominal Value of the Number of Shares Share Percentage Shareholders December 31, 2020 Shares – Thousands (100 unit) (%) of TL Türkiye Varlık Fonu (Group D) 1,405,622,490 1,405,622 35.99 TC Hazine ve Maliye Bakanlığı (Group A) 1,075,058,640 1,075,058 27.52 Vakıfbank Memur ve Hizmetlileri Emekli ve 402,552,666 402,553 10.31 Sağlık Yardım Sandığı Vakfı (Group C) TC Hazine ve Maliye Bakanlığı (Group B) 387,673,328 387,673 9.93 Other appendant foundations (Group B 2,591,250 2,591 0.07 Other real persons and legal entities (Group C) 1,527,393 1,528 0.04 Publicly traded (Group D) 630,596,723 630,597 16.14 Paid-in capital 3,905,622,490 3,905,622 100.00 Adjustment to share capital (*) 800,146 Total 4,705,768 *) The adjustment to share capital represents the cumulative restatement adjustment amount to nominal share capital on adopting IAS 29, “Financial reporting in hyper-inflationary economies” until January 1,2006. Nominal Value of Number of Shares Share Percentage Shareholders December 31, 2019 the Shares – (100 unit) (%) Thousands of TL TC Hazine ve Maliye Bakanlığı (Group A) 1,075,058,640 1,075,058 43.00 Vakıfbank Memur ve Hizmetlileri Emekli ve 402,552,666 402,553 16.10 Sağlık Yardım Sandığı Vakfı (Group C) TC Hazine ve Maliye Bakanlığı (Group B) 387,673,328 387,673 15.51 Other appendant foundations (Group B) 2,652,715 2,653 0.11 Other real persons and legal entities (Group C) 1,527,393 1,528 0.06 Publicly traded (Group D) 630,535,258 630,535 25.22 Paid-in capital 2,500,000,000 2,500,000 100.00 Adjustment to share capital (*) 800,146 Total 3,300,146 (*) The adjustment to share capital represents the cumulative restatement adjustment amount to nominal share capital on adopting IAS 29, “Financial reporting in hyper-inflationary economies” until January 1, 2006. 8 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 1. GENERAL INFORMATION (Continued) These consolidated financial statements were approved for issue on December 31, 2020. With the Decree Law No. 696 published in the Official Gazette dated December 24, 2017, the "Türkiye Vakıflar Bankası Turkish Joint-Stock Company Law" No. 6219 was amended. With the Presidential Decree dated December 3, 2019, published in line with the relevant provisions of Law No. 6219, 58.51% of the total of 43.00% (A) Group and 15.51% (B) Group, managed and represented by the General Directorate of Foundations' per share value of share is determined. In accordance with the relevant provisions of the Law No. 6219, the provisions of the Capital Market Law, including the obligation to propose shares regarding the transfer transactions regarding the shares specified in the Presidential Decree of December 3, 2019, will not be applied. There will be no changes regarding the 25.22% shares of the (D) Group traded at the stock exchange. The process regarding the transfer of bank shares has been completed as of December 11, 2019 and 58.51% of the Bank's share has been transferred to the Treasury and has been recorded in the Bank's share book on behalf of the Ministry of Treasury and Finance of the Republic of Turkey. With the decision of the Parent Bank's Board of Directors dated May 11, 2020, it has been decided to increase the issued capital of TL 2,500,000 provided that it remains within the registered capital ceiling, by completely restricting the pre-emptive rights of the current shareholders and by increasing cash capital increase, which will generate a total sales revenue of TL 7,000,000 in total. Within the framework of the relevant legislation of the Capital Markets Board, the Banking Regulation and Supervision Agency and the Procedure for Borsa İstanbul's Wholesale Purchase and Sales Transactions, all of the shares to be issued due to the capital increase, are set to be transferred to Turkey Wealth Fund, without public offering and by dedicated sales method. The disclosure published by the Parent Bank on May 15, 2020, it was announced that the sales price of the shares to be issued was determined as TL 4.98 for a share with a nominal value of 1 TL, and that the issued capital will be increased from TL 2,500,000 to TL 3,905,622 as a result of the capital increase. The disclosure published by the Parent Bank on May 20, 2020, it has been announced that the shares with a nominal value of TL 1,405,622 issued by the Parent Bank are sold with a dedicated sales method for a share with a nominal value of TL 1, with a total sales revenue of TL 7,000,000 over the price of TL 4.98. As of the same date, the shares were sold to Turkey Wealth Fund through the wholesale transaction method in stock market and the capital increase transactions have been completed. The table below sets out the subsidiaries and associates and shows their shareholding structure as at December 31, 2020 and December 31, 2019. Direct Indirect December 31, 2020 Shareholding Interest (%) Shareholding Interest (%) Subsidiaries: Vakıf Menkul Kıymet Yatırım Ortaklığı A.Ş. (*) 17.37 17.37 Vakıf Enerji ve Madencilik A.Ş. 65.50 80.48 Taksim Otelcilik A.Ş. 51.00 51.00 Vakıf Faktoring A.Ş. 78.39 80.62 Vakıf Finansal Kiralama A.Ş. 58.71 58.71 Vakıf Yatırım Menkul Değerler A.Ş. 99.25 99.40 Vakıfbank International AG 100.00 100.00 Vakıf Gayrimenkul Yatırım Ortaklığı A.Ş. (*) 45.71 45.71 World Vakıf UBB Ltd in Liquidation (**) 82.00 82.59 Associates: Kıbrıs Vakıflar Bankası Ltd. 15.00 15.00 T. Sınai Kalkınma Bankası A.Ş. 8.38 8.38 9 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 1. GENERAL INFORMATION (Continued) Indirect Direct Shareholding December 31, 2019 Shareholding Interest (%) Interest (%) Subsidiaries: Güneş Sigorta A.Ş. 56.10 56.10 Vakıf Menkul Kıymet Yatırım Ortaklığı A.Ş. (*) 17.37 17.37 Vakıf Emeklilik ve Hayat A.Ş. 82.68 99.00 Vakıf Enerji ve Madencilik A.Ş. 65.50 80.48 Taksim Otelcilik A.Ş. 51.00 51.00 Vakıf Faktoring A.Ş. 78.39 80.62 Vakıf Finansal Kiralama A.Ş. 58.71 58.71 Vakıf Yatırım Menkul Değerler A.Ş. 99.25 99.40 Vakıfbank International AG 90.00 90.00 Vakıf Gayrimenkul Yatırım Ortaklığı A.Ş. (*) 38.70 38.70 World Vakıf UBB Ltd in Liquidation (**) 82.00 83.50 Associates: Kıbrıs Vakıflar Bankası Ltd. 15.00 15.00 T. Sınai Kalkınma Bankası A.Ş. 8.38 8.38 (*) For those consolidated subsidiaries where the Bank does not own, directly or indirectly through subsidiaries, more than 50% of the subsidiary's voting power, proportion of ordinary shares held by the Group entitles the Bank to power over relevant activities - acquired through arrangements between shareholders or articles of association of the related subsidiary - and to variable returns from its involvement with the subsidiary while the bank has the ability to affect those returns through its power over the subsidiary. (**) World Vakıf UBB Ltd, was established in the Turkish Republic of Northern Cyprus in 1993 for offshore banking operations. Its head office is in Nicosia. The name of the Bank, which was World Vakıf Offshore Banking Ltd, has been changed to World Vakıf UBB. Ltd. on February 4, 2009. Pursuant to the March 4, 2010 dated and 764 numbered decision of Board of Directors of Central Bank of Turkish Republic of Northern Cyprus, the official authorization of World Vakıf UBB Ltd is abrogated due to incompliance with the 7th and 9th articles of 41/2008 numbered Law of International Banking Units. World Vakıf UBB Ltd. will be liquidated according to May 24, 2010 dated decision of the Nicosia Local Court. The liquidation process of World Vakıf UBB Ltd, has been carried out by NCTR Collecting and Liquidation Office. The application of the subsidiary for cancellation of the liquidation has been rejected and the decision of liquidation has been agreed. Thus, the name of the subsidiary has been changed as “World Vakıf UBB Ltd. in Liquidation”. Therefore, the financial statements of the subsidiary have not been consolidated as at December 31, 2020 and December 31, 2019. For the purposes of these consolidated financial statements, the Bank and its consolidated subsidiaries described below are referred to as the “Group”. A share transfer agreement was signed with TVF Finansal Yatırımlar AŞ on April 22, 2020 for Güneş Sigorta AŞ and Vakıf Emeklilik ve Hayat AŞ and the same share transfers were completed as of the same date. In the previous period, the aforementioned subsidiaries were consolidated over Non-Current Assets or Disposal Groups "Held for Sale" and "From Discontinued Operations” in the Assets and Liabilities section of the balance sheet, and in the income statement they were consolidated with full consolidation method. Subsidiaries were excluded from the scope of consolidation after the transaction. Balances belonging to income and expense items realized until the sale transaction date of the mentioned subsidiaries are accounted in the consolidated income statement. In March 24, 2020, Türkiye Vakıflar Bankası T.A.O. Memur ve Hizmetlileri Emekli ve Sağlık Yardım Sandığı Vakfı (ESV) shares, which are presented in the paid-in capital of Vakıfbank International AG, are purchased by the Parent Bank. Vakıf Menkul Kıymet Yatırım Ortaklığı AŞ was established in 1991 in Istanbul. The main activity of the subsidiary is to invest in a portfolio (including marketable debt securities and equity securities) without having managerial power in the partnerships whose securities have been acquired; and also gold and other precious metals trading in national and international stock exchange markets or active markets other than stock exchange markets, in accordance with the principles and regulations promulgated by Capital Markets Board. Its head office is in Istanbul. 10 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 1. GENERAL INFORMATION (Continued) Vakıf Enerji ve Madencilik A.Ş. was established in 2001 to produce electrical and thermal energy, and to sell this energy in accordance with the related laws and regulations. Its head office is in Ankara. Taksim Otelcilik AŞ was established under the Turkish Commercial Code in 1966. The main activity of the subsidiary is to operate in the hotel business or rent out the management of owned hotels. Its head office is in Istanbul. Vakıf Faktoring AŞ was established in 1998 to perform factoring transactions. Its head office is in Istanbul. Vakıf Finansal Kiralama AŞ was established in 1988 to enter into finance lease operations and related transactions and contracts. Its head office is in Istanbul. Vakıf Yatırım Menkul Değerler AŞ was established in 1996 to provide service to investors through making capital markets transactions, the issuance of capital market tools, purchase and sales of marketable securities, operating as a member of stock exchange, investment consultancy and portfolio management. Its head office is in Istanbul. Vakıfbank International AG was established in 1999 to operate in the banking sector in foreign countries, in line with the Bank’s globalization policy. Its head office is in Vienna, Austria. Vakıf Gayrimenkul Yatırım Ortaklığı AŞ was established as the first real estate investment partnership in the finance sector under the adjudication of the Capital Markets Law in 1996. The subsidiary’s main operation is in line with the scope in the Capital Markets Board’s regulations relating to real estate investment trusts including real estate, capital market tools based on real estate, real estate projects and investing on capital market tools. Its head office is in İstanbul. The Bank has also the following associates: Kıbrıs Vakıflar Bankası Ltd. Şti. was established in 1982 in the Turkish Republic of Northern Cyprus, mainly to encourage the usage of credit cards issued by the Bank, to increase foreign exchange inflow, and carry on retail and commercial banking operations. Its head office is in Nicosia. Türkiye Sınai Kalkınma Bankası AŞ was established as an investment bank in 1950 to support investments in all economic sectors. Its head office is in Istanbul. 11 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1. Basis of Preparation The consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards (“IFRS”) including International Accounting Standards issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Standards Interpretation Committee (“IFRIC”). The Bank and its subsidiaries which are incorporated in Turkey maintain their books of account and prepare their statutory financial statements in accordance with the regulations on accounting and reporting framework and accounting standards which are determined by the provisions of Turkish Banking Law and accounting standards promulgated by the other relevant laws and regulations. The foreign subsidiaries maintain their books of account and prepare their statutory financial statements in their local currencies and in accordance with the regulations of the countries in which they operate. The consolidated financial statements have been prepared in accordance with IFRS and presented in Turkish Lira (“TL”). For the purpose of fair presentation in accordance with IFRS, certain adjustments and reclassifications have been made to the statutory financial statements. Covid-19 virus, which first appeared in China and spread rapidly worldwide in a short time, started to appear in our country in March. Declared as an epidemic by the World Health Organization, Covid-19 had economic and social impacts worldwide. In order to slow down the epidemic, many measures have been taken, including in our country, to restrict travels around the world, to take quarantine measures, to increase distance work, and various arrangements are made to reduce the economic effects of the epidemic. The Group has explained the effects of Covid-19, which it reflects in the financial statements dated December 31, 2020, in the following sections. In addition, while preparing the interim financial statements dated December 31, 2020, the fair value measurements were reviewed within the scope of IFRS 13 Fair Value Measurement standard. The Indicator Interest Rate Reform - Phase 2, which introduced changes in TFRS 9, TAS 39, TFRS 7, TFRS 4 and TFRS 16, effective from January 1, 2021, was published in December 2020 and early implementation of the changes is permitted. With the amendments made, certain exceptions are provided in the basis for determining contractual cash flows and hedge accounting provisions. The changes have not been implemented early and the developments are being evaluated by the Parent Bank. From items indexed to benchmark interest rates, loans and securities constitute assets; securities issued and loans borrowed through repo constitute liabilities in the Parent Bank's financial statements. The effects of these changes on the financial statements and performance of the Parent Bank are evaluated by the management. As of December 31, 2020, the Parent Bank does not have any hedging transactions for interest rate risk. In preparation of the consolidated financial statements of the Group, the same accounting policies and methods of computation have been followed as compared to the prior year consolidated financial statements except for the adoption of new standards and interpretations as of January 1, 2020, where applicable, noted below: 12 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.2 New and Revised International Financial Reporting Standards a) Standards, amendments and interpretations applicable as at December 31, 2020: - Amendments to IAS 1 and IAS 8 on the definition of material; effective from Annual periods beginning on or after January 1, 2020. These amendments to IAS 1, ‘Presentation of financial statements’, and IAS 8, ‘Accounting policies, changes in accounting estimates and errors’, and consequential amendments to other IFRSs: i) use a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting; ii) clarify the explanation of the definition of material; and iii) incorporate some of the guidance in IAS 1 about immaterial information. - Amendments to IFRS 3 - definition of a business; effective from Annual periods beginning on or after January 1, 2020. This amendment revises the definition of a business. According to feedback received by the IASB, application of the current guidance is commonly thought to be too complex, and it results in too many transactions qualifying as business combinations. - Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate benchmark reform; effective from Annual periods beginning on or after January 1, 2020. These amendments provide certain reliefs in connection with interest rate benchmark reform. The reliefs relate to hedge accounting and have the effect that IBOR reform should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness should continue to be recorded in the income statement. Given the pervasive nature of hedges involving IBOR- based contracts, the reliefs will affect companies in all industries. - Amendment to IFRS 16, “Leases” - Covid-19 related rent concessions; effective from Annual periods beginning on or after June 1, 2020. As a result of the coronavirus (COVID-19) pandemic, rent concessions have been granted to lessees. Such concessions might take a variety of forms, including payment holidays and deferral of lease payments. On May 28, 2020, the IASB published an amendment to IFRS 16 that provides an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification. Lessees can elect to account for such rent concessions in the same way as they would if they were not lease modifications. In many cases, this will result in accounting for the concession as variable lease payments in the period(s) in which the event or condition that triggers the reduced payment occurs 13 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.2 New and Revised International Financial Reporting Standards (Continued) b) Standards, amendments and interpretations that are issued but not effective as at December 31, 2020: - IFRS 17, “Insurance contracts”; effective from annual periods beginning on or after January 1, 2023. This standard replaces IFRS 4, which currently permits a wide variety of practices in accounting for insurance contracts. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts and investment contracts with discretionary participation features. - Amendments to IAS 1, Presentation of financial statements’ on classification of liabilities; effective from January 1, 2022. These narrow-scope amendments to IAS 1, ‘Presentation of financial statements’, clarify that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. Classification is unaffected by the expectations of the entity or events after the reporting date (for example, the receipt of a waiver or a breach of covenant). The amendment also clarifies what IAS 1 means when it refers to the ‘settlement’ of a liability. - A number of narrow-scope amendments to IFRS 3, IAS 16, IAS 37 and some annual improvements on IFRS 1, IFRS 9, IAS 41 and IFRS 16; effective from Annual periods beginning on or after January 1, 2022.  Amendments to IFRS 3, ‘Business combinations’ update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations.  Amendments to IAS 16, ‘Property, plant and equipment’ prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the company is preparing the asset for its intended use. Instead, a company will recognise such sales proceeds and related cost in profit or loss.  Amendments to IAS 37, “Provisions, contingent liabilities and contingent assets” specify which costs a company includes when assessing whether a contract will be loss-making. Annual improvements make minor amendments to IFRS 1, ‘First-time Adoption of IFRS’, IFRS 9, ‘Financial instruments’, IAS 41, ‘Agriculture’ and the Illustrative Examples accompanying IFRS 16, ‘Leases’. - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform Phase 2; effective from annual periods beginning on or after January 1, 2021. The Phase 2 amendments address issues that arise from the implementation of the reforms, including the replacement of one benchmark with an alternative one. - Amendments to IFRS 17 and IFRS 4, “Insurance contracts”, deferral of IFRS 9; effective from annual periods beginning on or after January 1, 2021. These amendments defer the date of application of IFRS 17 by two years to January 1, 2023 and change the fixed date of the temporary exemption in IFRS 4 from applying IFRS 9, Financial Instrument until January 1, 2023. 14 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates Accounting in hyperinflationary countries Financial statements of the entities located in Turkey have been restated for the changes in the general purchasing power of the Turkish Lira based on IAS 29 - Financial Reporting in Hyperinflationary Economies as at December 31, 2005. IAS 29 requires that financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the reporting date, and that corresponding figures for previous years be restated in the same terms. One characteristic that necessitates the application of IAS 29 is a cumulative three-year inflation rate approaching or exceeding 100%. The cumulative three-year inflation rate in Turkey was 35.61% as at December 31, 2005, based on the Turkish nation-wide wholesale price indices announced by the Turkish Statistical Institute. This, together with the sustained positive trend in quantitative factors, such as the stabilization in capital and money markets, decrease in interest rates and the appreciation of TL against the US Dollar and other hard currencies have been taken into consideration to categorize Turkey as a non- hyperinflationary economy under IAS 29 effective from January 1, 2006. Functional and Presentation Currency These consolidated financial statements are presented in TL, which is the Bank’s functional currency. Except if indicated, financial information presented in TL has been rounded to the nearest thousand. Judgments and Estimates The preparation of the consolidated financial statements in accordance with IFRS, including International Accounting Standards (“IAS”) requires management to make estimates and assumptions that affect the application of policies and in the measurement of income and expenses in the statement of income and in the carrying value of assets and liabilities in the balance sheet, and in the disclosure of information in the notes to the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. 15 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) The actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised and in any future years affected. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year and about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements is disclosed below. These disclosures supplement the commentary on financial risk management. Impairment of Financial Assets As of January 1, 2018, a loss allowance for expected credit losses is provided for all financial assets measured at amortised cost and financial assets measured at fair value through other comprehensive income, all financial assets, which are not measured at fair value through profit or loss, loan commitments and financial guarantee contracts in accordance with IFRS 9 principles. Equity instruments are not subject to impairment assessment as they are measured at fair value. The Group has changed its credit calculation method with the expected credit loss model as of January 1, 2018. Expected credit loss estimates are required to be unbiased, probability-weighted, considering the time value of money and including supportable information about past events, current conditions, and forecasts of future economic conditions. The financial assets are divided into three categories depending on the gradual increase in credit risk observed since their initial recognition: Stage 1: Financial assets that do not have a significant increase in the credit risk at the first time they are received in the financial statements or after the first time they are taken to the financial statements. For these assets, credit risk impairment provision is accounted for 12 months expected credit losses. The Parent Bank applies the expected 12-month default probabilities to the estimated default amount and multiplies with the loss given default and downgrades to the present day with the original effective interest rate of the loan. For these assets, an expected 12-month credit loss is recognized and interest income is calculated over the gross carrying amount. 12-month expected credit loss is the loss arising from possible risks in the first 12 months following the reporting date. Stage 2: A financial asset is transferred to stage 2 in the event that there is a significant increase in the credit risk after the first time the financial asset is taken in the financial statements. The Parent Bank determines the credit risk impairment provision of the financial asset according to lifetime expected credit loss. Lifetime expected credit losses are credit losses arising from all events that may occur during the expected life of the financial asset. The probability of default, and loss given default are estimated over the life of the loan including the use of multiple scenarios. Expected cash flows are discounted using the original effective interest rate. Stage 3: Stage 3 includes financial assets with objective evidence of impairment as of the reporting date. Lifetime expected credit loss is recorded for these assets. The Parent Bank's methodology for loans at this stage is similar to loans classified in Stage 2, but the probability of default is considered 100%. Loss given default is calculated considering the period the loan waits in the non-performing loans and an aging curve formed from the historical data. 16 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Significant Increase in Credit Risk The Standard requires the assessment of whether there is a significant increase in the credit risk of financial assets by the date of initial recognition based on the information available without excessive effort and cost as of the reporting date. The factors that show a significant increase in credit risk under IFRS 9 are as follows: Past Due Date; significant increase in the credit risk since the granting date in the case of loans overdue more than 30 days. Restruction: Classification of financial assets under the stage 2 as a result of the emergence of privileges and financial difficulties in the case of restructuring of financial receivables. Qualitative Criteria: Implementation of set of qualitative criteria set by The Parent Bank in accordance with the information obtained. Quantitative Criteria: As of the reporting date, the default risk for the borrower and the default risk as of the date of the initial allowance are compared with the change in the grade / score information as a result of the application of statistically determined threshold values. The Parent Bank has accounted for the effect of applying the new provisions at the date of January 1, 2018 by recording a reversal in the opening records of previous years' profit and loss accounts. The primary impact is due to changes in the allowance for credit losses in accordance with the new impairment provisions and the tax effects of the corresponding provisions. Within the scope of the measures taken for COVID-19, the Parent Bank, pursuant to the BRSA's decision numbered 8970 dated March 27, 2020, effective as of March 17, 2020, and within the scope of Article 4 of the “Regulation on the Principles and Procedures Regarding the Classification of Loans and the Provisions”, 30-day delay period which was envisaged for classification in the Group II has started to be applied as 90 days until December 31, 2020 for the loans followed in the Group I. This regulation will be valid until June 30, 2021 according to the decision of the BRSA dated December 8, 2020 and numbered 9312. In this context, receivables that are not collected by the Parent Bank for up to 90 days can be classified under the First Group. In the classification of loans, the Parent Bank also takes into account whether it is due to a temporary liquidity shortage experienced by the borrower because of the COVID-19 outbreak. The Parent Bank continues to calculate the Expected Credit Loss based on its own risk models. 17 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Default Definition The Parent Bank takes into account the requirements of IFRS 9 and the relevant BRSA in order to determine the default situation in accordance with the definition of default and its indicators included in the Communiqué on the Calculation of Provisions Regulation and the Amount Based on the Internal Risk Based Approach of the Credit Risk. In terms of the default definition, the bank has set the following criterias; - Over 90 days delayed collection of principal and / or interest amount, - The customer has been bankrupt or has been found to apply for bankruptcy, - The customer's creditworthiness is impaired, - It is decided that the principal and / or interest payments of the borrower will be delayed by more than 90 days since the collaterals and / or borrower's own funds are insufficient to cover the payment of the receivables at maturity, - It is decided that the principal and / or interest payments of the customer will be delayed by more than 90 days due to macroeconomic, sector specific or customer specific reasons. Due to COVID-19, effective as of March 17, 2020, the "more than 90 days past due" condition used in the definition of default for the classification of loans has started to be applied as "more than 180 days past due" in accordance with the 4th and 5th articles of “Regulation on Classification of Loans and Procedures and Principles for Provisions to Be Allocated for them” announcement of BRSA. This regulation will be valid until June 30, 2021 according to the decision of the BRSA dated December 8, 2020 and numbered 9312. In this context, receivables that are not collected by the Parent Bank for up to 180 days can be classified under the Second Group. The Parent Bank, continues the calculate expected credit loss according to its own risk models for these loans. For loans that are not subject to individual evaluation on a customer basis and have a delay of more than 90 days, the Parent Bank determines the information and factors that cannot be included in the expected credit loss calculations based on expert opinion and reflects them in the provision. Expected Credit Loss (ECL) Calculation Expected credit loss calculation refers to the calculation to estimate the loss of the financial instrument in case of default and it is based on 3-stage impairment model based on the change in credit quality. It is possible to perform the expected credit loss calculations in accordance with IFRS 9, with three main parameters for each loan. Exposure at Default (EAD), Loss Given Default (LGD), Probability of Default (PD). 18 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Exposure at Default (EAD): Represents the amount of risk on the default date of the borrower in case of default. According to IFRS 9 in calculating EAD, the estimation of how customer risk rating changes over time is important. Amount of EAD for cash and non-cash loans are calculated in different ways. Cash loans are divided into two parts as loans with payment plan and loans without payment plan. For loans with payment plan, EAD is calculated by considering the installments to be paid in the future. For cash loans without payment plan, EAD is calculated by keeping credit balance constant. For non-cash loans and limit commitments EAD is calculated by regarding to credit conversion factor and behavioral maturity periods. Loss Given Default (LGD): The ratio that provides the uncollectable amount of the loans in the process after the default. The LGD ratio is the division of the uncollectable amount of a defaulted loan into the defaulted loan amount. This ratio enables to predetermine the risks in the case of default for the active credit portfolio and allows for provision under IFRS 9. In LGD methodology, all non-performing loans amounts and long term collection process has been taken into account and LGD rate is calculated after deducting net collections amounts from the default amount and discounted with effective interest rates or approximate rate over the net amounts with an approximate value. For corporate and retail portfolios, different LGD calculations are performed. Since the dragging effect, LGD rates in corporate portfolios are considered on customer basis. For retail portfolios, LGD rates are considered on credit basis. In order to differentiate variable risk characteristics in accordance with IFRS 9, individual and corporate segments are divided into its own LGD ratios according to different risk factors. Probability of Default (PD): Represents the probability of default of the debtor in a defined time lag in the future. The models used in PD calculations were developed based on historical data on past and quarterly and non- defaultable loans. PD rates used within the scope of IFRS 9 are calculated separately for each rating model and rating information. In this context, firstly, PD rates are calculated from historical data(through the cycle) from this model and rating values, then lifetime default rate curves are created. These lifetime default rate curves provide the following two basic estimation data in the calculation of expected credit losses as follows: - 12 Months PD ratio: The probability of default within 12 months from the reporting date estimate - Lifetime PD ratio: Estimation of the probability of default over the expected life of the financial instrument The models developed under IFRS 9 have detailed segment structures based on corporate and retail portfolios. While creating the corporate PD rates, the rating values assigned to the customers as of the date of each rating and the customers who default on the corporate side are considered. Retail portfolios are divided into sub-segments according to product groups and lifetime default rate curves vary according to product groups. By taking into account the periodic PD rates, a PD rate scale is generated on the basis of rating and model code through the cycle. 19 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Impairment of Financial Assets (Continued) Expected Credit Loss (ECL) Calculation (Continued) The relation of all risk parameters with macroeconomic conditions has been tested and it has been determined that macroeconomic conditions have an effect on the probability of default. In this context, macroeconomic forecasts are taken into account in changing the probability of default. Different macroeconomic models have been created for the retail portfolio and commercial portfolio, and macroeconomic forecasts affect the expected loss provision calculations in two separate scenarios, base and bad. The future macroeconomic expectations taken into account into IFRS 9 are in line with the Bank's current budget and ISEDES forecasts. In the calculation of expected credit loss in accordance with IFRS 9, certain part of commercial and corporate loans are subject to individual assessment on a customer basis in accordance with internal evaluations. The models and methodologies used for IFRS 9 are evaluated at least once a year by the teams responsible for the model and methodology for their accuracy and suitability. The models and other issues that were created within the scope of IFRS 9 and which need to be updated in 2020 were revised and reflected in financial statements of December 2020. Macroeconomic forecasts and risk delinquency data used in risk parameter models are re-evaluated every quarter to reflect changes in economic conjuncture and are updated if needed. The maximum period to determine the expected credit losses except for demand and revolving loans is up to the contractual life of the financial asset. Fair value The determination of fair value for financial assets and financial liabilities for which there is no observable market price requires the use of valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. The Group’s accounting policy on fair value measurements is discussed in (i) - Measurement. The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.  Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.  Level 2: Valuation techniques based on observable inputs, either directly-i.e. as prices-or indirectly- i.e. derived from prices. This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.  Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments the Group determines fair values using valuation techniques. 20 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Fair value (Continued) Valuation techniques include net present value and discounted cash flow models, comparison to similar instruments for which market observable prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other variables used in estimating discount rates, bond and equity prices, foreign currency exchange rates, equity and equity index prices and expected price volatilities and correlations. The objective of valuation techniques is to arrive at a fair value determination that reflects the price of the financial instrument at the reporting date, which would have been determined by market participants acting at arm’s length. The Group uses widely recognized valuation models for determining the fair value of common and more simple financial instruments, like interest rate and currency swaps that use only observable market data and require little management judgment and estimation. Observable prices and model inputs are usually available in the market for listed debt and equity securities, exchange traded derivatives and simple over the counter derivatives like interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgment and estimation and also reduces the uncertainty associated with determination of fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets. Significant accounting policies are as follows; (a) Basis of consolidation The consolidated financial statements include the financial statements of the Bank and the subsidiaries. Subsidiaries are those investees that the Group controls because the Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of investee’s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group, and are deconsolidated from the date on which control ceases. The Bank reassesses its control power over its subsidiaries if there is an indication that there are changes to any of the three elements of control. Subsidiaries are fully consolidated from the date of acquisition, being the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Companies where the Bank exercises significant influence, but not control are accounted for using the equity method. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. 21 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (a) Basis of consolidation (Continued) A share transfer agreement was signed with TVF Finansal Yatırımlar AŞ on April 22, 2020 for Güneş Sigorta AŞ and Vakıf Emeklilik ve Hayat AŞ and the same share transfers were completed as of the same date. In the previous period, the aforementioned subsidiaries were consolidated over Non-Current Assets or Disposal Groups "Held for Sale" and "From Discontinued Operations” in the Assets and Liabilities section of the balance sheet, and in the income statement they were consolidated with full consolidation method. Subsidiaries were excluded from the scope of consolidation after the transaction. Balances belonging to income and expense items realized until the sale transaction date of the mentioned subsidiaries are accounted in the consolidated income statement. Associates Associates are entities over which the Group has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method of accounting, and are initially recognized at cost. The carrying amount of associates includes goodwill identified on acquisition less accumulated impairment losses, if any. Dividends received from associates reduce the carrying value of the investment in associates. Other post-acquisition changes in Group’s share of net assets of an associate are recognized as follows: (i) the Group’s share of profits or losses of associates is recorded in the consolidated profit or loss for the year as share of result of associates, (ii) the Group’s share of other comprehensive income is recognized in other comprehensive income and presented separately, (iii); all other changes in the Group’s share of the carrying value of net assets of associates are recognized in profit or loss within the share of result of associates. However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Transactions eliminated on consolidation Inter-company balances and transactions, and any unrealized gains and losses arising from inter-company transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with associates are eliminated to the extent of the Bank and its subsidiaries’ interest in the entity. Unrealized gains arising from transactions with associates are eliminated against the investment in the associate. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency Foreign currency transactions Transactions are recorded in TL, which represents functional currency of the group’s entities except for World Vakıf UBB Ltd. in Liquidation and Vakıfbank International AG. Transactions denominated in foreign currencies are recorded at the exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are converted into functional currency at the exchange rates ruling at the end of reporting period with the resulting exchange differences recognized in profit or loss as foreign exchange gains or losses. 22 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Foreign currency transactions (Continued) In March 24, 2020, Türkiye Vakıflar Bankası T.A.O. Memur ve Hizmetlileri Emekli ve Sağlık Yardım Sandığı Vakfı (ESV) shares, which are presented in the paid-in capital of Vakıfbank International AG Turkey Foundations Bank, are purchased by the Bank. Since the reporting period of September 30, 2016, the Group has been implementing net investment hedging strategy in order to avoid foreign exchange risk arising from the Group’s € 75.7 million share capital in the VakıfBank International AG's € 100 million paid-in capital.In this context, 76.8 Million EUR portion of the securities issued by the Bank on May 4, 2016 with a nominal amount of 500 million Euros and the redemption date of May 4, 2021, were determined as hedging instruments. In this transaction, fair value changes related to the investment abroad, which is a hedged item, are reflected in the other accumulated comprehensive income or expenses to be reclassified in profit or loss under equity as long as the hedging transaction is effective.In this context, as of December 31, 2020, the foreign exchange income presented in the income statement is TL 184,408 .The effectiveness of the transaction is the degree to balance the changes in the fair value of the hedged item that can be associated with the hedged currency risk by the hedging instrument. As of December 31, 2020, it was identified that the evaluations that were made about the process to protect from the net investment hedge were effective. Efficiency testing, which is consistent with the Parent Bank's risk strategies, is conducted using the "Dollar off-set method" in the protection from risk process. According to this method, hedging compares the change in value of protection subject from risk with the change in value of protection tool from risk and calculates the relation with the effectiveness ratio of the hedge. The calculated effectiveness ratio is being evaluated within the TAS-39 Financial Instruments: Recognition and Measurement standards and hedge accounting principles are being applied. The Parent Bank documents the hedging strategies along with risk management goals. Hedge accounting ends when protection subject from risk ends or being sold or effectiveness test results are not effective anymore. Foreign operations The functional currencies of the foreign subsidiaries, World Vakıf UBB Ltd. In Liquidation and Vakıfbank International AG, are US Dollar and Euro, respectively and their financial statements are translated to the presentation currency, TL, for consolidation purposes, as summarized in the following paragraphs. - The assets and liabilities of the foreign subsidiaries are translated at the exchange rate ruling at the end of the respective reporting period. - The income and expenses of foreign operations are translated to TL using average exchange rates. - Foreign currency differences arising from the translation of the financial statements of the foreign operations into TL for consolidation purpose are recognized in other comprehensive income and accumulated in the foreign currency translation reserve (“translation reserve”). Where a foreign operation is disposed of, in part or full, the full amount in the translation reserve is transferred to profit or loss as part of the profit or loss on disposal. (c) Interest Interest income and expense are recognized in the consolidated 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 Group estimates future cash flows considering all contractual terms of the financial instrument but not future credit losses. The calculation of the effective interest rate includes all fees and points paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial assets or liabilities. 23 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Interest income and expense presented in the consolidated statement of profit or loss and other comprehensive income include:  interest on financial assets and liabilities at amortized cost on an effective interest rate basis,  interest on financial assets at fair value through other comprehensive income on an effective interest rate basis,  interest earned till the disposal of financial assets at fair value through profit or loss. (d) Fees and commission Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, commissions for insurance business (see also accounting policy (s)) are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognized on a straight-line basis over the commitment period. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. (e) Net trading income Net trading income includes gains and losses arising from revaluation and disposals of financial assets at fair value through profit or loss, the disposal of available-for-sale financial assets, and gains and losses on derivative financial instruments held for trading purpose. (f) Dividends Dividend income is recognized when the right to receive the income is established. Dividends are reflected as a component of other operating income. (g) Leases The Group as the lessee The difference between operating leases and financial leases has been eliminated with the “IFRS 16 Leases” effective as of January 1, 2019, and on the transition date, the Group has applied the simplified transition approach and elected not to restate comparative figures. The group operates as a lessee and lessor. The Group started to apply the “IFRS 16 Leases” standard which went into effect on January 1, 2019 to leases of service buildings and car rentals. However ATMs which are determined as low value by the Parent Bank and short term lease contracts with a duration of 12 months or less, have been evaluated within the scope of the exemption granted by the standard. The payments for these contracts are recorded as expense in the period they occured. 24 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) The Group as the lessee (Continued) In accordance with “IFRS 16 Leases” standard, the Group calculates the “right of use” amount on the basis of the present value of the lease payments of the fixed asset leased at the beginning of the lease and includes them in “Property, plant and equipment”. The securities/properties having a right to use were capitalised by showing them under property, plant and equipment. In calculating assets having a right to use, outstanding rent amounts were discounted by a specific rate, considering the remaining term of the lease contract signed with the property owner, to determine net present value. Instead of recognising leases in the scope of the "IFRS 16 Leases" standard as expenses or prepaid expenses, the Group recognised the total lease liabilities to be paid by the end of the lease contract as “Other Liabilities and Provisions” under liabilities on the balance sheet. Changes that may impact the lease liability are remeasured and included in the balance sheet accounts. Monthly interest and depreciation are calculated on the net present value based on the period of the lease contract, and are recognised on the income statement. The Group as the lessor When the Group is the lessor in a financial lease agreement that transfers substantially all of the risks and rewards incidental to ownership of the asset to the lessee, the arrangement is classified as a finance lease and a receivable equal to the net investment in the lease is recognized. (h) Income taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income. Corporate tax Turkey In Turkey, corporate tax rate is 20%. Corporate tax rate has applied as 22% for a period of three years in between 2018-2020, according to Law No: 7061 “The Law regarding amendments on Certain Tax Laws and their implications on Deferred Tax Calculations” published in the Official Gazette dated 5 December 2017. The corporate tax rate is applied to tax base which is calculated by adding certain nondeductible expenses for tax purposes and deducting certain exemptions (like dividend income) and exclusion of deductions on accounting income. If there is no dividend distribution, no further tax charges are made. Dividends paid to resident institutions and institutions working through local offices or representatives are not subject to withholding tax. Except for the dividend payments to those institutions, the withholding tax rate on the dividend payments is 15.0%. In applying the withholding tax rates on dividend payments to non- resident institutions and individuals, the withholding tax rates covered in the related Double Tax Treaty Agreements are taken into account. Appropriation of retained earnings to capital is not considered as profit distribution and therefore is not subject to withholding tax. No further tax is paid if the profit is not distributed. Prepaid corporate taxes for every three months are computed and paid using the related period’s tax rate. The payments can be deducted from the annual corporate tax calculated for the whole year earnings. 25 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Corporate tax (Continued) 75% of the profit from sales of associate shares that held at least 2 years and 50% of the profit from sales of real estates are exceptional from corporate taxes if there is a capital increase according to Corporate Tax Law or it is hold for 5 years on a special fund account. In accordance with the tax legislation, tax losses can be carried forward to offset against future taxable income for up to five years. Tax losses cannot be carried back to offset profits from previous periods. There is no procedure for a final and definite agreement on tax assessments. Companies file their tax returns with their tax offices by the end of the 25th day of the fourth month following the close of the accounting period to which they relate. Tax returns are open to inspection for five years from the beginning of the year that follows the date of filing, during which time the tax authorities have the right to audit tax returns, and the related accounting records on which they are based, and may issue assessments based on their findings. Foreign subsidiary The corporate tax rate for the Group’s subsidiary in Austria has been determined as 25.0%. Prepaid corporate taxes for every three months are computed and paid using the related period’s tax rate. Taxes which have been paid for previous periods can be deducted from corporate taxes computed on annual taxable income. According to the Double Taxation Treaty Agreement between Turkey and Austria, Turkish corporations in Austria possess the right to benefit from tax returns of 10.0% on interest earned from the investments and loans granted in Turkey. Deferred taxes Deferred tax assets and liabilities are recognized on all taxable temporary differences arising between the carrying values of assets and liabilities in the financial statements and their corresponding balances considered in the calculation of the tax base, except for the differences not deductible for tax purposes and initial recognition of assets and liabilities outside a business combination which affect neither accounting nor taxable profit. The deferred tax assets and liabilities are reported as net in the consolidated financial statements only if the Group has a legal right to set off current year tax assets and current year tax liabilities and the deferred tax assets and deferred tax liabilities related to same taxable entity. A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be utilized. 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 realized. Transfer pricing regulations In Turkey, the transfer pricing provisions have been stated under the Article 13 of the Corporate Tax Law with the heading of “disguised profit distribution via transfer pricing”. The General Communiqué on disguised profit distribution via Transfer Pricing, dated November 18, 2007 sets details about implementation. If a taxpayer enters into transactions regarding the sale or purchase of goods and services with related parties, where the prices are not set in accordance with the arm’s length principle, then related profits are considered to be distributed in a disguised manner through transfer pricing. Such disguised profit distributions through transfer pricing are not accepted as tax deductible for corporate income tax purposes. 26 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Transfer pricing regulations (Continued) The files that should be sent to the tax authorities are prepared in accordance with the existing transfer pricing regulations. However such documents are open for five years from the beginning of the year that follows the date of filing, during which time the tax authorities have the right to audit tax returns, and the related accounting records on which they are based, and may issue tax assessments based on their findings. Investment incentives As per the provisional Article no. 69, effective from January 1, 2006, added to the Income Tax Law no. 193 by Law no. 5479 dated April 8, 2006 and published in Official Gazette no. 26133, tax payers could deduct investment incentives which were calculated according to the legislative provisions (including tax rate related provisions) in force on December 31, 2005, only from the taxable income for the years 2006, 2007, and 2008. The rights of tax payers who could not deduct investment incentives fully or partially due to insufficient taxable income during those years, were lost as at December 31, 2008. In accordance with the decision taken by the Turkish Constitutional Court on October 15, 2009, the “2006, 2007 and 2008.” clause of the provisional Article no. 69 of the Income Tax Law mentioned above, is repealed and the time limitation for the use of the investment incentive is removed. The repeal related to the investment incentive was enacted and issued in the January 8, 2010 Official Gazette number 27456. Accordingly, the Group’s subsidiary operating in finance leasing business will be able to deduct its remaining investment incentives from taxable income in the future without any time limitation. As per “Law regarding amendments to the Income Tax Law and Some Other Certain Laws and Decree Laws” accepted on July 23, 2010 at the Grand National Assembly of Turkey, the expression of “can be deducted from the earnings again in the context of this legislation (including the legislation regarding the tax rate) valid at this date” has been amended as “can be deducted from the earnings again in the context of this legislation (including the legislation regarding the tax rate as explained in the second clause of the temporary article no 61 of the Law) valid at this date” and the following expression of “ Investment incentive amount used in determination of the tax base shall not exceed 25% of the associated taxable income. Tax is computed on the remaining income per the enacted tax rate” has been added. This Law has been published in the Official Gazette on August 1, 2010. The clause “The amount which to be deducted as investment incentive to estimate tax base cannot exceed 25% of related income” which has been added to first clause of the temporary 69th article of Law No: 193 with the 5th article of Law No: 6009 on Amendments to Income Tax Law and Some Other Laws and Decree Laws has been abrogated with the February 9, 2012 dated decisions no: E.2010/93 and K.2012/20. 27 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (i) Financial Assets Recognition It shall be recognised a financial asset or a financial liability in the statement of financial position when, and only when, an entity becomes party to the contractual provisions of the instrument. A regular way purchase or sale of financial assets shall be recognised and derecognised, as applicable, using trade date accounting or settlement date accounting. At initial recognition, the Group shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at FVPL, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Classification and Measurement of Financial Instruments According to IFRS 9, the classification and measurement of financial assets is determined according to the business model in which the financial asset is managed and whether it depends on the contractual cash flows that include interest payments only on the principal and principal balances. Assessments on whether contractual cash flows include only principal balances and interest payments on the principal Within the scope of this evaluation; principal is defined as the fair value of the financial asset when it is first recognized in the financial statements. For the time value of money, interest takes into account the costs (eg liquidity risk and management costs) for the credit risk and other underlying credit risks and profit margin associated with the principal amount over a period of time. The Parent Bank takes into consideration the contractual terms of the financial asset in the evaluation of the contractual cash flows that only include principal and interest payments on the principal. This includes assessing whether the financial asset includes a contractual condition that could change the timing or amount of contractual cash flows. While performing the assessment, The Parent Bank fulfills the on-balance sheet classification and measurement criteria by applying the procedures defined in IFRS 9 Financial Instruments including events that may change the amount and timing of cash flows, leverage structure of the financial product, early payment options, contingent interest rate changes and similar conditions. At the time of initial recognition, each financial asset is classified as measured at fair value through profit or loss, at amortized cost, or at fair value through profit or loss. 28 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Financial Assets at Fair Value Through Profit or Loss Financial assets at fair value through profit/loss” are financial assets other than the ones that are managed with business model that aims to hold to collect contractual cash flows or business model that aims to collect both the contractual cash flows and cash flows arising from the sale of the assets; and if the contractual terms of the financial asset do not lead to cash flows representing solely payments of principal and interest at certain date; that are either acquired for generating a profit from short term fluctuations in prices or are financial assets included in a portfolio aiming to short-term profit making. Financial assets at the fair value through profit or loss are initially recognized at fair value and remeasured at their fair value after recognition. All gains and losses arising from these valuations are reflected in the income statement. Equity securities classified as financial assets at fair value through profit/loss are recognized at fair value. Financial Assets at Fair Value Through Other Comprehensive Income In addition to financial assets within a business model that aims to hold to collect contractual cash flows and aims to hold to sell, financial assets with contractual terms that lead to cash flows are solely payments of principal and interest at certain dates, they are classified as fair value through other comprehensive income. Financial assets at fair value through other comprehensive income are recognized by adding transaction cost to acquisition cost reflecting the fair value of the financial asset. After the recognition, financial assets at fair value through other comprehensive income are remeasured at fair value. Interest income calculated with effective interest rate method arising from financial assets at fair value through other comprehensive income and dividend income from equity securities are recorded to income statement. “Unrealized gains and losses” arising from the difference between the amortized cost and the fair value of financial assets at fair value through other comprehensive income are not designated in the income statement of the period until the acquisition of the asset, sale of the asset, the disposal of the asset, and impairment of the asset and they are accounted under the “Accumulated other comprehensive income or expense to be reclassified through profit or loss” under shareholders’ equity. Equity securities, which are classified as financial assets at fair value through other comprehensive income, that have a quoted market price in an active market and whose fair values can be reliably measured are carried at fair value. Equity securities that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are carried at cost, less provision for impairment. 29 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Financial Assets at Fair Value Through Other Comprehensive Income (Continued) During initial recognition an entity can choose in an irrecovable was to record the changes of the fair value of the investment in an equity instrument that is not held for trading purposes in the other comprehensive income. In the case of this preference, the dividend from the investment is taken into the financial statements as profit or loss. Financial Assets Measured at Amortized Cost Financial assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are classified as financial assets measured at amortized cost. Financial assets measured at amortized cost are initially recognized at acquisition cost including the transaction costs which reflect the fair value of those instruments and subsequently recognized at amortized cost by using effective interest rate method. Interest income obtained from financial assets measured at amortized cost is accounted in income statement. Both “Fair value through other comprehensive income” and “measured at amortized cost” securities portfolio of the Group include Consumer Price Indexed (CPI) Bonds. These securities are valued and accounted using the effective interest rate method based on the real coupon rates and the reference inflation index at the issue date and the estimated inflation rate. The reference indices used in calculating the actual coupon payment amounts of these assets are based on the Consumer Price Index (CPI) of prior two months. The Bank also sets the estimated inflation rate accordingly. The estimated inflation rate used is updated as needed within the year. At the end of the year real interest rate is used. When the Group purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially a similar asset) at a fixed price on a future date (“reverse repo” or “stock borrowing”), the arrangement is accounted for as a loan and advance, and the underlying asset is not recognized in the Group’s financial statements. Such financial assets are presented separately on the face of consolidated statement of financial position. Financial liability is any liability that is a contractual obligation to deliver cash or another financial asset to another entity. See also specific instruments below. Measurement A financial asset or 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. Subsequent to initial recognition, all financial assets at fair value through profit or loss and all financial assets at fair value through other comprehensive income are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, including transaction costs, less impairment losses. All non-trading financial liabilities and financial assets at amortised cost are measured at amortized cost less impairment losses. The amortized cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount, minus any reduction for impairment. 30 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management’s best estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market-related measures at the reporting date. Fair values of foreign currency forward and swap transactions are determined by comparing the period end foreign exchange rates with the contractual forward rates discounted to the balance sheet date with the current market rates. The resulting gain or loss is reflected in the income statement. In the assessment of fair value of interest rate swap instruments, interest amounts to be paid or to be received due to/from the fixed rate on the derivative contract are discounted to the balance sheet date with the current applicable fixed rate in the market that is prevailing between the balance sheet date and the interest payment date, whereas interest amounts to be paid or to be received due to/from the floating rate on the derivative contract are recalculated with the current applicable market rates that are prevailing between the balance sheet date and the interest payment date and are discounted to the balance sheet date again with the current applicable market rates that are prevailing between the balance sheet date and the interest payment date. The differences between the fixed rate interest amounts and floating rate interest amounts to be received/paid are recorded in the profit/loss accounts in the current period. The fair value of call and put option agreements are measured at the valuation date by using the current premium values of all option agreements, and the differences between the contractual premiums received/paid and the current premiums measured at valuation date are recognized in the statement of income. Futures transactions are valued on a daily basis by the primary market prices and related unrealized gains or losses are reflected in the income statement. De-recognition A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when: • The rights to receive cash flows from the asset have expired; • The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’ arrangement; or • The Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset Financial assets at fair value through other comprehensive income and financial assets at fair value through profit or loss that are sold are derecognized and corresponding receivables from the buyer for the payment are recognized as at the date the Group commits to sell the assets. The specific identification method is used to determine the gain or loss on de-recognition. Financial assets at amortised cost are derecognized on the date they are transferred by the Group. The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled or expired. 31 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) Offsetting Financial assets and liabilities are set off and the net amount presented in the consolidated statement of financial position when, and only when, the Group has a legal right to set off the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. Specific instruments Cash and cash equivalents: Cash and cash equivalents which is a base for preparation of consolidated statement of cash flows includes cash in TL, cash in FC (foreign currency), cheques, balances with the Central Bank, money market placements and loans and advances to banks whose original maturity is less than three months. Loans and advances to banks and customers: Loans and advances provided by the Group to banks and customers are classified as loans and receivables, and reported net of allowances to reflect the estimated recoverable amounts. Finance lease receivables: Leases where substantially all the risks and rewards incident to ownership of an asset are substantially transferred to the lessee are classified as finance leases. A receivable at an amount equal to the present value of the lease payments, including any guaranteed residual value, is recognized. The difference between the gross receivable and the present value of the receivable is unearned finance income and is recognized over the term of the lease using the effective interest method. Finance lease receivables are included in loans and advances to customers. Factoring receivables: Factoring receivables are the loans and advances to customers arising from a financial transaction whereby the customers sell their accounts receivable (i.e., invoices) to the Group at a discount in exchange for immediate money with which to finance continued business. Factoring receivables are measured at amortized cost using the effective interest method after deducting unearned interest income and specific provision if impairment exists. Deposits, funds borrowed, debt securities issued and subordinated debts: Deposits, funds borrowed, debt securities issued and subordinated debts are the Group’s sources of debt funding. Deposits, funds borrowed, debt securities issued and subordinated debts are initially measured at fair value plus directly attributable transactions costs, and subsequently measured at their amortized cost using the effective interest method. (j) Repurchase transactions The Group enters into purchases/sales of investments under agreements to resell/repurchase substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognized. The amounts paid are recognized as receivables from reverse repurchase agreements in the accompanying consolidated financial statements. The receivables are shown as collateralized by the underlying security. Investments sold under repurchase agreements continue to be recognized in the consolidated statement of financial position and are measured in accordance with the accounting policy for either assets held for trading, held to maturity or available- for-sale as appropriate. The proceeds from the sale of the investments are reported as obligations under repurchase agreements. Income and expenses arising from the repurchase and resale agreements over investments are recognized on an accruals basis over the period of the transaction and are included in “interest income” or “interest expense”. 32 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (k) Property and equipment Property and equipment are stated at cost less accumulated depreciation and accumulated impairment in value. The Group pursues only the properties for use according to their fair values in terms of separating the land and buildings within the context of IAS 16 as at December 31, 2016. As a result of the valuation by the independent appraisal company, revaluation difference of TL 859,346 after deferred tax effect is followed as the revaluation surplus under shareholder’s equity. Gains/losses arising from the disposal of the property and equipment are recognized in profit or loss and calculated as the difference between the net book value and the net sales price. Maintenance and repair costs incurred for property and equipment are recorded as expense unless they extend the economic useful life of related asset. There are no changes in the accounting estimates that are expected to have an impact in the current or subsequent periods. Property and equipment are depreciated based on the straight line method. Depreciation rates and estimated useful lives are: Estimated useful Depreciation Property and equipment lives (years) Rates (%) Buildings 50 2 Office equipment, furniture and fixture, and motor 5-10 10-20 vehicles Vehicles obtained through finance leases 4-5 20-25 (l) Intangible assets The Group’s intangible assets consist of software programs. Intangible assets are recorded at cost. The costs of the intangible assets purchased before December 31, 2005 are restated for the effects of inflation from the purchasing dates to December 31, 2005, the date the hyperinflationary period is considered to be ended. The intangible assets purchased after this date are recorded at their historical costs. The intangible assets are amortized based on straight line amortization. The economic lives of intangible assets vary within the range of three and fifteen years and hereby the amortization rates applied are between 33.33% and 6.67%. (m) Provisions A provision is recognized if, as a result of a past event, the Group 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 recognized when the Group 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. (n) Employee benefits Pension and other post-retirement obligations The Bank has a defined benefit plan for its employees as described below: A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee and his/her dependents will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. 33 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (n) Employee benefits (Continued) Pension and other post-retirement obligations T. Vakıflar Bankası T.A.O. Memur ve Hizmetleri Emekli ve Sağlık Yardım Sandığı Vakfı (“the Fund”), is a separate legal entity and a foundation recognized by an official decree, providing pension and post- retirement medical benefits to all qualified Bank employees. The Fund has a defined benefit plan (“the Plan”) under which the Bank pays a mixture of fixed contributions, and additional contractual amounts. The Plan is funded through contributions of both by the employees and the employer as required by Social Security Law numbered 506 and these contributions are as follows: Employer % Employee % Pension contributions 11.0 9.0 Medical benefit contributions 7.5 5.0 This Plan is composed of the contractual benefits of the employees, which are subject to transfer to the Social Security Foundation (“SSF”) (“pension and medical benefits transferable to SSF”) and other excess social rights and payments provided in the existing trust indenture but not transferable to SSF and medical benefits provided by the Bank for its constructive obligation (“excess benefits”). As a result of the changes in legislation described below, the Bank will transfer a substantial portion of its pension liability under the Plan to SSF. This transfer, which will be a settlement of the Bank’s obligation in respect of the pension and medical benefits transferable to SSF, will occur within three years from the enactment of the Law no. 5754: “Law regarding the changes in Social Insurance and General Health Insurance Law and other laws and regulations” (“New Law”) in May 2008. Pension and medical benefits transferable to SSF: As per the provisional Article no. 23 of the Turkish Banking Law no. 5411 (“Banking Law”) as approved by the Turkish Parliament on October 19, 2005, pension funds which are in essence similar to foundations are required to be transferred directly to SSF within a period of three years. In accordance with the Banking Law, the actuarial calculation of the liability, if any, on the transfer should be performed having regard to the methodology and parameters determined by the commission established by the Ministry of Labor and Social Security. Accordingly, the Bank calculated the pension benefits transferable to SSF in accordance with the Decree published by the Council of Ministers in the Official Gazette no. 26377 dated December 15, 2006 (“Decree”) for the purpose of determining the principles and procedures to be applied during the transfer of funds. However they said Article was vetoed by the President and at November 2, 2005 the President initiated a lawsuit before the Turkish Constitutional Court in order to rescind certain paragraphs of the provisional Article no. 23. On March 22, 2007, the Turkish Constitutional Court reached a verdict with regards to the suspension of the execution of the first paragraph of provisional Article no. 23 of the Turkish Banking Law, which requires the transfer of pension funds to SSF, until the decision regarding the cancellation thereof is published in the Official Gazette. The Constitutional Court stated in its reasoned ruling published in the Official Gazette no. 26731, dated December 15, 2007 that the reason behind this cancellation was the possible loss of antecedent rights of the members of pension funds. 34 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (n) Employee benefits (Continued) Following the publication of the verdict, the Grand National Assembly of Republic of Turkey (“Turkish Parliament”) worked on the new legal arrangements by taking the cancellation reasoning into account. On April 17, 2008, the New Law was accepted by the Turkish Parliament and was enacted on May 8, 2008 following its publication in the Official Gazette no. 26870. In accordance with the New Law, members of the funds established in accordance with the Social Security Law should be transferred to SSF within three years following its enactment date. The three year period has expired on May 8, 2011. According to the decision of the Council of Ministers published on the Official Gazette dated April 9, 2011 no. 27900, the time frame for related transfer has been extended for two years. Within the postponement right granted to the Council of Ministers through the change in the first clause of the 20th provisional article of the “Social Insurance and General Health Insurance Law no. 5510” published on the Official Gazette no. 28227 dated March 8, 2012, the transfer process has been postponed for one more year with the decision of the Council of Ministers published on the Official Gazette no. 28987 dated April 30, 2014. The Council of Ministers has been lastly authorized to determine the transfer date in accordance with the last amendment in the first paragraph of the 20th provisional article of Law No.5510 implemented by the Law No. 6645 on Amendment of the Occupational Health and Safety Law and Other Laws and Decree Laws published in the Official Gazette dated April 23, 2015 numbered 29335. “Council of Ministers” expression in “Council of Ministers is authorized to determine the date of transfer to the Social Security Institution” stated in provisional article 20 of Social Insurance and Universal Health Insurance Law No. 5510 is replaced with the “President” pursuant to the paragraph (I) of Article 203 of Statutory Decree No. 703 promulgated in repeated Official Gazette No. 30473, dated July 2018. Excess benefit not transferable to SSF: The other social rights and payments representing benefits in excess of social security limits are not subject to transfer to SSF. Actuarial valuation: The technical financial statements of the Fund are audited by the certified actuary according to the “Actuaries Regulation” which is issued as per Article no. 21 of the Insurance Law no. 5684. As per the actuarial report dated January 2020, there is no technical or actual deficit determined which requires provision against. Transferable Retirement and Health Liabilities: December 31, 2020 December 31, 2019 Net Present Value of Transferable Retirement (9,103,430) (8,016,606) Liabilities Net Present Value of Transferable Retirement and 7,319,847 6,813,970 Health Contributions General Administration Expenses (91,034) (80,166) Present Value of Pension and Medical Benefits (1,874,618) (1,282,802) Transferable to SSF (1) Fair Value of Plan Assets (2) 6,577,453 6,255,056 Asset Surplus over Transferrable Benefits ((2)-(1)=(3)) 4,702,835 4,972,254 Actuarial assumptions used in valuation of Non Transferable Benefits based on IAS 19 are as follows: Discount Rates December 31, 2020 December 31, 2019 Benefits Transferable to SSF 9.80% 9.80% Non Transferable Benefits 2.50% 2.50% 35 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (n) Employee benefits (Continued) Distribution of total assets of the Retirement Fund as of December 31, 2020 and December 31, 2019 is presented below: December 31, 2020 December 31, 2019 Bank placements 2,462,572 639,362 Government Bonds and Treasury Bill, Fund and Accrual Interest 1,476,099 3,267,243 Income Tangible assets (*) 2,387,853 2,219,862 Other 250,929 128,589 Total 6,577,453 6,255,056 (*) The tangible assets vaue indicates all the stocks’ and real estate properties’ market values, as of December 31, 2020. Reserve for employee severance indemnity Reserve for employee severance indemnity represents the present value of the estimated future probable obligation of the Bank and its subsidiaries arising from the retirement of the employees and calculated in accordance with the Turkish Labor Law. IFRSs require actuarial valuation methods to be developed to estimate the entity’s obligation under reserve for employee severance indemnity. Other benefits to employees The Group has provided for undiscounted employee benefits earned during the financial period as per services rendered in the accompanying consolidated financial statements. (o) Items held in trust Assets, other than cash deposits, held by the Group in fiduciary or agency capacities for their customers and government entities are not included in the accompanying consolidated statement of financial position, since such items are not the assets of the Group. (p) Financial guarantees Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are initially recognized at their fair value, and the initial fair value is amortized over the life of the financial guarantee. The financial guarantee contracts are subsequently carried at the higher of this amortized amount and the present value of any expected payment when a payment under the guarantee has become probable. (r) Insurance business Through its insurance subsidiaries, the Group enters into contracts that contain insurance risk. An insurance contract is a contract under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance risk covers all risks except for financial risks. Investment contracts are those contracts which transfer financial risk without significant insurance risk. Financial risk is the risk of a possible future change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable, provided, that it is not specific to a party to the contract, in the case of a non-financial variable. 36 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (r) Insurance business (Continued) Insurance and investment contracts issued/signed by the insurance subsidiaries are accounted for as follows: Earned premiums: For short-term insurance contracts, premiums are recognized as revenue, proportionally over the period of coverage. The portion of premium received on in-force contracts that relates to unexpired risks at reporting date is recognized as the reserve for unearned premiums that are calculated on a daily pro-rata basis. Premiums are shown before deduction of commissions given or received and deferred acquisitions costs, and are net of any taxes and duties levied on premiums. For long-term insurance contracts, premiums are recognized as revenue when the premiums are due from the policyholders. Earned premiums, net of amounts ceded for reinsurance are recorded under operating income in the accompanying consolidated statement of comprehensive income. Premium received for an investment contract, is not recognized as revenue. Premiums for such contracts are recognized directly as liabilities. Reserve for unearned premiums: The reserve for unearned premiums represents the proportions of the premiums written in a period that relate to the period of risk subsequent to the reporting date, without deductions of commission or any other expense. Reserve for unearned premiums is calculated for all contracts except for the insurance contracts for which the Group provides actuarial provisions. The reserve for unearned premiums is also calculated for the annual premiums of the annually renewed long-term insurance contracts. The reserve for unearned premiums is presented under other liabilities and provisions in the accompanying consolidated statement of financial position. Reserve for outstanding claims: The reserve for outstanding claims represents the estimate of the total reported costs of notified claims on an individual case basis at the reporting date as well as the corresponding handling costs. A provision for claims incurred but not reported (“IBNR”) is also established as described below. Estimates have to be made both for the expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost of IBNR claims at the reporting date. It can take a significant period of time before the ultimate claims cost can be established with certainty. The primary technique adopted by management in estimating the cost of IBNR claims, is that of using past claim settlement trends to predict future claims settlement trends (“Actuarial Chain Ladder Method”). At each reporting date, prior year claims estimates are reassessed for adequacy and changes are made to the provision. In addition to that, the Group also reassesses its notified claims provision at each reporting date on an ‘each claim-file’ basis. The reserve for outstanding claims is not discounted for the time value of money. The reserve for outstanding claims is presented under other liabilities and provisions in the accompanying consolidated statement of financial position. Receivables from reinsurance activities: In the accompanying consolidated financial statements, receivables from reinsurance activities are presented under other assets. There receivables comprise the actual and estimated amounts, which, under contractual reinsurance agreements, are recoverable from reinsurers in respect of technical provisions. Reinsurance assets relating to technical provisions are established based on the terms of the reinsurance contracts and valued on the same basis as the related reinsured liabilities. Subrogation, salvage and quasi income: The Group may account for income accrual for subrogation receivables without any voucher after the completion of the claim payments made to the insuree. If the amount cannot be collected from the counterparty insurance company, the Group provides provision for uncollected amounts due for six months. If the counter party is not an insurance Company, the provision is provided after four months. Long term insurance contracts: Long term insurance contracts are the provisions recorded against the liabilities of the Group to the beneficiaries of long-term life and individual accident policies based on actuarial assumptions. 37 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (r) Insurance business (Continued) Long term insurance contracts are calculated as the difference between the net present values of premiums written in return of the risk covered by the Group and the liabilities to policyholders for long-term insurance contracts based on the basis of actuarial mortality assumptions as approved by the Republic of Turkey Ministry of Treasury and Finance, which are applicable for all Turkish insurance companies. Long term insurance contracts are presented under other liabilities and provisions in the accompanying consolidated financial statements. Investment contracts: Premiums received for such contracts are recognized directly as liabilities under investment contract liabilities. These liabilities are increased by bonus rate calculated by the Group and are decreased by policy administration fees, mortality and surrender charges and any withdrawals. Profit sharing reserves are the reserves provided against income obtained from asset backing investment contracts. These contracts entitle the beneficiaries of those contracts to a minimum guaranteed crediting rate per annum or, when higher, a bonus rate declared by the Group from the eligible surplus available to date. Deferred acquisition cost and deferred commission income: Commissions and other acquisition costs given to the intermediaries that vary with and are related to securing new contracts and renewing existing insurance contracts are capitalized as deferred acquisition cost. Deferred acquisition costs are amortized on a straight-line basis over the life of the contracts. Deferred acquisition costs are presented under other assets in the accompanying consolidated financial statements. Commission income obtained against premiums ceded to reinsurance firms are also deferred and amortized on a straight-line basis over the life of the contracts. Deferred commission income is presented under other liabilities and provisions in the accompanying consolidated financial statements. Liability adequacy test: At each reporting date, a liability adequacy test is performed, to ensure the adequacy of unearned premiums net of related deferred acquisition costs. In performing the test, current best estimates of future contractual cash flows, claims handling and policy administration expenses are taken into consideration. Any deficiency is immediately charged to the consolidated statement of comprehensive income. If the result of the test is that a loss is required to be recognized, the deferred acquisition cost is reduced to the extent that expense loadings are considered not recoverable. Finally, if there is a still remaining amount of loss, this should be booked as an addition to the reserve for premium deficiency. (s) Individual pension business Individual pension system receivables presented under ‘other assets’ in the accompanying consolidated financial statements consists of ‘receivable from pension investment funds for investment management fees’, ‘entrance fee receivable from participants’ and ‘receivables from the clearing house on behalf of the participants’. Pension funds are the mutual funds that the individual pension companies invest in, by the contributions of the participants. Shares of the participants are kept at the clearing house on behalf of the participants. Fees received from individual pension business consist of investment management fees, fees levied on contributions and entrance fees. Fees received from individual pension business are recognized in other income in the accompanying consolidated profit or loss and other comprehensive income. Investment management fees are the fees charged to the pension funds against the hardware, software, personnel and accounting services provided to those pension funds. Fees levied on contributions may be deducted over the participants’ contributions for the operational costs of the services rendered by the Group. The upper limit for such deductions is 2% over the contributions. Entrance fees are received by the Group from participants during entry into the system and for the opening of a new individual pension account. In some pension plans, the Group receives some or all of the entrance fees when the participants leave the group before the completion of a 5-years ‘staying period’. If the participants keep their pension accounts in the Group more than 5 years, the entrance fee is not charged in these pension plans. In such cases, the Group does not recognize the entrance fee as revenue. 38 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3. Accounting Policies, Judgements and Estimates (Continued) (t) Earnings per share Basic earnings per share from continuing operations disclosed in the accompanying consolidated profit or loss and other comprehensive income is determined by dividing the net profit for the period by the weighted average number of shares outstanding during the period attributable to the shareholders of the Bank. There are no potentially dilutive instruments. 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, such Bonus Shares issued are regarded as issued shares. (u) Subsequent events Post-balance sheet events that provide additional information about the Group’s position at the reporting dates (adjusting events) are reflected in the consolidated financial statements. Post-balance sheet events that are not adjusting events are disclosed in the notes when material. (v) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components, whose operating results are reviewed regularly by the Board of Directors (being chief operating decision maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available. (y) Assets classified as held for sale and related liabilities As per IFRS 5 - “Non-current Assets Held for Sale and Discontinued Operations”, a fixed asset classified as an asset kept for sales purposes (or a group of fixed assets to be disposed of) is measured with either its book value or fair value less costs to sell (with the lower one). A discontinued operation is a part of the Group’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. As per the Board of Directors decision in December 13th, 2019, the Bank has started the process of transfer of shares held in subsidiaries Güneş Sigorta and Vakıf Emeklilik ve Hayat AŞ respectively, including publicly held shares, to a new company to be established by Türkiye Varlık Fonu Yönetimi AŞ These two companies have been removed from the subsidiaries account and started to be classified under the Assets Held for Sale and Discontinued Operations account. The method of consolidation of the related companies is specified in the note 2.3.a Basis of consolidation. On April 22, 2020, a share transfer agreement was signed between TVF Financial Investments as the buyer and the Parent Bank as the seller, in order to transfer the Parent Banks shares which represent 51.1% of Güneş Sigorta AŞ’s capital and 53.9% of Vakıf Emeklilik ve Hayat AŞ’s capital to TVF Financial Investments AŞ ("TVF Financial Investments"). The share transfer has been completed as of the same date. As of April 22, 2020, all of the shares owned by the Parent Bank in Güneş Sigorta AŞ and Vakıf Emeklilik ve Hayat AŞ were transferred to TVF Finansal Yatırımlar AŞ, and the Parent Bank have not had any shares left in the relevant companies. 39 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.4. Statement of Cash Flows The cash and cash equivalents balance comprises cash and balances with central banks (excluding restricted reserve deposits), deposits with banks and other financial institutions and other money market placements with an original maturity of three months or less. Changes in cash and cash equivalents related to operating activities reflect cash flows generated by the Group’s operations. Cash flow movements of subsidiaries which are classified as held for sale asset are demonstrated in each related line of cash flow statement as if these subsidiaries are consolidated with full consolidation method in 2020. Changes in cash and cash equivalents related to investing activities reflect cash flows resulting from acquisitions and disposals of subsidiaries, as well as acquisitions and disposals of premises and equipment. Changes in cash and cash equivalents related to financing activities reflect the cash inflows and outflows resulting from transactions with shareholders and cash flows related to subordinated debt. 2.5. New and amended standards adopted by the Group TFRS 16 Leases Standard was published in the Official Gazette dated 16 April 2018 and numbered 30393, effective from 1 January 2019. This Standard specifies the principles for the leasing, presentation, presentation and disclosure of leases. The purpose of the standard is to provide tenants and lessees with appropriate information and to provide them with appropriate information. This information is the basis for evaluating the impact of the leases on the entity's financial position, financial performance and cash flows by users of financial statements. The Parent Bank has applied the simplified transition approach and elected not to restate comparative figures. The Parent Bank has not reassessed whether a contract is a lease or not a lease at the date of initial application for leases previously classified as operating leases in accordance with TAS 17 by preferring simplified transition approach. For the leases previously classified as operational leases in accordance with TAS 17, the lease liability calculated on the present value of the remaining lease payments, discounted using the alternative borrowing interest rate of the lessee at the initial application date is reflected to the financial statements. A right of use is also reflected in the financial statements at an amount equal to the lease obligation, which is reflected in the statement of financial position immediately prior to the initial application date, adjusted for the amount of all prepayment or accrued lease payments. 40 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.6 Explanations on Prior Period Accounting Policies not Valid for the Current Period 2.6.1 Leases The Group as the lessee Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of income on a straight-line basis over the period of the lease. Finance leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Capitalised leased assets are depreciated over the estimated useful life of the asset. 2.7 Explanations on IFRS 16 Standard The amounts recognized under IFRS 16 as of December 31, 2020 and December 31, 2019 are presented below. December 31, 2020 Service Buildings Vehicles Total Lease payables 1,362,596 24,393 1,386,989 Deferred rental expenses 384,516 3,158 387,674 Lease payables (Net) 978,080 21,235 999,315 Right of use assets 899,191 19,675 918,866 December 31, 2019 Service Buildings Vehicles Total Lease payables 1,413,536 20,589 1,434,125 Deferred rental expenses 495,782 2,405 498,187 Lease payables (Net) 917,754 18,184 935,938 Right of use assets 876,242 16,979 893,221 Short term lease contracts with a duration of 12 months or less and lease contracts for ATMs that are determined to be of low value by the Group have been evaluated within the scope of the exemption recognized by the standard, and payments for these contracts are recorded as expense in the period they occur. In this context, 81,040 thousand TL (December 31, 2019: TL 92,870) of rent was paid in the related period. 41 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (a) Introduction and overview This note presents information about the Group’s exposure to each of the risks below, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. The Group has exposure to the following risks from its use of financial instruments: • credit risk, • liquidity risk, • market risk, • operational risk, Risk management framework The Board of Directors of the Bank has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board of Directors monitors the effectiveness of the risk management system through the Audit Committee. Consequently, the Risk Management Department of the Bank, which carries out the risk management activities and works independently from executive activities, report to the Board of Directors. The Group’s risk management policies are established to identify and analyze the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The risks are measured using internationally accepted methodologies, in compliance with local and international regulations, and the Bank’s structure, policy and procedures. It is aimed to develop these methodologies to enable the Bank to manage the risks effectively. 42 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (a) Introduction and overview (Continued) In order to ensure the compliance with the rules as altered pursuant to Articles 23, and 29 to 31 of the Banking Law no. 5411 and Articles 36 to 69 of the Regulation on Internal Systems within the Banks, dated June 28, 2012 the Bank revised the written policies and implementation procedures regarding management of each risk encountered in its activities in September 2012. Audit Committee: The Audit Committee consists of two members of the Board of Directors who do not have any executive functions. The Audit Committee, established to assist the Board of Directors in its auditing and supervising activities, is responsible for: • The supervision of the efficiency and effectiveness of the internal control, risk management and internal audit systems of the Group, functioning of these systems as well as accounting and reporting systems within the framework of related procedures, and the integrity of information generated; • The preliminary assessment on the selection process of independent audit firms and the systematic monitoring of the activities of these companies; • The maintenance and coordination of the internal audit functions of corporations subject to consolidated internal audits. (b) Credit risk Credit risk is defined as the probability of loss if the customer or counterparty fails to meet its obligations partially or completely on the terms set. Credit risk is considered in depth, covering the counterparty risks arising from not only from loans and debt securities but also credit risks originating from the transactions defined as loans in the Banking Law. Management of credit risk For credit risk management purposes the Risk Management Department is involved in • the determination of credit risk policies in coordination with the Bank’s other units, • the determination and monitoring of the distribution of concentration limits with respect to sector, geography and credit type, • contribution to the formation of rating and scoring systems, • submitting to the Board of Directors and the senior management not only credit risk management reports about the credit portfolio’s distribution (borrower, sector, geographical region), credit quality (impaired loans, credit risk ratings) and credit concentration, but also scenario analysis reports, stress tests and other analyses, and • studies regarding the formation of advanced credit risk measurement approaches. The credit risk is assessed through the internal rating system of the Group, by classifying loans from highest grade to lowest grade according to the probability of default. As of December 31, 2020, consumer loans are excluded from the internal rating system of the Bank. The risks that are subject to rating models can be allocated as follows: Share in the Total % Share in the Total % Category* December 31, 2020 December 31, 2019 Above average 37.36 30.31 Average 46.96 50.69 Below average 13.68 16.58 Unrated 2.00 2.42 Total 100.00 100.00 (*) Rating scale on the table has been determined between 1 - 10, and average score has been selected as 4-5 43 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (b) Credit risk (Continued) Credit quality per class of financial assets as of December 31, 2020 and 2019 are as follows; Total allowance for December 31, 2020 Stage 1 Stage 2 Stage 3 impairment Total (Stage 1+2+3) Cash and balances with central banks (excluding cash on hand) 93,390,696 - - (2,868) 93,387,828 Financial assets at fair value through profit or loss 16,199,275 - - - 16,199,275 Securities 7,458,290 - - - 7,458,290 Derivative financial instruments 8,740,985 - - - 8,740,985 Financial assets at fair value through OCI 85,007,132 - - - 85,007,132 Debt Securities 83,909,766 - - - 83,909,766 Equity Securities 1,097,366 - - - 1,097,366 Financial assets at amortised cost 447,901,811 42,790,050 17,930,171 (22,152,093) 486,469,939 Loans and advances to banks 2,860,294 - - (892) 2,859,402 Loans and advances to customers 386,294,265 42,790,050 17,930,171 (22,144,605) 424,869,881 - Commercial 276,933,204 32,549,755 15,029,808 (18,483,054) 306,029,713 - Consumer 94,967,658 1,251,391 1,758,795 (2,197,849) 95,779,995 - Credit cards 14,393,403 243,970 863,752 (1,114,329) 14,386,796 - Lease receivables (*) - 3,055,519 215,491 (256,529) 3,014,481 - Factoring receivables (*) - 5,689,415 62,325 (92,844) 5,658,896 Debt Securities 58,747,252 - - (6,596) 58,740,656 Other assets 4,825,010 - - (124,424) 4,700,586 Total 647,323,924 42,790,050 17,930,171 (22,279,385) 685,764,760 (*) Simplified approach has been applied for lease and factoring receivables so no staging allocation has been performed. Total allowance for December 31, 2019 Stage 1 Stage 2 Stage 3 impairment Total (Stage 1+2+3) Cash and balances with central banks (excluding cash on hand) 39,930,367 - - (9,366) 39,921,001 Financial assets at fair value through profit or loss 6,815,205 - - - 6,815,205 Securities 2,307,977 - - - 2,307,977 Derivative financial instruments 4,507,228 - - - 4,507,228 Financial assets at fair value through OCI 26,584,063 - - - 26,584,063 Debt Securities 25,782,244 - - - 25,782,244 Equity Securities 801,819 - - - 801,819 Financial assets at amortised cost 294,661,795 34,913,874 17,712,516 (16,072,282) 331,215,903 Loans and advances to banks 1,266,251 - - (576) 1,265,675 Loans and advances to customers 246,380,911 34,913,874 17,712,516 (16,066,652) 282,940,649 - Commercial 178,337,870 29,738,663 14,367,257 (12,960,287) 209,483,503 - Consumer 55,354,636 1,648,613 2,091,605 (1,843,595) 57,251,259 - Credit cards 10,512,442 312,320 996,509 (993,080) 10,828,191 - Lease receivables 2,175,963 403,182 194,971 (189,690) 2,584,426 - Factoring receivables - 2,811,096 62,174 (80,000) 2,793,270 Debt Securities 47,014,633 - - (5,054) 47,009,579 Other assets 2,340,865 - - (29,477) 2,311,388 Total 370,332,295 34,913,874 17,712,516 (16,111,125) 406,847,560 The table below shows the maximum exposure to credit risk for the components of the financial statements; Gross maximum exposure December 31, 2020 December 31, 2019 Cash and balances with central banks (excluding cash on hand) 93,387,828 39,921,001 Financial assets at fair value through profit or loss 16,199,275 6,815,205 Financial assets at fair value through OCI (“FVOCI”) 85,007,132 26,584,063 - Debt Securities 83,909,766 25,782,244 - Equity Securities 1,097,366 801,819 Financial assets at amortised cost (“AC”) 486,469,939 331,215,903 - Loans and advances to banks 2,859,402 1,265,675 - Loans and advances to customers 424,869,881 282,940,649 - Debt securities 58,740,656 47,009,579 Other assets 4,700,586 2,311,388 Total 685,764,760 406,847,560 Financial guarantees 102,445,738 78,252,294 Loan commitments 114,481,983 82,998,434 Total 216,927,721 161,250,728 Total credit risk exposure 902,692,481 568,098,288 44 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (b) Credit risk (Continued) Sectorial distribution of the performing loans and advances to customers December 31, 2020 December 31, 2019 Amount % Amount % Consumer loans 96,219,049 22.43 57,003,250 20.27 Mortgage loans 40,613,169 9.47 23,616,133 8.40 General purpose loans 49,525,489 11.55 29,231,588 10.39 Overdraft checking accounts 5,599,393 1.30 3,737,703 1.33 Auto loans 478,516 0.11 415,757 0.15 Other consumer loans 2,482 - 2,069 - Manufacturing 113,832,924 26.53 70,106,672 24.92 Wholesale and retail trade 58,080,392 13.54 38,409,929 13.65 Transportation and telecommunication 48,418,802 11.28 34,381,429 12.22 Construction 41,169,434 9.59 26,340,031 9.36 Credit cards 14,637,373 3.41 10,824,762 3.85 Hotel, food and beverage services 14,975,711 3.49 9,026,757 3.21 Financial institutions 5,761,819 1.34 6,790,353 2.41 Agriculture and stockbreeding 3,184,954 0.74 2,281,748 0.81 Health, social and education services 4,422,847 1.03 3,009,339 1.07 Others 28,381,010 6.62 23,120,515 8.23 Total performing loans and advances to 429,084,315 100.00 281,294,785 100.00 customers Loans with renegotiated terms Loans with renegotiated terms are loans that have been restructured due to temporary deterioration in the borrower’s financial position and where the Group has made concessions that it would not otherwise consider. Carrying amount per class of loans whose terms have been renegotiated: December 31, 2020 December 31, 2019 Loans and receivables Commercial 14,578,505 14,002,997 Consumer 786,423 820,931 Credit Cards 66,585 85,665 Total 15,431,513 14,909,593 Allowances for impairment The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. Write-off policy The amendment with respect to the regulation on the Principles and Procedures Regarding the Classification of Loans and Reserves Set Aside for These Loans entered into force with its publication in the Official Gazette No.30961 on November 27, 2019. Pursuant to the regulation, the banks are enabled to write down and move off the balance sheet the portion of a loan which is classified as “Group V Loan” (Loans Classified as Loss) if it cannot reasonably be expected to be recovered. In accordance with the amendment in the related regulation on provisions, the deduction of loans from the records is an accounting practice and does not result in the right to waive. In the current period, a write-off transaction has been made for non-performing loans in the amount of TL 890,789 for which 100% provision has been made. (December 31, 2019: None.) 45 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (b) Credit risk (Continued) Set out below is an analysis of the gross and net (of specific impairment) amounts of individually impaired assets by risk grade. Loans and advances to customers Other assets December 31, 2020 Gross Net Gross (*) Net (*) Individually Impaired 17,930,171 4,212,271 - - Loans and advances to customers Other assets December 31, 2019 Gross Net Gross (*) Net (*) Individually Impaired 17,712,516 5,233,729 259,915 12,533 (*) Impaired insurance receivables are included. Collateral policy The Group holds collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held at December 31, 2020 and 2019. The breakdown of performing cash loans and advances to customers and non-cash loans (financial “guarantee contracts) by type of collateral are as follows: Cash loans December 31, 2020 December 31, 2019 Secured loans: 325,801,499 213,370,757 Secured by mortgages 79,279,008 57,759,070 Secured by cash collateral 2,432,473 1,701,967 Guarantees issued by financial institutions 1,066,489 888,161 Secured by government institutions or government 24,744,773 securities 63,686,242 Other collateral (pledge on assets, corporate and 128,276,786 personal guarantees, promissory notes) 179,337,287 Unsecured loans 103,282,816 67,924,028 Total performing loans and advances to customers 429,084,315 281,294,785 Non-cash loans (financial guarantee contracts) December 31, 2020 December 31, 2019 Secured loans: 59,292,422 44,610,715 Secured by mortgages 7,639,220 5,576,009 Secured by cash collateral 1,042,003 639,016 Guarantees issued by financial institutions 526,364 363,401 Secured by government institutions or government 306,285 396,293 securities Other collateral (pledge on assets, corporate and 49,778,550 37,635,996 personal guarantees, promissory notes) Unsecured loans 43,153,316 33,641,579 Total non-cash loans 102,445,738 78,252,294 46 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (b) Credit risk (Continued) An estimate of the fair value of collateral held against non-performing loans and receivables is as follows: December 31, 2020 December 31, 2019 Mortgages 8,593,313 7,441,090 Others(*) 9,336,858 10,271,426 Total(**) 17,930,171 17,712,516 (*) Sureties obtained for impaired loans are not presented in this table (**) As a Bank policy, it is aimed to utilize cash collateral or liquidate promissory notes for an impaired loan which was previously collateralized by cash collateral or promissory notes to cover the credit risk. Hence, the cash collateral and promissory notes amounts are shown as very small and not presented in the table. Sectorial and geographical concentration of impaired loans The Bank and its subsidiaries monitor concentrations of credit risk by sector and by geographic location. An analysis of concentrations of non-performing loans, finance lease and factoring receivables are shown below: December 31, 2020 December 31, 2019 Sectorial concentration Amount % Amount % Food 1,104,743 6.16 2,279,056 12.87 Consumer loans 1,739,547 9.70 2,080,572 11.75 Construction 3,754,035 20.94 1,957,276 11.05 Service sector 1,535,749 8.57 1,239,010 7.00 Metal and metal products 1,393,071 7.77 1,122,882 6.34 Durable consumer goods 576,311 3.21 650,497 3.67 Textile 347,634 1.94 368,826 2.08 Financial institutions 271,923 1.52 267,332 1.51 Agriculture and stockbreeding 165,839 0.92 173,821 0.98 Others 7,041,319 39.27 7,573,244 42.75 Total non-performing loans and advances to customers 17,930,171 100.00 17,712,516 100.00 December 31, 2020 December 31, 2019 Geographical concentration Amount % Amount % Turkey 17,722,073 98.84 17,571,373 99.20 Germany 150,331 0.84 113,164 0.64 Austria 8,681 0.05 7,514 0.04 Other 49,086 0.27 20,465 0.12 Total non-performing loans and advances to customers 17,930,171 100.00 17,712,516 100.00 Offsetting financial assets and financial liabilities The disclosures set out in the tables below include financial assets and financial liabilities that:  are offset in the Group’s statement of financial position; or  Zare subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. 47 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (b) Credit risk (Continued) The similar agreements include derivative clearing agreements. Financial instruments subject to such agreements include derivatives. Financial instruments such as loans and deposits are not disclosed in the tables below unless they are offset in the statement of financial position. Such collateral is subject to each agreement terms. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral. The Group receives and gives collateral in the form of cash in respect of the derivative transactions. Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreements Related amounts not offset in the statement of financial position Gross Net amounts of amounts of recognized financial financial assets Cash Types of Financial Net Gross liabilities presented collateral financial assets instruments amount amounts of offset in the in the received recognized statement of statement financial financial of financial assets position position December 31, 2020 Derivatives - 8,740,985 - 8,740,985 - 1,709,523 7,031,462 trading assets Reverse repurchase 13,000 - 13,000 13,000 - - agreements December 31, 2019 Derivatives - 4,507,228 - 4,507,228 - 1,210,663 3,296,565 trading assets Reverse repurchase 14,500 - 14,500 14,500 - - agreements Related amounts not offset in the statement of financial position Gross Net amounts of amounts of recognized financial financial assets Cash Types of Financial Net Gross liabilities presented collateral financial assets instruments amount amounts of offset in the in the received recognized statement statement financial of financial of financial assets position position December 31, 2020 Derivatives - trading 6,083,301 - 6,083,301 - 10,673,501 (4,590,200) liabilities Repurchase 101,312,205 - 101,312,205 101,308,756 3,449 - agreements December 31, 2019 Derivatives - trading 3,311,997 - 3,311,997 - 7,996,486 (4,684,489) liabilities Repurchase 25,424,068 - 25,424,068 25,414,146 9,922 - agreements 48 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (b) Credit risk (Continued) Transferred of Financial Assets Held or Pledged as Collaterals December 31, 2020 December 31, 2019 Related Related Asset pledged Asset Liability Asset Liability Balances with other banks 14,318,636 - 775,262 - Trading securities - - - - -Legal requirements - - - Investment securities 51,157,551 - 11,838,459 - - Financial assets at fair value through other comprehensive income 39,214,021 - 2,925,989 - -Legal requirements 39,214,021 - 2,925,989 - - Financial assets at amortised cost 11,943,530 - 8,912,470 - -Legal requirements 11,943,530 - 8,912,470 - Total 65,476,187 - 12,613,721 - December 31, 2020 December 31, 2019 Related Related Transferred asset that are not de-recognized Asset Asset Liability Liability Investment securities - Financial assets at fair value through other 25,744,884 15,916,838 4,443,499 4,772,186 comprehensive income portfolio -Repurchase agreement 25,744,884 15,916,838 4,443,499 4,772,186 Investment securities - Financial assets at amortised cost portfolio 38,158,425 41,308,482 21,285,024 19,401,997 - Repurchase agreement 38,158,425 41,308,482 21,285,024 19,401,997 Total 63,903,309 57,225,320 25,728,523 24,174,183 (c) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial liabilities. Management of liquidity risk The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Treasury Department of the Bank receives information from other business departments regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. The Treasury Department then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, short-term loans and advances to domestic and foreign banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. The liquidity requirements of business departments and subsidiaries are met through short-term loans from the Treasury Department to cover any short-term fluctuations and longer-term funding to address any structural liquidity requirements. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by the Asset-Liability Committee (“ALCO”). Daily reports cover the liquidity position of both the Bank and foreign branches. A summary report, including any exceptions and remedial action taken, is submitted regularly to ALCO. 49 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (c) Liquidity risk (Continued) In line with the Covid-19 outbreak, which caused a serious slowdown in global and regional economic activities, liquidity adequacy is constantly monitored through stress tests and scenario analyzes. It is observed that the impact of the Covid-19 outbreak on the Parent Bank's liquidity adequacy is limited. In accordance with the “Regulation on the Calculation of the Liquidity Coverage Ratio of Banks" published in the Official Gazette dated 21 March 2014 and numbered 28948, consolidated and non-consolidated total and foreign currency minimum liquidity coverage ratios are determined as 100% and 80%, respectively. Pursuant to the BRSA's regulation numbered 3520 dated March 26, 2020, it has been decided that deposit and participation banks will be exempted from Article 32 of the LCR regulation until December 31, 2020. The consolidated liquidity coverage ratio averages for current period. The highest value and the lowest value occurred in this period are given below: Liquidity Coverage TL+FC FC Ratio DATE RATIO (%) DATE RATIO (%) The lowest value November 2020 121.00 October 2020 232.42 The highest value December 2020 127.06 December 2020 363.42 Exposure to liquidity risk The calculation method used to measure the Bank’s compliance with the liquidity limit is set by BRSA. Currently, this calculation is performed on a bank-only basis (not including consolidated subsidiaries). The Bank’s banking subsidiary in the Austria is subject to a similar liquidity measurement, however the Austrian National Bank does not impose limits, but monitors the bank’s overall liquidity position to ensure there is no significant deterioration in the liquidity of banks operating in Austria. Maturity analysis of monetary assets and liabilities according to their remaining maturities: Less than 1-3 3-12 Over 5 Carrying December 31, 2020 Demand 1-5 Years one month months months years amount Cash and balances with Central Banks 95,377,191 258,530 868,158 - - - 96,503,879 Financial assets at fair value through P/L 344,999 58,047 4,018,108 5,883,549 2,817,593 3,076,979 16,199,275 Loans and advances to banks 655,187 687 - 1,023,506 1,180,022 - 2,859,402 Loans and advances to customers(*) 16,716,335 38,021,186 16,710,619 51,337,278 216,454,399 85,630,064 424,869,881 Investment securities 1,097,366 1,445,152 1,772,423 15,027,961 85,312,922 39,091,964 143,747,788 Assets classified as held for sale 1,256,254 - - - - - 1,256,254 Other assets 12,997,641 3,199,266 769,790 308,824 298,764 215,836 17,790,121 Total assets 128,444,973 42,982,868 24,139,098 73,581,118 306,063,700 128,014,843 703,226,600 . Derivative financial instruments - 610,057 393,662 3,150,500 115,865 1,813,217 6,083,301 Deposits from banks 1,636,729 16,980,113 4,416,355 - - - 23,033,197 Deposits from customers 80,000,254 226,015,030 70,104,554 16,596,835 1,468,070 58,501 394,243,244 Obligations under repurchase agreements - 84,629,165 884,084 6,033,879 9,352,737 412,340 101,312,205 Funds borrowed - 1,719,144 4,277,662 23,308,613 13,276,839 9,109,790 51,692,048 Debt securities issued - 2,137,454 4,224,438 10,134,605 22,508,680 7,149,346 46,154,523 Subordinated debts - - - - 11,339,072 8,119,726 19,458,798 Current tax liabilities 1,032 542,016 412,789 - - - 955,837 Liabilities classified as held for sale - - - - - - - Other liabilities and provisions 5,745,153 8,148,185 1,680,356 9,065 900,281 73 16,483,113 Total liabilities 87,383,168 340,781,164 86,393,900 59,233,497 58,961,544 26,662,993 659,416,266 Net 41,061,805 (297,798,296) 62,254,802) 14,347,621 247,102,156 101,351,850 43,810,334 (*) The amount of the difference between non-performing loans and stage 3 provisions are shown in demand column. 50 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (c) Liquidity risk (Continued) December 31, 2019 Less than 3-12 Over 5 Carrying Demand 1-3 months 1-5 Years one month months years amount Cash and balances with Central 38,487,326 2,964,947 603,035 329,183 - - 42,384,491 Banks Financial assets at fair value through 288,066 78,947 75,167 2,314,316 2,918,870 1,139,839 6,815,205 profit or loss Loans and advances to banks - 52,621 77,746 1,135,308 - - 1,265,675 Loans and advances to customers(*) 1,764,508 23,071,259 10,221,118 41,914,291 126,456,613 79,512,860 282,940,649 Investment securities 801,819 1,921,554 1,249,682 5,913,330 41,196,698 22,510,559 73,593,642 Assets classified as held for sale 7,690,615 - - - - - 7,690,615 Other assets 10,088,364 2,473,166 172 2,773 380,114 32,108 12,976,697 Total assets 59,120,698 30,562,494 12,226,920 51,609,201 170,952,295 103,195,366 427,666,974 . Derivative financial instruments 1,021,442 48 22,779 165,708 50,492 2,051,528 3,311,997 Deposits from banks 562,779 5,417,453 2,939,422 311,986 - - 9,231,640 Deposits from customers 50,779,585 139,942,599 35,524,895 16,909,795 1,484,718 41,826 244,683,418 Obligations under repurchase - 21,550,539 2,749,500 383,796 740,233 - 25,424,068 agreements Funds borrowed - 2,023,546 5,090,388 18,150,754 10,686,147 9,115,902 45,066,737 Debt securities issued - 2,219,364 3,621,254 655,942 21,185,480 1,566,016 29,248,056 Subordinated debts - - - - 8,614,505 10,630,948 19,245,453 Current tax liabilities 1,083 567,884 574,107 - - - 1,143,074 Liabilities classified as held for sale 5,378,292 - - - - - 5,378,292 Other liabilities and provisions 5,449,868 6,357,114 1,117,990 5,921 6,612 319,441 13,256,946 Total liabilities 63,193,049 178,078,547 51,640,335 36,583,902 42,768,187 23,725,661 395,989,681 Net (4,072,351) (147,516,053) (39,413,415) 15,025,299 128,184,108 79,469,705 31,677,293 (*) The amount of the difference between non-performing loans and stage 3 provisions are shown in demand column. 51 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (d) Market risk Market risk is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads will affect the Group’s income or the 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 on risk. Managemet of market risk The Group separates its exposure to market risk between trading and non-trading portfolios. Trading portfolios mainly are held by the Treasury Department, and include positions arising from market making and proprietary position taking, together with financial assets and liabilities that are managed on a fair value basis. Exposure to market risk - trading portfolios The market risk arising from the trading portfolio is monitored, measured and reported using Standardized Approach according to the legal legislation. The monthly market risk report and the weekly currency risk reports prepared by using Standardized Approach are reported to BRSA. Value at Risk (“VaR”) is also used to measure and control market risk exposure within the Bank’s trading portfolios. The VaR of a trading portfolio is the estimated loss that will arise on the portfolio over a specified period of time (holding period) from an adverse market movement with a specified probability (confidence level). The VaR model used is based on historical simulation and Monte Carlo simulation. Exposure to interest rate risk - non-trading portfolios The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for reprising bands. The ALCO is the monitoring body for compliance with these limits and is assisted by Risk Management in its day-to-day monitoring activities. A summary of the Group’s interest rate gap position on non-trading portfolios is as follows: Non- Less than Over 5 Carrying December 31, 2020 1-3 months 3-12 months 1-5 years interest one month years amount bearing . Cash and balances with Central Banks 12,384,265 868,158 - - - 83,251,456 96,503,879 Financial assets at fair value through profit or loss 1,122,858 5,382,738 5,259,416 2,353,437 1,735,827 344,999 16,199,275 Loans and advances to banks 687 - 1,023,506 1,013,893 166,129 655,187 2,859,402 Loans and advances to customers 144,391,802 74,156,428 91,833,674 71,288,250 26,483,392 16,716,335 424,869,881 Investment securities 29,216,847 9,636,544 32,321,763 57,502,162 13,973,106 1,097,366 143,747,788 Assets classified as held for sale - - - - - 1,256,254 1,256,254 Other assets 814,363 769,790 56,324 297,514 215,836 15,636,294 17,790,121 Total assets 187,930,822 90,813,658 130,494,683 132,455,256 42,574,290 118,957,891 703,226,600 . Derivative financial instruments 612,360 411,564 3,130,825 115,335 1,813,217 - 6,083,301 Deposits from banks 16,980,113 4,416,355 - - - 1,636,729 23,033,197 Deposits from customers 226,936,292 70,322,107 16,543,169 1,454,495 58,501 78,928,680 394,243,244 Obligations under repurchase agreements 84,629,165 3,262,412 6,310,789 7,109,839 - - 101,312,205 Funds borrowed 2,369,839 30,856,762 10,897,563 5,419,521 510,424 1,637,939 51,692,048 Debt securities issued 2,297,746 4,662,262 11,790,457 22,923,293 4,480,765 - 46,154,523 Subordinated debts - 354,530 1,126,376 13,457,920 4,519,972 - 19,458,798 Current tax liabilities 543,048 360,486 - - - 52,303 955,837 Liabilities classified as held for sale - - - - - - - Other liabilities and provisions 613,474 1,680,360 9,065 900,281 73 15,050,205 18,253,458 Total liabilities 334,982,037 116,326,838 49,808,244 51,380,684 11,382,952 97,305,856 661,186,611 Net (147,051,215) (25,513,180) 80,686,439 81,074,572 31,191,338 21,652,035 42,039,988 52 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (d) Market risk (Continued) Non- Less than 3-12 Over 5 Carrying December 31, 2019 1-3 months 1-5 years interest one month months years amount bearing . Cash and balances with Central Banks 3,314,570 603,035 329,183 - - 38,137,703 42,384,491 Financial assets at fair value through profit or 630,113 721,430 2,286,300 2,161,427 727,869 288,066 6,815,205 loss Loans and advances to banks 52,621 77,746 1,135,308 - - - 1,265,675 Loans and advances to customers 78,237,391 38,311,018 84,646,807 52,678,243 27,290,137 1,777,053 282,940,649 Investment securities 11,378,303 6,973,348 20,599,195 21,878,672 11,962,305 801,819 73,593,642 Assets classified as held for sale - - - - - 7,690,615 7,690,615 Other assets 759,219 219,855 207 94,764 305,891 12,398,580 13,778,516 Total assets 94,372,217 46,906,432 108,997,000 76,813,106 40,286,202 61,093,836 428,468,793 . Derivative financial instruments 23,024 189,968 50,492 2,027,070 1,021,443 - 3,311,997 Deposits from banks 5,417,453 2,939,422 311,986 - - 562,779 9,231,640 Deposits from customers 140,472,826 35,680,327 16,962,447 1,484,183 41,826 50,041,809 244,683,418 Obligations under repurchase agreements 21,550,539 2,749,500 383,796 740,233 - - 25,424,068 Funds borrowed 2,255,577 28,558,228 8,462,570 3,407,580 1,363,586 1,019,196 45,066,737 Debt securities issued 2,355,658 3,902,708 1,935,257 20,438,651 615,782 - 29,248,056 Subordinated debts - 450,299 1,054,717 11,421,734 6,318,703 - 19,245,453 Current tax liabilities 543,358 574,107 - - - 25,609 1,143,074 Liabilities classified as held for sale - - - - - 5,378,292 5,378,292 Other liabilities and provisions 201,943 43,867 2,611 6,612 319,441 12,682,472 13,256,946 Total liabilities 172,820,378 75,088,426 29,163,876 39,526,063 9,680,781 69,710,157 395,989,681 Net (78,448,161) (28,181,994) 79,833,124 37,287,043 30,605,421 (8,616,321) 32,479,112 The following table indicates the effective interest rates applied to monetary financial instruments by major currencies for the years ended December 31, 2020 and 2019: December 31, 2020 US Dollar % EUR % TL% Cash and cash equivalents 0.11 0.11 18.22 Financial assets at fair value through profit or loss - - 10.95 Loans and advances to banks - 0.01 1.26 Loans and advances to customers 6.16 5.02 13.07 Investment securities - - - Deposits from banks 1.89 1.08 19.64 Deposits from customers 2.75 1.58 14.76 Obligations under repurchase agreements 1.88 1.25 17.08 Debt securities issued 6.02 2.58 14.87 Subordinated debts 6.30 5.08 13.30 Funds borrowed 2.61 1.99 14.50 December 31, 2019 US Dollar % EUR % TL% Cash and cash equivalents 1.63 0.01 11.00 Financial assets at fair value through profit or loss - - 0.83 Loans and advances to banks 4.92 - 13.77 Loans and advances to customers 7.57 5.46 16.41 Investment securities - - - Deposits from banks 2.65 0.45 11.07 Deposits from customers 2.16 0.51 10.41 Obligations under repurchase agreements 2.86 0.85 10.58 Debt securities issued 6.13 4.04 12.59 Subordinated debts 6.53 5.08 13.27 Funds borrowed 4.16 2.00 8.01 Currency risk The Group is exposed to currency risk through transactions in foreign currencies and through its investment in foreign operations. 53 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (d) Market risk (Continued) Management of currency risk Risk policy of the Group is based on keeping the transactions within defined limits and keeping the currency position well-balanced. The Group has established a foreign currency risk management policy that enables the Group to take a position between lower and upper limits which are determined, taking total equity of the Group into account. Foreign currency translation rates used by the Group as of respective year-ends are as follows: EUR / TL USD / TL December 31, 2018 6.04 5.28 December 31, 2019 6.68 5.96 December 31, 2020 9.15 7.45 For the purposes of the evaluation of the table below, the figures represent the TL equivalent of the related foreign currencies. Measurement Frequency of Interest Rate Risk Interest rate risk arising from banking book accounts is calculated in accordance with “Regulation on Measurement and Assessment of Interest Rate Risk Arising from Banking Book Accounts according to Standard Shock Technique” published in the August 23, 2011 dated Official Gazette no. 28034. Legal limit is monthly monitored and reported accordingly. The economic value changes arising from the interest rate fluctuations which are measured according to “Regulation on Measurement and Assessment of Interest Rate Risk Arising from Banking Book Accounts according to Standard Shock Technique” are presented in the below table: Applied Shock Currency Unit-Current Period (+/- x base Gain/Loss Gain/ Equity-Loss/Equity point) 1. TL 500 / (400) (7,823,623) / 7,246,356 (11.97%) / 11.09% 2. EURO 200 / (200) (1,342,194) / (206,353) (1.50%) / 0.82% 3. USD 200 / (200) (980,927) / 535,680 (2.05%) / (0.32%) Total (For Negative Shocks) - 7,575,682 11.59% Total (For Positive Shocks) - (10,146,744) (15.53%) Applied Shock Currency Unit-Prior Period Gain/Loss Gain/Equity-Equity (+/- x base point) 1. TL 500 / (400) (3,460,645) / 2,719,186 (6.69%) / 5.26% 2. EURO 200 / (200) (1,109,163) / 50,912 (2.15%) / 0.10% 3. USD 200 / (200) (132,261) / 340,663 (0.26%) / 0.66% Total (For Negative Shocks) - 3,110,761 6.02% Total (For Positive Shocks) - (4,702,069) (9.10%) The above table is prepared based on unconsolidated financial figures as of 31 December 2020. 54 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (d) Market risk (Continued) Other December 31, 2020 US Dollar EUR Total currencies Cash and balances with Central Banks 30,578,218 41,780,438 9,364,757 81,723,413 Financial assets at fair value through profit or loss 161,038 9,842 7,000,000 7,170,880 Loans and advances to banks 22,893 1,012,143 - 1,035,036 Loans and advances to customers 58,340,408 69,275,538 214,357 127,830,303 Investment securities 47,036,953 20,393,491 - 67,430,444 Other assets 6,822,446 6,245,838 155,039 13,223,323 Total foreign currency denominated monetary assets 142,961,956 138,717,290 16,734,153 298,413,399 Deposits from banks 6,395,505 7,630,195 184,045 14,209,745 Deposits from customers 102,509,016 66,471,357 20,090,259 189,070,632 Obligations under repurchase agreements 7,839,458 13,714,059 - 21,553,517 Funds borrowed 25,268,094 23,806,452 164,153 49,238,699 Debt securities issued 21,561,305 11,270,337 2,060,725 34,892,367 Subordinated debts 13,057,337 - - 13,057,337 Other liabilities 3,484,952 2,185,846 4,837 5,675,635 Total foreign currency denominated monetary liabilities 180,115,667 125,078,246 22,504,019 327,697,932 Net statement of financial position (37,153,711) 13,639,044 (5,769,866) (29,284,533) Net off balance sheet position 38,046,541 (11,457,360) 5,788,929 32,378,110 Net long/(short) position 892,830 2,181,684 19,063 3,093,577 Other December 31, 2019 US Dollar EUR Total currencies Cash and balance with Central Banks 17,901,088 19,822,729 2,656,674 40,380,491 Financial assets at fair value through profit or loss 112,041 5,867 2,017,593 2,135,501 Loans and advances to banks 252,970 668,421 - 921,391 Loans and advances to customers 48,234,710 46,589,210 96,651 94,920,571 Investment securities 8,837,112 11,300,052 - 20,137,164 Other assets 5,420,128 3,334,894 890 8,755,912 Total foreign currency denominated monetary 80,758,049 81,721,173 4,771,808 167,251,030 assets Deposits from banks 2,368,286 3,046,177 307,637 5,722,100 Deposits from customers 53,884,298 45,912,624 6,366,406 106,163,328 Obligations under repurchase agreements 3,167,566 2,431,228 - 5,598,794 Funds borrowed 25,629,015 17,140,789 7,114 42,776,918 Debt securities issued 9,231,436 8,224,043 - 17,455,479 Subordinated debts 12,850,576 - - 12,850,576 Other liabilities 3,067,906 1,395,709 9,816 4,473,431 Total foreign currency denominated monetary 110,199,083 78,150,570 6,690,973 195,040,626 liabilities Net statement of financial position (29,441,034) 3,570,603 (1,919,165) (27,789,596) Net off balance sheet position 24,202,253 (2,478,824) 1,937,708 23,661,137 Net long/(short) position (5,238,781) 1,091,779 18,543 (4,128,459) The figures of the foreign subsidiary of the Group are presented in the table above with respect to its functional currency. 55 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (d) Market risk (Continued) Exposure to currency risk 10 percent devaluation of the TL against the following currencies as at and for the years ended December 31, 2020 and 2019 would affect consolidated total comprehensive income and profit or loss (without tax effects) by the amounts shown below. December 31, 2020 December 31, 2019 Profit or loss Equity Profit or loss Equity US Dollar 71,674 71,674 (523,878) (523,878) EUR 197,419 344,959 109,178 184,407 Other currencies 1,900 1,900 1,854 1,854 Total, net 270,993 418,533 (412,846) (337,617) 10 percent revaluation of the TL against the following currencies as at and for years ended December 31, 2020 and 2019 would affect consolidated total comprehensive income and profit or loss (without tax effects) by the amounts shown below. December 31, 2020 December 31, 2019 Profit or loss Equity Profit or loss Equity US Dollar (71,674) (71,674) 523,878 523,878 EUR (197,419) (344,959) (109,178) (184,407) Other currencies (1,900) (1,900) (1,854) (1,854) Total, net (270,993) (418,533) 412,846 337,617 This analysis assumes that all other variables, in particular interest rates, remain constant. Fair value information The estimated fair values of financial instruments have been determined using available market information by the Group, and where it exists, appropriate valuation methodologies. However, judgment is necessary to interpret market data to determine the estimated fair value. Turkey has shown signs of an emerging market and has experienced a significant decline in the volume of activity in its financial market. While management has used available market information in estimating the fair values of financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances. Management has estimated that the fair value of certain financial assets and liabilities recorded at amortized cost are not materially different than their recorded values except for those of loans and advances to customers, investment securities and deposit from customers. These financial assets and liabilities include loans and advances to banks, obligations under repurchase agreements, loans and advances from banks, funds borrowed and other short-term assets and liabilities that are of a contractual nature. Management believes that the carrying amount of these particular financial assets and liabilities approximates their fair values, partially due to the fact that it is practice to renegotiate interest rates to reflect current market conditions. Loans and Receivables Loans and receivables are net of provisions for impairment. The estimated fair value of loans and receivables represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. 56 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (d) Market risk (Continued) Investment Securities Held-to-Maturity Fair value for investments held-to-maturity is based on market prices or broker/dealer price quotations. Where this information is not available, fair value has been estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. Deposits from customers The estimated fair value of deposits from other banks and customer deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using interest rates for new deposits with similar remaining maturity. Set out below is a comparison by category of carrying amounts and fair values of the Group’s major financial instruments that are carried in the financial statements at other than fair values Carrying amount Fair value December 31, December 31, December 31, December 31, 2020 2019 2020 2019 Financial assets Loans and advances to customers 424,869,881 282,940,649 405,015,688 284,265,112 Financial assets at fair value through profit or loss 16,199,275 6,815,205 16,199,275 6,815,205 Investment securities 143,747,788 73,593,642 146,126,233 75,046,382 Financial assets at fair value through other comprehensive income 85,007,132 26,584,063 85,007,132 26,584,063 Financial assets measured at amortised cost 58,740,656 47,009,579 61,119,101 48,462,319 Financial liabilities Deposits from other banks 23,033,197 9,231,640 23,033,197 9,231,640 Deposits from customers 394,243,244 244,683,418 395,812,966 243,782,620 Funds borrowed 51,692,048 45,066,737 51,760,302 45,206,749 The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on on observable market data. The classification of fair value measurements of financial assets and liabilities measured at fair value is as follows: December 31, 2020 Level 1 Level 2 Level 3(*) Total Asset carried at fair value Financial assets - FVPL 288,397 15,740,985 169,893 16,199,275 Debt securities 110,576 7,000,000 - 7,110,576 Equity securities 162,165 - 169,482 331,647 Derivative financial assets held for trading purposes - 8,740,985 - 8,740,985 Other Financial Assets 15,656 411 16,067 Investment securities - FVOCI 83,320,472 589,294 950,277 84,860,043 Debt securities 81,506,602 - - 81,506,602 Equity securities - - 950,277 950,277 Other Financial Assets 1,813,870 589,294 - 2,403,164 Investments accounted for using the equity method 521,929 - - 521,929 Total financial assets 84,130,798 16,330,279 1,120,170 101,581,247 Financial liabilities held for trading purpose Derivative financial liabilities held for trading purpose - (6,083,301) - (6,083,301) Total financial liabilities - (6,083,301) - (6,083,301) (*) These amounts consist of fair value of the affiliates and subsidiaries determined by independent valuation companies. 57 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (d) Market risk (Continued) December 31, 2019 Level 1 Level 2 Level 3(*) Total Asset carried at fair value Financial assets - FVPL 120,901 6,524,821 169,483 6,815,205 Debt securities 199 2,017,593 - 2,017,792 Equity securities 115,843 - 169,483 285,326 Derivative financial assets held for trading purposes - 4,507,228 - 4,507,228 Other Financial Assets 4,859 - - 4,859 Investment securities - FVOCI 25,212,228 570,014 733,075 26,515,317 Debt securities 24,100,604 - - 24,100,604 Equity securities - - 733,075 733,075 Other Financial Assets 1,111,624 570,014 - 1,681,638 Investments accounted for using the equity method 442,194 - - 442,194 Total financial assets 25,775,323 7,094,835 902,558 33,772,716 Financial liabilities held for trading purpose Derivative financial liabilities held for trading purpose - (3,311,997) - (3,311,997) Total financial liabilities - (3,311,997) - (3,311,997) (*) These amounts consist of fair value of the affiliates and subsidiaries determined by independent valuation companies. The reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy as follows: December 31, 2020 December 31, 2019 Balance at the beginning of the period - 1 January 902,558 586,725 Total gains or losses for the period 217,612 315,833 Balance at the end of the period 1,120,170 902,558 (e) Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated 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 behavior. 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 as a 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 framework, an appropriate monitoring methodology is developed for each control area that covers all operational risks and control frequencies are determined. The data of operational losses may be exposed to during the Bank’s activities is collected and analyzed regularly by Risk Management Department and reported to Board of Directors, Audit Committee and senior management. The Group calculated the value at operational risk in accordance with the third section of “Regulation Regarding Measurement and Assessment of Capital Adequacy Ratios of Banks” that is “Computation of Value of Operational Risk” published in June 28, 2012 dated Official Gazette no. 28337. The operational risk which the Group is exposed to is calculated according to the “Basic Indicator Method” hence by multiplying the average of the 15% of last three years’ actual gross income with 12.5, in line with the effective legislation practices in the country. As at December 31, 2020, value of consolidated operational risk amounted to TL 25,510,114 (December 31, 2019: TL 21,759,874). 58 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 3. FINANCIAL RISK MANAGEMENT (Continued) (f) Capital management - regulatory capital BRSA, the regulatory 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 a minimum of 8% of total capital to total risk-weighted assets. BRSA regulation requires the calculation of the capital adequacy ratio based on the consolidated financial statements of the Bank and its financial subsidiaries. The Bank and its financial subsidiaries’ consolidated regulatory capital is analyzed into two tiers: • Tier 1 capital, is composed of share capital, legal, statutory, other profit and extraordinary reserves, retained earnings, translation reserve and non-controlling interests after deduction of goodwill, prepaid expenses and other certain costs. • Tier 2 capital, is composed of the total amount of general provisions for loans, restricted funds, fair value reserves of available-for-sale financial assets and equity investments, subordinated loans received and free reserves set aside for contingencies. Banking operations are categorized 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 commitment and contingencies exposures. Operational risk capital requirements and market risk capital requirements as at December 31, 2020 and 2019 are calculated using the Basic Indicator Approach and included in the capital adequacy calculations. The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Bank and its individually regulated operations have complied with externally imposed capital requirements throughout the year and the previous year. The Bank’s regulatory capital position on a consolidated basis at December 31, 2020 and 2019 is as follows: Consolidated Parent Bank December 31, December 31, December 31, December 31, 2020 2019 2020 2019 Capital Requirement for Credit Risk (CRCR) 30,663,082 23,485,908 29,696,363 22,658,091 Capital Requirement for Market Risk 274,216 591,648 208,992 566,405 (CRMR) Capital Requirement for Operational Risk 2,040,809 1,740,790 1,910,307 1,666,774 (CROR) Common Equity Tier 1 Capital 46,728,139 33,111,191 46,082,321 32,615,710 Tier 1 Capital 58,125,153 42,781,571 57,479,335 42,286,090 Tier 2 Capital 8,064,303 9,554,991 7,911,477 9,413,882 Deductions from Capital (11,112) (5,614) (11,112) (5,614) Total Capital 66,178,344 52,330,948 65,379,700 51,694,358 Total Capital 16.05 16.22 16.44 16.61 /((CRCR+CRMR+CROR)*12.5)*100 Tier 1 14.10 13.26 14.45 13.59 Capital/((CRCR+CRMR+CROR)*12.5)*100 Common Equity Tier 1 11.34 10.26 11.59 10.48 Capital/((CRCR+CRMR+CROR)*12.5)*100 59 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 4. INSURANCE RISK MANAGEMENT The risk under any insurance contract is the possibility that the insured event occurs and the amount of the resulting claim is uncertain. By the very nature of an insurance contact, the risk is random and therefore unpredictable. For a portfolio of insurance contracts where the theory of the probability is applied to pricing and provisioning, the principal risk that the Group faces under its insurance contracts is that the actual claim and benefit payments exceed carrying amount of the insured liabilities. These could occur because the frequency or severity of claims and benefits are greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year to year from the estimate established using statistical techniques. Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is likely to be affected across the board by a change in any subset of portfolio. The Group has developed its life and non-life insurance underwriting strategies to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome. Pricing policies The pricing policies and principles of the Group are as follows: i) While determining risk premiums, the amount of expected losses are considered and premium limits are determined accordingly. ii) During the study of pricing activities as a part of developing a new product, working of relevant units together within the Group is maintained by considering the needs of the customers and competition in the market. iii) It is aimed to achieve profitability in product basis and providing continuity. Results of the pricing studies are compared with the prices of the competitors and international pricing cases. Management of risks The Group manages its insurance risk through underwriting limits, approval procedures for transactions that involve new products or that exceed set limits, pricing, product design and management of reinsurance. The Group underwriting strategy seeks diversity to ensure a balanced portfolio and is based on a large portfolio of similar risks over a number of years which reduces the variability of the outcome. All non-life contracts are annual in nature and the underwriters have the right to refuse renewal or to change the terms and conditions of the contract at renewal. Concentration of insurance risk A key aspect of the insurance risk faced by the Group is the extent of concentration of insurance risk, which determines the extent to which a particular event or series of events could impact significantly upon the Group’s liabilities. Such concentrations may arise from a single insurance contract or through a number of related contracts where significant liabilities could arise. An important aspect of the concentration of insurance risk is that it could arise from the accumulation of risks within a number of different insurance classes. 60 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 4. INSURANCE RISK MANAGEMENT (Continued) Concentrations of risk can arise in low frequency, high-severity events such as natural disasters; in situations where the Group is exposed to unexpected changes in trends, for example, unexpected changes in human mortality or in policyholder behavior; or where significant litigation or legislative risks could cause a large single loss, or have a pervasive effect on many contracts. Within non-life insurance, the management believes that the Group has no significant concentration of exposure to any group of policyholders measured by social, professional, age or similar criteria. The greatest likelihood of significant losses to the Group arises from catastrophe events, such as flood, damage, storm or earthquake damage. The techniques and assumptions that the Group uses to calculate these risks are as follows:  Measurement of geographical accumulations.  Assessment of probable maximum losses.  Excess of loss reinsurance. Reinsurance The Group reinsures a portion of the risks it underwrites in order to control its exposure to losses and protect capital resources. Reinsurance companies, providing reinsurance protection against life insurance and other additional risks are the most important service providers for the insurance subsidiaries of the Group. The decisive criteria for the relationship with reinsurers are as follows: i) Financial strength, ii) Long-term relationship approach, iii) Competitive prices iv) Capacity provided for facultative and un-proportional (catastrophic) reinsurance contracts. v) Opportunities and information provided in risk assessment process, product development, trainings, information about new developments in the sector and etc. Performance of the reinsurance companies in treaty agreements is evaluated for each year by considering the payment performance of the reinsurers for the claims paid and other due payables to the insurance subsidiaries of the Group. Performance of the reinsurance companies in facultative agreements is evaluated by considering capacity provided to the insurance subsidiaries of the Group, speed in operational reinsurance transactions, and technical and market information provided to the insurance subsidiaries of the Group. In cases where the performance of the reinsurer is not seen as adequate, the insurance subsidiaries of the Group will decide to contract with alternative reinsurance companies. The Parent bank has sold Güneş Sigorta A.Ş. and Vakıf Emeklilik A.Ş. to TVF as of April 22,2020 and the insurance operations has been discontinued. 61 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 5. SEGMENT REPORTING Geographical information The Group’s activities are conducted predominantly in Turkey which is also the main operating company. The Group conducts majority of its business activities with local customers in Turkey. Operating segments The Group has six reportable segments, as described below, which are the Group’s strategic business units. The strategic business units offer different products and services, and are managed separately based on the Group’s management and internal reporting structure. For each of the strategic business units, the Board of Directors reviews internal management reports on at least a quarterly basis. The following summary describes the operations in each of the Group’s reportable segments: Retail banking: Includes loans, deposits and other transactions and balances with retail customers. Corporate and commercial banking: Includes loans, deposits and other transactions and balances with corporate customers. Investment banking: Includes the Group’s trading and corporate finance activities. This segment undertakes the Group’s funding and centralized risk management activities through borrowings, issues of debt securities and investing in liquid assets such as short-term placements and corporate and government debt securities. Leasing: Includes the Group’s finance lease business. Factoring: Includes the Group’s factoring business. Others: Includes combined information about operating segments that do not meet the quantitative thresholds and includes the Group’s insurance business. Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the Board of Directors. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. Inter-segment pricing is determined on an arm’s length basis. Measurement of segment assets and liabilities and operating segment results is based on the accounting policies set out in the accounting policy notes. 62 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 5. SEGMENT REPORTING (Continued) Information about operating segments Investment Total December 31, 2020 Retail Banking Corporate Banking Unallocated Leasing Factoring Others Combined Eliminations Total Banking Banking . Interest income on loan and receivables 10,028,411 21,446,385 5,334,966 - 36,809,762 - 352,762 43,171 37,205,695 (135,276) 37,070,419 Interest expense on deposit (6,524,939) (9,323,496) (689,063) - (16,537,498) - - - (16,537,498) 91,243 (16,446,255) Operating profit 2,623,384 5,133,235 8,244,081 (184,114) 15,816,586 109,623 131,398 706,681 16,764,288 857,838 17,622,126 Profit before income tax 1,144,772 896,332 6,562,892 (2,081,970) 6,522,026 80,216 113,008 282,310 6,997,560 1,007,538 8,005,098 Income tax expense (1,512,514) (23,603) (1,536,117) Profit for the year 5,485,046 983,935 6,468,981 . December 31, 2020 Segment assets 109,522,550 249,657,814 317,740,849 30,772,479 707,693,692 3,621,665 5,760,337 4,717,803 721,793,497 (10,018,867) 711,774,630 Investments accounted for using the equity method - - - - - - - - - 538,516 538,516 Total assets 109,522,550 249,657,814 317,740,849 30,772,479 707,693,692 3,621,665 5,760,337 4,717,803 721,793,497 (9,480,351) 712,313,146 Segment liabilities 159,193,919 236,260,695 242,476,047 21,391,585 659,322,246 3,325,370 5,317,235 2,893,249 670,858,100 (6,107,439) 664,750,661 Equity including non-controlling interest - - - 48,371,446 48,371,446 296,295 443,102 1,824,554 50,935,397 (3,372,912) 47,562,485 Total liabilities and equity 159,193,919 236,260,695 242,476,047 69,763,031 707,693,692 3,621,665 5,760,337 4,717,803 721,793,497 (9,480,351) 712,313,146 Tangible fixed assets 774,710 774,710 774,710 774,710 Intangible fixed assets (33,345) (33,345) (33,345) (33,345) Depreciation (295,573) (295,573) (295,573) (295,573) Amortization (37,904) (37,904) (37,904) (37,904) 63 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 5. SEGMENT REPORTING (Continued) Investment Total December 31, 2019 Retail Banking Corporate Banking Unallocated Leasing Factoring Others Combined Eliminations Total Banking Banking . Interest income on loan and receivables 8,613,963 22,290,710 3,868,967 - 34,773,640 - 520,668 14,332 35,308,640 (131,708) 35,176,932 Interest expense on deposit (9,345,908) (8,035,204) (787,652) - (18,168,764) - - - (18,168,764) 222,769 (17,945,995) Operating profit (1,134,736) 10,473,261 835,689 224,566 10,398,780 91,814 178,533 2,943,541 13,612,668 (575,126) 13,037,542 Profit before income tax (2,407,939) 7,287,252 (223,340) (984,087) 3,671,886 65,674 161,443 610,650 4,509,653 26,215 4,535,868 Income tax expense (1,033,209) - (1,033,209) Profit for the year 3,476,444 26,215 3,502,659 . December 31, 2019 Segment assets 68,112,914 168,651,541 164,293,791 24,148,316 425,206,562 2,978,609 2,812,434 9,515,412 440,513,017 (7,728,028) 432,784,989 Investments accounted for using the equity method - - - - - - - - - 456,087 456,087 Total assets 68,112,914 168,651,541 164,293,791 24,148,316 425,206,562 2,978,609 2,812,434 9,515,412 440,513,017 (7,271,941) 433,241,076 Segment liabilities 112,872,965 132,061,657 128,758,181 17,178,174 390,870,977 2,747,803 2,458,135 7,330,787 403,407,702 (4,077,251) 399,330,451 Equity including non-controlling interest - - - 34,335,585 34,335,585 230,806 354,299 2,184,625 37,105,315 (3,194,690) 33,910,625 Total liabilities and equity 112,872,965 132,061,657 128,758,181 51,513,759 425,206,562 2,978,609 2,812,434 9,515,412 440,513,017 (7,271,941) 433,241,076 Tangible fixed assets 1,509,748 1,509,748 1,509,748 1,509,748 Intangible fixed assets 229,583 229,583 229,583 229,583 Depreciation (416,929) (416,929) (416,929) (416,929) Amortization (120,094) (120,094) (120,094) (120,094) 64 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 6. CASH AND BALANCES WITH CENTRAL BANKS As at December 31, 2020 and 2019, cash and cash equivalents presented in the consolidated statement of financial position and cash flows are as follows: December 31, December 31, 2020 2019 . Cash on hand 3,115,986 2,463,490 Due from Central Bank 26,517,182 11,470,013 Balances with the CBRT excluding reserve deposits 61,517,690 21,792,413 Money market placements and receivables from repurchase agreements 206,589 14,535 Loans and advances to banks with original maturity less than three months 3,089,504 5,865,024 Others 2,056,928 779,016 Total cash and cash equivalents in the consolidated statement of financial position 96,503,879 42,384,491 Accruals on cash and cash equivalents (912) (17,346) Blocked bank deposits (14,318,636) (775,262) Due from Central Bank (26,517,182) (11,470,013) Advances to banks with original maturity less than three months classiffied assets held for sale - 935,335 Expected Credit Loss 2,866 9,366 Total cash and cash equivalents in the consolidated statement of cash flows 55,670,015 31,066,571 As of December 31, 2020, TL 14,318,636 is blocked bank deposits (December 31, 2019: TL 775,262) consist of held against the “Diversified Payment Rights” securitizations. As per Communiqué on Required Reserve of CBRT, required reserve may be kept in TL, USD, EUR and standard gold. CBRT pays interest for required reserve kept in TL. In accordance with “Announcement on Reserve Deposits” of CBRT numbered 2013/15, all banks operating in Turkey shall provide a reserve rate ranging from 1.0% to 6.0% (December 31, 2019: ranging from 1.0% to 7.0%). For foreign currency liabilities, all banks shall provide a reserve rate ranging from 5.0% to 22.0% in US Dollar or Euro (December 31, 2019: ranging from 5.0% to 21.0%). 7. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS As at December 31, 2020 and 2019, financial assets at fair value through profit or loss are as follows: December 31, 2020 December 31, 2019 Carrying Face Value Carrying Value Face Value Value Debt instruments held at fair value: Government bonds in TL 108,045 110,576 200 199 Asset-backed securities - - - - Eurobonds issued by the Turkish Government 6,942,486 7,000,000 2,001,510 2,017,593 Corporate bonds in TL - - - - Bonds issued by banks 3,545 3,522 - - Total 7,054,076 7,114,098 2,001,710 2,017,792 Equity and other non-fixed income instruments: Investment funds - 12,720 - 4,858 Equity shares - 331,472 - 285,327 Derivative financial assets held for trading purposes - 8,740,985 - 4,507,228 Total - 9,085,177 - 4,797,413 Total financial assets at fair value through profit or loss 7,054,076 16,199,275 2,001,710 6,815,205 65 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 7. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Continued) Gains and losses arising on derivative financial instruments held for trading purposes and income from sale of debt instruments held at fair value are reflected in net trading income. As at and for the year ended December 31, 2020 net income from trading of financial assets (including investment securities) amounting to TL 58,345 (December 31, 2019 net trading expense: TL 3,161,071) is included in “trading income”. Securities that were deposited as collateral with respect to various banking and insurance transactions None. Derivative financial instruments held for trading purposes A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying items, such as financial instrument prices, reference rates, commodity prices or indices. In the ordinary course of business, the Group enters into various types of transactions that involve derivative financial instruments. Derivative financial instruments used mainly include currency forwards, interest rate swaps, currency swaps and currency options. The table below shows the contractual amounts of derivative instruments analyzed by the term to maturity. The contractual amount is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The contractual amounts indicate the volume of transactions outstanding at year-end and are neither indicative of the market risk nor credit risk. The fair value of derivative financial instruments is calculated by using forward exchange rates at the reporting date. In the absence of reliable forward rate estimations in a volatile market, current market rate is considered to be the best estimate of the present value of the forward exchange rates. The maturity analyses of the gross nominal value of derivatives are presented below: December 31, 2020 December 31, 2019 Notional Amounts Notional Amounts Trading Derivatives Foreign Currency Related Derivative Transactions 120,966,766 85,949,525 Currency Forwards 3,073,644 4,537,627 Currency Swaps 116,344,721 80,075,495 Currency Futures 382,085 - Currency Options 1,166,316 1,336,403 Interest Rate Derivative Transactions 79,926,312 66,326,016 Interest Rate Forwards - - Interest Rate Swaps 79,926,312 66,326,016 Interest Rate Options - - Interest Rate Futures - - Other Trading Derivatives 29,788,647 23,593,260 Total Derivative Transactions 230,681,725 175,868,801 66 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 7. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Continued) December 31, 2020 Up to 1 1 to 3 3 to 12 1 to 5 Over 5 Total month months months years years Currency swaps: Purchases 26,476,028 11,801,238 6,715,770 - 223,500 45,216,536 Sales 29,727,665 11,491,289 6,926,215 - - 48,145,169 Currency forwards: Purchases 50,100 301,063 1,178,211 17,153 - 1,546,527 Sales 50,014 300,610 1,159,418 17,075 - 1,527,117 Cross currency interest rate swaps: Purchases - - 7,579,285 1,639,000 3,278,760 12,497,045 Sales - - 6,817,007 1,177,650 2,491,314 10,485,971 Interest rate swaps: Purchases 65,000 95,000 5,272,432 4,363,072 30,167,652 39,963,156 Sales 65,000 95,000 5,272,432 4,363,072 30,167,652 39,963,156 Currency options: Purchases 442,822 93,412 38,000 - - 574,234 Sales 461,568 97,208 33,306 - - 592,082 Futures: Purchase - - 186,250 - - 186,250 Sale - - 195,835 - - 195,835 Other: Purchases 2,614,950 563,977 2,045,191 4,085,486 7,884,604 17,194,208 Sales 4,386 563,977 1,789,764 3,139,412 7,096,900 12,594,439 Total of purchases 29,648,900 12,854,690 23,015,139 10,104,711 41,554,516 117,177,956 Total of sales 30,308,633 12,548,084 22,193,977 8,697,209 39,755,866 113,503,769 Total of derivatives 59,957,533 25,402,774 45,209,116 18,801,920 81,310,382 230,681,725 December 31, 2019 Up to 1 1 to 3 3 to 12 1 to 5 Over 5 Total month months months years years Currency swaps: Purchases 15,005,140 6,896,536 3,989,479 133,623 178,650 26,203,428 Sales 16,274,347 6,921,551 4,029,209 105,000 - 27,330,107 Currency forwards: Purchases 101,976 537,671 1,171,136 461,825 - 2,272,608 Sales 101,790 536,140 1,166,826 460,263 - 2,265,019 Cross currency interest rate swaps: Purchases - 122,124 357,300 10,734,025 2,501,707 13,715,156 Sales - 282,977 169,645 10,002,448 2,371,734 12,826,804 Interest rate swaps: Purchases 10,000 111,160 1,333,330 8,113,874 23,594,644 33,163,008 Sales 10,000 111,160 1,333,329 8,113,875 23,594,644 33,163,008 Currency options: Purchases 429,818 94,300 137,745 - - 661,863 Sales 440,210 96,002 138,328 - - 674,540 Futures: Purchase - - - - - - Sale - - - - - - Other: Purchases 1,306,719 173,000 - 5,540,430 6,733,189 13,753,338 Sales - 178,433 - 4,073,741 5,587,748 9,839,922 Total of purchases 16,853,653 7,934,791 6,988,990 24,983,777 33,008,190 89,769,401 Total of sales 16,826,347 8,126,263 6,837,337 22,755,327 31,554,126 86,099,400 Total of derivatives 33,680,000 16,061,054 13,826,327 47,739,104 64,562,316 175,868,801 Set out below accruals of derivative assets: December 31, 2020 December 31, 2019 Forwards 60,626 65,583 Swaps 8,677,596 4,438,751 Options 2,763 2,894 Fair value of derivative assets 8,740,985 4,507,228 67 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 8. OBLIGATIONS UNDER REPURCHASE AGREEMENTS The Group lends its extra fund as a result of daily operations to other financial institutions through reverse repurchase agreements. Assets purchased under reverse repurchase agreements are as follows: December 31, 2020 December 31, 2019 Carrying Value of Carrying Value of Fair value of Fair value of corresponding corresponding underlying assets underlying assets assets assets Reverse repurchase 13,000 13,000 14,500 14,500 agreements The Group raises funds by selling financial instruments under agreements to repay the funds by repurchasing the instruments at future dates at the same price plus interest at a predetermined rate. Repurchase agreements are commonly used as a tool for short-term financing of interest-earning assets, depending on the prevailing interest rates. The counterparties cannot resell or re-pledged the assets. Assets sold under repurchase agreements comprise the following: December 31, 2020 December 31, 2019 Fair value of Carrying value of Fair value of Carrying value of underlying corresponding underlying corresponding assets liabilities assets liabilities Financial assets at fair value through profit or loss (“FVPL”) 25,744,884 15,916,838 4,443,499 5,481,046 Financial assets at fair value through OCI (“FVOCI”) 38,158,425 41,308,482 21,285,024 19,943,022 Total 63,903,309 57,225,320 25,728,523 25,424,068 Accrued interest on obligations under repurchase agreements amounted to TL 52,459 (December 31, 2019: TL 33,552) and is included in the carrying amount of corresponding liabilities. In general, the fair values of such assets are more than the corresponding liabilities due to the margins set between parties, since such funding is raised against assets collateralized. 9. LOANS AND ADVANCES TO BANKS Loans and advances to banks comprise balances with more than three months maturity from the date of acquisition and are as follows as at December 31, 2020 and 2019: December 31, 2020 December 31, 2019 TL FC Total TL FC Total . Domestic banks 1,825,255 938,960 2,764,215 757 1,265,365 1,266,122 Foreign banks - 96,079 96,079 - 129 129 Provisions (892) - (892) (576) - (576) Total 1,824,363 1,035,039 2,859,402 181 1,265,494 1,265,675 As at December 31, 2020, the group has no loans and advances to banks with more than three months maturity from the date of acquisition include blocked accounts (December 31, 2019: None) held against the insurance liabilities of the Group in favor of the Turkish Treasury. 68 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 10. LOANS AND ADVANCES TO CUSTOMERS As at December 31, 2020 and December 31, 2019, outstanding loans and advances to customers comprise the followings: Credit Leasing Total December 31, 2020 Commercial Consumer Factoring Cards . Stage 1 loans to customers 276,933,204 94,967,658 14,393,403 - - 386,294,265 Stage 2 loans to customers 32,549,755 1,251,391 243,970 5,689,415 3,055,519 42,790,050 Stage 3 loans to customers 15,029,808 1,758,795 863,752 62,325 215,491 17,930,171 Total gross loans to customers 324,512,767 97,977,844 15,501,125 5,751,740 3,271,010 447,014,486 Less: Stage 1 expected credit loss 2,334,328 513,241 330,780 - - 3,178,349 Less: Stage 2 expected credit loss 4,835,446 248,036 28,919 32,304 103,651 5,248,356 Less: Stage 3 expected credit loss 11,313,280 1,436,572 754,630 60,540 152,878 13,717,900 Total expected credit loss 18,483,054 2,197,849 1,114,329 92,844 256,529 22,144,605 Total loans and advances to customers 306,029,713 95,779,995 14,386,796 5,658,896 3,014,481 424,869,881 Credit December 31, 2019 Commercial Consumer Factoring Leasing Total Cards . Stage 1 loans to customers 178,337,870 55,354,636 10,512,442 - 2,175,963 246,380,911 Stage 2 loans to customers 29,738,663 1,648,613 312,320 2,811,096 403,182 34,913,874 Stage 3 loans to customers 14,367,257 2,091,605 996,509 62,174 194,971 17,712,516 Total gross loans to customers 222,443,790 59,094,854 11,821,271 2,873,270 2,774,116 299,007,301 . Less: Stage 1 expected credit loss 1,313,341 166,583 143,713 - - 1,623,637 Less: Stage 2 expected credit loss 1,734,681 93,687 31,563 24,830 79,467 1,964,228 Less: Stage 3 expected credit loss 9,912,265 1,583,325 817,804 55,170 110,223 12,478,787 Total expected credit loss 12,960,287 1,843,595 993,080 80,000 189,690 16,066,652 Total loans and advances to customers 209,483,503 57,251,259 10,828,191 2,793,270 2,584,426 282,940,649 The credit quality analysis of outstanding allowance loans and advances to customers: Current Period Stage 1 Stage 2 Stage 3 Balances at January 1, 2020 1,623,637 1,964,228 12,478,787 Transfer to Stage 1 126,682 (126,122) (560) Transfer to Stage 2 (48,999) 1,124,446 (1,075,447) Transfer to Stage 3 (7,126) (343,580) 350,706 Recoveries and reversals(*) (453,094) (552,124) (1,659,736) Provision for the period 1,937,249 3,181,508 3,624,150 Balances at the end of the period 3,178,349 5,248,356 13,717,900 (*) As of December 31, 2020, the Parent Bank has written-off loans and provisions for these loans, which were classified in the “Stage 3 Loans” (Loans Classified as Loss) amounting to TL 890,789, unsecured, do not have reasonable expectations for recovery and with %100 provision, in accordance with the Amendments Regulation published in the Official Gazette dated November 27, 2019 and numbered 30961 by BRSA. Following the written-off loans, the Parent Bank's non-performing loan ratio decreased from 4.16% to 3.97%. Prior Period Stage 1 Stage 2 Stage 3 Balances at January 1, 2019 1,635,296 1,326,580 8,266,764 Transfer to Stage 1 64,333 (64,126) (207) Transfer to Stage 2 (109,512) 144,378 (34,866) Transfer to Stage 3 (26,799) (546,026) 572,825 Recoveries and reversals (619,064) (572,567) (482,092) Provision for the period 679,383 1,675,989 4,156,363 Balances at the end of the period 1,623,637 1,964,228 12,478,787 69 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 10. LOANS AND ADVANCES TO CUSTOMERS (Continued) Aging analysis for overdue receivables(*) The aging analysis of the loans and advances past due but not impaired is as follows: Current Period Prior Period December 31, 2020 December 31, 2019 31-60 days 2,562,274 1,917,753 61-90 days 2,067,323 2,434,914 91-180 days 2,122,903 - (*) Loan receivables with overdue loans are taken into consideration. The fair value of collaterals, capped with the respective outstanding loan balance relating to loans individually impaired: December 31, 2020 December 31, 2019 Mortgage 7,436,378 4,544,466 Vehicle 450,185 680,126 Other (*) 2,815,934 3,903,356 Total 10,702,497 9,127,948 (*) Includes guarantees from Treasury and Credit Guarentee Fund amouting to TL 1,311,367(December 31, 2019: TL 2,372,400). The fair value of collaterals, capped with the respective outstanding loan balance relating to those that are past due but not impaired: December 31, 2020 December 31, 2019 Mortgage 9,622,212 10,089,190 Vehicle 867,841 1,211,496 Cash 218,006 162,431 Other(*) 12,172,352 9,266,847 Total 22,880,411 20,729,964 (*) Includes guarantees from Treasury and Credit Guarentee Fund amounting to TL 4,827,750 (December 31, 2019: TL 4,084,965). 70 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 11. INVESTMENT SECURITIES Financial asset at fair value through OCI: December 31, 2020 December 31, 2019 Carrying Face Value Face Value Carrying Value Value Debt and other instruments FVOCI: Government bonds in TL 27,996,982 31,011,998 15,888,538 17,659,222 Eurobonds issued by the Turkish Government 48,175,490 49,412,449 5,664,507 6,036,410 Government bonds in foreign currencies 1,554,729 1,671,449 891,905 974,990 Lease Certificates - - - - Bonds issued by banks 719,929 696,871 537,833 520,027 Corporate bonds 1,088,127 1,117,000 560,883 591,595 Asset-backed securities - - - - Equity shares - 1,097,365 - 801,819 Total FVOCI financial assets 79,535,257 85,007,132 23,543,666 26,584,063 As at December 31, 2020 and 2019, investment securities comprise the following: December 31, 2020 December 31, 2019 Financial assets at fair value through OCI (“FVOCI”) 85,007,132 26,584,063 Financial assets at amortised cost (“AC”) 58,740,656 47,009,579 Total investment securities 143,747,788 73,593,642 As at December 31, 2020 and 2019, equity shares comprised the following: December 31, 2020 December 31, 2019 Unquoted investments: Roketsan Roket Sanayi ve Ticaret A.Ş. 840,181 659,036 Vakıf Pazarlama Sanayi ve Ticaret A.Ş. 98,679 98,681 Vakıf Gayrimenkul Değerleme A.Ş. 36,059 22,386 Takas ve Saklama Bankası A.Ş. 29,901 29,901 Borsa İstanbul 13,579 13,579 İzmir Enternasyonel A.Ş. 6,177 6,178 Vakıf İnşaat Restorasyon A.Ş. 4,921 4,921 Güney Ege Enerji Ltd. Şti. 653 653 Bayek Tedavi ve Sağlık Hizmetleri A.Ş. 106 106 Others 104,218 23,914 Impairment (37,108) (57,536) Total 1,097,366 801,819 71 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 11. INVESTMENT SECURITIES (Continued) The following table summarizes fair value through OCI financial assets that were deposited as collaterals with respect to various banking transactions: December 31, 2020 December 31, 2019 Carrying Carrying Face Value Face Value Value Value Deposited at financial institutions for repurchase transactions 24,001,952 25,744,884 6,753,307 7,369,488 Others - - - - Total 24,001,952 25,744,884 6,753,307 7,369,488 Amortized cost investment securities: December 31, 2020 December 31, 2019 Face Carrying Fair Carrying Fair Face Value Value Value* Value Value* Value Debt instruments: Government bonds in TL 34,099,760 44,218,604 45,829,858 27,872,698 34,945,547 35,136,137 Certificate of deposits - - - 58,419 250,570 119,100 Eurobonds issued by the Turkish Government 15,019,247 14,528,648 15,295,839 - 4,930,308 - Other Bonds - - - 7,147,775 6,888,208 13,331,235 Total amortized cost investment securities 49,119,007 58,747,252 61,125,697 35,078,892 47,014,633 48,586,472 (*) ECL provision amount of amortized cost investment securities has not been included in carrying value. Movements of investment securities are as follows: December 31, 2020 December 31, 2019 FVOCI Amortized FVOCI Amortized Financial Cost Total Financial Cost Total Assets Investments Assets Investments Balances at January 1, 2020 26,584,063 47,009,579 73,593,642 11,385,945 39,976,063 51,362,008 Additions (*) 76,735,038 10,980,105 87,715,143 21,066,241 6,514,751 27,580,992 Disposals (sale and redemption) (22,320,198) (5,718,504) (28,038,702) (7,761,711) (1,664,238) (9,425,949) Transferred to available for sale financial assets - - - - - - Changes in amortized cost and fair value 3,305,516 3,055,750 6,361,266 1,482,335 1,233,186 2,715,521 Change in Provision for Impairment 368,857 - 368,857 (168,151) - (168,151) Exchange differences 333,856 3,415,268 3,749,124 579,404 950,424 1,529,828 Expected Credit Loss - (1,542) (1,542) - (607) (607) Total 85,007,132 58,740,656 143,747,788 26,584,063 47,009,579 73,593,642 (*) The Parent Bank issued subordinated debts to a group accounted for under "Subordinated debts" in 2019, in exchange acquired government securities, as disclosed under "Financial assets at amortised cost" as debt securities, from the same group as part of a qualified sale and purchase transition differing from market. The following table summarizes financial assets measured at amortized cost that were deposited as collaterals with respect to various banking transactions: December 31, 2020 December 31, 2019 Carrying Carrying Face Value Face Value Value Value . Deposited at financial and other institutions for repurchase transactions 33,660,771 38,158,425 17,208,139 21,285,024 Deposited at Central Bank of Turkey for repurchase transactions - - - - Deposited at Central Bank of Turkey for interbank transactions 3,188,554 4,897,956 5,883,778 4,832,033 Deposited at Istanbul Stock Exchange for the transaction of financial 1,067,000 1,703,104 instruments 1,369,964 1,914,293 Others 5,340,293 5,131,281 1,142,050 1,288,344 Total 43,559,582 50,101,955 25,300,967 29,108,505 72 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 12. INVESTMENTS IN ASSOCIATES As at December 31, 2020 and 2019 investments in equity participations accounted for using the equity method are as follows: December 31, 2020 December 31, 2019 Unquoted investments: T. Sınai Kalkınma Bankası A.Ş. 521,929 442,194 Kıbrıs Vakıflar Bankası Ltd. 16,587 13,893 Total 538,516 456,087 13. PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS Movements in property and equipment and intangible assets from January 1 to December 31, 2020 and January 1 to December 31, 2019 are as follows: Currency Property and equipment January 1, translation December 31, 2020 difference Valuation Transfers Additions Disposals 2020 Cost: Land and buildings 1,665,142 (97,817) 100,873 1,435,074 720,653 (348,516) 3,475,409 Motor vehicles 140,829 146 - - 92,482 (2,305) 231,152 Furniture, office equipment & leasehold improvements 1,831,507 (73,658) 76,797 - 119,222 (28,376) 1,925,492 Right of use assets 1,136,446 - - - 456,269 (200,919) 1,391,796 Other tangibles 35,481 6,561 - - 2,246 - 44,288 Total 4,809,405 (164,768) 177,670 1,435,074 1,390,872 (580,116) 7,068,137 Accumulated depreciation: Land and buildings (99,077) 91,533 (94,381) 12,139 (14,645) 497 (103,934) Motor vehicles (32,724) - - - (28,202) 1,198 (59,728) Furniture, office equipment & leasehold improvements (1,267,008) 62,397 (65,905) - (3,781) 2,247 (1,272,050) Right of use assets (243,225) - - - (262,168) 32,463 (472,930) Other tangibles (10,495) - - - (161,436) 32,882 (139,049) Impaired (20,509) - - - - 7,434 (13,075) Total (1,673,038) 153,930 (160,286) 12,139 (470,232) 76,721 (2,060,766) Net book value 3,136,367 (10,838) 17,384 1,447,213 920,640 (503,395) 5,007,371 Currency Intangible assets January 1, translation Valuation Transfers Additions Disposals December 31, 2020 difference 2020 Cost: Software programs 484,812 - - - 73,128 (2,563) 555,377 Rights 55,178 (46,538) 48,007 - 4,043 (76) 60,614 Other intangible assets 14,596 - - - - - 14,596 Total 554,586 (46,538) 48,007 - 77,171 (2,639) 630,587 Accumulated amortization: Software programs (182,605) - - - (36,405) - (219,010) Rights (44,905) - - - (7,208) - (52,113) Other intangible assets 14,701 33,647 (35,072) - (838) 40 12,478 Total (212,809) 33,647 (35,072) - (44,451) 40 (258,645) Net book value 341,777 (12,891) 12,935 - 32,720 (2,599) 371,942 73 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 13. PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS (Continued) IFRS 16 Currency Property and January 1, Transition translation December 31, equipment 2019 Effect difference Valuation Transfers Additions Disposals 2019 Cost: Land and buildings 2,373,075 - 944 - 38,782 34,626 (782,285) 1,665,142 Motor vehicles 62,211 - 69 - - 80,551 (2,002) 140,829 Furniture, office equipment & leasehold improvements 1,804,232 - 6,313 - - 135,238 (114,276) 1,831,507 Right of use assets - 794,812 - - - 486,053 (144,419) 1,136,446 Other tangibles 42,056 - 2,904 - - (660) (8,819) 35,481 Total 4,281,574 794,812 10,230 - 38,782 735,808 (1,051,801) 4,809,405 Accumulated depreciation: Land and buildings (92,679) - (892) - 4,766 (10,754) 482 (99,077) Motor vehicles (21,557) - - - - (13,012) 1,845 (32,724) Furniture, office equipment & leasehold improvements (1,175,063) - (6,779) - - (154,900) 69,734 (1,267,008) Right of use assets - - - - 2,558 (254,301) 8,518 (243,225) Other tangibles (15,071) - - - - (1,669) 6,245 (10,495) Impaired (27,760) - - - - - 7,251 (20,509) Total (1,332,130) - (7,671) - 7,324 (434,636) 94,075 (1,673,038) Net book value 2,949,444 794,812 2,559 - 46,106 301,172 (957,726) 3,136,367 IFRS 16 Currency Intangible January 1, Transition translation December 31, assets 2019 Effect difference Valuation Transfers Additions Disposals 2019 Cost: Software programs 509,224 - - - - 36,015 (60,427) 484,812 Rights 80,589 - 438 - - 1,470 (27,319) 55,178 Other intangible assets 14,596 - - - - - - 14,596 Total 604,409 - 438 - - 37,485 (87,746) 554,586 Accumulated amortization: Software programs (164,813) - - - - (32,200) 14,408 (182,605) Rights (37,840) - - - - (7,065) - (44,905) Other intangible assets (5,118) - (9,560) 9,096 - (530) 20,813 14,701 Total (207,771) - (9,560) 9,096 - (39,795) 35,221 (212,809) Net book value 396,638 - (9,122) 9,096 - (2,310) (52,525) 341,777 There are no restrictions such as pledges, mortgages or any other restriction on the property and equipment. 74 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 14. ASSETS CLASSIFIED AS HELD FOR SALE As of December 31, 2020, the cost of property and equipment held for sale purpose and related to discontinued operations are TL 1,263,718 (December 31, 2019: TL 3,125,252) and the provision for impairment is TL 7,467 (December 31, 2019: TL 12,981). The amount of other assets held for sales and discontinued operations is 3 TL (December 31, 2019: None.) As per the Board of Directors decision in December 13th, 2019, the Bank has started the process of transfer of shares held in subsidiaries Güneş Sigorta and Vakıf Emeklilik ve Hayat AŞ respectively, including publicly held shares, to a new company to be established by Türkiye Varlık Fonu Yönetimi AŞ Güneş Sigorta AŞ and Vakıf Emeklilik ve Hayat AŞ have been removed from the subsidiaries account and started to be disclosed in the Non-Current Assets Held For Sale and Discontinued Operations account. On April 22, 2020, a share transfer agreement was signed between TVF Financial Investments as the buyer and the Parent Bank as the seller, in order to transfer the Parent Banks shares which represent 51.1% of Güneş Sigorta AŞ’s capital and 53.9% of Vakıf Emeklilik ve Hayat AŞ’s capital to TVF Financial Investments AŞ ("TVF Financial Investments") and the share transfers were completed as of the same date, and the mentioned companies were excluded from the Parent Bank's Non-Currents Assets or Disposal Groups "Held For Sale" and "From Discontuined Operations (Net). Accordingly, the price to be paid to the Parent Bank for Güneş Sigorta AŞ shares is determined as TL 2.22 per share, and the total sales price is TL 612,586. The sales price has been totally paid with a special issue government bond. The amount to be paid to the Parent Bank for Vakıf Emeklilik ve Hayat AŞ shares is determined as TL 0.0896 per share, and the total sales price is TL 724,584. The sales price has been totally paid with a special issue government bonds. Elimination adjusted income and expense figures which has been occurred until the aforementioned sales transaction were booked in the income statement. TL 804,835 consolidated net sales profit has been booked in other operating income. As at December 31, 2020, net book value of assets held for sale of the Group is amounting to TL 1,256,254 (December 31, 2019: TL 7,690,615). December 31, 2020 December 31, 2019 Real Estate 1,256,251 3,112,271 Fixed Assets - - Subsidiaries and Affiliates - 4,578,344 Other 3 - Total 1,256,254 7,690,615 75 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 15. OTHER ASSETS December 31, 2020 December 31, 2019 Collaterals for derivative financial instruments 10,673,501 7,996,486 Receivables from credit card payments 2,377,152 1,695,301 Prepaid expenses 1,749,705 969,892 Investment properties 502,143 608,990 Receivables from term sales of fixed assets 539,262 112,364 Assets held for resale 33,243 33,243 Prepaid taxes other than income tax and funds 14,615 13,004 Guarantees given for repurchase agreements 3,449 9,922 Other 3,607,743 2,199,140 Total 19,500,813 13,638,342 As of December 31, 2020, net balance sheet value of the Group's subsidiary operating in real estate investment trust amounts to TL 502,143, and the Group has investment properties with a fair value of TL 867,782. (December 31, 2019: Net balance sheet value of the Group's subsidiary operating in real estate investment trust amounts to TL 608,990, and the Group has investment properties with a fair value of TL 1,018,635.) As at December 31, 2020, TL 33,243 (December 31, 2019: TL 33,243) of the other assets is comprised of foreclosed real estate acquired by the Group against its impaired receivables. Such assets are required to be disposed of within three years following their acquisitions per the Turkish Banking Law. This three year period can be extended by a legal permission from BRSA. 16. TRADING LIABILITIES As at December 31, 2020 and 2019, trading liabilities comprise negative fair value differences of derivative financial instruments held for trading purpose and are as follows: December 31, 2020 December 31, 2019 Swaps 6,032,976 3,250,742 Forwards 47,867 58,397 Options 2,458 2,858 Total trading liabilities 6,083,301 3,311,997 76 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 17. DEPOSITS FROM BANKS As at December 31, 2020 and 2019, deposits from banks comprise the following: December 31, 2020 December 31, 2019 Time deposits 21,396,468 8,722,666 Demand deposits 1,636,729 508,974 Total deposits from banks 23,033,197 9,231,640 18. DEPOSITS FROM CUSTOMERS As at December 31, 2020 and 2019, deposits from customers comprise the following: December 31, 2020 December 31, 2019 Demand Demand Deposit Time Deposit Time Deposit Deposit Saving deposits 10,033,091 60,751,163 8,578,245 50,150,136 Foreign currency deposits 26,859,872 143,401,214 16,360,792 83,798,474 Residents in Turkey 24,614,226 130,918,702 14,650,994 72,248,090 Residents abroad 2,245,646 12,482,512 1,709,798 11,550,384 Commercial deposits 6,887,033 56,555,805 4,512,058 30,835,029 Public sector deposits 9,869,935 26,743,128 8,186,969 16,071,779 Precious metal deposit 17,226,185 1,565,891 5,596,470 306,639 Others 9,124,138 25,225,789 7,545,083 12,741,744 Total deposits from customers 80,000,254 314,242,990 50,779,617 193,903,801 19. FUNDS BORROWED As at December 31, 2020 and 2019, funds borrowed comprise the followings in accordance with their original maturities: December 31, 2020 December 31, 2019 Foreign Foreign TL TL Currency Currency Short-term funds 1,764,288 3,453,141 1,280,038 4,485,291 Short-term portion of long 213,513 18,109,384 term funds 357,516 23,605,253 Total short-term funds 2,121,804 27,058,394 1,493,551 22,594,675 Medium/long term funds 331,545 22,180,305 793,403 20,185,108 Total funds borrowed 2,453,349 49,238,699 2,286,954 42,779,783 Funds borrowed comprise syndication and securitization loans bearing various interest rates and maturities and account for 7.77% (December 31, 2019: 11.28%) of the Group’s liabilities. There is no risk concentration on funding sources of the Group. Syndicated Loans Receive Maturity Amount Beginning From Currency Interest rate Coordinator Bank Agent Bank (Days) (Millions) Abu Dhabi Commercial Bank 367 USD 312 Libor+2.25% Mizuho Bank, LTD. Emirates NBD Bank (P.J.S.C) May 4, 2020 Abu Dhabi Commercial Bank 367 EUR 589.5 Euribor+2.00% Mizuho Bank, LTD. Emirates NBD Bank (P.J.S.C) The Commercial Bank (P.S.Q.C.) Emirates NBD 367 USD 160 Libor+2.50% December 7, Emirates NBD Bank (P.J.S.C) Bank (P.J.S.C) 2020 The Commercial Bank (P.S.Q.C.) Emirates NBD 367 EUR 421 Euribor+2.25% Emirates NBD Bank (P.J.S.C) Bank (P.J.S.C) 77 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 19. FUNDS BORROWED (Continued) Syndicated Loans Received Amount Beginning from Due date Currency Loan Type (USDMillions) May 13, 2011 June 15, 2023 USD 346.5 Based on international remittance flows December 19, Based on international remittance flows / Based on treasury December 15, 2021 USD/EUR 428.6 2014 financing transactions September 15, 2021 USD/EUR 354.4 Based on international remittance flows October 4, 2016 Based on international remittance flows / Based on treasury June 15, 2023 USD/EUR 535.7 financing transactions May 4, 2018 March 15, 2023 USD/EUR 380 Based on international remittance flows Based on international remittance flows / Based on treasury October 5, 2018 September 15, 2028 USD 300 financing transactions Based on international remittance flows / Based on treasury October 15, 2019 December 15, 2026 USD 417 financing transactions As of December 31, 2020, the total securitization balance is equivalent of USD 1,175 million and EUR 168 million. (December31, 2019: USD 1,453 million and EUR 227 million). 20. DEBT SECURITIES ISSUED December 31, 2020 December 31, 2019 TL FC TL FC Nominal 11,175,240 34,507,623 11,734,890 17,233,590 Cost 11,017,983 34,353,772 11,562,300 17,160,519 Net Book Value 11,262,156 34,892,367 11,792,577 17,455,479 Original TL December 31, 2020 Currency Maturity Interest Rate Amount Amount Bank Bonds TL July 2020-February 2027 6.50 % - 20.44 % 11,262,156 11,262,156 Bank Bonds USD October 2021-February 2025 4.92 % - 8.13 % 3,783,779 28,189,153 Bank Bonds EUR May 2021 2.58 % 507,499 4,642,488 Bank Bonds GBP July 2020-September 2020 0.95 % - 1.50 % 202,995 2,060,726 Original TL December 31, 2019 Currency Maturity Interest Rate Amount Amount Bank Bonds TL January 2020-February 2027 10.10 % - 24.05 % 11,792,577 11,792,577 Bank Bonds USD October 2021-July 2024 5.50 % - 5.75 % 2,362,908 14,071,120 Bank Bonds EUR May 2021 2.58 % 506,553 3,384,359 On February 5, 2020, a new bond issuance amounting to USD 750 million with 5-year maturity, 5.25 percent coupon rate and 5.375 percent final return rate was realized. In the transaction, the largest bond issue in the history of the bank, US $ 4.3 billion has been collected worldwide. As of December 8, 2020 with 5 year maturity date, the yield and the coupon rate has been set at 6.625% and 6.5% respectively amounting to USD 750 Million which is the first Sustainable Eurobond issuance among deposit banks in Turkey. 78 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 21. SUBORDINATED DEBTS Stated bonds’ total balance sheet value is TL 19,458,798 as of December 31, 2020 (December 31, 2019: TL 19,245,453) December 31, 2020 December 31, 2019 TL FC TL FC Debt instruments to be included in the additional Tier 1 capital calculation 5,144,984 6,627,849 5,139,810 4,839,684 Debt instruments to be included in the additional Tier 2 capital calculation 1,256,477 6,429,488 1,255,067 8,010,892 Total 6,401,461 13,057,337 6,394,877 12,850,576 22. OTHER LIABILITIES AND PROVISIONS The principal components of other liabilities and accrued expenses are as follows: December 31, 2020 December 31, 2019 Accounts against expenditures of credit card holders 7,531,662 6,028,086 Miscellaneous payables 3,340,103 1,901,660 Unearned income 1,971,787 1,115,043 Margin deposit for derivative financial instruments 1,709,523 1,210,663 Cheque clearing account 1,475,966 1,142,745 Other provisions 1,240,038 957,244 Lease Payables 999,315 935,938 Import letter of credit 992,031 1,479,780 Provision for employee termination benefits 795,844 610,600 Provision for non-cash loans 278,244 168,114 Blocked accounts 111,322 70,856 Provision for unused vacations 94,479 102,631 Payment orders 55,961 52,044 Investment contract liabilities - - Cheques response - - Reserve for short term employee benefits 673,541 447,777 Other liabilities 490,064 342,926 Total other liabilities and provisions 21,759,880 16,566,107 As of 31 December 2020, the free provision in the financial statements amounted to a total of TL 1,072,000 (31 December 2019: TL 852,000), of which is constituted by TL 220,000 in the current period and TL 852,000 in the prior periods. 79 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 22. OTHER LIABILITIES AND PROVISIONS (Continued) Obligations under finance leases December 31, 2020 December 31, 2019 Gross Net Gross Net Under 1 year 24,659 23,607 20,932 19,639 1-4 Years 344,322 297,430 465,352 374,544 Over 4 years 1,018,008 678,278 947,841 541,755 Total 1,386,989 999,315 1,434,125 935,938 Movement in the reserve for employee severance indemnity is as follows: Reserve for employee severance December 31, 2020 December 31, 2019 indemnity At the beginning of the year 610,600 463,120 Currency translation difference 888 (1,570) Interest cost 70,439 65,401 Service cost 60,867 40,002 Payment during the year (40,771) (45,851) Actuarial remeasurement 93,821 89,498 At the end of the year 795,844 610,600 23. TAXATION Components of income tax expense recognized in the consolidated statement of comprehensive income are as follows: December 31, 2020 December 31, 2019 Income tax recognized in profit or loss for the year Current income tax related to income from operations (2,040,485) (1,880,222) Deferred income tax related to income from operations 504,368 847,013 (1,536,117) (1,033,209) Income tax recognized in other comprehensive income Current income tax recognized in other comprehensive income - - Deferred income tax recognized in other comprehensive income (184,408) (252,949) (184,408) (252,949) Income tax expense recognized in the consolidated profit or loss (1,720,525) (1,286,158) and other comprehensive income Details of tax liability are as follows: December 31, 2020 December 31, 2019 Corporate tax payable 396,020 586,727 Taxation on securities 283,597 257,672 Banking and Insurance Transaction Tax (BITT) 201,314 202,056 Value added tax payable 11,758 13,276 Capital gains tax on property 1,561 3,515 Taxes on foreign exchange transactions 8,002 4,428 Other 53,585 75,400 Total tax liability 955,837 1,143,074 80 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 23. TAXATION (Continued) The movement of corporate tax payable is as follows: December 31, 2020 December 31, 2019 At the beginning of the year 586,727 317,752 Current income tax charge 2,040,485 1,880,222 Taxes paid during the year (2,231,192) (1,611,247) Corporate tax payable 396,020 586,727 A reconciliation of income tax expense applicable to profit from operating activities before income tax at the statutory income tax rate, to income tax expense at the Group’s effective income tax rate for the years ended December 31, 2020 and 2019 is as follows: Tax rate Tax rate December 31, 2020 (%) December 31, 2019 (%) Profit from ordinary activities before income tax and non-controlling interest 8,005,098 4,535,868 Taxes on income per statutory tax rate (1,931,783) (24.13) (1,016,826) (22.42) Disallowable expenses 395,666 4.94 (16,383) (0.36) Income tax expense (1,536,117) (19.19) (1,033,209) (22.78) Deferred tax assets and liabilities at December 31, 2020 and 2019 are attributable to the items below: December 31, 2020 December 31, 2019 Expected credit loss 1,516,646 557,969 Valuation differences of financial assets and liabilities 289,956 431,022 Free provision 214,400 170,400 Provision for employee severance indemnity and unused vacations 176,791 143,769 Valuation difference of associates and subsidiaries 115,214 49,298 Other provisions 25,804 13,997 Investment incentive 302 4,345 Reporting standards-tax code depreciation differences - 49 Tax losses carried forward - - Valuation difference for property and equipment 42 - Other temporary differences 233,064 204,996 Deferred tax assets 2,572,219 1,575,845 Net-off of the deferred tax assets and liabilities from the same entity (1,117,284) (600,480) Deferred tax assets, (net) 1,454,935 975,365 Valuation differences of financial assets and liabilities 896,839 460,570 Valuation difference for property and equipment 96,345 74,679 Valuation difference of associates and subsidiaries 133,178 61,962 Other temporary differences 48,550 34,878 Deferred tax liability 1,174,912 632,089 Net-off of the deferred tax assets and liabilities from the same entity (1,117,284) (600,480) Deferred tax liability, (net) 57,628 31,609 81 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 24. EARNINGS PER SHARE Basic earnings per share are calculated by dividing the net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. There is no dilution of shares as at December 31, 2020 and 2019. The following reflects the basic earnings per share computations: December 31, 2020 December 31, 2019 Net profit attributable for the year 6,468,981 3,502,659 Net profit attributable to owners of the Bank 6,392,954 3,363,189 Number of 100 ordinary shares for basic earnings per shares 3,905,622,490 2,500,000,000 Basic earnings per 100 share 1.9134 1.3453 Diluted earnings per 100 share 1.9134 1.3453 (*) For the period between January 1, 2020 – May 22, 2020 “2,500,000,000” and for the period between May 22, 2020– December 31, 2020 “3,905,622,490” has been considered for the earning per 100 share calculation. There have been no other transactions involving ordinary shares or potential ordinary shares since the reporting date and before the completion of these financial statements. 25. EQUITY Share capital The Parent Bank increased its paid-in capital from TL 2,500,000 to TL 3,905,622, provided that it is within the registered capital ceiling, based on the decision taken at the Board of Directors meeting dated 11 May 2020. Accordingly, the amendment made in the related article of the Articles of Association was registered on 9 June 2020. Paid-in capital of the Parent Bank amounted to TL 3,905,622 is divided into groups comprised of 27.52% Group (A), 10.00 % Group (B), 10.35% Group (C) and 52.13% Group (D). Board of Directors’ members; three members representing Group (A), one member representing Group (B), and two members representing Group (C); among the nominees shown by the majority of each group, and one member among the nominees offered by the shareholders at the General Assembly are selected. Preference of Group (D) is primarily taken into account in the selection of the last mentioned member. Legal reserves The legal reserves consist of first and second reserves, appropriated in accordance with the Turkish Commercial Code (“TCC”). The TCC stipulates that the first legal reserve is appropriated out of the statutory profits of the Bank and its subsidiaries at the rate of 5%, until the total reserve reaches 20% of paid-in share capital. The second legal reserve is appropriated at the rate of 10% of all cash distributions in excess of 5% of the paid-in share capital. Under the TCC, the legal reserves can only be used to offset losses and are not available for any other usage unless they exceed 50% of paid-in share capital. 82 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 25. EQUITY (Continued) Non-controlling interest As at December 31, 2020 and 2019, non-controlling interest is analyzed as follows: December 31, 2020 December 31, 2019 Capital and other reserves 730,075 779,953 Legal reserves 17,158 14,473 Share Premium 131,132 122,011 Revaluation surplus 8,247 234,212 Retained earnings (26,754) (191,753) Profit for the year 76,027 154,861 Total non-controlling interest 935,885 1,113,757 Set out below is non-controlling profit and dividend payment for the year by subsidiaries: December 31, 2020 December 31, 2019 Profit or loss Profit or loss Dividends paid to non- Dividends paid to non- attributable to attributable to non- controlling interest controlling interest non-controlling controlling interest during the year during the year interest Taksim Otelcilik AŞ 4,827 - 8,098 - Vakıf Emeklilik ve Hayat AŞ - - 24,145 (79,557) Güneş Sigorta AŞ - - 70,041 - Vakıf Faktoring AŞ 16,820 - 14,199 - Vakıf Gayrimenkul Yatırım Ortaklığı AŞ 27,636 - (2,355) - Vakıfbank International AG - - 4,775 - Vakıf Finansal Kiralama AŞ 24,243 - 18,783 - Vakıf Enerji ve Madencilik AŞ 1,272 - 800 - Vakıf Menkul Kıymet Yatırım Ortaklığı A.Ş 279 - 821 - Vakıf Yatırım Menkul Değerler A.Ş 950 - 163 - Total 76,027 - 139,470 (79,557) Fair value reserves of FVOCI financial assets: December 31, 2020 December 31, 2019 Balance at the beginning of the year 1,492,861 315,654 Effects of accounting policy changes - - Net gains/(losses) from changes in fair values 454,805 1,071,163 Net gains transferred to profit or loss on disposal 10,279 400,346 Related deferred and current income taxes (93,017) (294,302) Balance at the end of the year 1,864,928 1,492,861 Summarised financial information on subsidiaries Summarised financial information for each subsidiary that has non-controlling interests that are material to the group as follows: Vakıf Gayrimenkul Yatırım Vakıf Menkul Kıymet Yatırım Ortaklığı A.Ş. Ortaklığı A.Ş. December December December 2019 December 2019 2020 2020 Non-controlling interest ratio (%) 54.29 61.30 82.63 82.63 Total Asset 2,928,981 1,781,467 29,411 19,462 Current Asset 1,204,036 92,602 29,206 19,196 Non-current Asset 1,724,945 1,688,866 205 266 Total Liabilities 1,484,506 717,807 318 752 Total Equity 1,444,475 1,063,661 29,093 18,710 Interest Income 41,859 7,091 1,662 2,952 Income on securities portfolio - - 912 465 Profit/(loss) 118,592 96,152 350 1,173 83 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 26. RELATED PARTY TRANSACTIONS For the purpose of these consolidated financial statements, shareholders, subsidiaries, associates, other group companies and key management personnel of the Group or of its parent and their close family members are referred to as related parties. The Group conducted some business transactions with related parties on normal commercial terms and conditions. The following balances exist and transactions have been entered into with related parties: December 31, 2020 December 31, 2019 Non-cash Non-cash Related party Cash loans Deposits Cash loans Deposits loans loans Direct/Indirect shareholders - 32,511 2,237,815 - 29,783 298,755 Associates 57,561 447,116 1,581,484 334,885 377,754 54,095 Key management personnel 5,762 - 8,063 110 - 328 Total 63,323 479,627 3,827,362 334,995 407,537 353,178 December 31, 2020 December 31, 2019 Other Other Commission Interest Interest Commission Interest Interest Related party operating operating Income income expense Income income expense expense expense Direct/Indirect 141 49,350 204,471 141 shareholders - - 99,294 - Associates 205 19,596 36,197 2,860 - - 17,271 443 Total 205 19,596 135,491 2,860 141 49,350 221,742 584 Key Management Remuneration For the period ended December 31, 2020, the key management personnel received remuneration and fees amounted to TL 48,738 (December 31, 2019: TL 53,150). 27. FEE AND COMMISSION INCOME December 31, 2020 December 31, 2019 Fee and commission income Debit and credit card fee and commission 1,201,992 1,785,156 Collection and payment commissions 789,508 861,562 Non-cash loan commission 771,180 718,014 Reinsurance commission 446,557 327,286 Investigation charges 112,765 269,989 Money transfer charges 119,040 161,791 Mutual funds commission 34,397 25,370 Account maintenance fee 10,293 19,201 Other 357,651 348,914 Total fee and commission income 3,843,383 4,517,283 Fee and commission expense Debit and credit card fee and commission 496,424 751,398 Fee and commission for funds borrowed 93,312 113,377 Fee and commission for marketable securities issued 79,474 54,996 Money transfer charges 33,787 24,042 Other 156,306 174,355 Total fee and commission expense 859,303 1,118,168 Net fee and commission income 2,984,080 3,399,115 84 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 28. OTHER INCOME As at and for years ended December 31, 2020 and 2019, other income comprised the followings: December 31, 2020 December 31, 2019 Reversal of miscellaneous provision 5,385,947 3,526,244 Gain on sale of fixed assets 739,410 315,137 Individual pension business income 39,340 161,784 Earned premiums 268,629 2,015,707 Written premiums 268,629 2,344,871 Change in reserve for unearned premiums - (329,164) Rent income 99,219 20,314 Dividend income from equity shares 17,633 8,682 Excess fee charged to customers for communication expenses 16,148 37,251 Others 1,540,098 517,671 Total 8,106,424 6,602,790 29. SALARIES AND EMPLOYEE BENEFITS As at and for the years ended December 31, 2020 and 2019, salaries and employee benefits comprised the following: December 31, 2020 December 31, 2019 Wages and salaries (1,436,172) (1,364,415) Employer’s share of social security premiums (1,399,656) (1,234,814) Other fringe benefits (647,564) (550,429) Total (3,483,392) (3,149,658) The average number of employees of the Group during the year is: December 31, 2020 December 31, 2019 The Bank 16,748 16,835 Subsidiaries 532 2,139 Total 17,280 18,974 Reserve for employee severance indemnity Reserve for employee severance indemnity represents the present value of the estimated future probable obligation of the Bank and its subsidiaries arising from the retirement of the employees and calculated in accordance with the Turkish Labor Law. It is computed and reflected in the financial statements on an accruals basis as it is earned by serving employees. The computation of the liabilities is based upon the retirement pay ceiling announced by the Government. The ceiling amounts applicable for each year of employment are TL (full TL) 7,117 and TL (full TL) 6,380 as at December 31, 2020 and December 31, 2019, respectively. IFRS require actuarial valuation methods to be developed to estimate the entity’s obligation under reserve for employee severance indemnity. The main actuarial assumptions used in the calculation of the total liability in the accompanying consolidated financial statements at December 31, 2020 and 2019 are as follows: December 31, 2020 December 31, 2019 Discount Rate 12.80% 12.10% Inflation Rate 9.50% 8.20% Increase in Real Wage Rate 10.50% 9.20% 85 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 30. OTHER EXPENSES As at and for the years ended December 31, 2020 and 2019, other expenses comprised the following: December 31, 2020 December 31, 2019 Banking services promotion expenses (1,147,255) (943,361) Provision for Severance pay and Employee Benefits (474,312) (328,419) Other provision expenses (293,224) (57,270) Saving Deposit Insurance Fund premiums (286,352) (283,627) Incurred insurance claims (222,175) (1,117,881) Insurance claims paid (188,972) (1,034,866) Change in provision for outstanding claims (33,203) (83,015) Communication expenses (179,742) (151,659) Advertising expenses (175,359) (197,051) Cleaning service expenses (112,745) (73,661) BRSA participation fee (83,885) (66,271) Computer usage expenses (83,840) (64,871) Leasing expenses related to IFRS 16 exceptions (81,040) (92,870) Maintenance expenses (79,918) (77,078) Energy expenses (73,223) (66,262) Office supplies (68,567) (37,750) Credit card promotion expenses (64,599) (49,665) Hosting expenses (31,811) (28,478) Loss on sale of assets (30,778) (7,306) Consultancy expenses (23,568) (31,004) Transportation expenses (23,289) (30,618) Other various administrative expenses (1,737,611) (851,543) Total (5,273,293) (4,556,645) 31. COMMITMENTS AND CONTINGENCIES In the normal course of business activities, the Group undertakes various commitments and incurs certain contingent liabilities that are not presented in the consolidated financial statements including: December 31, 2020 December 31, 2019 Letters of guarantee 75,424,836 58,980,316 Letters of credit 20,921,424 13,732,645 Acceptance credits 5,115,792 4,582,834 Other guarantees 983,686 956,499 Total non-cash loans (financial guarantee contracts) 102,445,738 78,252,294 Loan granting commitments 26,088,692 18,079,079 Credit card limit commitments 21,320,698 17,293,741 Commitments for cheque payments 5,723,932 3,528,150 Commitments for credit card and banking operations promotions 597,623 484,519 Other commitments 60,751,038 43,612,945 Total commitments 114,481,983 82,998,434 Total commitments and contingencies 216,927,721 161,250,728 Contingent assets and liabilities There are various legal cases against the Group for which TL 44,200 (December 31, 2019: TL 37,306) has been provided, excluding routine insurance claims. Due to the nature of insurance business and considering the general attitude of the legal system in favor of the policyholders, the Group provides in full for the claims opened, except for these claims including damages for mental anguish and risks which are not covered by the insurance policies. Since most of such material claims are ceded to reinsurance firms by facultative agreements, such claims, net of ceded amounts have no material effect on the Group’s financial position. 86 TÜRKİYE VAKIFLAR BANKASI TÜRK ANONİM ORTAKLIĞI AND ITS SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (Amounts expressed in thousands of Turkish Lira (TL) unless otherwise stated.) 31. COMMITMENTS AND CONTINGENCIES (Continued) Pending tax audits The tax and other government authorities (Social Security Institution) have the right to inspect the Group’s tax returns and accounting records for the past five fiscal years. The Group has not recorded a provision for any additional taxes for the fiscal years that remained unaudited, as the amount cannot be estimated with any degree of certainty. The Group’s management believes that no material assessment will arise from any future inspection for unaudited fiscal years. 32. SUBSEQUENT EVENTS As of January 8, 2021, all of the shares of the Parent Bank in Keskinoğlu Tavukçuluk ve Damız İşletmeleri Sanayi ve Ticaret AŞ, a subsidiary of the Bank, were transferred to TC Ziraat Bankası AŞ. Thus, the Parent Bank does not have any shares in the company. On May 18, 2020, the Qatar Financial Center Regulatory Authority (QFCRA) approved the Parent Bank's license application to carry out its banking activities and allowed the Qatar branch to be operational as of February 2, 2021. A temporary article has been added to the Corporate Tax Law No. 5520 with the Law No. 7316 on the Procedure for the Collection of Public Claims and the Law on Amendment to Certain Laws published in the Official Gazette dated April 22, 2021. The stated amendment will be applied to the declarations to be submitted as of July 1, 2021 and entered into force as of April 22, 2021 starting from the fiscal period of January 1, 2021, and the corporate tax rate, which is 20% in the current law, is 25% for 2021, it has been decided to apply as 23% for the revenues of 2022. Accordingly, corporate tax will be applied as 20% in the first advance tax period of 2021, and 25% as of the second temporary taxation period. The Parent Bank has issued financing bills with various maturities between January 1, 2021 and May 20, 2021. ………………… 87