TURKiYE HALK BANKASI A.$. The Project Financial Statements of "Small and Medium Enterprises Energy Efficiency Project" With Independent Auditors' Report As at 31 December 2018 DRT Bagmsiz Denetim ve D e oitte Serbest Muhasebeci Mali Md5avirlik A5. Maslak nol Plaza Eski BUyukdere Caddesi Maslak Mahallesi No:1 Maslak, Sanyer 34485 istanbul, Turkiye Tel :+90(212)3666000 Fax: +90 (212) 366 6010 www.deloitte.com.tr Mersis No: 0291001097600016 INDEPENDENT AUDITOR'S REPORT Ticar; Sicil No' 304099 To the Board of Directors of T(irkiye Halk Bankasi A.$. Quahfied Opinion We have audited the accompanying project financial statements of Tiirkiye Halk Bankasi A.S. (the "Bank"), which comprise the project balance sheet as at 31 December 2018 and the statement of designated account which includes a summary of funds received from the International Bank for Reconstruction and Development ("IBRD"), the summary of expenditures shown under the main project headings and by main categories of expenditures for the period between 1 January 2018 and 31 December 2018, and notes to the project financial statements, including a summary of significant accounting policies (together "the project financial statements"). In our opinion, except for the effects of the matter described in the basis for qualified opinion section of our report, the accompanying project financial statements of the Bank as at 31 December 2018 and for the period between 1 January 2018 and 31 December 2018 are prepared, in all material respects, in accordance with the financial reporting provisions of Terms of Reference ("TOR") (Note 3) of the agreement dated 6 May 2013 between the IBRD and the Bank. Basis for Qualified Opinion The Bank did not recognize the accrued interest income on the amounts due from loan customers and the accrued interest expenses on the amount due to IBRD and any commission amount on the balances in the project financial statements, although such accruals were included in its statutory financial statements. We were unable to determine its impact on the project financial statements of the Bank as at 31 December 2018 and for the period between 1 January 2018 and 31 December 20 8. We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Financial Statement section of our report. We are independent of the Bank in accordance with the Code of Ethics for Independent Auditors ("Code of Ethics") published by the Public Oversight Accounting and Auditing Standards Authority, together with the ethical requirements that are relevant to our audit of the project financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis ofMatter - Basis ofAccounting and Restriction on Distribution and Use We draw attention to Note 3 to the project financial statements, which describe the basis of accounting. The project financial statements are prepared to assist the Bank to comply with the financial reporting provisions of the TOR of the agreement referred to above. As a result, the project financial statements may not be suitable for another purpose. Our report is intended solely for the IBRD and the Bank and should not be distributed to or used by parties other than the IBRD and the Bank. Our opinion is not modified in respect of this matter. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is s responsible for the preparation of the project financial statements in accordance with the financial reporting provisions of TOR, and for such internal control as management determines is necessary to enable the preparation of the project financial statements that is free from material misstatement, whether due to fraud or error. Delitte refers to one or me of Del6tte Touche Tohmatsu Limited, a UK pevate conpany limited by guarantee ("DTrL X its network -f member firm and their related entitie:. DTTL and each of it, member firm, are legally separate and independent entities. DTTL (al-U referred to as 'Delcitte Globar) does not provide serv es t clients. Please see www.delcitte )rrmabout to learn more ab,ut ur gktal network of member firr )019. FR informatio- contact Deoitte Tc iche Tohmat'a Lirmted. Deloitte In preparing the project financial statements, management is responsible for assessing the Bank'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 Bank or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Bank's financial reporting process. Auditors' Responsibilities for the Audit of the Project Financial Statements Our objectives are to obtain reasonable assurance about whether the project 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 the project financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the project 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 Bank'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 Bank'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 schedule 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 Bank to cease to continue as a going concern. 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. DRT BAOIMSIZ DENETIM VE SERBEST MUHASEBEC! MALi MO$AVIRLIK A.$. Member of DELOITTE TOUCHE TOHMATSU LIMITED Istanbul, 17 May 2019 TORKIYE HALK BANKASI A.$. SME Energy Efficiency Project IBRD TU 8242 and GEF TF 14580 Project Financial Position for the year ending 31 December 2018 in USD ASSETS Designated (Project) Account (IBRD) Designated (Project) Account (GEF TA) GEF Loan Loss Reserve Fund Account Credit-line to loan customers (IBRD) 54,757,656.00 Credit-line initiated through leasing companies 12,242,344.00 IBRD 67,000,000.00 Halkbank own funds - GEF Funds 377,503.37 GEF Loan Loss Reserve Account - GEF TA Component 377,503.37 TOTAL ASSETS (*) 67,377,503.37 LIABILITIES Amount due to World Bank (excluding the front-end-fee) IBRD 67,000,000.00 Total grant amount GEF 377,503.37 Co-financing amount Halkbank own funds - TOTAL LIABILITIES 67,377,503.37 (* The full arnount of loans allocated within the scope of SME Energy Efficiency Project IBRD TU 8242 agreement dated 6 May 2013 between the IBRD and the Bank is 67,146.444 USD in total as at 31.12.2018. The exceeding loan usage amounting to USD 146.444 is in line with Schedule 2. Article -g" of SME Energy Efficiency Project IBRD TU 8242 agreenent dated 6 May 2013 between the IBRD and the Bank. The accompanying notes are an integral part of these project financial statements. TJRKIYE HALK BANKASI A.$. SME Energy Efficiency Project IBRD TU 8242 Designated Account (DA) Statement for IBRD for the year ending 31 December 2018 in USD Opening balance as at 1 January 2018 (beginning of the year) 6,644,580.55 IBRD advances during the reported year Funds available during the year 6,644,580.55 Less: Refund to I3RD from SA during the year Loans advances / expenses paid in period 6,644,580.55 Outflows from Designated Account during the year 6,644,580.55 Closing balance as at 31 December 2018 (end of the year) (0) The accompanying notes are an integral part of these project financial statements. 2 TCRKIYE HALK BANKASI A.S. SME Energy Efficiency Project GEF TF 14580 Designated Account (DA) Statement for GEF TA for the year ending 31 December 2018 in USD Opening balance as at 1 January 2018 (beginning of the year) 199,258.88 GEF advances for TA activities during the reported year 178,244.49 Funds available during the year - Less: Refund to GEF from SA during the year - Expenses paid in period 178,244.49 Outflows from Designated Account during the year 178,244.49 Closing balance as at 31 December 2018 (end of the year) 377,503.37 (*) Global Environment Facility (GEF) advances means expenses in connection with the consulting services provided for projects financed under the IBRD loan facility. 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OBJECTIVES AND NATURE OF THE PROJECT Tflrkiye Halk Bankasi A. . (the "Bank" or "Halkbank") received loan of USD 67,000,000 and grant of USD 900,000 for Access to Finance For Small and Medium Enterprises ("SMEs") Energy Efficiency Project (the "Project") from the International Bank for Reconstruction and Development ("IBRD"). The main objective of the Turkey SME Energy Efficiency Project is to improve the efficiency of energy use in the small and medium enterprises by scaling-up commercial bank lending for energy efficiency. By providing SMEs with credit line financing and development of new business models, the project aims to remove the market barriers that exist to inhibit financing to energy efficiency (EE) investments in SMEs. The IBRD agrees to lend to the Borrower, on the terms and conditions set forth or referred to in the Loan Agreements, the amount of sixty-scvcn million Dollars ($67,000,000) ("Loan") and the amount of nine- hundred thousand Dollars ($900,000) ("Grant"), to assist in financing its respective part of the project that described in Loan and GEF Agreements between the IBRD and the Bank dated 6 May 2013. 2. OPERATIONS OF THE PROJECT IMPLEMENTING AGENCY Tilrkiye Halk Bankasi A.5. was established in Turkey in accordance with the Law No: 2284 in 1933 and began its operations in 1938 and still continues its activities as a public commercial bank. As per the decree of the Higher Council of Privatization numbered 200718 and dated 5 February 2007; 25% of the public shares that were previously held by the Privatization Administration were privatized by a public offering and the Bank's shares were registered to Capital Market Board records by decision number 16/471 dated 26 April 2007. The shares were traded on the Borsa istanbul A.$. as of 10 May 2007. As per the decree of the Higher Council of Privatization numbered 2012/150 and dated 4 October 2012; 23.92% of the public shares that were previously held by the Privatization Administration were privatized by a second public offering and privatization was completed on 21 November 2012. The shares belonging to the Prime Ministry Privatization Administration were transferred to Turkey Wealth Fund on 10 March 2017 pursuant to the Decree of the Higher Council for Privatization No. 2017/1 dated 3 February 2017. The Bank's service activities and operating areas: The Bank's operating areas include, commercial financing and corporate banking, fund management operations, retail banking and credit card operations. As of 31 December 2018, the Bank operates with a total of 994 branches consisting of 988 domestic and 6 foreign branches that are 5 in Cyprus and I in Bahrain. Domestic branches include 47 satellite branches. The Bank has also 3 representative office that are I in England, I in Singapore and I in [ran. 3. SIGNIFICANT ACCOUNTING POLICIES The project financial statements have been prepared in accordance with generally accepted accounting principles and practices. The Bank did not recognize the accrued interest income on the amounts due from loan customers and the accrued interest expenses on the amount due to World Bank, any commission amount and any other charges on the balances in the project financial statements, although such accruals were included in its statutory financial statements. These project financial statements are presented in USD. The significant accounting policies are as follows: 3.1 Designated (Project) account Designated (project) account presents Word Bank Fund which is not yet disbursed to SMEs. Undisbursed amount as of the current period is USD 0. Designated (project) account is recognized initially at their principal amounts, and subsequently are continued to be measured with their principal amounts. 3.2 Credit-line to loan customers Credit-line to loan customers are financial assets which are not traded in an active market and have fixed or floating payments. Credit-line to loan customers are recognized initially at their principal amounts, and subsequently are continued to be measured with their principal amounts. Disbursements to the local firms other than USD are translated into USD at the prevailing exchange rates as of the date of the disbursements. The collections from the local firms are converted with the exchange rates prevailing on the collection dates. The balance includes EUR 21,581,606.87, USD 19,606,741.86 USD and TRY 50,254,244.71 of principal amounts which makes USD 67,000,000.00 in total, as translated with the prevailing exchange rates at the disbursement dates when loans were used. The Loan Agreements do not define exchange rates to be used during the lifetime of the Project. 3.3 Amounts due to World Bank Amounts due to World Bank are recognized initially at their principal amounts, and subsequently are continued to be measured with their principal amounts. The balance includes USD 67,000,000.00 that is used from the IBRD fund of USD 67,000,000.00. 3.4 Co-financing amount (GEF) and GEF Funds GEF Grant to assist in defraying risks associated with new energy efficiency and in addressing SME collateral requirements and to sponsor to finance the cost of carrying the Bank's sub-projects. Amounts due to World Bank, acting as an implementing agency of the GEF are recognized initially at their principal amounts, and subsequently are continued to be measured with their principal amounts. The balance includes USD 377,503.37 that is used from the IBRD fund of USD 377,503.37. 4. RESTRICTED USE OF FUNDS AND OTHER ASSETS In accordance with the loan and grant agreements between the Bank and the IBRD, funds available in the Special Account are restricted to project purposes only. 10 5. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT LOAN The balance allocated to Tiirkiye Halk Bankasi A.$. to be on-lent out of the proceeds of the loans to the Bank under its respective subsidiary loan agreements is USD 67,900,000. The Bank is obliged to pay a front-end fee for the loan in an amount equal to one quarter of one percent (0.25)% of the loan amount, subject to any waiver of a portion of such fee as may be determined by the IBRD from time to time. The loan is a Fixed Spread Loan (FSL) with level repayments, starting on 15 March 2019, and a 23 year total repayment term. The loan is being utilized in the form of a fixed spread loan (FSL) facility with repayment Schedule linked to actual disbursements. In order to draw down funds under the Access to Finance for Small and Medium Enterprises Energy Efficiency Project, the Bank is entering into sub-loan agreements with beneficiary enterprises. The sub-loan agreements are in accordance with the Project sub-loan terms and conditions and prudent banking practices. Sub-loans are being provided for working capital and investment expenditures. Financial covenants: The key covenants with basically the financial effects are detailed below. a) Each Sub-loan shall be charged interest, on the principal amount thereof withdrawn and outstanding from time to time, at such a rate as may be determined by the Borrower on the basis of its assessment of market conditions and risk management. b) Each Sub-loan to: (a) a Sub-project Sponsor that is a SME shall not exceed $3,500,000; and (b)a Sub- project Sponsor that is a Mid-Cap Company, a Leasing Company or an Energy Service Company (ESCO) shall not exceed $5,000,000; and Sub-project Sponsor that is a Vendor (Vendor means a technology and/or equipment supplier that sells energy efficient equipment and/or Services.) shall not exceed $10,000,000. c) Except as the Bank shall otherwise agree, the aggregate principal amount under multiple Sub-loans made by the Borrower to any of the following and its affiliates shall not exceed $10,000,000 equivalent: (a) a Sub-project Sponsor that is a SME or Mid-cap Company; and (b) a beneficiary of a Sub-project Sponsor that is an ESCO or a Leasing Company; and (c) a Sub-project Sponsor that is a Vendor. d) The Front-end Fee payable by the Borrower shall be equal to one quarter of one percent (0.25%) of the Loan amount. The Borrower shall pay the Front-end Fee not later than sixty (60) days after the Effective Date. e) "Mid-cap Company" means an enterprise that: (a) is not an SME; and (b) employs fewer than 1,500 employees. f) "SME" means a small or medium enterprise that has less than 50,000,000 Euro in sales and employs fewer than 250 employees. g) The Borrower shall monitor and evaluate the progress of its Respective Part of the Project (including progress in implementation of the Environmental Policy Framework and plans prepared in accordance with said framework and accepted by the Bank) and prepare Project Reports in accordance with the loan agreement dated 6 May 2013. i) For the investments to be made on the river, the following waterways that are not identified as international waterways should be supported: Susurluk, North Aegean, Gediz, Kuquk Menderes, Buyuk Menderes, Western Mediterranean, Antalya, Sakarya, Western Black Sea, Yesilirmak, Kizilirmak, Konya Kapali, Eastern Mediterranean, Seyhan, Ceyhan, Eastern Black Sea, Burdur, Afyon, Orta Anadolu and Van. A Project Implementation Unit (PIU) was established under the International Banking and Structured Financing Directorate of the Bank. The sub-loans extended to the SMEs from the IBRD funds are followed up in the Bank's general management information system coherent with the procedures of other loans tracked within the system, accounted and reported for. All transactions for the transfers from the IBRD, transfers to SMEs or to their suppliers and other Project transactions are accounted for in the main accounting system of the Bank. 11 6. IBRD ADVANCES Withdrawal Number Date Amount in USD(*) 1 19 March 2015 15,000,000 2 14 June 2016 12,997,989 3 30 June 2016 1,465,340 4 3 April 2017 6,638,153 5 9 May 2017 8,699,682 6 22 September 2017 10,928,332 7 27 November 2017 11,270,504 67,000,000 (*)This table shows disbursements from IBRD to the Bank. GEF ADVANCES Withdrawal Number Date Amount in USD(**) 1 5 April 2016 26,304 2 15 February 2017 36,292 3 20 June 2017 28,416 4 29 August 2017 108,327 5 17 July 2018 149,431.10 6 25 December 2018 28,813.39 377,503.37 *) This table shows disbursements from GEF to the Bank. 7. SUBSEQUENT EVENTS None. 8. OTHER MATTERS On 16 May 2018 a former deputy CEO of the Bank was sentenced for the indictment of the court case in the USA at which he was a defendant on the violation of the USA sanctions involving Iran. The Bank is not a trialist or defendant in this case. The respective court in this trial has not issued any administrative or monetary decision against the Bank. 12