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Turbine Aviation Inc (CE) | USOTC:TURA | OTCMarkets | Common Stock |
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0.00 | 0.00% | 0.0001 | 0.00 | 01:00:00 |
RNS Number:4689I Turk Ekonomi Bankasi A.S. 07 March 2003 Turk Ekonomi Bankasi Anonim Sirketi Consolidated Financial Statements Together With Report of Independent Auditors December 31, 2002 TABLE OF CONTENTS Page ------ Report of Independent Auditors 1 Consolidated Balance Sheet 2 Consolidated Income Statement 3 Consolidated Statement of Changes in Equity 4 Consolidated Cash Flow Statement 5 Notes to the Consolidated Financial Statements 6- 49 Unconsolidated Financial Statements of the Bank Appendix To the Board of Directors of Turk Ekonomi Bankasy Anonim Sirketi We have audited the accompanying consolidated balance sheet of Turk Ekonomi Bankasy Anonim Sirketi (the Bank - a Turkish corporation) and its subsidiaries as of December 31, 2002 and the related consolidated income, changes in equity and cash flow statements for the year then ended, all expressed in the equivalent purchasing power of Turkish lira as of December 31, 2002. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The consolidated financial statements of Turk Ekonomi Bankasy Anonim Sirketi for the year ended December 31, 2001 were audited by other auditors who have ceased operations and whose report dated June 12, 2002 expressed an unqualified opinion on those statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Turk Ekonomi Bankasy Anonim Sirketi and its subsidiaries as of December 31, 2002 and the results of their operations and their cash flows for the year then ended in accordance with International Financial Reporting Standards. March 5, 2003 Istanbul, Turkey ASSETS Notes 2002 2001 Cash and balances with the Central Bank 4 430,766 192,993 Deposits with banks and other financial institutions 4 1,039,578 534,692 Other money market placements 4 414,125 805,833 Reserve deposits at the Central Bank 5 133,072 132,482 Trading securities 6 53,650 9,012 Investment securities 6 57,245 202,935 Originated loans and advances 7 1,326,555 1,224,355 Factoring receivables 8 66,966 53,516 Minimum lease payments receivable 9 85,780 61,840 Derivative financial instruments 19 4,058 666 Investments in unconsolidated subsidiaries 10 337 820 Investments in associates 11 446 501 Premises and equipment 12 42,349 40,905 Intangible assets 13 3,742 3,303 Other assets 14 29,307 25,183 Total assets 3,687,976 3,289,036 LIABILITIES AND EQUITY Deposits from other banks 15 105,668 89,055 Customers' deposits 15 2,714,223 2,121,862 Other money market deposits 15 22,828 265,676 Funds borrowed - Subordinated loan 16 24,919 - - Other funds borrowed 16 394,661 417,788 Factoring payables 8 27,983 14,204 Derivative financial instruments 19 4,568 543 Other liabilities and provisions 17 108,519 117,255 Income taxes payable 18 13,396 15,860 Deferred tax liability 18 2,082 3,913 Total liabilities 3,418,847 3,046,156 Minority interest 11,897 10,347 Equity Share capital issued 20 55,125 55,125 Adjustment to share capital 20 181,945 405,554 Currency translation differences 6,312 5,162 Legal reserves and accumulated profits (deficit) 21 13,850 (233,308) Total equity 257,232 232,533 Total liabilities and equity 3,687,976 3,289,036 The accompanying policies and explanatory notes on pages 6 through 49 form an integral part of the consolidated financial statements. Notes 2002 2001 Interest income Interest on originated loans and advances 206,298 255,343 Interest on securities 58,543 81,051 Interest on deposits with banks and other financial institutions 62,624 229,004 Interest on other money market placements 85,354 13,014 Interest on financial leases 22,871 48,310 Other interest income 18,010 44,173 Total interest income 453,700 670,895 Interest expense Interest on deposits (179,439) (333,228) Interest on other money market deposits (28,723) (585) Interest on funds borrowed (50,176) (148,286) Other interest expense (1,408) (291) Total interest expense (259,746) (482,390) Net interest income 193,954 188,505 Provision for possible loan, lease and factoring receivables losses 7,8,9 (15,205) (10,172) Net interest income (expense) after provision for possible loan and lease (factoring) receivables losses 178,749 178,333 Foreign exchange gain (loss) (14,378) (38,863) Net interest income after foreign exchange gain (loss) and provision for possible loan, lease and factoring receivables losses 164,371 139,470 Other operating income Fees and commissions income 24,713 35,509 Income from banking services 20,645 22,441 Trading income (loss) 21,711 23,991 Other income 25 17,503 24,730 Total other operating income 84,572 106,671 Other operating expense Fees and commissions expense (17,277) (15,671) Salaries and employee benefits 24 (60,098) (63,312) Depreciation and amortization 12,13 (13,632) (13,615) Taxes other than on income (13,050) (17,153) Other expenses 25 (49,400) (61,186) Total other operating expense (153,457) (170,937) Profit (loss) from operating activities before income tax, monetary gain (loss) and minority interest 95,486 75,204 Income tax 18 (28,328) (18,177) Monetary gain (loss) (42,667) (114,884) Net profit (loss) from ordinary activities 24,491 (57,857) Minority interest (942) 6,798 Net profit (loss) 23,549 (51,059) Earnings per share Basic 214 (463) The accompanying policies and explanatory notes on pages 6 through 49 form an integral part of the consolidated financial statements. Legal reserves and accumulated Share Adjustment Currency profits translation (deficit) Notes capital to share differences Total capital At January 1, 2001 55,125 405,554 (407) (183,502) 276,770 Effect of change in consolidation - - - 153 153 structure Transfer to general banking reserves - - - 1,100 1,100 Currency translation differences - - 5,569 - 5,569 Net loss for the year - - - (51,059) (51,059) At December 31, 2001 55,125 405,554 5,162 (233,308) 232,533 Accumulated losses netted off 20 - (223,609) - 223,609 - Currency translation differences - - 1,150 - 1,150 Net profit for the year - - - 23,549 23,549 At December 31, 2002 55,125 181,945 6,312 13,850 257,232 The accompanying policies and explanatory notes on pages 6 through 49 form an integral part of the consolidated financial statements. 2002 2001 Cash flows from operating activities Interest received 470,780 797,535 Interest paid (275,761) (595,640) Fees and commissions received 24,713 35,509 Income from banking services 20,645 22,441 Trading income (loss) 21,711 23,991 Recoveries of loans previously written off 1,004 2,008 Fees and commissions paid (17,277) (15,671) Cash payments to employees and other parties (60,098) (63,312) Cash received from other operating activities 17,503 35,522 Cash paid for other operating activities (62,450) (78,339) Income taxes paid (40,185) (32,631) Cash flows from operating activities before changes in operating assets and 100,585 131,413 liabilities Changes in operating assets and liabilities Net (increase) decrease trading securities (44,638) (6,890) Net (increase) decrease in reserve deposits at the Central Bank 754 (27,207) Net (increase) in originated loans and advances (119,205) (71,013) Net (increase) decrease in factoring receivables (15,133) 56,752 Net (increase) decrease in minimum lease payments receivable (23,940) 36,232 Net (increase) decrease in other assets (4,124) 5,918 Net increase (decrease) in deposits from other banks 16,410 (23,025) Net increase in customers' deposits 600,093 580,000 Net increase (decrease) in other money market deposits (242,876) 163,732 Net increase in factoring payables 13,779 11,185 Net increase (decrease) in other liabilities (8,736) 15,118 Net cash from operating activities 272,969 872,215 Cash flows from investing activities Purchases of available for sale securities (17,520) (87,177) Proceeds from sale and redemption of available for sale securities 153,515 6,690 Purchases of held to maturity securities (39,725) (29,439) Proceeds from redemption of held to maturity securities 49,413 100,122 Disposal of subsidiaries and associates net of cash disposed (483) - Purchases of premises and equipment (15,265) (12,074) Proceeds from the sale of premises and equipment 1,623 799 Purchase of intangible assets (1,854) - Net cash provided by (used in) investing activities 129,204 (21,079) Cash flows from financing activities Proceeds from funds borrowed 351,418 179,489 Repayments of funds borrowed (390,961) (1,022,019) Net cash provided by (used in) financing activities (39,543) (842,530) Effect of net foreign exchanges difference and monetary gain (loss) on cash (43,664) (5,522) and cash equivalents Net increase in cash and cash equivalents 319,466 3,084 Cash and cash equivalents at beginning of year 1,533,518 1,530,434 Cash and cash equivalents at end of year 1,852,984 1,533,518 The accompanying policies and explanatory notes on pages 6 through 49 form an integral part of the consolidated financial statements. 1. CORPORATE INFORMATION General Turk Ekonomi Bankasy A.S. (a Turkish joint stock company - TEB, the Bank) was incorporated in Turkey. Certain shares of the Bank, representing 20% of the total, are listed on the Ystanbul Stock Exchange. The registered office address of TEB is located at Meclis-i Mebusan Caddesi, No: 35, Fyndykly-Ystanbul/Turkey. The Bank was originally incorporated in 1927 and in 1982 was acquired by the Colakoglu Group and renamed as Turk Ekonomi Bankasy A.S. The consolidated financial statements of the Bank were authorized for issue by the management on March 5, 2003. The General Assembly and certain regulatory bodies have the power to amend the statutory financial statements after issue. The parent and the ultimate parent of the Bank is TEB Mali Yatyrymlar A.S.. Nature of Activities of the Bank / Group For the purposes of the consolidated financial statements, the Bank and its consolidated subsidiaries are referred to as "the Group". The operations of the Group consist of banking, leasing, factoring, insurance, brokerage and portfolio management in capital markets, which are conducted mainly with local customers. The Bank provides banking services through 74 (2001-54) branches and 1,673 employees (2001 - 1,263) (excluding the subsidiaries) as of December 31, 2002 in Turkey. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the IASB, and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain in effect. The consolidated financial statements have been prepared on an historical cost convention except for the measurement at fair value of derivative financial instruments, trading securities and available-for-sale financial assets. The Bank and its subsidiaries which are incorporated in Turkey, maintain their books of account and prepare their statutory financial statements ("Statutory Financial Statements") in accordance with the regulations on accounting and reporting framework and accounting standards which are determined by the provisions of 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 from statutory financial statements of the Bank and its subsidiaries and presented in accordance with IFRS in Turkish Lira (TL) with adjustments and certain reclassifications for the purpose of fair presentation in accordance with IFRS. Such adjustments mainly comprise effects of restatement for the changes in the general purchasing power of Turkish lira, deferred taxation, and employee termination benefits. The effects of the differences between IFRS and the generally accepted accounting principles in the United States or countries other than Turkey, in which the IFRS financial statements may be used, have not been quantified herein. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Reclassifications on 2001 Financials The Group has made certain reclassifications in the consolidated financial statements as of December 31, 2001 to be consistent with the current year presentation. Such reclassifications relate to certain classifications in asset, liability and income statement accounts and presentation of cash flow statement using direct method and are made primarily to be consistent with the financial statement reporting format prescribed by the Banking Regulation and Supervision Agency (BRSA) effective December 31,2002, which is also in line with the international banking practices. Changes in Accounting Policies The Group adopted IAS 39- Financial Instruments: Recognition and Measurement in 2001. The financial effects of adopting IAS 39 were reported in previous years' consolidated financial statements. Measurement and Reporting Currency and Translation Methodology Measurement and Reporting Currency and Translation Methodology for the Bank and Its Subsidiaries Which Operate in Turkey: Measurement currency of the Bank and its subsidiaries, which operate in Turkey, is Turkish Lira (TL). The restatement for the changes in the general purchasing power of TL as of December 31, 2002 is based on IAS 29 ("Financial Reporting in Hyperinflationary Economies"). 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 balance sheet date and the corresponding figures for previous periods 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%. As of December 31, 2002, the three year cumulative rate has been 227 % (2001- 308 %) based on the Turkish countrywide wholesale price index published by the State Institute of Statistics. Such index and conversion factors as of the end of the three year period ended December 31, 2002 are given below: Dates Index Conversion Factors December 31, 2000 2,626.0 2.467 December 31, 2001 4,951.7 1.308 December 31, 2002 6,478.8 1.000 The main guidelines for the above mentioned restatement are as follows : - the financial statements of prior year, including monetary assets and liabilities reported therein, which were previously reported in terms of the measuring unit current at the end of that year are restated in their entirety to the measuring unit current at December 31, 2002. - monetary assets and liabilities reported in the consolidated balance sheet as of December 31, 2002 are not restated because they are already expressed in terms of the monetary unit current at that balance sheet date. - the inflation adjusted share capital was derived by indexing cash contributions, dividends reinvested, transfers from statutory retained earnings and income from sale of investments and property transferred to share capital from the date they were contributed. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) - non-monetary assets and liabilities which are not carried at amounts current at the balance sheet date and other components of equity (except for the statutory revaluation adjustment which is eliminated) are restated by applying the relevant conversion factors. - the effect of general inflation on the net monetary position is included in the income statement as monetary gain(loss). - all items in the income statement are restated by applying appropriate average conversion factors with the exception of depreciation, amortization, gain or loss on disposal of non-monetary assets (which have been calculated based on the restated gross book values and accumulated depreciation/ amortization). Restatement of balance sheet and income statement items through the use of a general price index and relevant conversion factors does not necessarily mean that the Group could realize or settle the same values of assets and liabilities as indicated in the consolidated balance sheets. Similarly, it does not necessarily mean that the Group could return or settle the same values of equity to its shareholders. Measurement and Reporting Currencies of Foreign Subsidiaries: As of December 31, 2002 and 2001, foreign subsidiaries (Economy Bank and Petek International) have adopted EURO as their measurement and reporting currency. The foreign subsidiaries are regarded as foreign entities since they are financially, economically and organizationally autonomous. Basis of Consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries drawn up to 31 December each year. Subsidiaries are consolidated from 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. The consolidated financial statements of the Group include the Bank and its subsidiaries, which it controls. This control is normally evidenced when the Group owns, either directly or indirectly, more than 50% of the voting rights of a company's share capital and is able to govern the financial and operating policies of an enterprise so as to benefit from its activities. The equity and net income attributable to minority shareholders' interests are shown separately in the balance sheet and income statement, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Intercompany balances and transactions, including intercompany profits and unrealized profits and losses are eliminated. Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. The subsidiaries included in consolidation and their shareholding percentages at December 31, 2002 and 2001 are as follows : Place of Effective Shareholding Incorporation and Voting Rights % 2002 2001 The Economy Bank N.V.(Economy Bank) Netherlands 100.0 100.0 Petek International Holdings B.V.(Petek International) Netherlands 100.0 100.0 TEB Yatyrym Menkul Degerler A.S.(TEB Yatyrym) Turkey/Istanbul 91.8 91.8 TEB Portfoy Yonetimi A.S.(TEB Portfoy) Turkey/Istanbul 88.6 88.6 TEB Finansal Kiralama A.S.(TEB Leasing) Turkey/Istanbul 72.5 72.5 TEB Factoring A.S.(TEB Factoring) Turkey/Istanbul 70.8 70.8 TEB Sigorta A.S.(TEB Sigorta) (*) Turkey/Istanbul 50.0 50.0 (*) The management of the Company is controlled by the Bank representatives. The principal activities of the consolidated subsidiaries are as follows: Economy Bank -- Commercial bank, which deals mainly with trade and commodity finance. Petek International -- Private holding company. TEB Yatyrym -- Rendering brokerage and investment banking services to customers in line with the rules of the Capital Market Board of Turkey. TE Portfoy -- Private company managing portfolios which are made up of the capital market instruments according to the rules of the related regulation and the Capital Market Law by making portfolio management agreements with the clients. TEB Leasing -- Leasing of industrial machinery, office equipment, various equipment and transport vehicles. TEB Factoring -- Providing both domestic and export factoring services to industrial and commercial enterprises in Turkey. TEB Sigorta -- Rendering all types of property and casualty insurance services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment in Associates The Group's investments in associates are accounted for under the equity method of accounting. These are entities in which the Group has significant influence and which are neither subsidiaries nor joint ventures of the Group. The investments in associates are carried in the balance sheet at cost, less any impairment in value. The income statement reflects the Group's share of the results of operations of the associates. Foreign Currency Translation Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. All differences are taken to the income statement. Foreign currency translation rates used by the Group as of respective year-ends are as follows: Dates TL (full) / USD December 31, 2000 671,765 December 31, 2001 1,446,638 December 31, 2002 1,639,745 The assets and liabilities of foreign subsidiaries are translated at the rate of exchange ruling at the balance sheet date. The income statements of foreign subsidiaries are also translated at year-end exchange rates, which is considered as a proxy to restate such income statement amounts at year-end purchasing power of TL. Differences resulting from the deviation between the inflation rate and the appreciation of foreign currencies against the Turkish Lira related to equity accounts of consolidated subsidiaries were taken to shareholders' equity as a translation gain (loss). Premises and Equipment Premises and equipment is stated at cost less accumulated depreciation and any impairment in value. Land is not depreciated. The initial cost of premises and equipment comprises its purchase price, including import duties and non-refundable purchase taxes and any directly attributable costs of bringing the assets to its working condition and location for its intended use. Expenditures incurred after the fixed assets have been put into operation, such as repairs and maintenance, are normally charged to income in the period in the costs are incurred. Expenditures incurred that have resulted in an increase in the future economic benefits expected from the use of premises are capitalized as an additional cost of premises and equipment. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Buildings and land improvements 50 years Machinery and equipment 5 years Office equipment 5 years Furniture, fixtures and vehicles 5 years Leasehold improvements Lease period, not less than 5 years 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The carrying values of premises and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. Impairment losses are recognized in the income statement. The useful life and depreciation method are reviewed periodically to ensure that the method and period of depreciation are consistent with the expected pattern of economic benefits from items of premises and equipment. Intangible Assets Intangible assets acquired separately from a business are capitalized at cost. Intangible assets, excluding development costs, created within the business are not capitalized and expenditure is charged against profits in the year in which it is incurred. Intangible assets are amortized on a straight-line basis over the best estimate of their useful lives. The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Investments All investments are initially recognized at cost, being the fair value of the consideration given and including acquisition charges associated with the investment. The Group maintains three separate securities portfolio, as follows: Trading securities Trading securities are securities, which were either acquired for generating a profit from short-term fluctuations in price or dealer's margin, or are securities included in a portfolio in which a pattern of short-term profit taking exists. After initial recognition, trading securities are remeasured at fair value based on quoted bid prices. All related realized and unrealized gains or losses are recognized in trading income / (loss), net. Held- to- maturity securities Investment securities with fixed or determinable payments and fixed maturity where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Management determines the appropriate classification of its investments at the time of the purchase. Held-to-maturity investments include debt securities primarily government bonds and treasury bills initially recognized at cost, which is the fair value of consideration given for them and are carried at amortized cost using the effective yield method, less any impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition, over the period to maturity. For investments carried at amortized cost, gains and losses are recognized in income when the investments are derecognized or impaired, as well as through the amortization process. Interest earned whilst holding held-to-maturity securities is reported as interest income. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Available- for- sale securities All other investments are classified as available-for-sale. Available-for-sale securities are subsequently carried at fair value. Gains or losses on remeasurement to fair value are recognized in income. Gold and share certificates and investment funds participation certificates are initially recorded at cost which is the fair value of the consideration given for them, including transaction costs and subsequently stated at fair value based on the quoted market prices at the balance sheet date. Any changes in the carrying value of gold, share certificates and investment fund participation certificates during the year are charged or credited to the statement of income. Available-for-sale securities also include debt securities primarily government bonds and treasury bills. Debt securities classified as 'available-for-sale' are stated at fair values, with resulting gain/(loss) and recognized in the statement of income. Fair value is determined by reference to their quoted market prices at the balance sheet date. Foreign currency denominated debt securities are valued at their closing prices and translated at the foreign currency year-end rate of exchange on the balance sheet date. Interest earned on available-for-sale investments is reported as interest income. Dividends received are included in dividend income. For investments that are actively traded in organized financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices at the close of business on the balance sheet date. For investments where there is no quoted market price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment. Equity securities for which fair values cannot be measured reliably are recognized at cost less impairment. All regular way purchases and sales of financial assets are recognized on the settlement date. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. Repurchase and Resale Transactions The Group enters into short-term sales of securities under agreements to repurchase such securities. Such securities, which have been sold subject to a repurchase agreement, continue to be recognized in the balance sheet and are measured in accordance with the accounting policy of the security portfolio which they are part of. The counterparty liability for amounts received under these agreements is included in other money market deposits. The difference between sale and repurchase price is treated as interest expense and accrued over the life of the repurchase agreements. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repurchase agreements) are not recognized in the balance sheet, as the Group does not obtain control over the assets. Amounts paid under these agreements are included in other money market placements. The difference between purchase and resale price is treated as interest income and accrued over the life of the reverse repurchase agreement. Offsetting Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Recognition and Derecognition of Financial Instruments The Group recognizes a financial asset or financial liability in its balance sheet when and only when it becomes a party to the contractual provisions of the instrument. The Group derecognizes a financial asset or a portion of financial asset when and only when it loses control of the contractual rights that comprise the financial asset or a portion financial asset. The Group derecognizes a financial liability when and only when a liability is extinguished that is when the obligation specified in the contract is discharged, cancelled and expired. Cash and Cash Equivalents For the purposes of the consolidated cash flow statement, cash and cash equivalents comprise cash and balances with central banks, deposits with banks and other financial institutions and other money market placements with an original maturity of three months or less. Originated Loans and Advances to Customers Loans originated by the Group by providing money directly to the borrower or to a sub-participation agent at draw down are categorized as loans originated by the Group and are carried at amortized cost. Third party expenses, such as legal fees, incurred in securing a loan are treated as part of the cost of the transaction. All loans and advances are recognized when cash is advanced to borrowers. Provisions for Possible Loan, Lease and Factoring Receivable Losses Based upon its evaluation of credits granted, management estimates the total credit risk provision that it believes is adequate to cover uncollectable amounts in the Group's loan and receivable portfolio and losses under guarantees and commitments. If there is objective evidence that the Group will not be able to collect all amounts due (principal and interest) according to original contractual terms of the loan; such loans are considered impaired and classified as "loans in arrears". The amount of the loss is measured as the difference between the loan's carrying amount and the present value of expected future cash flows discounted at the loan's original effective interest rate or as the difference between the carrying value of the loan and the fair value of collateral, if the loan is collateralized and foreclosure is probable. Impairment and uncollectibility are measured and recognized individually for loans and receivables that are individually significant, and on a portfolio basis for a group of similar loans and receivables that are not individually identified as impaired. On the portfolio basis, management estimates that a 1.5% lump sum allowance over net investments in direct financing leases to third parties (excluding related parties) is adequate to cover future, potential or unforeseen uncollectible amounts in rentals receivable and in the net investment in direct financing leases. The Group ceases to accrue interest on those loans that are classified as "loans in arrears" and for which the recoverable amount is determined primarily in reference to fair value of collateral. The reserve is also reviewed for compliance with the Tax Procedural Law and Government Decrees and Communiques issued by the BRSA with respect to classification of loans and minimum reserve requirements. The carrying amount of the asset is reduced to its estimated recoverable amount through use of an allowance for impairment account. A write off is made when all or part of a loan is deemed uncollectible or in the case of debt forgiveness. Write offs are charged against previously established allowances and reduce the principle amount of a loan and reduce the principal amount of a loan. Recoveries of loans written off in earlier periods are included in income. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) If the amount of the impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is credited to the provision for loan losses expense. Unwinding of the discount is treated as income and remaining provision is then reassessed. Deposits and Funds Borrowed Deposits and funds borrowed are initially recognized at cost. After initial recognition, all interest liabilities are subsequently measured at amortized cost using effective yield method, less amounts repaid. Amortized cost is calculated by taking into account any discount or premium on settlement. Gain or loss is recognized in the income statement when the liability is derecognized or impaired as well as through the amortization process. Employee Termination Benefits In accordance with existing social legislation, the Group is required to make lump-sum termination indemnities to each employee who has completed one year of service with the Company and whose employment is terminated due to retirement or for reasons other than resignation or misconduct. Such amounts are recognized in the accompanying financial statements as earned. The total reserve represents the estimated amount of liability required in accordance with IAS 19 (Revised 1998) - Employee Benefits. In the financial statements the Group has reflected a liability calculated using the Projected Unit Credit Method and based upon estimated limit increase rates and factors derived using the Company and its Turkish subsidiaries' experience of personnel terminating their services and being eligible to receive such benefits and discounted by using the average current market yield at the balance sheet date on government bonds. Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, 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. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Leases The Group as Lessee Finance leases Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalized leased assets are depreciated over the estimated useful life of the asset. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Operating leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. These include rent agreements of branch premises, which are cancelable subject to a period of notice. Related payments are recognized as an expense in the income statement on a straight-line basis over the lease term. The Group as Lessor Finance leases The Group presents leased assets as a receivable equal to the net investment in the lease. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are recognized immediately as expenses. Factoring Receivables and Factoring Payables Factoring receivables are recognized at original factored receivable amount, which represents the fair value of consideration given, and subsequently remeasured at amortized cost less reserve for possible losses. Factoring payables are recognized at original factored amount less advances extended against factoring receivables, interest and factoring commissions charged, and then carried at amortized cost. Income and Expense Recognition Interest income and expense are recognized in the income statement for all interest bearing instruments on an accrual basis using the effective yield method based on the actual purchase price. Interest income also includes coupons earned on fixed income securities and accrued discount and premium on treasury bills and other discounted instruments. Commission income, fee for various banking services and dividends are recorded as income when collected. Insurance premium income represents premiums on policies written during the period, net of cancellations. Unearned premiums, set aside to provide for the period of risk extending beyond the date of the balance sheet, are determined from premiums written during the period, less reinsurance, on the basis that, premiums are written on the middle day of each month (the twenty-fourth basis). Income Tax Tax expense / (income) is the aggregate amount included in the determination of net profit or loss for the period in respect of current and deferred tax. Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences, except for the taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred income tax assets are recognized for all deductible temporary differences. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Derivative Financial Instruments The Group enters into transactions with derivative instruments including forwards, swaps and options in the foreign exchange and capital markets. These derivative transactions are considered as effective economic hedges under the Group's risk management policies; however since they do not qualify for hedge accounting under the specific provisions of IAS 39, they are treated as derivatives held for trading. Derivative financial instruments are initially recognized in the balance sheet at cost and subsequently are remeasured at their fair value. Fair values are calculated by using forward exchange rates at the balance sheet 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. For derivatives that do not qualify for special hedge accounting, any gains or losses arising from changes in fair value are taken directly to net profit or loss for the period. Fiduciary Assets Assets held by the Group in a fiduciary, agency or custodian capacity for its customers are not included in the balance sheet, since such items are not treated as assets of the Group. Use of Estimates The preparation of the financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet. Actual results may vary from the current estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. 3. SEGMENT INFORMATION Segment information is prepared on the following bases: Business segments The Group conducts the majority of its business activities in the following areas: Year ended December 31, 2002: Brokerage, Insurance and Banking Leasing Factoring Other Eliminations Group Net interest income 166,060 22,649 2,146 3,099 - 193,954 Provision for possible loan, lease and factoring receivable losses (14,562) (631) (12) - - (15,205) Foreign exchange gain/ 2,004 (9,065) 662 1,822 (9,801) (14,378) loss Other operating income 64,547 2,030 1,752 27,161 (10,918) 84,572 Other operating expense (127,519) (4,157) (3,723) (20,876) 2,818 (153,457) Profit loss from operating activities 90,530 10,826 825 11,206 (17,901) 95,486 Income/loss from - - - - - - associates Unallocated items - - - - - - Income tax (24,259) (1,385) (163) (2,521) - (28,328) Monetary gain/loss (40,232) (3,721) (1,813) (6,196) 9,295 (42,667) Minority interest - - - - (942) (942) Extraordinary items - - - - - - Net profit/loss 26,039 5,720 (1,151) 2,489 (9,548) 23,549 Other segment information Segment assets 3,572,331 133,848 72,417 49,648 (140,714) 3,687,530 Investment in associates 446 - - - - 446 Unallocated assets - - - - - - Total assets 3,572,777 133,848 72,417 49,648 (140,714) 3,687,976 Segment liabilities 3,245,172 111,535 63,977 22,032 (23,869) 3,418,847 Unallocated liabilities - - - - - - Total liabilities 3,245,172 111,535 63,977 22,032 (23,869) 3,418,847 Capital expenditures Tangible fixed assets 14,800 35 35 395 - 15,265 Intangible fixed assets 1,593 8 137 116 - 1,854 Investment properties - - - - - - Depreciation 10,191 203 229 1,585 - 12,208 Amortization 1,132 45 50 197 - 1,424 Impairment losses - - - - - - Other non-cash expenses Provision for - - - - - - restructuring 3. SEGMENT INFORMATION (continued) Year ended December 31, 2001: Brokerage, Insurance and Banking Leasing Factoring Other Eliminations Group Net interest income 114,824 40,458 21,187 11,400 636 188,505 Provision for possible loan, lease and factoring receivable losses (9,214) (244) (714) - - (10,172) Foreign exchange gain/loss 34,668 (36,565) (18,710) 348 (18,604) (38,863) Other operating income 97,913 1,627 3,381 43,238 (39,488) 106,671 Other operating expense (137,761) (5,427) (6,178) (38,745) 17,174 (170,937) Profit loss from operating 100,430 (151) (1,034) 16,241 (40,282) 75,204 activities Income/loss from associates - - - - - - Unallocated items - - - - - - Income tax (14,808) (1,196) 1,690 (3,863) - (18,177) Monetary gain/loss (91,951) (13,279) (7,530) (15,906) 13,782 (114,884) Minority interest - - - - 6,798 6,798 Extraordinary items - - - - - - Net profit/loss (6,329) (14,626) (6,874) (3,528) (19,702) (51,059) Other segment information Segment assets 3,201,343 88,494 70,203 51,565 (123,070) 3,288,535 Investment in associates 501 - - - - 501 Unallocated assets - - - - - - Total assets 3,201,844 88,494 70,203 51,565 (123,070) 3,289,036 Segment liabilities 2,908,675 71,900 60,612 26,331 (21,362) 3,046,156 Unallocated liabilities - - - - - Total liabilities 2,908,675 71,900 60,612 26,331 (21,362) 3,046,156 Transactions between the business segments are on normal commercial terms and conditions. Those transactions are eliminated in consolidation. Geographical segments: The Group conducts majority of its business activities with local customers and therefore, geographical segments are insignificant. 4. CASH AND CASH EQUIVALENTS 2002 2001 Cash on hand 87,952 188,671 Balances with the Central Bank 342,814 4,322 Cash and balances with the Central Bank 430,766 192,993 Deposits with banks and other financial institutions 1,039,578 534,692 Funds lent under reverse repurchase agreements 7,051 131,388 Interbank placements 407,074 674,445 Other money market placements 414,125 805,833 Cash and cash equivalents in the balance sheet 1,884,469 1,533,518 Less: Time deposits with original maturities of more than three months (31,485) - Cash and cash equivalents in the cash flow statement 1,852,984 1,533,518 As of December 31, 2002 and 2001, interest range of deposits and placements are as follows: 2002 2001 Amount Effective interest rate Amount Effective interest rate Turkish Foreign Turkish Foreign Turkish Foreign Turkish Foreign Lira currency Lira currency Lira currency Lira currency Balances with the Central 14,800 328,014 - 0.5% 2,520 1,802 - 0.86% Bank Deposits with banks and other financial institutions 42,884 996,694 42% - 71.5% 0.45% - 5% 514,868 19,824 55% - 60% 1% - 9% Funds lent under reverse repurchase agreements 7,051 - 42% - - 131,388 - 1.9% - 3.45% Interbank placements 228,244 178,830 44%- 45.25% 1% -1.5% 138,271 536,174 59% - 62% 2.75% - 4% Total 292,979 1,503,538 655,659 689,188 5. RESERVE DEPOSITS AT THE CENTRAL BANK 2002 2001 - Turkish lira 10,162 9,803 - Foreign currency 122,910 122,679 Total 133,072 132,482 According to the regulations of the Central Bank of Turkish Republic (the Central Bank), banks are obliged to reserve a certain portion of their deposits other than interbank deposits. Such reserves are deposited with the Central Bank. As of December 31, 2002, reserve deposit rates applicable for Turkish lira deposits were 6% (2001- 4%) and 11% (2001- 11%) for foreign currency deposits. Effective from August 2001 and 2002, the Central Bank has started to give interest for the Turkish lira and foreign currency reserves deposited, respectively. As of December 31, 2002, the interest rates applied for Turkish lira and foreign currency reserve deposits are 25% and 0.55 % (December 31, 2001 - 40% and 0%), respectively. 6. INVESTMENTS IN SECURITIES Trading Securities: 2002 2001 Amount Amount Trading securities at fair value Debt instruments Turkish government bonds 21,793 4,797 Turkish treasury bills 22,210 4,215 Foreign currency government bonds 1,475 - Eurobonds issued by the Turkish government 7,900 - 53,378 9,012 Others Precious metals 272 - 272 - Total trading securities 53,650 9,012 6. INVESTMENTS IN SECURITIES (continued) Investment Securities : 2002 2001 Effective Effective Interest rate Interest rate Amount Amount Available for sale securities at fair value Debt instruments Turkish government bonds - - 145,282 62% - 68% Turkish treasury bills 298 43.8% - - Eurobonds issued by the Turkish government 17,213 3.5% 8,036 8.1% -12.3% 17,511 153,318 Others Precious metals - - 196 - Total available for sale securities at fair value 17,511 153,514 Available for sale securities at cost Equity instruments -unlisted 9 - 9 - Total available for sale securities 17,520 153,523 2002 2001 Effective Effective Amount Interest rate Amount Interest rate Held to maturity securities at amortized cost Debt instruments Turkish government bonds 265 43.8% 49,412 62% - 64% Eurobonds issued by the Turkish government 1,308 8.1% - 12.3% - - Turkish treasury bills 36,553 44.6% - 56.1% - - Foreign currency government bonds 1,599 - - - Total held to maturity securities 39,725 49,412 Total investment securities 57,245 202,935 6. INVESTMENTS IN SECURITIES (continued) Carrying value of debt instruments given as collateral under repurchase agreements are: 2002 2001 Trading securities 25,579 - Available for sale - 141,246 As of December 31, 2002, the carrying value and the nominal amounts (in historical terms) of government securities kept in the Central Bank and in Istanbul Menkul Kyymetler Borsasy Takas ve Saklama Bankasy Anonim Sirketi (Ystanbul Stock Exchange Clearing and Custody Incorporation) for legal requirements and as a guarantee for stock exchange and money market operations are TL 38,417 and TL 35,270 (2001 - TL 49,412 and TL 34,500), respectively. 7. ORIGINATED LOANS AND ADVANCES 2002 Effective interest rate Amount Foreign Foreign currency currency Turkish Foreign indexed Turkish Foreign indexed Lira currency Lira currency Corporate loans 258,139 961,381 74,747 25% - 90% 2.75% - 16% 3.5% - 8% Consumer loans 12,319 346 5,937 0.36% - 84% 3.5% - 4.7% 9% - 10.8% Credit cards 13,677 1,180 - 93% 93% - Total loans 284,135 962,907 80,684 Loans in arrears 20,212 - - Less: Reserve for possible loan (21,343) (40) - losses 283,004 962,867 80,684 2001 Effective interest rate Amount Foreign Foreign currency Turkish Foreign Currency Turkish Foreign indexed Lira currency indexed Lira currency Corporate loans 212,940 949,311 5,137 8.5% - 140% 1.7% - 26% 6% - 11% Consumer loans 31,383 - - 12% - 120% - - Credit cards 13,893 870 - 96% - 102% 96% - 102% - Total loans 258,216 950,181 5,137 Loans in arrears 22,641 - - Less: Reserve for possible loan (11,820) - - losses 269,037 950,181 5,137 7. ORIGINATED LOANS AND ADVANCES (continued) Movements in the reserve for possible loan losses: 2002 2001 Reserve at beginning of year 11,820 9,575 Provision for possible loan losses 15,540 11,222 Recoveries (978) (2,008) Provision net of recoveries 26,382 18,789 Loans written off during the year (6) (432) Monetary gain (4,993) (6,537) Reserve at end of year 21,383 11,820 As of December 31, 2002, loans and advances on which interest is not being accrued, or where interest is suspended, amounted to TL 20,212 (2001- TL 22,641). There is no uncollected interest accrued on impaired loans. 8. FACTORING RECEIVABLES AND PAYABLES 2002 Amount Effective interest rate Turkish Foreign Turkish Foreign Lira currency Lira currency Open accounts 14,380 24,793 53% - 58% 5% - 6% Checks receivable 28,218 - 53% - 58% 5% - 6% Notes receivable 908 - 53% - 58% 5% - 6% Doubtful factoring receivables 572 - - - Total factoring receivables 44,078 24,793 Less: Reserve for possible losses (637) - - - Less: Deferred income (1,268) - - - Net factoring receivables 42,173 24,793 Factoring payables 13,104 14,879 Funds in use, net 29,069 9,914 8. FACTORING RECEIVABLES AND PAYABLES (continued) 2001 Amount Effective interest rate Turkish Foreign Turkish Foreign Lira currency Lira currency Open accounts 21,270 23,562 59% - 62% 7% - 8% Checks receivable 8,429 - 59% - 62% - Notes receivable 551 - 59% - 62% - Doubtful factoring receivables 812 - - - Total factoring receivables 31,062 23,562 Less: Reserve for possible losses (812) - Less: Deferred income (296) - Net factoring receivables 29,954 23,562 Factoring payables - 14,204 Funds in use, net 29,954 9,358 Movements in the reserve for possible losses: 2002 2001 Reserve at beginning of year 812 493 Provision for possible losses 12 714 Recoveries - - Provision net of recoveries 824 1,207 Factoring receivables written off during the year - - Monetary gain (187) (395) Reserve at end of year 637 812 9. MINIMUM LEASE PAYMENTS RECEIVABLES Gross investment in finance leases, receivable: 2002 2001 Not later than 1 year 64,450 45,684 Later than 1 year and not later than 5 years 32,342 28,066 Later than 5 years 1,451 - Minimum lease payments receivables, gross 98,243 73,750 Less: Unearned interest income (11,151) (10,870) Net investment in finance leases 87,092 62,880 Less: Reserve for impairment (1,312) (1,040) Minimum lease payments receivables, net 85,780 61,840 Net investment in finance leases may be analyzed as follows: 2002 2001 Not later than 1 year 56,431 38,343 Later than 1 year and not later than 5 years 29,290 24,537 Later than 5 years 1,371 - 87,092 62,880 As of December 31, 2002 and 2001, TL97,410 and TL65,705 of gross lease receivables are denominated in foreign currency (mainly US$ and Euro) and TL, respectively and the effective interest rates are 13.92% to 14.84% (2001-17.52% to 16.14%) for foreign currency and 69% to 92% for TL (2001 - 59.09%). Movements in the reserve for impairment: 2002 2001 Reserve at beginning of year 1,040 1,503 Provision for impairment 657 244 Recoveries (26) - Provision net of recoveries 1,671 1,747 Minimum lease payments receivables written off during the year (48) - Monetary gain (311) (707) Reserve at end of year 1,312 1,040 10. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES Investment in unconsolidated subsidiaries The breakdown of unconsolidated subsidiaries is comprised of the following: Participation Percentage Participation Amount 2002 2001 2002 2001 TEB Kyymetli Madenler A.S. 66.1 66.1 337 337 Factors International Holding S.A. - 99.9 - 483 337 820 According to the General Meeting of Factors International Holding S.A. held on December 28, 2001, it was decided to liquidate Factors International Holding S.A. in 2002. Accordingly, in 2002, Factors International Holding S.A was liquidated. These investments were not consolidated on grounds of immateriality. 11. INVESTMENTS IN ASSOCIATES The following comprise investments in associates: 2002 2001 Group's Group's Principle Country of Carrying Ownership Share (*) Carrying Ownership Share (*) Entity Activities Business Value Interest of Income Value Interest of Income Varlyk Yatyrym Turkey 446 34.0% 19 501 34.0% 124 Ortaklygy A.S. 446 19 501 124 (*) Group's share of income represents statutory share of net income at related year-ends. 12. PREMISES AND EQUIPMENT Furniture, Office Equipment and Leasehold Land and Leased Motor Improvements Buildings Assets Vehicles Total At January 1, 2002, net of accumulated depreciation 8,367 13,673 2,129 16,736 40,905 Additions - 5,489 1,409 8,367 15,265 Disposals - - (109) (1,514) (1,623) Depreciation charge for the year (225) (5,271) (918) (5,794) (12,208) Exchange adjustment - - 1 9 10 At December 31, 2002, net of accumulated depreciation 8,142 13,891 2,512 17,804 42,349 At December 31, 2001 Cost 10,973 27,512 4,666 42,675 85,826 Accumulated depreciation (2,606) (13,839) (2,537) (25,939) (44,921) Accumulated impairment - - - - - Net carrying amount 8,367 13,673 2,129 16,736 40,905 At December 31, 2002 Cost 10,973 32,949 5,479 47,266 96,667 Accumulated depreciation (2,831) (19,058) (2,967) (29,462) (54,318) Accumulated impairment - - - - - Net carrying amount 8,142 13,891 2,512 17,804 42,349 13. INTANGIBLES Software Licenses and Other At January 1, 2002, net of accumulated amortization 3,303 Additions 1,854 Disposals (1) Amortization charge for the year (1,424) Exchange adjustment 10 At December 31, 2002, net of accumulated amortization 3,742 At December 31, 2001 Cost 7,534 Accumulated amortization (4,231) Net carrying amount 3,303 At December 31, 2002 Cost 9,398 Accumulated amortization (5,656) Net carrying amount 3,742 14. OTHER ASSETS 2002 2001 Insurance premium receivables 15,984 14,081 Transitory accounts and prepaid expenses 2,044 2,797 Value added taxes receivable 1,104 - Prepaid taxes 492 3,280 Others 9,683 5,025 29,307 25,183 15. DEPOSITS Deposits from other banks 2002 2001 Amount Effective interest rate Amount Effective interest rate Turkish Foreign Turkish Foreign Turkish Foreign Turkish Foreign Lira currency Lira currency Lira currency Lira currency Demand 747 19,183 0% - 5% - 1,297 4,317 0% - 5% - Time 32,785 52,953 41% - 49% 2.5% - 3.75% 20,322 63,119 54% - 62% 3.5% - 6% Total 33,532 72,136 21,619 67,436 Customers' deposits 2002 2001 Amount Effective interest rate Amount Effective interest rate Turkish Foreign Turkish Foreign Turkish Foreign Turkish Foreign Lira currency Lira currency Lira currency Lira currency Saving Demand 17,258 2,725 0% - 5% - 6,561 4,678 0% - 5% - Time 151,983 65,260 28% - 65% 0.75% - 5% 103,482 98,726 33% - 75% 1% - 8.5% 169,241 67,985 110,043 103,404 Commercial and other Demand 86,957 460,164 0% - 5% - 58,068 338,767 0% - 5% - Time 108,733 1,821,143 28% - 65% 0.75% - 5% 106,401 1,405,179 33% - 75% 1% - 8.5% 195,690 2,281,307 164,469 1,743,946 Total 364,931 2,349,292 274,512 1,847,350 Other money market deposits 2002 2001 Amount Effective interest rate Amount Effective interest rate Turkish Foreign Turkish Foreign Turkish Foreign Turkish Foreign Lira currency Lira currency Lira currency Lira currency Obligations under repurchase agreements: -Due to 9,812 - 28.21% - 41% - 134,306 131,370 51.28% - 64.1% 1.5% - customers 3.45% -Due to banks 13,016 - 44% - 44.1% - - - 59% - 22,828 - 134,306 131,370 Interbank - - - - - - - - deposits Other money market deposits - - - - - - - - Total 22,828 - 134,306 131,370 16. FUNDS BORROWED 2002 2001 Amount Effective interest rate Amount Effective interest rate Turkish Foreign Turkish Foreign Turkish Foreign Foreign Lira currency currency Lira currency currency Lira Turkish Lira Short-term Fixed interest 37,169 19,422 36% -71% 4% -7.42% 53,508 31,643 8.45% - 65% 1.75% - 13.00% Floating - 269,296 - 1% -6.22% - 246,809 - 1.75% - 13.00% interest Medium/long term Fixed interest - 682 - - 71 782 100% 2.44% - 13.02% Floating - 93,011 - 2% -8% - 84,975 - 2.44% - 13.02% interest Finance lease obligations - - - - - - - - Debt - - - - - - - - securities Total 37,169 382,411 53,579 364,209 Repayments of medium-long-term borrowing are as follows: 2002 2001 Fixed rate Floating rate Fixed rate Floating rate 2002 - - - 6,435 2003 - 9,379 213 10,770 2004 682 24,430 640 27,821 2005 - 15,131 - 17,467 2006 - 12,916 - 14,910 2007 - 11,478 - 7,572 Thereafter - 19,677 - - 682 93,011 853 84,975 The Bank has signed an agreement with the International Finance Corporation (IFC) on July 17, 2002, to receive a US$85 million financing facility. The facility consists of three separate loans. The first loan is a US$15 million, 7-year term, subordinated convertible loan, bearing an interest rate of Libor + 4.5% and matching BRSA's Tier II Capital definitions as well as contributing to the Bank's capital adequacy ratio in a positive manner. The second loan is a US$20 million medium-term loan facility to be lent as working capital, investment or export pre-finance needs to TEB' clients with 3-month to 5-year maturity from IFC's own account. The third part of the loan allows for the syndication of up to US$50 million from private commercial banks when markets recover. 17. OTHER LIABILITIES AND PROVISIONS Other liabilities and provisions 2002 2001 Payment orders 27,641 38,911 Transitory accounts 14,893 21,766 Insurance technical reserves 11,961 10,619 Taxes other than on income 11,212 7,242 Trade payables 5,318 - Employee termination benefits 4,318 3,805 Others 33,176 34,912 108,519 117,255 Employee Termination Benefits In accordance with existing social legislation, the Bank and its subsidiaries incorporated in Turkey are required to make lump-sum payments to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. In Turkey, such payments are calculated on the basis of 30 days' pay (limited to a maximum of TL 1.260 and TL 0.978 at December 31, 2002 and December 31, 2001 respectively) per year of employment at the rate of pay applicable at the date of retirement or termination. In the financial statements as of December 31, 2002 and 2001, the Group reflected a liability calculated using the Projected Unit Credit Method and based upon factors derived using their experience of personnel terminating their services and being eligible to receive retirement pay and discounted by using the current market yield at the balance sheet date on government bonds. 17. OTHER LIABILITIES AND PROVISIONS (continued) IAS 19 (revised) requires actuarial valuation methods to be developed to estimate the enterprise's obligation under defined benefit plans. Accordingly, the principal actuarial assumptions used in the calculation of the total liability at the balance sheet dates are as follows: 2002 2001 Discount rate 43% 70% Expected rates of limit increases 35% 60% Actuarial gains and losses are recognized in the income statement in the period they occur. The movement in provision for retirement pay liability is as follows: At January 1, 2001 3,976 Paid during the year (611) Increase during the year 2,422 Monetary gain (1,982) At December 31, 2001 3,805 At January 1, 2002 3,805 Paid during the year (479) Increase during the year 1,909 Monetary gain (917) At December 31, 2002 4,318 Insurance Technical Reserves 2002 2001 Unearned premiums reserve 13,278 11,231 Unearned premiums reserve reinsurer' share (5,203) (4,099) 8,075 7,132 Deferred commission income 2,006 1,839 Claim provision 5,918 3,458 Claim provision, reinsurer's share (4,038) (1,810) 1,880 1,648 Total 11,961 10,619 18. INCOME TAXES General Information The Group is subject to taxation in accordance with the tax procedures and the legislation effective in the countries in which the Group companies operate. In Turkey the effective corporate tax rate including the fund levied is 33%. Items exempted from corporation tax (except dividends collected) are subject to income tax at the effective rate of 11% or 19.8%. In case of dividend distributions in the form of cash, depending on public or privately owned status of the entity, 5% or 15% income tax (plus 10% additional fund) is calculated over that portion of the distributed amount which is subject to 33% corporation tax and paid to tax authorities on behalf of shareholders. In Turkey, tax regulations do not provide a procedure for final agreement of tax assessments. Tax returns are filed within the fourth month after the end of the year to which they relate to and tax authorities may examine the accounting records and revise assessments within five years. In Turkey, the tax legislation does not permit a parent company and its subsidiaries to file a consolidated tax return. Therefore, provision for taxes, as reflected in the consolidated financial statements, has been calculated on a separate-entity basis. In accordance with the advance tax payment regulation in Turkey, entities are required to file temporary tax returns quarterly and pay 25% of their quarterly earnings which is offset from the final tax liability computed on the current year's operating results. Accordingly, the taxation charge computed is not equal to the final tax liability appearing on the balance sheet. 2002 2001 Consolidated income statement Current income tax Current income tax charge 29,156 31,095 Deferred income tax Relating to origination and reversal of temporary differences (828) (12,918) Income tax expense reported in consolidated income statement 28,328 18,177 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 was as follows : 2002 2001 Net profit/loss from ordinary activities before income tax 51,877 (32,882) At Turkish statutory income tax rate of 33% 17,120 (10,851) Effect of different income tax rates in other countries 243 313 Income not subject to tax (36,234) (21,177) Expenditure not allowable for income tax purposes 33,228 57,479 Utilization of previously unrecognized tax losses (4,536) - Effect of restatement and other 18,507 (7,587) Income tax 28,328 18,177 18. INCOME TAXES (continued) Deferred income tax Deferred income tax at December 31, relates to the following: Consolidated Balance Sheet 2002 2001 Deferred income tax liabilities Restatement of premises and equipment and intangible assets (including leased assets) 5,892 6,254 Deferred gains and losses on foreign exchange contracts 1,339 220 Deferred acquisition costs related to insurance contracts 1,212 1,116 Others 592 1,337 Gross deferred income tax liabilities 9,035 8,927 Deferred income tax assets Loan loss provisions 2,010 1,593 Unearned premium reserve and claim provisions 1,886 1,945 Deferred gains and losses on foreign exchange contracts 1,507 179 Post-employment benefits 1,424 1,256 Others 126 41 Gross deferred income tax assets 6,953 5,014 Net deferred income tax liability 2,082 3,913 Net deferred income tax asset - - Movement of net deferred tax liability/asset can be presented as follows: 2002 2001 Balance at January 1 3,913 23,560 Deferred income tax recognized in income statement (828) (12,918) Monetary gain/loss (1,003) (6,729) Balance at December 31 2,082 3,913 Deferred income tax liabilities have not been established for the withholding and other taxes that would be payable on the unremitted earnings of certain subsidiaries incorporated in Turkey, as it is not certain whether such amounts will be permanently reinvested or received in cash. Such unremitted earnings totaled TL7,530 at December 31, 2002 (2001 - TL 1,400) at nominal values. If such amounts are collected in cash in the form of dividends, they will be subject to withholding tax at the effective rates of 5.5% to 16.5% depending on whether the subsidiary is publicly quoted or not. 19. DERIVATIVES In the ordinary course of business, the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instruments, reference rates or indices. Derivative financial instruments include forwards, swaps, futures and options. The table below shows the favorable (assets) and unfavorable (liabilities) fair values of derivative financial instruments together with the notional amounts analyzed by the term to maturity. The notional 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 notional 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 balance sheet 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. 2002 Notional More amount in than 5 Fair Fair value Turkish Up to 1 1 to 3 3 to 6 6 to 12 1 to 5 years value liabilities Lira months months months months years assets equivalent Derivatives held for trading Forward purchase 3,320 - 127,959 89,817 17,810 16,233 4,099 - - contract Forward sale - 2,414 131,052 92,844 17,516 16,593 4,099 - - contract Currency swap 738 - 151,844 128,895 - 22,949 - - - purchase Currency swap sale - 2,154 153,188 130,705 - 22,483 - - - 4,058 4,568 564,043 442,261 35,326 78,258 8,198 - - 2001 Notional amount in Fair Fair value Turkish Lira Up to 1 1 to 3 3 to 6 6 to 12 1 to 5 More value liabilities equivalent months months months months years than 5 assets years Derivatives held for trading Forward purchase 653 - 114,481 78,642 11,113 4,707 20,019 - - contract Forward sale - 535 114,469 78,938 10,874 4,675 19,982 - - contract Currency swap 13 - 14,467 14,467 - - - - - purchase Currency swap sale - 8 14,641 14,641 - - - - - 666 543 258,058 186,688 21,987 9,382 40,001 - - The Bank has certain structured transactions with foreign financial institutions, which the Bank has a right to set off the recognized amounts and intends to settle on a net basis. As of December 31, 2001, such transactions which are due for settlement in 2002, are reflected net in the balance sheet as the net of financial liabilities and financial assets in the form of foreign currency share certificates with call and put options and Eurobonds with swap commitments of TL38,573. 20. SHARE CAPITAL 2002 2001 Number of common shares, TL 500 (in full TL), par value Authorized 110,250 million; Issued and outstanding 110,250 110,250 110,250 million in 2002 and 2001 million million Share of TL500 nominal value each trade in the Istanbul Stock Exchange in the form of units of two shares with a combined nominal value of TL1,000 each. As of December 31, 2002 and 2001, the Bank's historical subscribed and issued share capital was TL 55,125 (historical terms). There is no increase in share capital of the Bank during 2002 and 2001. As of December 31, 2002 and 2001, the composition of shareholders and their respective % of ownership can be summarized as follows: 2002 2001 Amount % Amount % TEB Mali Yatyrymlar A.S. 38,631 70.08 38,631 70.08 Publicly Traded 11,025 20.00 11,025 20.00 Colakoglu Metalurji A.S. 4,740 8.60 4,740 8.60 Other shareholders 729 1.32 729 1.32 55,125 100.00 55,125 100.00 Restatement effect 181,945 405,554 237,070 100.00 460,679 100.00 As allowed by the BRSA, the Bank has set off prior year losses against legal reserves and restatement effect of share capital. 21. LEGAL RESERVES AND ACCUMULATED PROFITS (DEFICIT) Legal Reserves The legal reserves consist of first and second legal reserves in accordance with the Turkish Commercial Code. The first legal reserve is appropriated out of the statutory profits at the rate of 5%, until the total reserve reaches a maximum of 20% of the entity's share capital. The second legal reserve is appropriated at the rate of 10% of all distributions in excess of 5% of the entity's share capital. The first and second legal reserves are not available for distribution unless they exceed 50% of the share capital, but may be used to absorb losses in the event that the general reserve is exhausted. As of December 31, 2002, the Group's legal reserves, which were included within the legal reserves and accumulated deficit balance amount to TL 7,294 (2001 - TL 7,068) at nominal values. The statutory general reserve and statutory current year profit are available for distribution, subject to the reserve requirements referred to above. 21. LEGAL RESERVES AND ACCUMULATED PROFITS (DEFICIT) (continued) Dividends There are no dividends declared and authorized in 2001. The profit appropriation for 2002 will be resolved in the annual general meeting of the shareholders to be held in March 2003. 22. EARNINGS PER SHARE Basic earnings per share (EPS) 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. In Turkey, companies can increase their share capital by making a pro rata distribution of shares ("Bonus Shares") to existing shareholders without consideration for amounts resolved to be transferred to share capital from retained earnings and revaluation surplus. For the purpose of the EPS calculation such Bonus Share issues are regarded as stock dividends. Dividend payments, which are immediately reinvested in the shares of the Bank, are regarded similarly. Accordingly the weighted average number of shares used in EPS calculation is derived by giving retroactive effect to the issue of such shares, which are shown in the table below, without consideration through December 31, 2002. Number of Shares (in millions) Issued Attributable to Transfers Transfers from from Reinvestment Retained Revaluation of Dividend Earnings Surplus Payments Total 1995 and before 32 247 2,969 3,248 1996 - 330 1,270 1,600 1997 1,022 596 4,382 6,000 1998 529 682 7,277 8,488 1999 600 2,062 16,338 19,000 2000 - - 26,068 26,068 2001 - - - - 2002 - - - - 2,183 3,917 58,304 64,404 There is no dilution of shares as of December 31, 2002 and 2001. The following reflects the income (in full TL) and share data (in billions) used in the basic earnings per share computations: 2002 2001 Net profit / (loss) attributable to ordinary shareholders for basic earnings per 214 (463) share 2002 2001 Weighted average number of ordinary shares (in billions) for basic earnings per 110.25 110.25 share 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. 23. RELATED PARTY DISCLOSURES Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making the financial and operating decisions. The Group is controlled by TEB Mali Yatyrymlar A.S. which owns 70.08% (2001 - 70.08%) of ordinary shares, and included in Colakoglu Group of companies. For the purpose of these consolidated financial statements, unconsolidated subsidiaries, associates, shareholders and Colakoglu Group companies are referred to as related parties. Related parties also include individuals that are principal owners, management and members of the Group's Board of Directors and their families. In the course of conducting its banking business, the Group conducted various business transactions with related parties on commercial terms and at rates which approximate market rates. The following transactions have been entered into with related parties: Fund lent Minimum under lease securities Placements Non-cash payments Premium resale Related party with bank Cash loans receivable receivable agreements Funds loans borrowed Shareholders 2002 - 103,147 6,730 - 2,496 - - 2001 - 21,505 505 10 4,068 - - Others 2002 17,461 10,154 4,373 34 2,382 - 44,146 2001 19,296 107,876 6,432 216 3,826 131,155 35,131 Notional amount of derivative Other Other Deposits transactions Interest Interest operating Operating Related Party taken income expense income expense Shareholders 2002 187,132 43,311 2 (2,450) 925 (813) 2001 63,938 23,168 15,299 (9,570) 48 (73) Others 2002 759,241 24,485 739 (13,645) 687 (1,019) 2001 326,718 15,676 21,975 (44,605) 2,682 (405) Cash loans granted to related parties include TL102,553 (2001 - TL123,899) of cash collateralized loans. 24. SALARIES AND EMPLOYEE BENEFITS 2002 2001 Staff costs Wages and salaries 46,106 49,410 Bonuses 1,505 793 Other fringe benefits 5,480 5,785 Provision for employee termination benefits 1,909 2,422 Cost of defined contribution plan (employers' share of social security premiums) 5,098 4,902 Total 60,098 63,312 The average number of employees during the year is: 2002 2001 The Bank 1,570 1,301 Subsidiaries 318 324 Total 1,888 1,625 25. OTHER INCOME/OTHER EXPENSES Other income 2002 2001 Fund management fees 4,522 5,537 Insurance technical income 5,518 7,131 Others 7,463 12,062 Total 17,503 24,730 Other expenses 2002 2001 Rent expense 11,506 13,258 SDIF premium 8,898 11,121 Advertisement expenses 3,798 3,749 Various administrative expenses 25,198 33,058 Total 49,400 61,186 26. COMMITMENTS AND CONTINGENCIES In the normal course of business activities, the Bank and its subsidiaries undertake various commitments and incur certain contingent liabilities that are not presented in the financial statements including: 2002 2001 Letters of guarantees - issued by the Bank 553,430 577,640 - obtained by consolidated subsidiaries from other banks 27,203 24,150 Letters of credit 321,987 28,222 Acceptance credits 40,361 219,377 Total non-cash loans 942,981 849,389 Other commitments 122,968 269,605 Credit card limit commitments 67,335 63,971 1,133,284 1,182,965 Trust Assets The nominal values of the assets held by the Group in fiduciary, agency or custodian capacities amounted to TL1,539,865 (2001 - TL 1,185,674) and EURO 40.2 million (2001 - EURO 1,468 million) at December 31, 2002 and 2001, respectively. Letters of Guarantee Given to Istanbul Stock Exchange (ISE) and Istanbul Gold Market (IGM) As of December 31, 2002 and 2001, in line with the requirements of IGM letters of guarantee amounting to US$1,610,000 had been obtained from local banks and were provided to IGM for transactions conducted in that market. As of December 31, 2001 and 2002, according to the general requirements of the ISE, letters of guarantee amounting to TL1,902 (in historical terms) and US$17 million had been obtained from various local banks and were provided to the ISE for bond market transactions. Also, as of December 31, 2002 and 2001, according to the general requirements, letters of guarantee amounting to TL2,346 and TL 572 (2001 - TL 252) (in historical terms) were given to the Capital Market Board, respectively. Other The Group manages nine open-ended investment funds which were established under the regulations of the Turkish Capital Board. In accordance with the funds' charters, the Group purchases and sells marketable securities on behalf of funds, markets their participation certificates and provides other services in return for a management fee and undertakes management responsibility for their operations. As of December 31, 2002 and 2001, the total value of the investment funds managed by the Group amounted to TL327,529 and TL194,436 respectively. 27. FINANCIAL RISK MANAGEMENT General The Risk Management Group is headed by a dedicated member of the Board who is assigned as Risk Supervisor. The group reports to the Board of Directors and manages Market Risk, Credit Risk and Operational Risk. Board of Directors sets limits and risks taken for all money, capital and commodity markets and counterparties . Credit Risk Credit risk represents the risk generating from the counter party's not fulfilling its responsibilities stated in the agreement either partially or totally. Credit Risk Department is established, the internal rating system for corporate credits is being used by the Credit Control Department and a scoring system for retail banking was put in-effect in 2001. The rating of the firms, credit limit and guarantee acceptance processes are taken into consideration all together in accordance with conservative lending policies applied by the Loan Lending and Risk Follow up Group. Accordingly the follow up of credit risk is established. Sectoral counterparty credit limits are set on individual borrowers and groups. Money Market placement lines and risks of the Group companies are monitored centrally by an in-house Line Limit System. The risks and limits generated from treasury and client based commercial transactions are followed up daily. Additionally, the control of the limits of the correspondent banks is determined by their ratings and the control of the accepted risk level in relation to the Bank's equity are performed daily. Risk limits are determined for the transactions taking place daily and the risk concentration of the off-balance sheet transactions are followed up by the system. The credibility of the debtors of the Bank is assessed periodically in accordance with the "Communique on Methods and Principles for the Determination of Loans and Other Receivables to be Reserved for and Allocation of Reserves." Majority of the accepted statements presenting the financial position of the borrowers are audited statements. Transaction limits for the forward and other similar agreement positions held by the Bank is determined by the Board of Directors and transactions take place within these limits. Foreign country and institution risks of the Bank are generally determined for foreign countries and institutions, which are considered at the investment level, in other words, which are stated as carrying minimum level of default risk by the international rating companies. Accordingly, the likely risks that may occur are minor risks when the financial structure of the Bank is considered. 27. FINANCIAL RISK MANAGEMENT (continued) Sectoral break down of cash and non-cash loans is as follows: 2002 2001 Cash Non-cash Cash Non-cash Financial institutions and discounted bills 208,221 85,026 187,499 87,934 Metals 184,191 90,187 85,380 68,143 Textiles 152,815 103,716 78,453 88,338 Chemicals and chemical products 123,582 71,710 108,783 54,475 Food, beverage, tobacco 102,275 102,349 86,289 91,320 Wholesale and retailing 101,465 82,645 65,119 53,690 Transportation 64,409 30,860 60,788 37,422 Ready-to-wear textiles 63,379 37,606 95,986 23,373 Wood products 61,204 24,412 85,503 24,828 Machinery 32,118 35,658 19,572 42,578 Construction 25,662 28,228 22,456 14,496 Tourism, transportation, warehousing 24,402 24,456 15,147 31,144 Mining, other than metals 18,659 9,651 7,184 6,919 Electricity and optic devices 16,604 15,095 115,058 13,488 Fuel products 12,524 7,096 32,395 1,206 Fiber and plastic 10,290 29,196 15,297 49,719 Leather and leather products 3,370 1,993 2,516 1,236 Others 72,051 39,898 65,025 12,541 Corporate loans 1,277,221 819,782 1,148,450 702,850 Consumer loans 31,176 10,358 32,413 11,957 Letters of guarantee secured by counter guarantees - 48,550 - 51,458 Confirmed and collateralized letters of credit - 37,088 - 58,974 Interest accruals 19,329 - 32,671 - Loans in arrears 20,212 - 22,641 - Provision for possible loan losses (21,383) - (11,820) - 1,326,555 915,778 1,224,355 825,239 Liquidity Risk Liquidity risk occurs when there is insufficient amount of cash inflows to fulfill the cash outflows completely on time. Liquidity risk may occur when market penetration is not enough, when the open positions cannot be closed at a suitable price and sufficient amount due to barriers and conditions at the markets. The Bank's policy is to establish a liquid asset structure that provides comfort in meeting all kinds of liabilities by liquid assets. The Board of Directors of the Bank continuously determines the liquidity ratios and related standards, and controls them, in order to keep this structure. When the funding and liquidity sources are considered, the Bank covers majority of its liquidity need by deposits, and in addition to this source, it makes use of prefinancing and syndication products to generate additional sources. The Bank is a net lender in interbank money markets. 27. FINANCIAL RISK MANAGEMENT (continued) The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining period at balance sheet date to contractual maturity date. Up to 1 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 Total Undistributed month months months months years years As at December 31, 2002 Assets Cash and balances with - 430,766 - - - - - 430,766 the Central Bank Deposits with banks and - 1,014,347 13,493 9,035 2,703 - - 1,039,578 other financial institutions Other money market - 414,125 - - - - - 414,125 placements Reserve deposits at the - 133,072 - - - - - 133,072 Central Bank Trading securities - 368 16,281 10,760 6,719 18,588 934 53,650 Investment securities - 572 17,213 1,600 1,307 36,553 - 57,245 Originated loans and - 406,846 256,497 305,136 156,907 201,169 - 1,326,555 advances Factoring receivables - - 66,966 - - - - 66,966 Minimum lease payments - 4,685 13,728 12,978 22,919 31,470 - 85,780 receivable Derivative financial - 1,532 704 1,822 - - - 4,058 instruments Investments in 337 - - - - - - 337 unconsolidated subsidiaries Investments in 446 - - - - - - 446 associates Premises and equipment 42,349 - - - - - - 42,349 Intangible assets 3,742 - - - - - - 3,742 Other assets 13,323 3,276 2,814 6,221 3,673 - - 29,307 Total assets 60,197 2,409,589 387,696 347,552 194,228 287,780 934 3,687,976 Liabilities: Deposits from other - 102,036 2,632 1,000 - - - 105,668 banks Customers' deposits - 2,249,893 163,022 53,367 82,626 165,315 - 2,714,223 Other money market - 22,828 - - - - - 22,828 deposits Funds borrowed - 33,289 32,427 80,793 188,757 64,637 19,677 419,580 Factoring payables - - 27,983 - - - - 27,983 Derivative financial - 2,690 563 1,082 233 - - 4,568 instruments Other liabilities and 77,501 8,472 4,645 5,908 11,961 - 32 108,519 provisions Income taxes payable 13,396 - - - - - - 13,396 Deferred tax liability 2,082 - - - - - - 2,082 Total liabilities 92,979 2,419,208 231,272 142,150 283,577 229,952 19,709 3,418,847 Net liquidity gap (32,782) (9,619) 156,424 205,402 (89,349) 57,828 (18,775) 269,129 As at December 31,2001 Total assets 266,487 1,966,346 286,436 266,484 362,919 140,364 - 3,289,036 Total liabilities 151,775 1,910,705 294,132 208,940 315,494 165,110 - 3,046,156 Net liquidity gap 114,712 55,641 (7,696) 57,544 47,425 (24,746) - 242,880 27. FINANCIAL RISK MANAGEMENT (continued) Market Risk The interest rate and exchange rate risks of the financial positions taken by the Bank related to balance sheet and off-balance sheet accounts are measured and while calculating the capital adequacy, the amount subject to Value-at-Risk (VAR) is taken into consideration. Scenario analysis and stress tests are used additionally in market risk computations. In order to measure the market risk of the Bank, the Board of Directors has established risk management strategies in accordance with the proposals of the Senior Management Risk Committee and these strategies are required to be followed up periodically. The Board of Directors evaluates the basic risks faced and determines limitations accordingly. The limits are revised periodically. Additionally the Board of Directors requires the risk management group and senior management to take necessary precautions to consider, evaluate, and control the variety of risks the Bank faces. Currency Risk Foreign currency risk indicates the possibilities of the potential losses that banks are subject to due to the exchange rate movements in the market. While calculating the share capital requirement, all foreign currency assets, liabilities and forward transactions of the Bank are taken into account. Net short and long position of Turkish Lira equivalent of each foreign currency is calculated. The value, which will be a base for calculating the share capital requirement, is computed by taking the higher absolute value of the position by adding to absolute net gold position. Share capital requirement is computed over of this amount. The Board of Directors sets limits for the positions, which are followed up daily. Additionally, possible value changes in the existing or possible foreign currency positions are observed together with the follow-up of the foreign currency risk in accordance with the provisions of the "Communique on Internal Control and Risk Management Systems of Banks". The Board of Directors of the Bank determines the short position limits that the Bank can hold in accordance with the present legal limitations. The Treasury Department of the Bank is responsible for the management of Turkish Lira or foreign currency price, liquidity and affordability risks that could occur in the domestic and international markets. The Risk Control Department continuously controls risk and risk related transactions occurring in the money markets and prepares weekly reports for the Bank's Asset-Liability Committee. The related principles and limitations of the counterparties are determined by the Loan Committee. The limits concerning the maturity structure of the foreign currency transactions and interest rates are monitored by the Asset-Liability Committee. 27. FINANCIAL RISK MANAGEMENT (continued) The concentrations of assets, liabilities and off balance sheet items: Japanese Turkish US Dollars Euro Yen Others Total Lira As at December 31, 2002 Assets Cash and balances with the 20,933 409,822 11 - - 430,766 Central Bank (or central banks Deposits with banks and other 42,884 787,297 146,701 1,834 60,862 1,039,578 financial institutions Other money market placements 235,295 178,830 - - - 414,125 Reserve deposits at the Central 10,162 122,910 - - - 133,072 Bank (or central banks) Trading securities 43,779 2,687 6,912 - 272 53,650 Investment securities 37,125 1,599 - 17,213 1,308 57,245 Originated loans and advances 283,004 793,657 226,656 - 23,238 1,326,555 Factoring receivables 42,173 6,238 9,835 - 8,720 66,966 Minimum lease payments 4,822 31,918 43,129 - 5,911 85,780 receivable Derivative financial 3,743 - 315 - - 4,058 instruments Investments in unconsolidated 337 - - - - 337 subsidiaries Investments in associates 446 - - - - 446 Premises and equipment 41,940 - 409 - - 42,349 Intangible assets 3,614 - 128 - - 3,742 Other assets 26,389 2,064 748 5 101 29,307 Total assets 796,646 2,337,022 434,844 19,052 100,412 3,687,976 Liabilities Deposits from other banks 33,532 39,758 7,979 3 24,396 105,668 Customers' deposits 364,931 2,028,520 267,990 804 51,978 2,714,223 Other money market deposits 22,828 - - - - 22,828 Funds borrowed 37,169 354,487 14,001 - 13,923 419,580 Factoring payables 13,104 3,688 5,478 - 5,713 27,983 Derivative financial 4,568 - - - - 4,568 instruments Other liabilities and 61,702 5,433 39,443 - 1,941 108,519 provisions Income taxes payable 11,711 - 1,685 - - 13,396 Deferred tax liability 2,082 - - - - 2,082 Total liabilities 551,627 2,431,886 336,576 807 97,951 3,418,847 Net on-balance sheet position 245,019 (94,864) 98,268 18,245 2,461 269,129 Off-balance sheet position Net notional amount of (40,527) 169,107 (103,839) (18,082) (11,096) (4,437) derivatives Non- cash loans - - - - - - At December 31, 2001 Total assets 758,565 2,100,439 355,230 382 74,420 3,289,036 Total liabilities 549,162 2,127,306 292,837 363 76,488 3,046,156 Net on balance sheet position 209,403 (26,867) 62,393 19 (2,068) 242,880 Off-balance sheet position (2,104) 10,805 (8,990) 72 55 (162) 27. FINANCIAL RISK MANAGEMENT (continued) Interest Rate Risk Interest rate risk measures the probability of loss related to the changes in interest rates depending on the Bank's position. This is managed by the Treasury Department. The Board of Directors determines the interest rate risk limits. The Risk Control Department calculates, controls and reports the interest rate risk. All types of sensitivity analysis are calculated by the risk management group and reported to the Asset-Liability Committee. The Asset-Liability Committee monitors the interest rate risk and takes these into consideration in defining the repricing strategies. The table below summarizes the Group's exposure to interest rate risk on the basis of the remaining period at the balance sheet date to the repricing date. Non Up to 1 1 to 3 3 to 6 6 to 12 1 to 5 Over 5 interest month months months months years years bearing Total As at December 31, 2002 Assets: Cash and balances with the 342,814 - - - - - 87,952 430,766 Central Bank Deposits with banks and 948,322 13,493 9,035 2,703 - - 66,025 1,039,578 other financial institutions Other money market 414,125 - - - - - - 414,125 placements Reserve deposits at the 133,072 - - - - - - 133,072 Central Bank Trading securities 2,694 32,002 11,148 6,822 666 46 272 53,650 Investment securities 265 53,766 1,600 1,307 - - 307 57,245 Originated loans and 406,846 256,497 305,136 156,907 201,169 - - 1,326,555 advances Factoring receivables - 66,966 - - - - - 66,966 Minimum lease payments 4,685 13,728 12,978 22,919 31,470 - - 85,780 receivable Derivative financial 1,532 704 1,822 - - - - 4,058 instruments Investments in - - - - - - 337 337 unconsolidated subsidiaries Investments in associates - - - - - - 446 446 Premises and equipment - - - - - - 42,349 42,349 Intangible assets - - - - - - 3,742 3,742 Other assets 3,276 2,814 6,221 3,673 - - 13,323 29,307 Total assets 2,257,631 439,970 347,940 194,331 233,305 46 214,753 3,687,976 Liabilities: Deposits from other banks 102,036 2,632 1,000 - - - - 105,668 Customers' deposits 2,249,893 163,022 53,367 82,626 165,315 - - 2,714,223 Other money market deposits 22,828 - - - - - - 22,828 Funds borrowed 33,289 198,619 75,374 101,744 10,554 - - 419,580 Factoring payables - 27,983 - - - - - 27,983 Derivative financial 2,690 563 1,082 233 - - - 4,568 instruments Other liabilities and - - 5,908 11,961 - 32 90,618 108,519 provisions Income taxes payable - - - - - - 13,396 13,396 Deferred tax liability - - - - - - 2,082 2,082 Total liabilities 2,410,736 392,819 136,731 196,564 175,869 32 106,096 3,418,847 On balance sheet interest (153,105) 47,151 211,209 (2,233) 57,436 14 108,657 269,129 sensitivity gap Off balance sheet interest - - - - - - - - sensitivity gap Total interest sensitivity (153,105) 47,151 211,209 (2,233) 57,436 14 108,657 269,129 gap 27. FINANCIAL RISK MANAGEMENT (continued) Operational Risk Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal process, people and systems or from external events. Operational risk which is inherent in all business activities is associated with human error, system failure and inadequate controls and procedures. Operational risk includes errors and omissions in business activities, internal and external fraud and natural disasters. The Bank's first objective is to achieve all qualitative standards of Basel Committee, by implying policy and procedures, ensuring the strict observance of internal code of conduct and also developing strong internal control culture. Compliance with legal rules, information security, fraud prevention, contingency planning and disaster recovery, and also incident management are the main subjects of the operational risk mitigation controls. Capital Adequacy To monitor the adequacy of its capital, the Group uses ratios established by BRSA. These ratios measure capital adequacy (minimum 8% as required by BRSA) by comparing the Group's eligible capital with its balance sheet assets, off-balance sheet commitments and market and other risk positions at weighted amounts to reflect their relative risk. As of December 31, 2002, the Bank's capital adequacy ratio on an unconsolidated basis is 15.40% (2001- 13.26%). 28. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Values Set out below is a comparison by category of carrying amounts and fair values of the Group's financial instruments that are carried in the financial statements at other than fair values. Carrying amount Fair value 2002 2001 2002 2001 Financial assets Originated loans and advances to customers 1,326,555 1,224,355 1,326,487 1,194,505 Investments held to maturity 39,725 49,412 39,136 49,071 Minimum lease payments receivables 85,780 61,840 86,000 59,411 1,452,060 1,335,607 1,451,623 1,302,987 Financial liabilities Deposits from other banks 105,668 89,055 105,658 89,055 Customer deposits 2,714,223 2,121,862 2,713,694 2,121,937 Funds borrowed 419,580 417,788 422,614 408,537 3,239,471 2,628,705 3,241,966 2,619,529 Fair values of remaining financial assets and liabilities carried at cost, including deposit with banks and other financial instruments, balances with the Central Bank, reserve deposits, other money market placements, deposits, factoring receivables and payables, funds borrowed under securities repurchase agreements and promissory notes are considered to approximate their respective carrying values due to their short-term nature. To the extent relevant and reliable information is available from financial markets in Turkey, the fair value of financial instruments is based on such market data. The fair values of other financial instruments are determined by using estimation techniques that include reference to the current market value of another instrument with similar characteristics or by discounting the expected future cash flows at prevailing interest rates. The interest used to determine the fair values of financial instruments, applied on the balance sheet date to reflect active market price quotations are as follows: Originated loans and advances: Interest Rates Applied (%) December 31, December 31, 2001 Currency 2002 Turkish lira 37.59 67.00 US$ 5.71 7.31 EURO 5.38 6.63 Lease contract receivables: Interest Rates Applied (%) December 31, December 31, 2001 Currency 2002 Turkish lira 70.71 70.00 US$ 11.26 15.00 EURO 13.31 17.00 CHF 9.97 - 28. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) Deposits: Interest Rates Applied (%) December 31, December 31, 2001 Currency 2002 Turkish lira 43.87 58.00 US$ 2.51 2.75 EURO 2.60 4.00 Funds borrowed: Interest Rates Applied (%) December 31, December 31, 2001 Currency 2002 Turkish lira 45.23 59.00 US$ 3.25 4.75 EURO 5.67 5.80 29. SUBSEQUENT AND OTHER EVENTS i) The Bank is in the process of establishing a branch in Bahrain in an offshore bank status based on the permission of the Under secretariat of Treasury to the Prime Ministry of Turkish Republic and the branch is planned to start operations in March 2003. ii) As of January 1, 2003 retirement pay liability ceiling was increased to TL 1.324. iii) In 2002, 24 branches have been acquired from banks, which are under the control of the Saving Deposits Insurance Fund. 30. UNCONSOLIDATED FINANCIAL STATEMENTS OF THE BANK The Bank's own unconsolidated balance sheets and income statements prepared in accordance with IFRS as of and for the years ended December 31, 2002 and 2001 are included in the Appendix for information purposes only. In the unconsolidated financial statements, the Bank opted to account for investments in subsidiaries at restated cost in accordance with IAS 27. These financial statements have been included within the consolidated financial statements as of the respective dates. ASSETS 2002 2001 Cash and balances with the Central Bank 430,654 173,379 Deposits with banks and other financial institutions 331,085 251,553 Other money market placements 407,074 674,444 Reserve deposits at the Central Bank 133,072 132,482 Trading securities 31,298 9,012 Investment securities 54,039 196,773 Originated loans and advances 807,734 603,163 Derivative financial instruments 4,394 666 Investments in subsidiaries and associates 106,816 94,712 Premises and equipment 37,234 34,125 Intangible assets 2,964 2,324 Deferred tax assets 43 - Other assets 7,145 4,087 Total assets 2,353,552 2,176,720 LIABILITIES AND EQUITY Deposits from other banks 60,147 23,762 Customers' deposits 1,637,596 1,375,348 Other money market deposits 22,828 134,306 Funds borrowed - Subordinated loan 24,919 - - Other funds borrowed 270,478 305,604 Derivative financial instruments 4,568 730 Other liabilities and provisions 71,684 92,770 Income taxes payable 10,473 9,003 Deferred tax liability - 2,262 Total liabilities 2,102,693 1,943,785 Equity Share capital issued 55,125 55,125 Adjustment to share capital 181,945 405,554 Legal reserves and accumulated profits (deficit) 13,789 (227,744) Total equity 250,859 232,935 Total liabilities and equity 2,353,552 2,176,720 INCOME STATEMENT 2002 2001 Interest income Interest on originated loans and advances 160,105 194,967 Interest on securities 57,030 71,131 Interest on deposits with banks and other financial institutions 17,427 73,255 Interest on other money market placements 85,848 126,351 Other interest income 4,675 1,348 Total interest income 325,085 467,052 Interest expense Interest on deposits (111,058) (262,818) Interest on other money market deposits (28,770) (585) Interest on funds borrowed (28,493) (99,954) Other interest expense (1,359) (2,332) Total interest expense (169,680) (365,689) Net interest income 155,405 101,363 Provision for possible loan losses (14,521) (9,214) Net interest income (expense) after provision for possible loan losses 140,884 92,149 Foreign exchange gain (loss) 1,127 35,221 Net interest income after foreign exchange gain (loss) and provision for possible loan losses 142,011 127,370 Other operating income Fees and commissions income 9,846 12,715 Income from banking services 19,193 25,766 Trading income (loss) 18,776 20,282 Other income 9,325 30,988 Total other operating income 57,140 89,751 Other operating expense Fees and commissions expense (15,150) (11,715) Salaries and employee benefits (46,109) (46,782) Depreciation and amortization (10,967) (10,688) Taxes other than on income (12,418) (15,884) Other expenses (36,459) (46,881) Total other operating expense (121,103) (131,950) Profit (loss) from operating activities before income tax and monetary gain 78,048 85,171 (loss) Income tax (19,891) (9,473) Monetary gain (loss) (40,232) (91,950) Net profit (loss) 17,925 (16,252) This information is provided by RNS The company news service from the London Stock Exchange END FR ILFVEVRIDIIV
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