Credit Risk

The Risk Management Center is responsible for maintaining data in the credit risks that Türkiye Finans is exposed to on account of its loans, and for quantifying and analyzing such risks. Additionally, the center also monitors compliance with credit limits and criteria as prescribed by credit policies and risk appetite structure, and reports the results of its risk monitoring, measurement, and analysis activities to the members of the senior management. In addition, all limits and concentration ratios for credit products, customers, terms, and for each sector and country are periodically checked for their compliance with lending policies as prescribed by applicable laws and regulations.

Credit risk is measured using “the Standardized Approach” set forth in the “Regulation on Measurement and Assessment of Capital Adequacy of Banks”.

The Center employs rating models for the credit risk quantification and grading of loans extended to SMEs, Commercial and Corporate Customers. These models are both appropriate for the sector and compliant with international standards, and make use of portfolio-specific statistical methods. These rating models not only come up with ratings for individual customers but also provide an estimate of a customer’s probability of default (PD). The generated rating notes and PD values are actively used in credit decisions and determination of working conditions.

In addition to these rating models, SMEs, Commercial and Corporate Customer credit risk measurement and grading also involve the use of a suite of “Target Market and Risk Acceptance Criteria” that allow judgments on individual customers’ ratings based on their sectoral, financial and market performance, market expectations, ratings and risk appetite.

Risk rating for Personal Financing Support, credit cards and business segment is carried out through scoring models which are developed by using statistical methods and are specific to bank portfolio. Different models are used according to product groups and customer sizes, which allows effective risk measurement and rating for each group. Besides scoring, the values of probability of default are also generated together with scoring models. Customers are separated according to risk profiles by using risk ratings generated by the models and in line with these profiles credit disbursement decisions and working conditions are determined.

Decision support systems are used in order to measure credit disbursement risk in a healthy and effective manner, through which policies and business rules, scoring models for Personal Financing Support, Credit Cards and Business Line are managed systematically. Within the scope of these systems, solvency calculations are also made in addition to customers’ risk rating, the amount of funds that can be utilized and credit card limits are determined systematically in line with the policies in practice. Due to this infrastructure, credit disbursement policy and business rules are monitored effectively and developed regularly.

Loans taken for close monitoring as well as non-performing loans are analyzed and recommendations are tabled to the Board of Directors, the Audit Committee and to members of senior management such that risk-mitigating measures may be taken based on the specific market, sector, customer, and product risk exposure as well as being in accordance with the Bank’s own practices and processes.

Risk analyzes are carried out by measuring the impacts of new products on the Bank’s credit disbursement portfolio and financial structure and regulation and change suggestions are generated to mitigate identified risks.

Market Risk

Market risk is measured using the simple-method standardized approach set forth in the “Regulation on Measurement and Assessment of Capital Adequacy of Banks”.

Moreover, as part of market risk management, The Risk Management Center monitors, checks, and reports compliance with limits that are specified by the Türkiye Finans Board of Directors, on a daily, monthly, and yearly basis.

Within the scope of FI TM&RAC (Financial Institutions Target Market & Risk Acceptance Criteria) policy, compliance with the limits allocated to the counterparty financial institutions is monitored and are reported on a weekly basis. Moreover, country, rating, risk group, limit type and concentration on the counterpart are monitored and are reported on a monthly basis to the senior management.

The bank implements a prudent policy for not holding a significant foreign currency position. Within the scope of this policy, open position limit determined by members of board is monitored on a daily basis and reported by Risk Management Center.

Furthermore, within the scope of stress tests and scenario analyzes, stress tests are carried out to monitor the impacts of changes in market risk factors and market volatility on the bank’s financial situation and to mitigate the potential risks.

A project aimed at implementation of a measurement model that is sensitive to volatility in market risk factors was launched in 2015. The objectives of this project are effective calculation of value at market risk (VaR), the calculation of expected loss amounts and monitoring of concentration systematically.

Liquidity Risk

Türkiye Finans makes use of such strategies as diversifying its resources, obtaining longer-term funding and matching the maturities of its assets and liabilities in order to protect itself against exposure to liquidity risk.

All balance sheet items that have an impact on the liquidity are separated on a term basis and their liquidity situation is analyzed. In addition, measurements and assessments regarding liquidity target and stimulus indicators determined by Asset/Liability Committee are conducted on a monthly basis.

In line with Basel III principles “Liquidity Coverage Ratio” and “Net Stable Funding Ratio” reports are prepared. Liquidity Coverage Ratio report is reported to BRSA (Banking Regulation and Supervision Agency) pursuant to the relevant regulation, Net Stable Funding Ratio report is currently prepared for information.

Türkiye Finans has formulated and published a “Liquidity Risk Management & Contingency Plan” which sets out the actions and measures to be taken in the event of a shortage of liquidity, whether in the markets or in the Bank itself. The plan also defines those who are responsible for taking such actions and the measures to be taken, along with those who would be held accountable for their actions.

Operational Risk

Türkiye Finans currently quantifies its operational risk exposure using the “Basic Approach” prescribed by regulations pertaining to the calculation of capital requirements. The Bank is currently collecting loss data systematically in order to quantify operational risk exposure using the “Advanced Measurement” approaches as appropriate.

In order to abide by internationally recognized approaches in the management of operational risk, Türkiye Finans has adopted a risk terminology that is compatible with Basel standards. The use of such a common terminology ensures the consistency of an operational risk-related understanding and of communication throughout the Bank. Software solutions are being used to create a database of operational risk and losses and to classify, analyze, evaluate and report such losses in order to formulate a standardized framework for operational risk management.

Risk control assessments (RCA) are carried out to identify the business processes that are exposed to operational risks and to implement controls determined by process owners and to limit the impact of such risks. In the directorates where RCA is conducted, “Key Risk Indicators” are identified, threshold values are determined for such risk points and periodical monitoring is carried out for compliance to the threshold values.

As per the “Regulation Regarding Banks’ Procurement of Support Services”, risk assessments are made for support services procured by the Participation Bank after examining the reports, which are prepared by the department that procured the service, on the relevant service and supplier. The risk assessments are submitted to the Audit Committee for review.

Works are carried out across the Bank within the scope of compliance with the best practice guidelines published by BRSA for the management of operational risk.

Moreover, in the Bank, dividend rate risk, risk arising from banking, country and transfer risk, concentration risk, reputational risk, compliance risk and residual risk are monitored and managed in line with the policies and procedures created.

Internal Capital Adequacy Assessment Process, Stress Test and Scenario Analyzes

As the Presidency of Risk Management Center, ICAAP (İSEDES) report is prepared minimum once in a year and submitted to BRSA. The report is prepared for the purposes of calculating internally the capital that is sufficient to meet current risks or future risks that the Bank may be exposed to by analyzing the Bank’s current and future capital requirements together with strategic objectives and macroeconomic variables and to maintain the Bank’s activities with adequate levels of capital.

Within the scope of the report, potential losses that the bank may suffer and the level of capital adequacy to cover these losses are estimated through stress test and scenario analysis which identifies potential events that may affect the Bank negatively or potential changes in market conditions. Necessary actions that are to be taken to maintain adequate capital levels are determined as a result of assessments made by taking into account current situation, risk appetite, strategic planning, scenario analyzes and the stress test. Assessments are made with regard to the Bank’s liquidity adequacy and planning under stress conditions through stress test and scenario analysis. The level of liquidity that the Bank may need in order to fulfill its obligations is determined through these assessments.

Apart from scenario analysis and stress tests, which are carried out within the scope of ICAAP (İSEDES), additional stress tests are carried out monthly and quarterly periods. Within the framework of “Regulation on Banks Internal Systems and Internal Capital Adequacy Assessment Process”, stress tests pertaining to market and counterparty credit risk and the bank’s total liquidity risk are carried out monthly. Stress tests in which the significant risks faced by the Bank are evaluated are carried out quarterly.