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 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.

“Target Audience and Risk Acceptance Criteria” are also applied in the risk measurement and rating of micro, SME, commercial and corporate funds supplied. Within the scope of determining the target audience, customers are selected by evaluating their credit ratings in our Bank, their compliance with basic financial ratios (indebtedness etc.), past payment performance, risk level of the sectors in which they operate and data provided from Credit Registration Bureau and Risk Centre systems. Within the scope of Risk Acceptance Criteria, credit limits and guarantee structures are determined.

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 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.

In order to manage credit risk more effectively, the Credit Risks Committee carries out assessments on areas requiring improvement and actions to reduce risk, which are to be decided on or recommended within its authority and be followed up. It this vein, it monitors the credit portfolio, activities that carry credit risk and the related processes from end to end together.

In 2017, priority has been placed on revising the rating and behavioral scoring models used for risk measurement and rating of funds supplied by taking into account the changing market conditions and portfolio structure. However, the Bank aims to improve the quality of credit portfolio structure and increase productivity through the review of existing Target Audience and Risk Acceptance Criteria, organizational changes and the development projects in credit practices and policies. In addition, the Bank expects to achieve more effective management of the risk-return balance and increase its profitability with the risk-based pricing practice, which started to be implemented in 2016 and which will be developed in 2017.

Market Risk

Market risk is measured and reported by the “Standard Method” specified in the “Regulation on Measurement and Evaluation 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.

In the Bank, a project has been launched to establish a measurement model in order to measure market risk by using methods that are compatible with international standards which are sensitive to volatility in risk factors. With this project, in 2017 the Bank aims to carry out effective calculation of its value exposed to market risk (VMR), perform retrospective tests, carry out scenario analysis and stress tests for market risk and to systematically carry out monitoring of concentrations.

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. The liquidity risk early warning indicators are also determined at the level of the Assets/Liabilities Committee, and the measurements and assessments pertaining to liquidity risk within the scope of risk appetite are presented to the Asset/Liability Committee monthly.

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

Operational risk is measured and reported by using the “Basic Indicator Method” specified in the “Regulation on Measurement and Assessment of Capital Adequacy of Banks”.

In order to employ an international approach in operational risk management, the Bank adopted a risk language (terminology) which was in line with the Basel standards. This common risk language provides a consistent view and communication across the Bank regarding operational risk. In order to increase the effectiveness in operational risk management, software is used to create an operational risk and loss database and to classify, analyze, evaluate and report such data. By analyzing the loss data within the operational loss database through the aforementioned software, we can ensure that actions are taken to minimize operational losses.

The Risk Control Evaluation (RCE) is performed periodically as a basic principle of the operational risk implementations.

RCE is 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 RCE 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.

At the same time, the Bank ensures that any findings and problems marked as important/high risk, which are brought up the agenda by the “Operational Risk Committee” together with the audit and other departments, the External Audit and Regulatory Audit Bodies, are effectively assessed, discussed and are put into action plan and resolution calendar. This also applies to any issues that could pose an operational risk for the Bank.

Other Risks

Except for the risks detailed above, the profit share rate risk arising from banking accounts, country and transfer risk, concentration risk, reputation risk, compliance risk and residual risk are monitored and managed in accordance with the established policy and implementation procedures.

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.

Monthly, quarterly, annual and ad-hoc stress tests are carried out in addition to the scenario analysis and stress tests conducted within the scope of the ISEDES in order to measure significant risks and vulnerabilities that may arise from adverse developments specific to the Bank or in an economic and financial environment under stress. 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.

Furthermore, the application of liquidity buffer calculations has started to ensure adequate liquidity supply, even in economic conditions where there is a liquidity shortage. The liquidity buffer will be taken into account in the liquidity planning in 2017. Moreover, the effects of exchange rate movements on the Bank’s capital adequacy are analyzed through regularly conducted exchange rate simulation studies. Action plans are prepared against potential scenarios, by taking into consideration the stress test results.