Credit Risk

The Risk Management Center is responsible for maintaining data of the credit risks that Türkiye Finans is exposed to in connection to 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 the risk appetite structure, and reports the results of its risk monitoring, measurement, and analysis activities to the senior management. In addition, all limits and concentration ratios for credit products, customers, collaterals 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/Simple Method” set forth in the “Regulation on Measurement and Assessment of Capital Adequacy of Banks”. Additionally, counterparty risk resulting from trading accounts are measured using fair value pricing method, compliance with limits established for financial institutions in this context are monitored. Moreover, concentration within the portfolio in terms of rating, risk group and limit type are being monitored and reported to the top management.

Customers’ risk measurement rating notes and probability of default (PD) values are generated using statistical methods based on industry and international standards customized for the portfolio, these ratings and PD values generated are effectively used in credit decisions and working terms.

Rating/Scoring Models are used for commercial fund allocations, rating notes and PD values calculated via scorecards are used for individual fund allocations. For individual portfolio, a decision tree structure is established using the results of scorecards developed specifically for the Bank with statistical methods. For the commercial portfolio, average PD is calculated monthly and monitored, distribution and concentration based on Rating/Scoring is closely followed up. For individual products, scorecards and decision tree results are being continuously monitored on a product basis. For the risk measurement and rating of fund allocations, risk appetite and other performance variables are considered and criteria for credit approvals are being applied. In this scope, customer selection is carried out by evaluating data obtained from a customer’s past payment performance and the Credit Bureau and Risk Center systems.

Current portfolio data for the related segment is modelled using statistical methods for rating and scoring models taking the expert opinions into consideration. Furthermore, performance of rating and scoring models were closely monitored in 2023, validation/tracking of models was made and revisions were realized as needed. Technical infrastructure of the risk measurement process was designed so that it can adapt to potential changes and developments and flexible so that it will not disrupt the measurement process. Revisions were made in 2023 as needed, in accordance with TFRS 9, to the models used to calculate PD, LGD and EAD parameters and following the execution of validations the models have been launched as planned.

Individual scoring models developed specifically for the bank’s portfolio and using statistical methods were updated in 2023. Validation / monitoring studies on the models are carried out periodically and revisions are made in areas deemed necessary. Customers are classified according to their risk profiles, by using risk ratings generated by the models and credit decisions and working conditions are determined in line with these profiles.

Loans brought under 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 analysis is carried out by measuring the impact of new products on the Bank’s credit disbursement portfolio and financial structure, and regulations and suggestions for change are generated to mitigate identified risks.

In order to manage credit risk more effectively, the Credit Risks Committee carries out assessments in areas requiring improvement and takes actions to reduce risk, which are to be decided on or recommended within its authority and be followed up. It this vein, it simultaneously monitors the credit portfolio, activities that carry credit risk and the related processes from end-to-end. Effectiveness of monitoring of credit portfolio is analyzed based on requests from the top management and through ad-hoc analyses based on credit portfolio with risk, risk appetite limits are being monitored monthly within the scope of credit risk and reported to the related committees.

For credit limit allocation to related parties, employees, their spouses and dependent children, compliance with legal limits is monitored and results are reported to the Audit Committee.

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 its market risk management operations, The Risk Management Center Directorate monitors, checks, and reports compliance with limits that are specified by the Board of Directors, on a daily, monthly and yearly basis.

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

Furthermore, within the scope of stress tests and scenario analyses, 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.

Measurement of the Bank’s market risk based on international standards sensitive to vulnerability in risk factors is performed by the effective calculation of VAR (value at risk), performing retroactive tests, risk-based scenario analysis, application of stress tests and monitoring of concentration.

The Bank uses the calculation model and methodology to determine the guarantees that meet the Bank’s risks accurately by taking into consideration the new products of the Bank which include market risk. Methods which constitute the basis to determine the most accurate guarantee rate by the decision making business units in terms of underlying asset, volatility, risk factors and maturity segments.

Liquidity Risk

Türkiye Finans follows strategies such 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 liquidity are separated on a term basis and their liquidity situation is analyzed. The early warning indicators for liquidity risk 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 every month.

“Liquidity Coverage Ratio” and “Net Stable Funding Ratio” reports are prepared In line with Basel III principles. Liquidity Coverage Ratio and Net Stable Funding Ratio reports are regularly reported to BRSA in accordance with the relevant regulations.

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.

Moreover, to provide for proactive management of liquidity squeeze resulting from the bank or the market, stress tests were designed for various scenarios. Within the scope of these stress tests, liquidity levels are measured for effective management of the Bank’s operations for various base situation, unfavorable situation and extremely unfavorable situation scenarios. Results of measurements are periodically reported to Asset/Liability Management Committee and Executive Management Committees when needed.

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 Basel standards. This common risk language provides a consistent view and communication across the Bank regarding operational risk. In order to increase its effectiveness in operational risk management, software is used to simulate operational risk and a 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.

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

For the purpose of monitoring and effectively managing the Bank’s operational risk level, a Key Risk Indicator structure is formed which includes periodic monitoring of operations and elements containing operational risk, reporting of those indicators, analyzing the extraordinary developments and taking actions related with them.

Within the scope of integrated risk management, The Bank’s information systems, information security and business continuity risks are continuously monitored and managed. Results of measurement and monitoring related with these risks are being presented to the Operational Risk Committee periodically.

Monitoring of risk concentration by analysis of fraud incidents and risks, coordination / consultancy for taking actions to decrease the fraud risk the Bank is exposed to and review of fraud tendencies at the Bank level are provided.

Furthermore Fraud Risk Committee conducts activities to implement policies, precautions and procedures within the fraud strategy, to review and evaluate fraud incidents and organize emergency meetings when needed, to evaluate trainings and awareness programs for employees and related parties and to monitor the actions to develop risk reduction controls through committee governance in fraud risk management.

Trainings are delivered to Bank employees to increase operational risk awareness and to act with this awareness in Bank’s operations.

Other Risks

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

All risks that are significant for the Bank are managed in accordance with the roles, responsibilities, principles and procedures defined in “Risk Policies” document and procedures and processes documented in other sources established for significant risks.

Internal Capital Adequacy Assessment Process, Stress Test and Scenario Analysis

The Head of the Risk Management Center prepares the ICAAP report and a validation report related to it at least once a year, and the report is submitted to the BRSA. The report is prepared for the purpose of internally calculating the level of capital which 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 tests and scenario analysis, which identify potential events that may negatively affect the Bank or potential changes in market conditions. Actions deemed necessary to maintain adequate capital levels are then determined following assessments carried out by taking into account the current situation, risk appetite, strategic planning, scenario analysis and the stress test. Assessments are undertaken with regard to the Bank’s liquidity adequacy and planning under stress conditions through the 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 ICAAP 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 the “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 on a monthly basis. Stress tests in which the significant risks faced by the Bank are evaluated are carried out on a quarterly basis. Furthermore, the application of liquidity buffer calculations has been carried out to ensure adequate liquidity supply, even in the hard economic conditions where there is a liquidity shortage. The liquidity buffer calculations are presented to the Asset Liability Management Committee on a monthly basis. Action plans are prepared for potential scenarios by taking the results of the stress tests into consideration.