Information about Risk Management Policies and Activities According to Type of Risk

Ziraat Participation risk management activities are continued under the basic approach of aligning the risk management function with the best practices by means of instilling risk culture, continuously improvement of the system and the human resources.

The risk management activities cover the main headings of credit risk, market risk, operational risk, balance sheet risks and validation. Policy and application procedures regarding the afore-mentioned risks are governed by regulations approved by the Board of Directors on the basis of each risk type. Care is given to ensure that all risk management system activities are coordinated through the involved participation of the operational branches with which each type of risk is associated.

Within the scope of “Regulation on Banks’ Internal System and Intrinsic Capital Adequacy Assessment Processes”, an Intrinsic Capital Adequacy Assessment Process was formulated. The purpose of this process is to identify the required capital to cover the exposed/to be exposed risks and to set up a system that will enable the assessment of the capital requirements and levels compatible with strategic goals and the continuity of this system. Analyses are performed in line with BRSA principles and are further supported by means of risk-specific stress tests and scenario analyses. Stress Test and Capital Adequacy (ICAAP) Reports prepared at year-ends with the contribution of other related units are presented to BRSA after their approval by the Board of Directors.

Compliance to Basel III regulations are carried out within the framework of “Regulation on Measurement and Assessment of Banks’ Leverage Level” and “Regulation on the Capital Conservation Buffer and Loop Capital”. Additionally, the compliance efforts to the regulation amendments made within the scope of Basel by the BRSA and the “Best Practice Guides” published on the Institution’s web site are ongoing.

As part of Basel III liquidity criteria, the Liquidity Coverage Ratio Report is prepared within the scope of “Regulation on the Calculation of Banks’ Liquidity Coverage Ratio” and conveyed to the BRSA.

Credit Risk

Credit risk pertains to the potential loss that the Bank might incur as a result of the counterparty involved in a transaction failing to meet the contractual obligations outlined with the Bank, either partially or whole, within the specified timeframe.

Credit risk management includes presentation of credit risks of the Bank, definition of those risks, activities related with measurement, monitoring, control and reporting of those risks.

The Bank calculates its risk weighted assets within the scope of 1st Structural Block within the framework of Regulation on Measurement and Evaluation of Capital Adequacy of Banks. In this context, amount subject to credit risk is reported to BRSA on a monthly basis as solo and consolidated. Within the scope of 2nd Structural Block, the Bank calculates annual general stress test in accordance with the Bank’s plans and scenarios and the Internal Capital Evaluation Process Report is prepared in coordination with the Bank Management and other departments.

Counterparty credit risk refers to the risk that the counterparty, which is the addressee of a transaction that imposes obligations on both parties, would default before the final payment in the cash flow of this transaction. Counterparty credit risk, which is considered within the scope of credit risk, is calculated and reported monthly using the Standard Approach (SA-CCR) method in accordance with the provisions of the Regulation on Measurement and Evaluation of Capital Adequacy of Banks and its annexes. Calculation of counterparty credit risk are made for repurchase and derivative transactions. Additionally, capital adequacy is calculated for credit evaluation adjustment of all derivative transactions.

Credit provisions were modeled in accordance with IFRS 9 and calculated based on related legislation.

The Leverage Ratio is conveyed to the BRSA and the CBRT in three-month periods.

The Company Assessment System is used in order to evaluate the credit worthiness of the customers who are in Ziraat Participation’s commercial portfolio. Credit risk limits and trigger values on the basis of risk groups and customer segments, which are approved by the Board of Directors, as well as limits and trigger values of non-performing loan ratio have been calculated. All these values are monitored on a weekly basis.

Market Risk

Market risk refers to the potential for financial loss resulting from shifts in profit share rates, exchange rates, commodities, and security prices of the Bank’s on-balance sheet and off-balance sheet accounts.

Risk measurement and monitoring activities are carried out in order to reveal the market risks to which Ziraat Participation may be exposed. The results of these activities are taken into account in the Bank’s strategic decision-making processes. The market risks and potential effects of the factors that create the risks are measured and regularly reported to the BRSA by Ziraat Participation.

The Standardized Approach methodology is used to calculate the Bank’s exposure to market risk, the amount of which is included in its mandatory capital adequacy ratio. Within the context of market risk, exchange risk is also calculated on a daily basis using a VaR-based internal model. The effectiveness of the models being used is also analyzed by means of back testing.

In the conduct of its day-to-day operations, trigger values are monitored as part of the early-warning process that is carried out to protect Ziraat Participation’s financial strength from being seriously affected by increases in market volatility. Risk exposure levels are kept within prescribed limits.

Operational Risk

Operational risk represents probability of loss due to inadequate or unsuccessful internal processes, people and systems or external events, including legal risk. Amount subject to operational risk is calculated using Basic Indicator Approach.

All employees of the Bank perform their duties with a strong sense of responsibility, recognizing that the principles and practices in the Bank’s legislation, particularly the operational risk policy, aim to establish a working environment that is highly aware of operational risks and that will minimize the potential for losses by taking into account the control mechanisms of these risks.

Signals and limits approved by the Board of Directors related with operational risks are established within the scope of internal regulations and being monitored periodically.

Works for monitoring operational risks through the Operational Risk Loss Database are ongoing. The mandatory capital needed to cover the Ziraat Participation’s operational risk exposure is calculated using the Basic Indicator Approach methodology. In order to create a basic integrated risk framework, IT-associated risks and the actions taken are also monitored. They are part of operational risk reports presented to Board of Directors.

As part of the Business Continuity Plan, “Business Impact Analyses” works are completed in order both to identify the risks that might arise if the Bank’s operations are interrupted and to determine their potential consequences.

In order to ensure the continuity of outsourced support services, the risks that might arise from their procurement are assessed in light of “Regulation on the Outsourcing of Support Services by Banks” issued by the BRSA.

Balance Sheet Risks

Within the scope of balance sheet risks, the target is to effectively manage risks from the Bank’s assets, liabilities and off-balance sheet accounts.

Within the scope of balance sheet risks management, risk measurement and monitoring activities are carried out in order to reveal the Liquidity and Dividend Ratio arising from Banking Account risks that the Bank may encounter, and the results are taken into account in the strategic decision-making process of Ziraat Participation.

Liquidity risk consists of liquidity risk from funding and liquidity risk from the market.

Liquidity risk associated with funding pertains to the potential for the Bank to incur a financial loss due to its failure to fulfill all anticipated or unanticipated cash flow obligations or daily operations without impacting its financial framework.

Market-related liquidity risk pertains to the potential for the Bank to incur financial losses as it is unable to close out or balance its positions at prevailing market prices due to insufficient market depth or excessive volatility.

Profit share rate risk is defined as possible losses which may result from assets, liabilities and off- balance sheet transactions that are sensitive to profit share changes.

All on-balance sheet and off-balance sheet items sensitive to dividends are monitored in Banking Accounts, except for the items monitored in trading accounts and the items other than subordinated debts taken into account in the equity calculation as outlined in the BRSA’s “Regulation on Equity of Banks”. The standard ratio of dividend rate risk arising from banking accounts is calculated for the Bank’s on-balance sheet and off-balance sheet positions in accordance with the BRSA’s “Regulation on Measurement and Evaluation of Interest Rate Risk in the Banking Book with the Standard Shock Method”.

Compliance with mandatory ratios pertaining to liquidity and profit share rate risks arising from banking business accounts is also monitored. When carrying out the liquidity risk control; funding and lending maturity mismatches, assets’ and liabilities’ re-pricing as well as contractual maturities, the level of primary (cash and cash-equivalent) liquidity reserves needed to conduct the Bank’s normal day-to-day operations, Central Bank liquidity facilities to which recourse may be had in order to cope with unexpected liquidity requirements are monitored. In addition to the foregoing, scenario and sensitivity analyses regarding liquidity risk are performed.

Signal values are followed and risk levels are limit as part of early warning process to prevent the Bank’s financial strength from increased volatility in the markets and mismatch that can be seen on cash inflows and outflows while carrying out daily activities. Risk limits are determined observing liquidity situation, targeted return level and risk appetite and become effective upon approval of the Board of Directors.

Modeling and Validation

The Risk Management Department is in charge of conducting our Bank’s TFRS-9 Expected Credit Loss calculations. The models used to calculate the Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD) parameters used in this calculation undergo regular reviews. Validation studies were conducted in 2023 to assess the Probability of Default parameter, while the performance of other parameters was closely monitored throughout the year. Furthermore, the Company Evaluation System used in the allocation process and the Revenue Estimation Model used in the credit card limit assignment system underwent validation studies.