Türkiye Halk Bankasi : 2024 May 08-Auditor Reports

INDEPENDENT AUDITOR'S REPORT

To the General Assembly of Türkiye Halk Bankası A.Ş.

1. Report on the Audit of the Financial Statements

1. Qualified Opinion

We have audited the financial statements of Türkiye Halk Bankası A.Ş. ("the Bank"), which comprise the unconsolidated balance sheet as at 31 December 2023, and the unconsolidated statement of profit or loss, unconsolidated statement of profit or loss and other comprehensive income, unconsolidated statement of changes in shareholders' equity and unconsolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, except for the effects of the matters on the unconsolidated financial statements described in the basis for the qualified opinion paragraphs, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2023, and its financial performance and its cash flows for the year then ended in accordance with "the Banking Regulation and Supervision Agency ("BRSA") Accounting and Reporting Regulations" including the regulation on "The Procedures and Principles Regarding Banks' Accounting Practices and Maintaining Documents" published in the Official Gazette dated 1 November 2006 with No. 26333, and other regulations on accounting records of banks published by the Banking Regulation and Supervision Board and circulars and pronouncements published by the BRSA and provisions of Turkish Financial Reporting Standards (TFRS) for the matters not legislated by the aforementioned regulations.

1. Basis for Qualified Opinion

The Bank reclassified the government bonds amounting to TRY 18.965.006 thousand, which were previously classified under financial assets at fair value through other comprehensive income according to the business model prepared in accordance with Turkish Financial Reporting Standard ("TFRS") 9, into financial assets measured at amortised cost and reversed the marketable securities revaluation fund accumulated under other comprehensive income or loss to be reclassified through profit or loss amounting to TRY 2.229.977 thousand on 23 May 2018. The reclassification constitutes a departure from TFRS 9. The government bonds reclassified into financial assets measured at amortised cost as at 31 December 2023 amounted to TRY 44.066.438 thousand. If such classification were not made, total assets and shareholders' equity, excluding tax effect, would be lower by TRY 6.117.199 thousand as at 31 December 2023.

We conducted our audit in accordance with the regulation on "Independent Auditing of Banks" published in the Official Gazette dated 2 April 2015 with No. 29314 and Standards on Independent Auditing ("SIA") which is a part of Turkish Auditing Standards published by the Public Oversight Accounting and Auditing Standards Authority ("POA"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the Code of Ethics for Independent Auditors ("Code of Ethics") published by the POA, together with the ethical requirements that are relevant to our audit of the financial statements, and we have fulfilled our other ethical responsibilities

in accordance with these requirements and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

1. Emphasis of Matter

As detailed in Section Six Note One, we draw attention to the following:

On October 15, 2019, the US Department of Justice, United States Attorney Southern District of New York indicted the Bank in the Southern District of New York Court ("District Court") for the violations of Iranian sanctions. This criminal case is pending at the District Court. The proceedings are stayed as the Bank requests an appeal under the "Foreign Sovereign Immunity Act" ("FSIA"). The US Supreme Court has rejected the Bank's FSIA appeal and remanded the case to the US Court of Appeals for the Second Circuit to be reviewed on common law immunity grounds. The process is ongoing.

In addition, a group of plaintiffs filed a civil lawsuit (the Owens case) against the Bank with a claim for damages before the District Court for the Southern District of New York on March 27, 2020, "on the grounds that they (plaintiffs) could not collect their judgments from Iran due to the violations of sanctions." The case was dismissed by the District Court, the Second Circuit and the U.S. Supreme Court, respectively. Consequently, the Owens case was conclusively dismissed on January 8, 2024.

Finally, on July 26, 2023, a new civil case (the Hughes case) was filed against the Bank by a group of plaintiffs in a complaint filed with the District Court, seeking to satisfy judgements similar to the civil case dated March 27, 2020. The plaintiffs seek judgments by attempting to establish a connection between certain aggrievements they have suffered in various countries and the allegations in the current criminal case against the Bank, which was filed on October 15, 2019. The Bank filed its motion to dismiss the case with the District Court on December 22, 2023. The process is ongoing.

At this stage, the Bank's Management stated that there is no penalty, compensation, sanction or other measure arising from the pending criminal and civil cases against the Bank. There is an uncertainty if any decisions will be made by the US authorities that may adversely affect the financial position of the Bank. No provision has been made in the financial statements of the Bank related to these matters. However, the above mentioned matters do not affect the opinion provided by us.

1. Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter explained in the Basis for Qualified Opinion section, the issues described below have been identified as key audit matters and are disclosed in our report.

Key Audit Matter	How the matter was addressed in the audit
Impairment of	loans in accordance with
TFRS 9 "Financial Instruments Standard"
Impairment of	loans is a key area of	As part of our audit work, the following
judgement for the management. The Bank has	procedures were performed:

the total loans amounting to TRY

1.270.544.675

thousand,

which

comprise

We

assessed

and

tested

the

design,

58% of the Bank's total assets in its

implementation and operating effectiveness of key

unconsolidated financial statements and the

controls applied by the Bank with respect to

total provision for expected credit loss

classification of loans and determination and

amounting to TRY 48.509.527 as at 31

calculation of impairments. Our information

December 2023.

system experts have also participated to perform

these procedures.

The Bank recognizes provisions for

impairment in accordance with the TFRS 9

We have read and analysed the relevant contract

requirements according to the "Regulation on

terms to assess management's accounting policy

the

Procedures

and

Principles

for

and classification of the instrument for selected

Classification of Loans by Banks and

samples.

Provisions to be set aside" published in the

Official Gazette dated 22 June 2016

We have performed audit procedures on selected

numbered 29750.

Applied

accounting

samples of loans and receivables with the

policies are explained in detail in the Section

objective of identifying whether the loss event had

3 Note VIII. The expected credit loss

occurred and whether the provision for expected

estimates are required to be unbiased,

credit loss has been recognized in a timely manner

probability-weighted and should include

within the framework of the provisions of the

supportable information about past events,

relevant regulation.

current conditions, and forecasts of future

economic conditions.

We have tested relevant inputs and assumptions

used by the management considering the expected

The Bank exercises significant decisions

credit loss calculation by considering

whether

using

judgement,

interpretation

and

those appear reasonable, the relationship between

assumptions

over

calculating

loan

the assumptions and whether the assumptions are

impairments.

These

judgements,

interdependent and internally consistent, whether

interpretations and assumptions are key in the

the assumptions appropriately reflect current

development of the financial models built to

market information and collections, and whether

measure the expected credit losses on loans.

the assumptions appear reasonable when

considered collectively with other assumptions,

There is a potential risk of impairment

including those for the same accounting estimates

losses/provisions provided/will

be

provided

and those for other accounting estimates.

may not meet the requirements of the TFRS

9. Failure in determining the loans that are

We have tested historical loss data to validate the

impaired and not recording the adequate

completeness and accuracy of key parameters.

provision for these impaired loans is the

We tested the application of the model to the

aforementioned

risk.

Accordingly,

relevant inputs and the mathematical integrity of

impairment of loans is considered as a key

each stage of the expected credit loss calculation.

audit matter.

Based on our discussions with the Bank

Related explanations relating to the

management, we evaluated whether the key

impairment of loans are presented in Section

assumptions and other judgements underlying the

5 Note I.5.

estimations of impairments were reasonable.

Our specialists are involved in all procedures

related to models and assumptions.

				We have reviewed disclosures made within the
				TFRS 9 framework in the financial statements of
				the Bank with respect to loans and related
				impairment provisions.
Key Audit Matter			How the matter was addressed in the audit
Valuation of Pension Fund Obligations
Defined benefit pension plan that the Bank	Our audit work included the following procedures:
provides to its employees is managed by
Türkiye Halk Bankası AŞ Emekli Sandığı	We involved internal experts (actuary) in our audit
Vakfı and T.C. Ziraat Bankası ve T. Halk	team to evaluate the assumptions used in the
Bankası Çalışanları Emekli Sandığı Vakfı	calculation of the pension obligations and the
("Plan") which were established by the 20th	appropriateness of the estimates.
provisional article of the Social Security Law
numbered 506 (the "Law").		It has been tested whether the plan assets meet
				plan obligations in accordance with the methods
As disclosed in the Section III Note XVII to	and assumptions used.
the unconsolidated financial statements, the
Plan is composed of benefits which are	In addition, reconciliations and tests were carried
subject to transfer to the Social Security	out through sampling of the accuracy of the data
Foundation ("SSF") as per the Social Security	provided to the Bank's actuary.
Law no.5510 provisional article 20, and other
social rights and pension benefits provided by	We have assessed whether there is a significant
the Bank that are not transferable to the SSF.	change in the actuarial assumptions, methods,
The Council of Ministers has been authorized	legal regulations and legislation used in the
to determine the transfer date. Following the	calculations and whether the assumptions are
transfer, the funds and the institutions that	reasonable. In addition, we have reviewed the
employ the funds' members will cover the	sufficiency of disclosures prepared with this
non-transferable social rights and pension	regard.
benefits provided under the Plan even if it is
included in foundation deed.
As of 31 December 2023, the Bank's
transferrable liabilities are calculated by an
independent actuary using the actuarial
assumptions regulated by the Law, and in
accordance with the Decision of the Council
of Ministers announced in the Official
Gazette dated 15 December 2006 and
No.26377. The valuation of the Plan
liabilities requires judgment in determining
appropriate assumptions such as defining the
transferrable social benefits, discount rates,
salary	increases,	inflation	levels,
demographic assumptions, and the impact of

changes in the Plan. Management uses expert
opinion of the independent actuary in
assessing uncertainties related to these
underlying assumptions and estimates.
As described in Section Five Note II.9.f
considering the subjectivity of key judgments
and assumptions, plus the uncertainty around
the transfer date and basis of the transfer
calculation given the fact that the technical
interest rate is prescribed under the Law, we
considered this as a key audit matter.
Key Audit Matter	How the matter was addressed in the audit
Information Technologies Audit
The Bank and its finance functions are	Procedures within the context of our information
dependent on the IT-infrastructure for the	technology audit work:
continuity of its operations, and the demand
for technology-enabled business services is	• We identified and tested the Banks' controls
rapidly growing in the Bank and its		over information systems as part of our audit
subsidiaries. Controls over reliability and		procedures.
continuity of the electronic data processing
are within the scope of the information	• Information generation comprise all layers of
systems internal controls audit. The reliance		information systems (including applications,
on information systems within the Bank		networks,	transmission	systems	and
means that the controls over access rights,		database). The information systems controls
continuity of systems, privacy and integrity of		tested are categorized in the following areas:
the electronic data are critical and found to be
key area of focus as part of our risk based	•	Security management
scoping.	•	Change management
	•	Operations management
	• We selected	high-risk areas as, database
		logging and change management control
		activities, to prevent and detect whether
		accesses to financial data had been identified
		in a timely manner.
	• We tested the accesses and logging controls
		underlying all applications that have direct or
		indirect impacts on financial data generation.
	• Automated controls and integration controls
		are tested to underly and detect changes and
		accesses in the process of financial data
		generation.

• We also tested the appropriateness and accuracy of the information produced by the entity and information used in controls reports as inputs to our controls and outputs generated by the IT components.

• Finally, we understood and tested the controls over database, network, application and operating system layers of applications.

1. Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with the BRSA Accounting and Reporting Regulations, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Bank's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Bank's financial reporting process.

1. Auditor's Responsibilities for the Audit of the Financial Statements

Responsibilities of independent auditors in an independent audit are as follows:

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the regulation on "Independent Auditing of Banks" published in the Official Gazette dated 2 April 2015 with No. 29314 and SIA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with the regulation on "Independent Auditing of Banks" published in the Official Gazette dated 2 April 2015 with No. 29314 and SIA, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. (The risk of not detecting a material

misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.)

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report.
  However, future events or conditions may cause the Bank to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
  We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
  We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
  From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
• 1. Report on Other Legal and Regulatory Requirements

In accordance with paragraph four of the Article 402 of the Turkish Commercial Code ("TCC"), nothing has come to our attention that may cause us to believe that the Bank's set of accounts for the period 1 January-31 December 2023 does not comply with the TCC and the provisions of the Bank's articles of association in relation to financial reporting.

In accordance with paragraph four of the Article 402 of the TCC, the Board of Directors provided us all the required information and documentation with respect to our audit.

The engagement partner on the audit resulting in this independent auditor's report is Erdem Taş.

Additional Paragraph for English Translation

The effect of the differences between the accounting principles summarized in Section III and the accounting principles generally accepted in countries in which the accompanying financial statements are to be distributed and International Financial Reporting Standards ("IFRS") have not been quantified and reflected in the accompanying financial statements. Accordingly, the accompanying financial statements are not intended to present the Bank's financial position and results of its operations in accordance with accounting principles generally accepted in such countries of users of the financial statements and IFRS.

DRT BAĞIMSIZ DENETİM VE SERBEST MUHASEBECİ MALİ MÜŞAVİRLİK A.Ş. Member of DELOITTE TOUCHE TOHMATSU LIMITED

Erdem Taş

Partner

Istanbul, 14 February 2024