A concise background regarding the recent financial and regulatory developments in Europe and Turkey were provided from a practitioner’s point of view.

1. GLODEM
December 4, 2018
Recent Developments in
Global Financial Markets:
Impact on Turkey
Presenter-1:
Ozan Çağlar, PhD
Credit Risk Strategies Manager
ozan.caglar@unicredit.eu
Presenter-2:
Eren OCAKVERDİ
Research & Analytics Consultant
eren.ocakverdi@yapikredi.com.tr

2. -1350
-1200
-1050
-900
-750
-600
-450
-300
-150
0
-80
-70
-60
-50
-40
-30
-20
-10
0
Oct-17 Apr-18 Oct-18 Apr-19 Oct-19
Flows impact of Fed policy expectations
Flows impact of Fed balance sheet reduction
Fed balance sheet reduction (right scale)
USD billions, cumulative monthly contributions USD billions, cumulative monthly contributions
Emerging market portfolio flows - forecast
Source: IMF Global Financial Stability Report, October 2017
Estimates point to a substantial
reduction in portfolio flows due
to US monetary policy
normalization…

3. -1.50
-1.40
-1.30
-1.20
-1.10
-1.00
-0.90
-0.80
-0.70
-0.60
-0.50
-0.40
-0.30
-0.20
-0.10
0.00
Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19
China
India
Brazil
Indonesia
Turkey
Poland
Colombia
Malaysia
Chile
Mexico
South Africa
Percent of GDP
Impact of external factors on portfolio flows
Source: IMF Global Financial Stability Report, October 2017
Some countries likely to
experience reduced inflows of
1 – 1.5 percent of annual GDP
over the next two years

4. Economic growth forecasts
7.4
3.5
0.4
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Developing economies
Advanced economies
World
Turkey
(%) (%)
Source: IMF World Economic Outlook, October 2018

5. 6.9 5.9 6.5 5.3 6.6 5.5 6.5 8.0 7.0
5.2
7.5
3.9
6.4
10.5
6.2 7.4 8.2 8.8 8.5
11.9
23.5
-4.0
0.0
4.0
8.0
12.0
16.0
20.0
24.0
28.0
-4.0
0.0
4.0
8.0
12.0
16.0
20.0
24.0
28.0
201020112012201320142015201620172018
Fiscal adjustment
Underlying trend
Import prices and
exch. rate
Volatility in food
prices
Forecast
Realization
(%) (%)
Source: CBRT Inflation Reports.
5
Enflasyonla mücadeleyi etkileyen unsurlar
Factors influencing the fight against inflation

6. -10
-5
0
5
10
15
20
25
30
35
40 Malaysia
Turkey
Poland
SouthAfrica
Chile
Mexico
India
Colombia
Brazil
China
Indonesia
Russia
Short-term debt on remaining maturity basis (2018-20 avg.)
Current account deficit (2018-20 avg.)
External financing requirement (2018-20 avg.)
15% external financing requirement threshold
Percent of GDP
External financing requirements
Source: IMF Global Financial Stability Report, October 2017
Current outlook will prove challenging for those with large external financing needs…

7. 7
Corporate sector open FX position
There was a marked rise in the economy-wide leverage, which has already increased the
output cost in the case of an external adjustment risk.
0.0
5.0
10.0
15.0
20.0
25.0
30.0 2002-Q4
2004-Q4
2006-Q1
2006-Q3
2007-Q1
2007-Q3
2008-Q1
2008-Q3
2009-Q1
2009-Q3
2010-Q1
2010-Q3
2011-Q1
2011-Q3
2012-Q1
2012-Q3
2013-Q1
2013-Q3
2014-Q1
2014-Q3
2015-Q1
2015-Q3
2016-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
0.0
50.0
100.0
150.0
200.0
250.0
300.0
USD billions (right scale) % of GDP

8. Implied FX volatility
Source: Bloomberg, as of November 30, 2018.
0
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Emerging Markets Turkey
(%) (%)
Selected Emerging Markets: Brazil, Chile, Columbia, Czech Republic,
Hungary, India, Indonesia, Mexico, Poland, Romania, Russia, South Africa,
South Korea.
8

9. Nonperforming loans (weekly % change)
Source: BRSA, own calculations.
9
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Jul-18
Observed Smoothed

10. 10
Financial Regulation and Bank Capital:
Capital of a bank protects the bank against insolvency.
Allowances of credit losses should be sufficient to cover Expected Losses. Capital should be
cover Unexpected Losses.
How much capital a bank should hold in relation to the risks to which it is exposed?
Point of Attentions
Financial Stability and Cyclicality:
Experience suggests that the determinants of credit losses (including macroeconomic
variables) begin to deteriorate a considerable time before they result in cumulative
delinquency..
G-20 explicitly asked accounting standard setters to 'strengthen accounting recognition of
loan-loss provisioning by incorporating a broader range of available credit information',
including forward looking macroeconomic variables.
The recognition of credit losses in the past was mostly based on past events (e.g. missed
payments or unemployment). In many cases this information signals the effective
materialization of a credit loss rather than a timely anticipation of the potential credit losses.
Often deteriorating macroeconomic conditions can anticipate future increases missed
payments for a loan.

11. 11
 High NPL Levels have a
negative impact on bank
lending to the economy.
 Sustainable reduction of
NPLs in banks' balance
sheet is beneficial to the
economy from both
macroprudential and
microprudential
perspective.
 Adressing asset quality
issues is one of the key
priorities for ECB.
 ECB's focus on this issue
began with the 2014
comprehensive assessment.
High Levels of Non-Performing Loans-ECB Actions

12. 12
IFRS9
NPL Guidelines – AST
Calendar Provisioning
Basel III-IV
Main aim of the regulations: Fair Presentation
/Sustainable Capital/Investor Protection

13. Source: EBA Risk Dashboard
For Total Loans and NPLs Dec14=100
13
• According to the EBA's quarterly Risk
Dashboard, Europe's main banks report an
average NPL Ratio of 3,9% as of March 2018
• The ratio steadily decreased in the last 3 years
thanks to a constant reduction in the
numerator and the recovery of the lending
activity started in the first months of 2017
• Although the evolution is positive, differences
remain between national figures, with some
countries still at double digit…
NPL ratio for a sample of large European
Banks NPLs goes down, but more still to do
114
71
Jun17 Dec17Mar18
3,9%
Dec16Dec14
6,5%
Jun15 Dec15 Jun16
100
Non Performing Loans NPL RatioTotal Loans
Driving down NPLs to pre-crisis level and restoring
profitability was the leading concern for Banks and
Regulators in the last few years

14. Source: EBA Risk Dashboard for 2014 and 2018 data. Internal managerial figures for UniCredit
For cross economical region reference: United States March 2018 NPL ratio was 1,7%
(source: Federal Reserve) and for Japan 1,2% in September 2017 (source: Financial Services Agency) 14
NPL Ratio for a sample of large European
Banks – %
23.9
3.9
13.5
4.1
4.6
20.1
21.5
17.3
16.3
1.7
7.9
1.4
3.2
6.3
8.3
9.3
9.3
10.8
Romania
Croatia
Italy
Hungary
Slovenia
Bulgaria
Czech Republic
France
Germany
Mar 2018Sept 2014
All Countries significantly improved ratio since
end-2014 but still remain above pre-crisis levels
Source: EBA Risk Dashboard
For Slovenia starting date Dec 2015
Coverage Ratio for a sample of large
European Banks – %
59.8
28.1
61.1
50.3
52.4
43.6
51.2
52.8
62.7
66.6
60.5
40.3
55.4
58.2
59.4
59.6
65.5
66.0
Romania
Hungary
Bulgaria
Slovenia
Czech Republic
Croatia
Italy
Germany
France
Mar 2018Sept 2014

15. Stress Testing Case Study