Esteemed Shareholders,

2016 will be remembered as a year of turbulence and volatility both in Turkey and around the world.
Before presenting our annual report and financial results that sum up our performance for 2016, I would like to discuss the opportunities and risks the banking system faced in 2016 along with the developments in Turkish economy and the global economy and finally present you the sustainable earnings of TEB and our expectations looking forward.

Fed’s long expected rate hike came in December.
Since the global financial crisis of 2008, it is long clear that the policy decisions of the central bank of United States (Fed) has a very strong impact on the global economy. We have witnessed a similar effect following the 25 basis points rate hike and a revision of the Fed’s expectations for the future following the Federal Open Market Committee (FOMC) meeting on 14 December 2016. The rate hike has already been priced in by the markets however the revision in Fed’s projections for the year 2017 caught everyone by surprise. Fed revised its 2017 year-end interest rate median estimate 25 basis points upwards to 1.375 % and signaled three rather than two rate hikes within the year.

It did not take long for the markets to react to these changes in Fed’s expectations and while the long term interest rates escalated, US Dollar gained value in international markets against other currencies especially the developing countries’ currencies.

The overall consensus is that Fed will continue its cautious stance in 2017 and will be closely monitoring the US economic data and take steps accordingly while observing the global balances as well.

Inflation expectations increased following the presidency of Donald Trump
Attracting a lot of attention during his election

campaign with his speech and promises, Trump’s election win in November has stirred a lot of concern and turbulence in a global scale albeit for a short period.

The economic policies of Donald Trump, who took office on 20 January 2017, is anticipated anxiously. The policies and decisions of the republican president may not only affect the future of US economy but may also impact Fed’s decisions in 2017 and beyond and thus the global economy and international trade. The protective measures that the president promised during his election campaign is a source of concern and a threat for the rest of the world. Trump has been mentioning reconsidering trade with Mexico and China and even withdrawing from international treaties like NAFTA; if Trump adheres to such measures that will potentially limit trade and contract the labor market, it will put pressure on the future growth of US economy. This may trigger another recession in the global economy and world trade through contraction in financial markets and international trade.

Eurozone inflation reached 1.8% in January 2017.
Eurozone managed to grow at a higher rate than the US economy in 2016, for the first time since the global recession started in 2008. While the growth rate for the US was 1.6%, the Eurozone grew by 1.7% in 2016.

Despite the structural problems in the Italian banking system, the abiding financial crisis in Greece and the referendum results that imply an exit from the EU for the United Kingdom, the economic activity was steady in the Eurozone and recovery continued. On the other hand, despite the terrorist attacks in France, Germany and Belgium, the Eurozone performance surpassed expectations and actually recorded the best percentages in consumer trust index and unemployment in the past few years.

Annual inflation rate in the Eurozone is climbing up in line with the targets of European Central Bank (ECB). Inflation rate in January 2017 peaked to 1.8%, the highest in the last four years. According to the statistics published by Eurostat, the Statistical Office of the European Union, on December 2016, unemployment rate-corrected for seasonality, was at its lowest since July 2009.

The greatest contributors to the 2016 growth performance were Spain with 3.2% growth and Ireland with 4% growth in the Eurozone that is experiencing 14 quarters of consecutive growth. Germany, the biggest economic power of the zone, also speeded up its growth and reached 1.9% on an annual basis.

A Victory of the Expansionary Monetary Policies?
Expansionary monetary policies play a significant part in the recovery observed primarily in the US and currently in the EU. ECB’s extremely expansionary monetary policy boosted the household consumption and the leverage of the companies, thus, accelerating the economic activity.

In its meeting held on 8 December 2016, ECB announced that it would keep the interest rates unchanged and extend the asset purchase program which is the main instrument of its expansionary monetary policy, until the end of 2017. Despite the extension of the program ECB gave the first signal of tapering by scaling down its monthly purchases from EUR 80 billion EUR 60 billion starting from April 2017 onwards. ECB announced that it would be closely and cautiously monitoring inflationary environment and in case of a deterioration in the outlook or a discrepancy in the financial environment and the improvement in the inflation, reassess the upper limit of the asset purchase program.

IMF kept its growth forecast for the world economy unchanged.
In the Global Economic Outlook report update issued on 16 January 2017, IMF did not change its growth forecast for the world economy. In the update report, IMF revised its forecast for the 2017 and 2018 growth rates for developed countries up by 0.1 and 0.2 points, respectively.

While Trump administration’s growth oriented policies are cited as the main catalyst for the upgrade of the growth forecasts of the US economy in the IMF report, the 0.4 point increase in the forecast for 2018 growth rate is noteworthy. As for the developing countries, IMF notes that the growth has somewhat slowed down and expects a weaker growth than stated in its October 2016 report. In the report, 2017 growth forecast for China has been revised up to 6.5% from 6.2% in line with the incentives to be granted.

Turkey is keeping its strong stance against multifaceted risks
It is fair to say that despite all the internal and external unfavorable events and the coup d’état attempt that we went through, the Turkish economy kept its strong stance and was relatively unshaken by the turbulences thanks to its solid foundations and resilience.

Economic activity in Turkey already slowed down in the second quarter and further slowdown in the third quarter meant that economic growth was replaced by contraction resulting in 2.2 % growth of the economy in the first 9 months of 2016. According to the Medium Term Programme, the GDP growth rate for 2016 is expected to be around 3%.

Fluctuating in the 6.6% -9.6% range throughout the year, consumer inflation was realized at 8.5% by the end of 2016, exceeding the (+, -) 2 points band around the %5 year end inflation target of the Central Bank of Turkey (CBT). On the other hand, domestic wholesale inflation was affected both from the changes in commodity prices and the exchange rate, thus fluctuating in a wider band throughout the year. The year-end wholesale inflation of 9.94% was the highest in the 26 consecutive months period.

In the last two months, exports have been picking up, a good news on that front. The depreciation of TL is a factor in the %9.5 increase in November and 9% increase in December of the exports. This high performance in the last two months of the year limited the fall in the exports at 0.9% for 2016.

As a result of the economic recovery in the Eurozone, Turkey’s exports to EU has flourished.

In 2016, Turkey’s total imports fell at a rate higher than of its exports, thus contracting the foreign trade deficit by 11.7% at USD 56 billion.

On the other hand, the oil prices have started to climb up again in the last quarter of 2016. This implies an upward move on the total imports of Turkey which further implies a higher foreign trade deficit in the near future. Additionally, the measures taken lately to revive domestic demand may cause a rise in the imports. Taking all these points into consideration, we may conclude that the foreign trade deficit may widen in 2017.

The credit expansion in the banking sector lost some pace in 2016.
In 2016, CBT’s rate cuts were not fully reflected on the deposit rates, therefore the credit rates did not come down as much as we would like them to do. This resulted in a slower rate of increase in the credit expansion.

Banking sector, as usual, worked on diversifying its funding sources, albeit deposits making up the major source. In December 2016, total deposits increased by 16.7% on an annual basis and reached TL 1,454 billion. The rate of increase for TL deposits in the same period was 18.1%.

Despite the downward revisions in Turkey’s credit ratings, banking sector did not face problems in its overseas funding and continued to make use of international funding, primarily the syndications. The banking sector is sound and strong with a high capital adequacy ratio and likely to exhibit a similar growth in 2017 as the previous year.

Esteemed shareholders,

TEB has continued to perform its best work in these conditions described above and stood by its customers as their solution partners in this highly volatile domestic and global environment.

TEB continues to be a brand that differentiates itself with innovation and leadership and is the first choice of millions of households and companies. Our Bank demonstrates its distinctness as an enabler in every field of finance through its products, services and solutions.

TEB, as one of the most established and respectable participants of the Turkish banking sector, achieved an asset size of almost TL 80 billion out of which TL 56.4 billion is the credit volume in 2016.

TEB has been transferring funds to the industries that are contributing to the growth of the Turkish economy and a sustainable future in the areas of manufacturing, employment, public finance, exports and by doing so TEB is encouraging the seamless flow of the production-trade cycle.

It gives me great pleasure to inform you that 2016 has been a successful year for our subsidiaries as well, satisfactory results have been obtained in various parameters such as number of customers and transaction volumes.

Before I end my remarks, I would like to confirm that TEB has also been ceaselessly working to make a difference and create value in the realm of social responsibility.

Our Bank has been vigorously supporting the SME’s and all the entrepreneurs, primarily entrepreneur women and implementing exemplary corporate social responsibility projects on propagating financial literacy and awareness in our society.

As TEB family, we are proud to have executed and implemented projects that are considered best practices and have been inspiration for others in a field that we consider to be the major component of our social responsibility.

At TEB we believe that we must create a framework that will support a much healthier ecosystem and sustainable development along with welfare and hand it over to next generations. We will be undertaking our duties with this awareness and responsibility while creating new success stories.

In the banking sector where the competition is ever increasing and the rules of the game constantly change, we envisage digitalization as the mega trend of the industry. Digitalization is already an integral part of the leading-edge banking services and we foresee that it will change the rules of the game and become a major factor in determining the requirements of the customers.

TEB will continue to be at the forefront of this race as a dynamic and well-established institution. While our employees constitute our greatest asset in this journey, our innovative culture will, as always, place us in front of the competition and enhance our ability to create added value.

I would like to extend my gratitude and regards especially to our shareholders who trust and contribute to the TEB brand, our employees, our customers and our business partners on behalf of the Board of Directors and myself.

Yours respectfully,

Yavuz Canevi
Chairman of the Board