Chairman's Message

Esteemed shareholders,

Before presenting our report summarizing our Bank’s activities in 2011 and assessing its financial results, I would like to briefly consider the year’s economic developments around the world and in Turkey and consider their impact upon our sector.

In search of a global balance: Public debt or growth?
The global economy is being affected by two main developments: the first of these is the observed slowdown in the rates at which developed economies have been recovering since the beginning of 2011; the second is the aggravated financial uncertainty and the deterioration that has become particularly apparent in EU countries’ public finances since August. Both of these developments are worrisome and have implications which pose a serious element of risk for the global economy and need to be monitored carefully.

The effects of both the global financial crisis and its aftershocks since 2008 continue to be felt.

As the global crisis completed its third year in 2011 in parallel with ongoing megatrends, it reached a new point involving greater risks and uncertainties about the future in terms of its scope and impact. The dynamics of the crisis originate in the economies of the developed countries and plunged the global economy into the worst upheavals experienced since 1929. Neither the packages of extraordinary measures taken by the developed countries during the most recent three years nor national economies’ self-dynamics have been successful in ending this crisis. There appear to be fundamental differences both in the problems being faced by the world’s economic blocks and in the search for ways to deal with those problems. Among the developed countries, political actors and policy-makers tend to put off dealing with problems because of the potentially high political and social costs entailed by realistic, long-term policies that might be capable of achieving solutions. Decision-making processes and the efforts of governments to implement the resulting decisions are restricted within the national borders. Given the global and complex nature of the difficulties, this suggests that the problems are not going to be resolved any time soon.

One hallmark of 2011 was an outbreak of problems with public finances among developed countries. High levels of public sector indebtedness, especially in EU countries, emerged as the most important problem faced by the developed countries last year. The difficulties that Greece had in rolling over its high public sector debt quickly led to a loss of confidence in markets and before long the contagion spread to other parts of Europe as well.

Since the global financial crisis that broke out in 2008, Turkey has been adhering to monetary policies that are mindful of both price and financial stability. This has been a matter of crucial importance to the country's sustainable macroeconomic balance.

The worsening in the public finances of developed countries brought on by measures to deal with the crisis will both set the global economy’s agenda and remain on it for some time to come. Particularly if the problems grow deeper in the Euro Zone, the consequences for the global economy could be dire indeed. At the same time, due to their potential impact on international finance and foreign trade, these developments are such as to lead to serious problems for the world economy as a whole and for the emerging countries in particular.

According to the most recent IMF projections, the emerging countries look set to outperform the developed countries in terms of growth in the period ahead as well. That said, the developed countries are the emerging countries’ chief export markets and if especially the EU countries are unable to pull themselves out of recession, that could have an adverse impact on the emerging countries’ economic growth performance. Nevertheless, emerging countries will continue to be more attractive for capital inflows than developed countries do primarily because of low interest rates, limited potential for investments and expectation of low growth in the developed countries.

Turkey: Outperforming the developed economies
Since the global financial crisis that broke out in 2008, Turkey has been adhering to monetary policies that are mindful of both price and financial stability. This has been a matter of crucial importance to the country’s sustainable macroeconomic balance.

Having successfully ranked among the world’s fastest-growing economies in 2010, the Turkish economy’s strong growth performance continued in 2011 as well with a real rise in GDP that is put at something over 8% despite all of the adversities that beset the global economic climate. As was the case in previous years, the underlying dynamics of that growth were provided by robust private sector consumption and investment outlays.

Paralleling the economic growth registered in 2011, there was also a rapid expansion in the current account deficit and this became the issue at the very top of the country’s economic agenda. Throughout the year Turkey’s export performance was adversely affected by ongoing problems in the Euro Zone–which is our country’s biggest export market–and by political developments in the Middle Eastern and North African countries that might serve as its market alternatives. On the other hand, strong domestic demand and high energy prices initially fueled a rapid growth in imports. The domestic economic activity lost some of its momentum later in the year in parallel with a significant decline in the value of the Turkish Lira and a deteriorating global economic outlook, slowing down the expansion in the foreign trade deficit.

Policies designed to bring domestic demand under control by throttling the growth in the credit supply took some of the steam out of economic activity and also contributed to the loss of momentum in imports. Another factor that made it possible for Turkey’s economic performance to compare favorably with that in developed countries was a commitment to budget discipline and the maintenance of a solid public-finance balance at a time when many other countries were having problems with budget deficits and high levels of public debt.

Concurrent with this, the Central Bank of the Republic of Turkey (CBRT) took a proactive approach to monetary and exchange rate policies that were mindful of both price and financial stability. This helped insulate domestic markets from the effects of international markets volatilities by making them less severe.

If the course of the global economy remains problematic in 2012, as it is expected to do, Turkey, as an open economy will unavoidably be affected and the economic activity will lose some of its momentum. The fact that;

• the Turkish banking sector operates with lower leverage than that of the case in developed countries,
• greater advantage is being taken of the alternative market opportunities that have been developed through market diversification in Turkey during the last ten years and
• regulatory authorities are both flexible and proactive in their approach to policy

will make significant contributions towards ensuring that the expected slowdown in economic activity takes place in a controlled manner and thus towards sustaining the healthy growth performance of the Turkish economy in the period ahead.

Paralleling the vigor in economic activity, our sector continued to grow consistently in terms of assets, newly-opened branches and employment numbers.

The Turkish banking sector: An industry that has successfully managed the first stage of the crisis
Having strong dynamics, our sector maintained a relatively robust stance throughout the first stage of the global crisis. By firmly adhering to risk management policies, it proved to be quite successful in its management of its loans portfolio.

The stable growth demonstrated by the Turkish financial services industry has contributed greatly to the relatively mild impact which the adverse developments taking place in the global economy for the last three years have had in our country. Since the beginning of the 2000s, banking in Turkey has undergone tremendous changes and it has strengthened its foundations. Thanks to its robust capitalization, to successful risk management practices and to proactive policies, the banking sector has financed the sustainable growth of the Turkish economy without interruption.

2011 was a successful year for the Turkish banking industry. Paralleling the vigor in economic activity, the banking sector continued to grow consistently in terms of assets, newly-opened branches and employment numbers.

Towards the end of 2010 and in early 2011, CBRT increased banks’ reserve requirements for the sake of maintaining financial stability. Along with this, decisions taken by the Banking Regulation and Supervision Agency (BRSA) about consumer loans in the second half of the year helped keep the sector’s loan volume in line with what was needed for a sustainable economic growth.

It is estimated that the Turkish banking industry will continue to grow in 2012 in parallel with the growth that is foreseen in the Turkish economy. In keeping with the supposition that the rise in domestic demand will be more gradual in 2012 than was the case in the previous year, it is expected that the expansion in the volume of loans will also be more moderate.

It is also thought that while some Turkish banks will be keeping a close watch on growth opportunities in neighboring countries as they continue to expand in the domestic market, others may slow down their growth and even shed market share.

İşbank continues to consistently create value and contribute to economic growth.
İşbank has been creating value and contributing to sustainable economic growth for 87 years. Our Bank is a leading supplier of high value adding financial products and services at every stage of economic and commercial life. İşbank takes every opportunity to demonstrate that it is a service provider that stands the closest to the customer no matter what the economic climate may be.

Confronting the volatile and fraught market conditions that prevailed in 2011, İşbank’s strategic choices were formed by policies that focused on problem-free growth. This not only distinguished it from a great many of its competitors but also made possible its successful performance.

In the face of the effects of an unfavorable global economic environment, we focused primarily on protecting İşbank’s profitability in parallel with fund creation strategies that concentrated on prudent asset management policies and on costs and stability. It gives me pleasure to state that İşbank made progress in both capital and profitability indicators in 2011 and that it maintained its sustainable and profitable growth through a problem-free credit risk performance.

Our cross-border banking activities that we conduct in line with our pursuit of growth in financial services, with our desire to take advantage of investment opportunities in areas where there is profit potential and with our goal of becoming a regional financial force, continued to support our growth strategy. In that respect, 2011 was witness to a milestone development in İşbank’s corporate history. For the first time since its inception, our Bank acquired another bank with its purchase of a Moscow-based financial institution. This new acquisition is now operating under the name of “İşbank Russia”. Just in the 8th year of its inception, İşbank demonstrated that it intended to be an international bank when it opened branches in Hamburg and Alexandria. Today İşbank’s banking subsidiaries, branches and offices give it an international presence in twelve countries.

We are of the opinion that operational productivity and expenditure control are more important than ever in today’s global economic climate. Productivity and effectiveness will be what fundamentally drive competition in the period ahead. We are a bank that focuses on offering its customers products and services in the most effective way possible. A number of major projects that we have recently completed, have boosted our Bank’s strength to an incomparable degree. We are committed as well as ready to make certain that our potential is fully reflected in our performance under today’s conditions of global competition.

Just as in the past, we will continue to raise the standards of banking in Turkey to even higher levels and to augment our contributions to our stakeholders and country within the framework of our mission.

Our responsibility to our country and society
Being aware of our responsibility, to our country and society, as well as our identity as an institution of the Republic, we continue to support education, culture, arts and environment, aiming to improve the quality of social life in Turkey.

Part of the value that we create through our economic undertakings we share with society and we do so in ways that ensure that our contributions are as broad-based and diverse as possible. Every one of our social responsibility projects is shaped by our long-term approach and is undertaken with care being given to institutionalization. Special attention is also given to making sure that our projects create value for our country and its people.

As İşbank we are committed to making an ongoing effort to add more value both to Turkey and to the lives of its people through social responsibility projects that are both broad-based and sustainable.

We are determined to raise the standards of Turkish banking to even higher levels.
Just as in the past, we will continue to raise the standards of banking in Turkey to even higher levels and to augment our contributions to our stakeholders and country within the framework of our corporate mission.

İşbank’s success is an outcome of its competent human resources, management team and systematic strategy. The strength that we derive from this plain and simple fact is what gives us the energy to remain on course and to raise our sights even higher.

2011 was a year in which we demonstrated strong, consistent growth that further entrenched our position among privately-owned banks. It was also a year that marked the beginning of a process through which the momentum of our performance will be augmented under today’s new conditions of global competition.

At a time when the world of banking and finance–indeed even the sovereigns–exhibited serious weaknesses regarding management and shareholder will, İşbank demonstrated that it was a beacon of international stability in terms of shareholder, management and executive will. The strength arising from that will is what enabled us to bring about important changes in our management and executive teams in 2011 without in the least way sacrificing our mission or identity. With the support of our shareholders and other stakeholders, we shall absolutely continue to provide the real economy with the banking products and services demanded by the process of economic growth in Turkey with the best possible conditions.

In closing and speaking on behalf of myself and the members of the Board of Directors, I take this opportunity to express my thanks to our shareholders as well as to our customers, business partners, correspondents and employees.

As it grows and creates value for everyone, İşbank continues to advance confidently and strongly towards its 100th year of life.

Yours sincerely,

H. Ersin Özince
Chairman of the Board of Directors