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AKBANK: CREDIT CARD DIVISION1 Marina Apaydin wrote this case under the supervision of Professor Mary Crossan solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2008, Ivey Management Services Version: (A) 2008-12-12 Akbank was ranked as Turkey’s most valuable bank, having achieved the most profitable banking operations among all privately owned banks in Turkey. Akbank was one of Turkey’s pioneers in the credit card market, and its credit card division had experienced a stellar success since its inception almost a decade earlier. However, because of Turkey’s current unpredictable political and economic environment Akbank’s management found it difficult to develop an appropriate strategy to sustain the bank’s spectacular growth. Not even a year had past since the general parliamentary elections that had confirmed the leadership position of the main political party, which had been leading the government since 2002. For decades before that, Turkey had been governed by a coalition government, which analysts claimed to be the root cause of the country’s political and economic turmoil. Although this situation had undermined international investments in Turkey to the full extent of their capacity, Akbank had been able to successfully launch its credit card business in late 2001, growing its customer base to one million in the first eight months. As a result of a number of successful initiatives, this spectacular growth continued, eventually reaching 15 per cent of the market. However, now that the political uncertainty seemed to be resolved, and the political climate appeared to have stabilized for at least the next five years, international competitors were expected to increase their participation in Turkey’s already highly competitive credit card market, where any differentiating attempt could be copied virtually overnight. Akbank’s management needed to address the following key questions: How can Akbank continue its spectacular success at the same pace? How can Akbank create an advantage that cannot be copied easily? What should be Akbank’s next growth opportunities? 1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those f Akbank or any of its employees.

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A MACROECONOMIC AND POLITICAL OVERVIEW OF TURKEY2 Politics The Republic of Turkey was founded in 1923 on the remains of the Ottoman Empire and became a democratic country in 1945. The territory it occupies has been on the international crossroads between Europe and Asia for at least two millennia, creating both advantages and disadvantages for the country. Strategically placed, militarily powerful and influential in the energy-rich new states of Central Asia, Turkey was the largest economy in Eastern Europe, the Balkans, the Black Sea basin and the Middle East. At the same time, torn between its affiliations with East and West, the country suffered from continuous political and economic instability. Political stability has been problematic in Turkey with the military intervening in political sphere and taking power on three occasions, 1960, 1971 and 1980. The current government was formed in March 2003 under the leadership of the Justice and Development Party (in Turkish, Adalet ve Kalkınma Partisi, or AKP). In 2007, AKP’s Abdullah Gul was elected president amid major protests from both military and secular circles. On the state level, Turkey’s orientation has been firmly to the West. A committed member of the North Atlantic Treaty Organization (NATO) since 1952, Turkey has had an association agreement with the European Union (EU) since 1964 and a custom union agreement with the EU since 1995. In 2005, Turkey entered into formal accession negotiations with EU but they were fraught with difficulties related to Turkey’s slow and erratic implementation of human rights reforms. In spite these fears and criticism, the AKP has performed well in government, and its management of the economy has been good. Despite some slippages and delays, the AKP has broadly adhered to the reform program backed by a series of International Monetary Fund (IMF) standby agreements. As a result, the Turkish economy was now more robust and resilient to shocks than when the AKP first took office. However, as shown by the sharp falls in the lira and the Istanbul stock exchange in May and June 2006, the country’s economy continued to be vulnerable to volatility and sharp changes in investor sentiment. Economy Turkey’s economic performance had been as volatile as its politics. The annual real gross domestic product (GDP) growth rate averaged 3.7 per cent between 1991 and 2000. Although higher than the two per cent GDP growth rate of the Organisation for Economic Co-operation and Development (OECD), Turkey’s GDP growth rate was significantly lower than that of the other emerging markets and disappointing by its own historical standings: six per cent in the 1960s and four to five per cent in 1970s to 1980s. Growth, which had always been volatile, became even more so in the 1990s. Although the 1994 recession had been sparked by a currency crisis and a subsequent tightening of fiscal policy, the 1999 contraction reflected the impact of the Russian financial crisis, which had reduced demand for Turkish exports (including tourism, construction and engineering) and had prompted the flight of capital. The effects of the downturn had been compounded by massive earthquakes that same year. On the other hand, in the so-called “boom” years of the 1990s, the economy had been driven by domestic demand with sharp increases in expenditure both on private consumption and on gross fixed investment. A severe recession, exacerbated by a burgeoning current account deficit and severe problems in the banking sector, swamped the country in 2001, and the GDP contracted by 7.5 per cent, the sharpest drop in

2 Source: Robert O’Daly (Editor), “The Country Profile: Turkey;” The Economist Intelligence Unit Ltd London, UK, 2007.

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economic activity since the Second World War. Incomes and consumer confidence were severely hit by the devaluation, the attendant surge in inflation, high interest rates and a significant rise in unemployment. Economic activity bounced back again from 2002 to 2006. In 2002, GDP rose by 7.9 per cent, driven mainly by stock building and exports, which continued to benefit from the positive impact of the devaluation in 2001. Further sustainable growth of seven to eight per cent continued till 2006, supported by the sharp increase in consumer spending, which had been triggered by the strength of the Turkish lira, declining nominal interest rates and increased consumer lending. The abrupt fall in the lira in mid-year had led to a rise in inflation and sharp monetary policy tightening. As a result, GDP growth had slowed to a still robust five per cent in the second half of the year. Inflation Turkey had experienced significant bouts of inflation in the late 1950s and for most of the 1970s. Between 1988 and 1999, the average annual rate of consumer price inflation ranged between 60 per cent and 90 per cent. By year-end 2000, the new exchange rate policy had begun to reduce both imported inflation and inflationary expectations to 39 per cent. However, inflation surged again, following the abandonment of the currency peg, to reach a peak of 73 per cent in January 2002. A generally stronger lira and continued excess capacity helped to drive inflation down to 7.7 per cent by the end of 2005, just below the eight per cent target agreed to with the IMF. The steady decline was mainly the result of several influences: the impact on import prices of a prolonged appreciation of the lira since April 2003, the disinflationary monetary policy followed by the Central Bank, wage moderation, strong productivity growth and a downward adjustment in overall inflation expectations. Inflation started to edge upward from the end of 2005, reaching 12 per cent in August 2006. Since then it had eased slightly, fluctuating at approximately 10 per cent. Given the sharp tightening of monetary policy and the recovery in the value of the lira in 2007, the rate of inflation was expected to decline again toward the 2007 year-end target of four per cent, as agreed upon with the IMF. Communications Turkey had comprehensive fixed-line and mobile-telecommunications networks, but its infrastructure for Internet and data services was less well developed. The fixed-line penetration rate was approximately 26 per cent of the population, well below the rates in most European countries, a discrepancy partly explained by Turkey’s generally larger households. Unlike fixed-line subscriptions, the number of mobile-phone subscribers continued to grow rapidly. By the end of 2006, Turkey had 52.7 million mobile telephone subscribers, representing a penetration rate of more than 70 per cent, which was expected to rise further, closing the gap between Turkey’s penetration and that of the EU, at 108 per cent in 2007 (i.e. more than one mobile phone per person). Internet usage had also been increasing steadily in Turkey. Although widespread home usage continued to be hampered by low computer ownership, the Internet had become essential for business, and adolescents and young adults commonly frequented Internet cafés. Approximately 16 million Turkish people were said to use the Internet, but the number of subscribers was much lower.

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Socio-economic Trends Turkey had the third-largest population in Europe (73 million in 2006), after Russia and Germany. The rate of population growth was estimated at 1.3 to 1.4 per cent per year, a strong growth rate by EU standards, down compared with Turkey’s growth rate of 2.3 per cent from the 1970s to the 1990s. The deceleration in the birth rate since the 1950s was related to improvements in the educational level of women, greater migration from rural areas to urban areas and a wider use of modern birth control practices. Cities were expanding through migration from rural areas, resulting in the urban population (comprising provincial and district centers) accounting for about 65 per cent of the country’s total population, compared with 27 per cent in 1960. The education in Turkey was improving because of continuous reforms implemented by the government. Government and private spending on education was approximately seven per cent of GDP, well above the OECD average of 5.2 per cent in 2002 and lower only than Denmark and the United States. The biggest educational challenge facing Turkey was transforming the school system that educated a small number of students at the highest international standards to a system that educated all students well. The size of Turkey’s workforce varied according to seasonal trends, particularly in agriculture. Unemployment from 2004 to 2006 averaged 10 per cent, and an additional 3.6 per cent were considered “underemployed” (in part-time or temporary work, but not by choice). Women comprised just less than one-half of the population, but little more than one-quarter of the workforce. Approximately 50 per cent of working women were employed in agriculture. The non-participation of urban women in the workforce was the main reason that Turkish women’s workforce participation rate was just below 50 per cent, compared with more than 60 per cent in most EU countries. Information regarding wages was limited, especially because of the extent of informal employment. However, the available evidence suggested the government had sought to tailor its incomes policy to the inflation targets agreed on with the IMF by adjusting the minimum wage at least once every two years, but usually twice a year. Income distribution was poor and was affected by regional and rural-urban differences and by inadequate education and a lack of effective redistributive mechanisms. In 2000, income per head was reported at US$7,556 in the industrialized northwest, but at only US$725 in the remote east. Inequality in Turkey was considerably higher than in other west European countries and similar to that in Russia, Ecuador and Tunisia. Educated Turks had often expressed concern that poor income distribution could lead to political radicalism, social unrest and rising crime (see Exhibit 1 for development indicators for Turkey and for selected countries in the region). THE HISTORY OF FINANCIAL SERVICES IN TURKEY3 The banking sector in Turkey had witnessed considerable development in the 1990s, in terms of assets, profits, sophistication and number of institutions. However, the sector also faced a number of problems. State banks were weakened by financing public expenditures, and the banking system was overly dependent on high-interest earnings from government securities. In addition, many small private banks lacked economies of scale and in some cases existed mainly to finance the other business activities of their owners. The authorities began to tackle some of these problems under IMF monitoring in 1999/2000, seizing troubled banks and establishing a banking sector watchdog. However, imbalances grew, as banks sidestepped regulations and increased their short-term hard-currency borrowing. When liquidity tightened

3 Source: Robert O’Daly (Editor), “The Country Profile: Turkey;” The Economist Intelligence Unit Ltd London, UK, 2007

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as the lira devalued in early 2001, banks with net foreign-currency liabilities experienced an instant loss, and the problem of bad loans exacerbated. Since 1999, banking sector reform had been one of the central pillars of the IMF-backed programs. Major improvements included the establishment of an independent watchdog, the Bank Regulation and Supervision Authority; recapitalization of public and private banks; the closure or sale of failed private banks; the start of a process of consolidation; corporate bank debt restructuring with the backing of the IMF and the World Bank. Banks had also been required to set up internal risk management systems and to make more thorough provisions for bad loans. Banking regulation and supervision was tightened further and, in October 2005, Turkey’s new Banks Act replaced the 1999 Banks Act. Among other reforms, this law sought to smooth the path of ongoing bank mergers and takeovers. Privatization of state banks had made limited progress. In late 2005, a share offering for approximately 22 per cent of the shares in the state-owned Vakifbank was successfully concluded, but whether the state would relinquish overall control of the bank was unclear, given the doubts about Vakifank’s ability to compete as a privately owned bank. In late 2006, preparations for the privatization of Halkbank, which had traditionally provided loans to small and medium-sized enterprises, were underway but were later delayed, owing to legal difficulties and political concerns ahead of the next general election in July 2007. In 2007, the financial sector was dominated by a handful of large domestic banks, some state-owned and some private. The private banks were often members of conglomerates with widely dispersed holdings throughout the economy. Banks frequently controlled, as subsidiaries, many major non-banking financial institutions, such as insurance companies, mutual fund firms, factoring firms and financial leasing companies. Although small in asset terms, foreign banks played a dynamic role in bringing innovations to the local industry. The Forecast for Turkey’s Financial Services A recent study by Philip M. Parker4 outlined the 2007 to 2012 world outlook for financial services across more than 200 countries. Using econometric models that project fundamental economic dynamics within each country and across countries, the report estimated the potential industry earnings for each country. This study was strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved, without considering short-term cycles that could affect the sales realized. Market potential represents the industry earnings of a market when that market becomes accessible and attractive to serve by competing firms. It is typically expressed as the total revenues potentially extracted by firms if a market is served in an efficient manner. Market potential can be either lower or higher than actual sales if a market is inefficient (i.e. not representative of relatively competitive levels). Inefficiencies can arise from a number of factors, including a lack of international openness, cultural barriers to consumption, regulations and cartel-like behavior on the part of firms. In general, however, latent demand was typically larger than actual sales in a country market. The world’s market potential for financial services was estimated at $565.5 billion in 2007; however, it was not evenly distributed across regions. Asia was the largest market, representing 35 per cent, followed by Europe and the Middle East with 30 per cent, and then North America and the Caribbean with 23 per

4 Philip M. Parker, The 2007-2012 World Outlook for Financial Services , ICON Group International, Inc., San Diego, CA, 2006, www.icongrouponline.com, accessed November 10, 2008..

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cent of the world market (see Exhibit 2 for the market potential for financial services in Turkey and other selected countries). COMMERCIAL BANKING IN TURKEY5 Key Official Institutions Three official institutions dominated Turkey’s banking landscape. The first was the Central Bank of the Republic of Turkey (CBRT). CBRT’s primary objective was price stability accomplished by setting short-term interest rates to manage inflation. Prior to December 1999, the lira had depreciated broadly in line with actual inflation. Between December 1999 and early 2001, the currency was managed by way of a crawling peg, which limited devaluation to the targeted rate of inflation (not the actual rate, which was often higher). Since early 2001, the lira had been a floating currency. The second key institution was the Banking Regulatory and Supervisory Authority (BRSA), which was set up in 2000. The BRSA also oversaw the Banking Sector Restructuring Programme (BSRP), which had been initiated in response to the crisis of 2000/01. BSRP had four main pillars; the first three were (1) the restructuring of the state banks, (2) the strengthening of the private banks and (3) the overall supervisory framework. The final fourth pillar was the prompt resolution of the banks transferred to the Savings Deposit Insurance Fund (SDIF), the third key institution. Since 1997, 20 banks had been transferred to the SDIF, most of which had been liquidated or sold, with just two remaining under the control of the SDIF. The roles of the BSRP and the SDIF had become more important since the complex financial crisis from November 2000 to February 2001. In essence, a mounting current account deficit meant that interest rates rose to crippling levels as a result of Turkey’s crawling-peg exchange-rate regime. Because the banks were substantial (and, indeed, primary) holders of Turkish government bonds, they were hurt hard by the rise in interest rates. Some banks suffered from very tight liquidity conditions and incurred losses when the currency was allowed to plunge in February 2001. The Competitive Landscape In addition to the two SDIF banks, the Turkish banking sector consisted of three state banks, 18 private sector commercial banks, 12 foreign banks and 14 non-depository finance institutions. The state-owned Ziraat Bank (Ziraat) was the largest bank in terms of assets, and it accounted for about one-fifth of the Turkish market’s total assets and by far the largest share of deposits (23 per cent). However, its loans accounted for only eight per cent of the total. Although Ziraat traditionally focused on the rural sector, it had become a universal bank with a wide clientele. In terms of assets, Akbank and Isbank, both within the private sector, were Turkey’s second- and third-largest financial institutions. Akbank was a part of the Sabanci business group, whereas Isbank was at the center of its own corporate empire. Akbank and Isbank each accounted for approximately 12 per cent of the Turkish market’s total financial assets, loans and deposits.

5 Source: Turkey Commercial Banking Reports (Q1, Q2, Q3, Q4, 2007, Q1, Q2 2008) Business Monitor International Ltd. London, UK (2007), accessed November 10, 2008.

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Yapi Kredi Bank (Yapi) and Garanti Bank (Garanti), private banks controlled respectively by the Cukurova and the Dogus groups, were almost exactly the same size. They each held nine per cent of the Turkish market’s total assets, 11 per cent and 12 per cent (respectively) of the country’s total loans and eight per cent and nine per cent (respectively) of total deposits. The two other state-owned banks, Halkbank and Vakifbank, followed in terms of size. Both banks accounted for approximately seven per cent of the Turkish market’s total assets and deposits, although Vakifbank’s share of lending, at eight per cent was twice that of Halkbank. Various private banks, each of which was significantly smaller than any of the four large groups, accounted for approximately 23 per cent of total assets, 30 per cent of loans and 22 per cent of deposits. The 14 investment banks represented four per cent of total assets and eight per cent of lending. These banks did not take deposits. Pamukbank and Bayindirbank, which remained under the control of the SDIF, each had four per cent of total assets and deposits and just two per cent of loans. Of the few foreign banks in Turkey, the largest was widely believed to be HSBC, which bought Demirbank from the SDIF in late 2001 and currently held less than two per cent of total assets in the Turkish market. From 2005 to 2007, the Turkish banking sector saw a sudden upsurge in foreign interest, including such major deals as the National Bank of Greece buying 44.6 per cent in Finansbank; Dexia (Belgium/France) acquiring 75 per cent in Denizbank; and U.S. Citigroup purchasing 20 per cent of Akbank. Foreign banks, despite controlling only five per cent of total assets in the Turkish market, compared with 77 per cent in Poland and Hungary and 94 per cent in the Czech Republic, appeared to be growing strongly and increasing their market share at the expense of the bigger local players. The Turkish banking industry was fragmented compared with the situation globally. The top five players controlled 57 per cent of loans, 63 per cent of deposits and constituted 62 per cent of total assets of the industry. Also relatively unusual in a global comparison were the large variations in market shares of the top players in the different categories (i.e. loans and deposits). For example, Ziraat Bank, the largest bank by assets, had eight per cent of the total loans but 23 per cent of total deposits. Garanti Bank’s business constituted nine per cent of total assets and nine per cent of total deposits. Interestingly, a combination of two of the players outside of the top three, but in the top seven, would result in a bank close to the size of the largest bank in Turkey. Given that some of the smaller players were very aggressive and the market was fragmented, the industry seemed to be dynamic, with significant benefits ahead from consolidation activity in the industry. Recent Developments The Turkish banking sector, although large by both Central and Eastern European (CEE) and Middle Eastern standards, remained underdeveloped, especially given the low loan-deposit and loan-asset ratios, which indicated that very strong loan growth could easily be funded by Turkish banks. Loan growth, fueled by low interest rates, promoted the boom currently being witnessed by the Turkish commercial banking sector. Even by regional (i.e. Central and Eastern European) standards, growth of assets, loans and deposits has been very strong, at 21 per cent, 38 per cent and 22 per cent respectively.

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THE CREDIT CARD SECTOR IN TURKEY Historical Overview6 Over the last few decades, credit cards had been increasingly adopted as a plastic currency all over the world. In this respect, Turkey was not an exception. In terms of issued cards, Turkish market was the third-largest market in Europe after England and Spain; Turkey ranked 10th in Europe in consumption volume, revealing a great potential for growth. As a modern payment system, the credit card market required an appropriate infrastructure to run smoothly. Turkey’s frequent financial crises and high-inflation episodes had delayed the adoption and widespread usage of the credit cards until recently. Credit cards were first introduced in Turkey 50 years after their introduction in the United States. The Diners Club card entered the Turkish market in 1968. However, its usage was very limited, and the interest rate fluctuations were high throughout the 1990s. The typical Turkish cardholders were educated high-income earners with professional jobs. The banks in Turkey preferred to lend money through lower-risk instruments, such as treasury bills, due to their high real interest returns and low-risk premiums. Widespread usage of treasury bills was achieved toward the end of 1990s; however, when interest rates started to decline after the 2001 crisis, treasury bills had lost their profitability and therefore the banks channeled their operations more toward the consumer credit market (see Exhibit 3). A credit-related legal infrastructure had been partially established in 2003. Moreover, BRSA had started to announce credit card rates in January 2005, to enable consumers to compare the interest rates of all credit card issuers in Turkey. The first draft of the new regulations package for the credit card market had been announced at the beginning of 2005. The Nature of the Competition The Turkish credit card market differed from other countries. For instance, credit card issuers announced their rates on a monthly basis but applied a compounded interest rate on the accumulated debt. Competition among credit card issuers focused not on lowering the interest rates but on non-price competition through loyalty programs and increasing the grace period with interest-free equal payments for up to 18 months. In 2006, the Turkish credit card market comprised 22 players, which seemed to be enough for competition, especially for a relatively homogenous product. The main networks were Visa and MasterCard, with equal market shares of overall consumption. The other players, such as American Express, were proprietary networks, and their usage was very limited in the Turkish market given that they simultaneously served as an issuer, acquirer and the network operator. The Turkish market had essentially two leader issuers and two follower issuers (see Exhibit 4). These four together constituted 84.9 per cent of all transaction volume and 61.4 per cent of all cards in the market. According to the volumes and card numbers, the market leader, Yapı Kredi Bank (YKB), had sustained the advantage of being the first issuer in Turkey (see Exhibit 4).

6 Ahmet Faruk Aysan and Nusret Ahmet Muslim, “The Failure of Competition in the Credit Card Market in Turkey: The New Empirical Evidence,” discussion paper 2006/10, Bogazici University, Istanbul, Turkey, 2006.

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Chronic uncertainty in the Turkish market had led to extremely high interest rates, especially in the default interest rates (interest for consumers with default history) prior to 2003. Moreover, the uncertain conditions had led to an asymmetric response to the cost of fund changes whereby decreases were largely ignored by the issuers while the increases were matched overnight. Whereas other credit markets, such as consumer credit, home and auto credit, converged to competitive rates within a year after the 2001 crisis, credit card rates continued to float at approximately four times the funding costs, despite the low inflation. In December 2005, average compounded annual interest rates for credit cards were approximately 87 per cent, whereas risk-free treasury bills had interest rates of only 14 per cent. The leading issuers in the market were also commanding the highest interest rates (see Exhibit 4). High interest rates could be explained by several factors, including lack of price competition, high operating and funding costs, and peculiarities of the Turkish regulatory system. The credit card market in Turkey had not been consolidated with the rules and regulations for years. Some regulatory aspects were incorporated into the consumer protection law of 2003, which confined the default credit card interest rate up to 30 per cent more of the initial credit card rate. One reason for high credit card interest rates was the relationship between the default annual percentage rate (APR) and the actual APR. The banks charged higher rates for default consumers because their risk levels were higher than regular consumers. Nearly all Turkish banks set their default APR at the upper limit permitted by regulation. Although the Turkish Central Bank had the right to impose lower credit card rates on banks, the relationship between the actual and the default APR could lead to the Turkish banks moving their operations overseas if they could not operate profitably. As an example, some U.S. banks moved their credit card branches to other states, such as Delaware, when their home states enforced price cap regulation. Because the Visa and MasterCard infrastructures served all over the world, the overpressures on the issuers could induce them to relocate their operations abroad. Profitability of the banks had been positively affected by these high interest rates. The second-largest issuer received 60 per cent of non-interest banking profits from its credit card branch in 2004. According to the Interbank Card Centre (ICC) survey, these high rates also reduced the revolving credit card debt stock incurred because 78 per cent of cardholders paid their debt fully in 2005. The remaining 22 per cent of outstanding balances resulted in approximately $15 billion in interest-bearing funds with 87 per cent APR. The low percentage of revolving cardholders in Turkey (compared with 90 per cent in the United States) likely stemmed from Turkey’s high credit card interest rate. Competition in the Turkish credit card industry mainly concentrated on loyalty programs. The reward bonuses of the second-largest player reached US$160 million in 2005. Other than the top four credit card issuers, the remaining 18 banks captured less than half of the aggregate market. Because the issuers offered identical products (either a Visa card or MasterCard), they preferred differentiating their services instead of indulging in price competition. The four largest card-issuing banks were also the main players in the acquirers market. Most sellers had many point-of-sale (POS) machines that offered the benefits of the corresponding loyalty program. More POS machines and inefficiency resulted in extra costs for the credit card operations. Currently, Interbank Card Center was working on improving the infrastructure to serve to all issuers through the same POS machine. The success of this project was expected to have a positive effect on the competition by diminishing the entry costs. Otherwise, a small issuer bank needed to set up its own POS machines to all sellers for a loyalty program. In 2005, delinquency rates increased considerably, reaching 7.5 per cent of all cardholders. Nonetheless, the default volume in Turkey was approximately 1.67 per cent, compared with 4.5 per cent in Europe. The corresponding debt amounts of the average consumer with repayment difficulties were low. Hence, any

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debt consolidation was not likely to affect the default risk position of the industry. The maturity of home loans exceeded 20 years, and the interest rates for home loans declined less than one per cent monthly. The card-issuing banks predicted better interest rates and a better overall credit situation in the coming years. European Union candidateship also contributed to this optimistic behavior of the interest rates. Moreover, the central system had started to collect the credit card histories of consumers, giving the issuers better tools to assess their customers and to plan their future for a longer horizon. Key Trends and Developments, 2002 to 20077 Between 2002 and 2007, the number of credit cards had grown, due to an increase in launches, advertisements and promotions. For example, the launch of Garanti Bank’s Flexi card offered consumers the ability to determine their own credit limits, interest rates and card designs. On the other hand, mergers of financial institutions had slowed the growth of credit cards: when two institutions merged, their two credit cards became one credit card, representing the newly merged entity. Spending per transaction slowed from 2005, but continued to increase toward the end of the review period. This slower rate related to credit card transactions in sectors where consumers had shopping limits. For example, at gas stations, people were limited by the size of their fuel tank. In supermarkets, consumers usually purchased only as much as they could carry. However, promotions at supermarkets and gas stations increased the growth in spend per transaction in 2007. Positive Economic Conditions Increased Spending High interest rates and increasing credit card debts had the potential to lower consumers’ continuing use of credit cards; however, most consumers did not use their credit cards sensibly. Instead, many compensated their low incomes by using their credit cards and, ultimately, could not pay off their growing debts. Consumer problems with credit cards in 2003, 2004 and 2005 resulted in changes in the law that restricted credit card limits, made it illegal for banks to increase limits without informing the consumer and increased both the penalties for late payments and the minimum payment required. The sector recorded a boom after this consumer problem in the middle of the review period. Since 2003, decreasing inflation and increasing purchasing power have influenced the level of consumer demand. Previously, consumers tended to see credit cards as a mechanism for spending limitless amounts of money. However, after 2003, many consumers experienced the side effects of irresponsible credit card spending. Good economic conditions allowed consumers to normalize their spending and realize the benefits of responsible credit card use. After the economic recovery began in 2003, consumers were able to spend more of their income because their purchasing power was stronger. However, spend per transaction also increased because consumers started to use more tools of the banking systems (e.g. using their credit cards for bill payments) and alternative banking channels. According to research conducted in 2006, by the Turkish Banking Association, credit card purchases accounted for more than 15 per cent of all consumption. Banks, following the positive economic conditions, started to lower their consumer credit interest rates. Consumers started to use cash to pay their credit card debts, which avoided the harsh financial penalties

7 Source: “Country Market Insight: Financial Cards-Turkey” Euromonitor International Ltd. London, UK, 2008.

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levied on late payments, thus allowing consumers to raise their level of credit card spending. After the crisis, people slowly started to consume again, aided by the use of credit cards, which helped people to regain their consumption habits. Mindful of their unpaid debts, many people stopped incurring further debt that was beyond their payment capacity. The Banking Sector Monitoring Board took precautions by restricting credit card limits, intervening with regard to banking interest rates and increasing the minimum payment required. According to the new regulations, credit card limits could be no more than double the income earned by the cardholder. The number of consumers unable to pay their debts started to grow at a much slower rate after these precautionary measures were introduced. Because of Turkey’s more stable economic environment, consumers were expected to be more responsible about their debts and to follow interest rates more closely, which was likely to fuel competition among banks. Promotion and Advertising Raised Credit Card Consumption Promotions and the availability of different payment options increased the demand for credit cards considerably, as consumers with no debt continued to use credit cards to benefit from gift promotions or extra points that were convertible to cash. Installment payment options, especially at gas stations, supermarkets and hypermarkets (large retail centers incorporating both a supermarket and a department store), encouraged credit card use among consumers who had difficulty in spending large amounts in a single transaction. Decreased growth in credit card transactions forced issuers to offer more attractive promotions, such as free reward miles and points that could be redeemed for a range of goods and services. Advertisements started to become one of the competitive tools of the companies. During recent years, celebrity endorsements, promotional incentives and television advertising became de rigueur for credit card companies in Turkey. To attract consumer attention, issuer and operator companies competed for the most attractive promotions, such as gifts and points that could be redeemed for money in return for a predetermined level of spending. Consequently, many people used their cards more frequently to qualify for these gifts. The marketing areas of financial card companies could be found at the most popular shopping outlets. Credit card companies started to enter into agreements with popular outlets to offer both installment payments and additional gift promotions. These outlets also functioned as advertising channels where companies could display their advertisements. The issuing companies also used newspapers and magazines to advertise the retail outlets where cardholders were eligible for discounts. The increasing promotions were expected to encourage credit card activity in new areas. For example, consumers were encouraged to use their credit cards for such tasks as bill paying and travel spending, which would greatly increase credit card spending. In one promotion, extra points (convertible to money) were offered to consumers who used paid their electric bills by credit card. Issuing companies were also expected to make deals with other utilities, such as natural gas and water companies, to introduce greater credit card payment options. According to Euromonitor International, more areas of the market would become subject to credit card promotions.

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Security Concerns Increased the Prevalence of Smart Cards In response to growing security threats from fraudsters, Turkey had begun to introduce chip and personal identification numbers (PINs) to increase consumer confidence. The chip and PIN system, launched in Turkey in June 2007, required consumers to enter their PIN in a point-of-sale machine before using their credit card. This system considerably decreased the incidence of credit card copying, the use of fake identities and stolen card activity. In advertisements, Okan Bayülgen, a famous Turkish actor and comedian, encouraged consumers to convert their cards to the chip and PIN system by contacting their issuing banks. Since the introduction of security precautions, more services began accepting payment by credit card. Telephone and credit card companies started to work together similar to the way banks operated, offering consumer credit by telephone. Also, because of the enhanced security, tourists were more likely to use their credit cards, especially in restaurants, where others were not present at the point-of-sale machine. Companies also upgraded their Internet operations to make them as secure as possible. In some banks, consumers accessed their Internet accounts using many passwords and/or PINs that were changed periodically. Because of consumers’ sensitivity to issues of confidentiality, companies started to compete on the quality of their security systems. Halk Bank, Garanti Bank and Akbank developed high-level security systems that protected their customers’ accounts from fraudulent activity. In addition to passwords, identification numbers and PINs, customers could also be asked to identify images they had previously defined in the system. When customers wanted to transfer money, they needed to order, via a cell phone text message, a temporary security number that expired in three minutes. Because fewer fraud operations meant better service and more consumer activity, companies were encouraged to upgrade their security technology frequently and to increase their spending on security applications. However, because security technology developments could quickly become obsolete as hackers caught up with the new technology, companies needed to develop systems with inherently high levels of security. Installment Payments Changed Consumer Spending Habits In many Turkish retail outlets, at the point of sale, consumers could choose to divide their payments into as many as 20 monthly installments, which allowed consumers to buy more expensive goods and pay only a portion of the price upfront. Such installment payments, which were only possible with credit cards, had led to many cardholders having quickly spent their limit of available credit. Moreover, this payment option also encouraged consumers to have more credit cards, which offered a multitude of promotions. Credit card issuer and operator companies earned huge profits from these installment payments and discounts. However, these features were changing consumer spending habits, binding people to payments for at least one year, which limited their other retail spending. The Banking Sector Monitoring Board expressed concern that a financial deadlock could occur for middle-income consumers who risked running out of credit. Some newspapers speculated about a government ban on payment periods longer than 12 months. As a result, longer payments periods, such as 20 months (as seen five years ago) were, in recent years, reduced to three months. The trends of installment paying and promotions were predicted to benefit the larger banks, which could afford discounts and installments. These larger issuer companies were also more likely to have better

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bargaining positions in their agreements with retail outlets. Longer installments were expected to be popular for payments of electrical appliances and holiday purchases, such as airline and hotel bookings. Promotions were predicted to be more applicable in supermarkets and gas stations, where consumers who spent a predetermined level qualified for gift promotions or points that were convertible to cash. Because of the large number of credit card accounts at their limits, bank-sponsored consumer credit loans were expected to increase. Cash spending was predicted to become more popular, especially in the household and textile sectors, where people tended to use their credit cards less frequently. Although for small purchases, consumers continued to pay by credit card, in general, people were expected to consume less. Retailers determined the prices of goods by considering the installment option. With increasing demand for fewer divisions, prices were expected to fall. Consumer Credit and Lending Total credit lending and consumer credit increased in 2007, due in part to the effects on the Turkish economy of the international financial crisis related to oil prices. These conditions resulted in decreased consumption and difficulties in paying debts. Installment payments could now be paid by credit card, and despite credit debts being included in credit evaluations, many people started to take out more consumer credit to pay their debts before the economy worsened. Moreover, because of banks’ increased information technologies infrastructure, the consumer credit evaluation process was easier and less time-consuming. Credit applications could even be arranged via cell phone message systems. Companies started promotions to offer more credit and to attract more credit applicants. Additionally, Turkey’s high rate of consumer lending was due in part to high unemployment rates: unemployed people often applied for consumer credit to fund their current needs with the hope of paying back their debt after finding a job. Banks decreased their consumer credit interest rates both to compete with each other and to attract more consumers. Banks even offered consultancy services to plan consumers’ total financial needs. Garanti Bank, for example, offered a credit limit equal to 10 times a consumer’s income, and Vakif Bank set its interest rates three points lower than other companies. Competition focused both on advertising how companies’ options exceeded their competitors’ in terms of consumer credit loans and on payment strategies that could be changed at any time. E-commerce Consumers often preferred the shopping environment on the Internet, instead of shopping in person. Using the Internet, consumers could peruse an array of products described in detail, read product comments and reviews and share their own findings. Internet shopping also increased consumer knowledge of products and their prices. As a result, Internet transactions and purchases increased considerably: in 2007, the total number of Internet users in Turkey had reached 15 million, and the total size of e-commerce in Turkey was YTL2 billion8. Thus, companies in the credit card market and companies where customers shopped in person started to invest in Internet sales.

8 In 2007 YTL1.15 to YTL1.44 = US$1

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When using credit cards for online shopping in Turkey, customers could use their credit card to pay in full or in installments. Retailers’ websites were developed to include wider payment options, increased product portfolios, and better and swifter access to shopping areas. These companies invested in their payment systems, offering such features as confirmation by e-mail or cell phone text message, to enhance fast and secure shopping. Euromonitor International predicted high Internet credit card transaction growth of more than 50 per cent a year in the next five years. M-commerce Mobile commerce (m-commerce) referred to the buying and selling of goods using a mobile device, such as a cell phone or a personal digital assistant (PDA). Despite having been introduced in 2003, m-commerce, started to develop rapidly only in late 2006. Because of the increased number of airline customers and ticket buyers, m-commerce activities had significantly increased. M-commerce was particularly popular for purchases that needed to be transacted quickly, usually by telephone, which was more widely accessible than the Internet. However, although m-commerce seemed to be developing in Turkey, it still represented only a tiny fraction of the overall retail market. Companies that offered Internet sales would likely also provide m-commerce services in the future. In particular, some watchers predicted that companies that accepted Internet orders for lunch and dinner orders would soon turn to accepting telephone orders routed through call centers. However, without investment, m-commerce would remain negligible, because its costs were much greater than the costs of an Internet sales channel. M-commerce, which needed equipment and much human capital, was still only applicable to businesses whose services were required within a limited timeframe, such as airline tickets, theater tickets and concert tickets. In other businesses, m-commerce was not expected to develop due to the increased focus of companies on e-commerce, which provided both marketing and sales. Automated Teller Machines and Point-of-Sale Terminals Turkey was home to more than 17,000 automated teller machines (ATMs), many of which were installed because of industry players’ desires to reach every consumer and to attract potential consumers. Free-standing ATM kiosks began to replace the previous system of kiosks located near banks. The new ATMs offered customers more functions than before: consumers could pay their bills, buy Global System for Mobile communications (GSM) accounts, buy bonds and make electronics fund transfers (EFTs). These added services increased consumers’ usage of ATMs and led to the installation of even more ATMs to meet the rising demand. ATMs appeared in even less developed regions, such as rural areas and the undeveloped eastern regions of Turkey. These locations provided companies with access to more potential consumers. When an ATM was situated in a rural area, even when no banks were available locally, consumers were more likely to have bank cards or credit cards. ATM services sometimes could not carry the business load in crowded locations and ran out of cash or broke down. Whereas bigger companies could provide better technical support systems and networks, in rural areas, the time needed to solve a problem or malfunction was much longer than for ATMs in busy urban locations. Companies were expected to invest more in ATM transactions because, especially in urban settings, consumers needed both the fastest transaction channels and the highest levels of security.

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Cash Withdrawal vs. Card Purchases According to the Interbank Card Center (in Turkish, Bankalararasi Kart Merkezi, or ICC), 15 per cent of transactions were for cash withdrawals and the remaining 85 per cent were card purchases. When credit cards were used for cash withdrawals, consumers incurred both a cash usage commission fee and an interest rate that could be punitively high if the sum withdrawn was not paid back quickly. On the other hand, some companies, such as the Garanti Bank issuer company, offered the option of installment payments to repay cash withdrawals. Compared with cash withdrawals, credit cards were more frequently used for purchasing because most people thought of credit cards as tools for shopping. In grocery and gas station retailing in particular, credit card companies named their cards with specific retailers that offered more installment payments or discounts to customers of that issuer’s credit card. This promotion was expected to bring dynamism into card purchases at the expense of cash withdrawals. Credit card purchases were expected to continue to be popular in the future. Increased Number of Mergers Led to Dynamism and Stability The Turkish banking industry had been working through a period of consolidation in an effort to boost efficiency and stability in the post-crisis era. A series of high-profile mergers and acquisitions had taken place, most notably in the credit card sector. Once the banks had stabilized after the effects of the 2001 crisis, they started to merge their systems either totally or only in their card systems or ATM systems. This activity started a movement towards standardization in the banking system and helped with the move toward high-quality service. In some cases, however, the merger of two banks — neither of which previously had an efficient system — did not guarantee that the new system would be efficient. BankEuropa started to convert its credit cards to the World Card, owned by Yapi Kredi and was followed by Koçbank in late 2006 and by one of Turkey’ small banks, Millennium Bank, in 2007. Oyak Bank and Isbank struck a similar agreement to convert Oyak’s cards to Isbank’s Maximum Card in 2007, as did one of the biggest banks, Ziraat Bank, also in 2007. Denizbank was merged with Dexia and also converted its credit cards to Garanti Bank’s Bonus Card in early 2007. Later the same year, Garanti Bank forged similar credit card usage agreements with Turk Ekonomi Bank and Seker Bank. Garanti Bank merged with General Electric and Disbank was taken over by Fortis Bank in late 2006. All these mergers were expected to both stabilize the banking sector stable and pave the way for greater credit card usage. The Competitive Landscape Garanti Bank continued to be the leader among the acquirers. Garanti Bank’s Bonus Card and Flexi Card could be easily distributed to consumers, helping the bank to maintain second place among the issuers. Among the operators, Visa preserved its leadership in credit card volume and value transactions and cemented its leadership in the number of cards. E-Kart, which had the majority share among manufacturers, increased its share even more. Visa recorded the biggest increase in personal credit card volume. The company started to increase its share in credit card transactions in 2003 and held the leading position in the number of cards. Visa advertisements were influential, as evidenced by Garanti Bank’s successful promotions of its Shop&Miles card, which targeted a premium image for the Visa card users.

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In 2006, Axess card by Akbank was relaunched, offering new payment opportunities. The company increased its advertisements, which featured the famous Turkish actress Özgü Namal, who emphasized the advantages of the Axess card through small sketches that illustrated how an ordinary girl’s life was changed by her Axess card. HSBC increased demand for its Advantage card with advertisements targeted at the middle-aged working population that sought the highest promotions for credit cards. Garanti Bank’s Flexi card advertisement selected Tugba Ünsal, one of Turkey’s leading models, to attract attention to the new concept of its card. In late 2006, Denizbank launched the Sea&Miles card, which offered sea miles that could be redeemed for sea transportation, a popular activity in Turkey. In 2006, Garanti Banki launched its new Flexi card, which allowed consumers to determine their own limits, designs, interest rates and installment numbers. Multinationals Visa and MasterCard dominated the operators, while issuers comprised a few multinational banks led by HSBC. Many banks were set to merge with multinationals in the forecast period. Multinational companies were not dominant among the issuers, however, and the majority of all manufacturers and acquirers were domestic players in Turkey. American Express cards were available in Turkey, but not as charge cards, only as credit cards. In 2006, Garanti Bank took over from Akbank the rights for issuing American Express cards and started to issue the cards as credit cards that could only take advantage of discounts if the cards were used in point-of-sale machines as credit cards (see Exhibit 4 for a breakdown of credit card market shares). Summary In 2007, 21 per cent of Turkish population held an average of 2.2 credit cards, less than the European average of three to four cards. On the other hand, credit card usage in Turkey was significantly higher (98 per cent) than debit card usage (two per cent). The shares of card usage in individual and household consumption were 7.1 per cent and 19.7 per cent, respectively. AKBANK9 Akbank was founded in Adana, Turkey, in January 1948, to provide financing for the cotton producers in the region. In 1950, Akbank opened its first branch in Istanbul, where it relocated its headquarters in 1954. After rapidly increasing the number of its branches, Akbank automated all banking operations in 1963. Akbank pioneered Internet usage by launching, in 2000, the Commercial Internet Branch, which targeted small and medium-size companies and by opening, in 2001, its English-language Internet branch for foreign customers. Together with its core banking activities, Akbank offered a wide range of retail, commercial, corporate, private banking and international trade financial services. Non-banking financial services, as well as capital market and investment services, were provided by the bank’s subsidiaries. Akbank operated through its headquarters in Istanbul and from its 13 regional directorates within Turkey. With a strong and extensive distribution network that included 682 branches and 12,333 employees, Akbank provided services beyond traditional distribution channels through its innovative branches, such as

9 Source: Akbank website www.akbank.com, accessed June 2008.

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“Credit Express” branches (which extended only consumer loans), “Big Red House” branches (which extended only mortgage loans), as well as through nontraditional channels, such as Retail and Corporate Internet branches, the Telephone Banking Center, 1,615 ATMs, 641 Akbank’s brand of ATM (BTMs), 233,520 POS terminals and through cell phones and web platforms, which utilized the latest technologies. In addition, a Freedom Banking Area had been set up within branch premises to offer customers banking service access via the Internet and telephone. Akbank’s overseas operations were managed by Akbank NV in the Netherlands, Akbank AG in Germany and a branch in Malta. On January 9, 2007, Akbank and Citigroup successfully completed their strategic partnership agreement, in which Citigroup acquired a 20 per cent equity stake in Akbank for approximately US$3.1 billion (YTL0.095 per share). At year-end 2006, Akbank’s net profit was YTL1,600 million (approximately US$1,131 million), and total assets reached YTL57,273 million (approximately US$40,476 million). Akbank’s capital adequacy ratio of 20.7 per cent was one of the highest in the sector. In 2006, Akbank continued to obtain loan facilities from overseas markets at favorable terms; the amount of these funds reached US$6,422 million. Akbank was recognized as the “Best Bank in Turkey” five times by Euromoney and three times by The Banker and was ranked as Turkey’s most valuable bank, after having achieved the most profitable banking operations among privately owned banks in Turkey in 2007 (see Exhibit 5 for Akbank’s selected ratios). AKBANK’S CREDIT CARD DIVISION Akbank was among the largest participants in the payment card industry in Turkey, offering both credit cards and debit cards. In September 2000, Akbank transferred its credit card business from its mainstream operations to a newly incorporated, wholly owned subsidiary, in an effort to enhance the bank’s marketing strategy and provide customers with higher quality services. The Akbank Credit Card Division was managed by a senior vice president and staffed by a total of 23 employees. Akbank was one of the pioneers in the credit card market in Turkey and continued to offer a variety of card options to customers: Visa (Gold, International and Domestic), MasterCard (International, Domestic and e-Card) and co-branded cards in conjunction with MasterCard. Credit Risk Management Akbank’s Retail Credit Approval Department was responsible for the allocation and monitoring of credit cards, consumer loans and micro business credits. The department aimed to implement the credit approval processes on the basis of minimum cost, minimum risk and maximum speed; it assessed credit based on decision models developed through data and statistical modeling and on business flows that fit customers’ characteristics. On January 1, 2005, Akbank finalized a project to establish a fast and accurate credit card allocation system encompassing systematic assessments and automatic credit decisions. Effective credit decisions and limit allocations were determined by queries on Consumer Credit Bureau information and investigations of other banks’ data on customers’ usage of credit-based consumer products, which were modeled on a decision tree. As a result, Akbank’s ratio of non-performing loans (NPL) in 2006 was 2.1 per cent, significantly lower than the average ratio of 3.6 per cent in the banking sector in Turkey.

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Market Segmentation Strategy Akbank’s credit card customer segmentation was initiated in 2004, when Akbank started tracking the spending cycles and habits of cardholders in each segment to enable the bank’s promotional activities to focus on customers’ expectations. To achieve this goal, Akbank’s credit card portfolio was reorganized to address the needs of different customers. Another segment of customers held co-branded CarrefourSA and Yimpafl cards, which entitled cardholders to specific benefits at these retailers. At the same time, these cards give member merchants the opportunity to provide their customers with superior service while generating cross-selling opportunities. The co-branded cards created retail synergies within the Sabanci Group and offered customers more attractive payment conditions. Under a cooperative agreement between CarrefourSA and ChampionSA, Turkey’s leading hypermarket chains, consumers with CarrefourSA credit cards were entitled to discounts when shopping at ChampionSA and were eligible for enrollment in installment payment plans. Points earned when shopping with these cards could be exchanged for gift checks redeemable in any CarrefourSA store. Other valuable cardholder campaigns were continuously being promoted by CarrefourSA. AXESS CARD In November 2001, Akbank launched the Axess card, based on the so-called “smart card” technology that recognized consumer preferences and spending habits and offered personalized benefits. Axess was the first credit card in Turkey to accumulate cash through purchases; the cash could then be used immediately for new purchases. Axess also offered discounts at contracted stores, campaign sales and other surprises. More than 200 contracted brands were available at advantageous terms to Axess cardholders at more than 3,000 sales outlets. Within almost a month of its launch, the number of Axess cardholders had reached 200,000, a record number in the credit card market. In 2003, thanks to the success of the Axess card, Akbank strengthened its position in the plastic card market in Turkey and had the greatest increase of any bank in Turkey in its market share of the number of cardholders. Developed according to consumer preferences, Axess quickly became an outstanding market success. MasterCard International acclaimed it as the fastest-growing credit card brand in Turkey and Europe in 2002. As of year-end 2002, Akbank had approximately two million credit cardholders, a year-on increase of 96.7 per cent that raised the bank’s share of the credit card market from 6.3 per cent to 12 per cent. Thanks to innovative and successful personalized marketing, Axess had gained 750,000 new card customers, increasing Akbank’s penetration of the retail banking market. Axess’s ground-breaking market penetration strategies and practices in 2002 made this card a role model, and its features were being imitated by competitors. By the end of 2002, the Axess network of participating businesses encompassed 1,800 brands and 14,000 retail sales outlets, thanks in large part to strategic cooperation with such leading brand names as BP and Migros. In 2003, the Axess turnover increased 193 per cent, three times the sector’s growth rate in Turkey. By 2004, Axess was the fastest-growing credit card in the market with growing numbers of cards and member merchants. Rapidly, Axess developed the largest member merchant network in the installment-based credit card sector and positioned itself well ahead of other cards because of its cardholder benefits and its various privileges and promotional campaigns. Diversified in a parallel manner among different customer segments (Classic, Gold and Platinum cards), the number of Axess cards issued grew by 86 per cent reaching nearly three million in 2004. Axess demonstrated a real increase of 90 per cent in 2004 in turnover, achieving the highest growth in terms of turnover market share in the sector.

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In the space of just four short years after its introduction, the number of Axess cards issued surpassed three million in 2005. With close to 160,000 points of sale in early 2007, Axess had the most widespread merchant member network in Turkey. The Wings Card The Wings credit card was launched in March 2007, with the slogan “Turkey’s easiest card to fly with.” The only card having “black” status, The Wings was Akbank’s new travel and entertainment credit card with the most comprehensive miles program ever launched in Turkey. Miles were instantly earned on every purchase at the rate of one mile per YTL1 spent. Miles could be redeemed with any airline without blackout dates. Unlike most flying programs, all ticket taxes were included, and miles were earned even on the free, miles-funded, flights. The Wings card was the only credit card offering both miles and cash points, which could be converted to miles. This card met with customer appreciation due to its advantageous miles program, which doubtlessly helped it exceed the bank’s year-end sales target of 150,000 cards. The Axess Loyalty Program The main pillar of the Axess loyalty program was “chip-money” — a feature offering instant cashback on purchases, allowing the customer to enjoy instant earnings in both Axess-affiliated and non-Axess-affiliated merchant stores and in other Axess-enabled alternative channels. One chip-money was equal to one Turkish lira (YTL). Buying from merchants affiliated with Axess presented customers with a double advantage: earning more chip money (up to 20 per cent of the purchase value) than in non-affiliated merchant locations and the ability to redeem the money instantly. Chip-money was funded 82 per cent by the merchant, and the balance was funded by Akbank. Chip-money received for purchases from non-affiliated and international merchants was funded by Akbank only. Axess loyalty program created advantages for all the three parties participating in the process: customers, merchants and Akbank. To create shopping convenience for the customer, Axess offered up to 12 months of interest-free installment payments and cash flow management tools, such as cash advance and balance transfer. During special marketing campaigns, customers were able to earn more chip-money, especially if they increased their purchase frequency and volume at a particular merchant. Additionally, customers had a wide range of value-added services available, such as utility payments, “yellow line” concierge services supported by 450 customer service representatives, access to an airport lounge, valet parking and shuttle services at the Istanbul and Ankara airports, and information services accessed via mobile phones. Although merchants funded chip-money and the cost of funding the installments, they benefited amply from higher traffic and sales. As a result, the number of participating merchants increased dramatically from 1,700 in 2001 to 143,000 by mid-2007. Two-thirds of merchants with Akbank’s POS equipment had joined this program. In addition to increasing their sale volumes, merchants also benefited from extensive customer relationship management (CRM) support to track customer behaviors, cross-campaign opportunities between merchants (e.g. BP and Carrefour) and an opportunity to organize instant sales promotions and discounts and stronger customer loyalty. Merchant initiatives were supported by 54 merchandisers and supervisors who conducted more than 23,000 merchant visits per month. More than 15,000 merchants were reached via the Axess Interactive Incentive program, which, since 2005, had offered training and conferences, and a merchant support web site, launched in 2007.

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The Axess loyalty program helped Akbank to generate a sustainable profit in an increasingly competitive environment by increasing per card spending (33 per cent above market average in Turkey), improving customer loyalty (attrition rate of less than five per cent), reducing customer acquisition costs and enabling cross-selling opportunities with banking products (70 per cent of Akbank customers were Axess members). As a result, the Axess card became one of the bank’s most profitable products. Differentiating Initiatives Market research conducted in 2006 showed that the Axess brand identity was strongly established as a life companion, characterized as trustworthy, innovative and most advantageous in clothing purchases. The card and its advertising campaign were most recognizable for research participants. Axess’s advertising campaigns achieved their effectiveness by aiming at a specific marketing goal. Chip-money campaigns proved to be an effective way to increase volume among affiliated merchant network, whereas gift-based campaigns were preferred by customers who were sensitive to instant rewards. Extra installment campaigns were particularly effective for the textile sector, while extra GSM air-time campaigns were popular among food and oil merchants. The Axess Exi26 credit card was launched in 2005 to meet the demands and needs of the youth segment and was marketed at universities. The following year, Axess started a new system in Turkey that enabled users to earn TeknoPuan (Techno Points), in addition to chip-money. Customers who reached a predetermined level of TeknoPuan could buy select electronic equipment at a special discount and using installment schemes. Since 2005, the Platinum Mile Program, a unique program for Axess Platinum cardholders, had been giving upscale customers the opportunity to earn mile points, as well as chip-money, to qualify for free airplane tickets. Thanks to these differentiated services offered to the higher-income group, the share of this segment captured by Axess had grown rapidly. In 2006, Akbank launched some innovative products and services in response to the needs and expectations of customers. Installment Cash Advance met Axess cardholders’ cash needs instantly through alternative distribution channels and offered advantageous interest rates for installments. Installment Debt Transfer enabled Axess cardholders to transfer their debt on other banks’ credit cards to their Axess credit card and offered installment payments at advantageous interest rates. Offering services that could make customers’ lives easier was another innovative effort implemented in 2006. The services offered as a part of Axess Assistant Services were further enriched after the launch of Axess Driver Service in February. Axess Yellow Line was enhanced to offer customers much more comprehensive services. In 2007, Akbank began extending instant consumer loans from its affiliated retailers as well as its branches, using the unique Axess Consumer Credit feature. Launched in April, Axess Consumer Credit allowed customers to make regular consumer loan payments through Axess, increased cross-selling possibilities and provided great convenience for the bank’s customers. As a first in Turkey, Akbank launched its Instant Card Issuance application in May and, at select branches, began issuing ready-to-use cards in only seven minutes. This innovation was met with great interest at the CardIst, Compex and Cebit trade fairs. Currently available in 25 Akbank branches, the Instant Card Issuance innovation was expanding to more branches each day. Akbank developed innovative application channels for its credit cards during 2007. For example, consumers could submit their Axess and Wings credit card applications within three minutes via the Internet, a short message service (SMS) or through the 444 00 11 Credit

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Hotline. In addition, Akbank launched the instant temporary credit card application at Credit Express branches located in certain member retailers. In 2007, Akbank’s focus on customer relations and minimizing customer loss led to structured programs and reacquisition campaigns to retain Axess and Wings customers or to persuade lapsed customers to return. In 2007, Akbank continued to offer services to make customers’ lives easier. Content of the Axess Assistant Services was further enriched and all customers began receiving much more comprehensive services with Axess Yellow Line. Through Installment Cash Advance, Axess cardholders could meet their cash needs instantly using the alternative distribution channels and repaying it in installments at suitable interest rates. With the Installment Balance Transfer feature, customers could transfer debt from another bank’s credit card to an Axess credit card with favorable installments (see Exhibit 6 for selected Akbank credit card data). CURRENT SITUATION AT AKBANK CREDIT CARD DIVISION Although overall the Axess card had been a success story since its inception, much uncertainty surrounded this business on different levels. Government stability and positive macroeconomic trends provided a continuous opportunity for growth; however, new regulations and increasing local and international competition put pressure on profitability. Sector Growth Prospects Credit cards were expected to enter a phase of slow growth, which was related to stabilization in the sector and the passing of the first boom caused by massive innovations and investments after the recovery of the economy. Moreover, government regulations on credit card usage, such as restrictions on card limits and higher minimum credit card debt payments for all credit cards, were expected to reduce unconscious credit card usage. Overall, the credit card sector expected to see trends toward manageable debts, conscious spending, and a higher quality of service and security. New applications for credit cards were expected to be introduced, including for public transportation fares as well as for payment of electric, telephone, water and natural gas bills. The chip and PIN system, which was introduced in the late review period, was expected to increase credit card usage as consumers gained trust in the system’s security features, which were intended to reduce fraudulent activity. Credit card transactions were expected to rise as a result of more home delivery options and greater Internet usage. Internet credit card usage was expected to be boosted by more secure systems, more installment options, better promotions and Internet advertisements. In the forecast period, financial institutions were expected to make greater investments in research and development, innovation and promotional activities. The favorable credit atmosphere was expected to attract acquirers to enter into intense competition in bringing the latest technology to Turkey. Market Consolidation Among the issuers, companies were expected to be more limited over the forecast period due to credit card usage merger agreements and wholesale mergers, such as that of Yapi Kredi Bank and Koçbank. Major banks that were expected to enter into competition were the Isbank, HSBC, Garanti and Yapi Kredi issuer

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companies. Garanti was favored to take the leading position in the forecast period because of the strength gained through its merger with General Electric. However, Yapi Kredi’s merger with Koçbank, the biggest holding group in Turkey, was predicted to boost Garanti Bank in the fiercely fought competitive environment. Garanti Bank took the distribution and issuing of American Express from Akbank. American Express was expected to have a higher share in total credit cards. European Union Accession Turkey’s candidacy to the European Union (EU) increased the significance of the country’s credit card market. Foreign banks took an increasing share in this flourishing market through mergers and acquisitions. This trend was expected to accelerate even more in the near future. According to 2004 statistics, credit card usage grew 14 per cent in the Euro zone and 34 per cent in Turkish credit card market.10 Defaults on credit card debt in the European market of 4.5 per cent was higher than the Turkish market at 1.67 per cent. The high interest rate spread together with low default rates provided substantial profit opportunities for credit card issuers in the Turkish market and was one of the reasons for the increasing appetite in recent years of the international banks to acquire Turkish banks. HSBC quickly bought a credit card network (Advantage Card) after entering into the Turkish financial markets. Another international financial giant (General Electric) became the equal partner of the second-largest issuer in the Turkish credit card market. Government Intervention in the Credit Card Business11 Although the credit card business remained the highest-yielding banking product in Turkey, falling interest rates on credit card loans and possible abolishment of annual fees on credit cards had created uncertainty in the sector. The Central Bank had recently lowered the interest rate cap on credit card lending from 4.93 per cent to 4.54 per cent, thus curtailing the yield on credit card loans, which was likely to edge down from 36 per cent possibly to 32 per cent. At first glance, Yapi Kredi Bank and Garanti Bank, which dominated the credit card market, were expected to suffer the worst impact. Isbank and Akbank also commanded a significant presence in this market, and their yields were also expected decline with the lowering of the credit card interest rate. The abolishment of the annual fee on credit cards was currently under consideration. If this proposed change were to become law, Yapi Kredi Bank and Garanti Bank would likely be most affected, by virtue of their commanding presence in the market. Isbank and Akbank were also likely to suffer, but not to the same extent. Issues with Co-branded Cards According to the academic research,12 brands can and do serve as valuable relationship partners, and brand behavior reflects the degree and depth to which consumers link brands with concepts of self and identity.

10 Euromonitor International: Credit Card Transactions 2002-2007 London, UK, 2008. 11 Sadrettin Bagci, Turkish Equities: Banks (Sector Update) FinansInvest , Istanbul, Turkey, April 21, 2008 12 Susan Fournier, “Consumers and Their Brands: Developing Relationship Theory in Consumer Research,” Journal of Consumer Research¸ Vol. 24 No. 4, pp. 343–373.

Page 23 9B09M002

To this extent, brands are often considered a meanings-based communication system used to portray who we are and what we want people to think of us. Brands can only be understood within the broader context of people’s lives and experiences. At the same time, many loyalty programs appear unrelated to the cultivation of customer brand loyalty and the creation of customer assets. The key idea is that firms must commit to their customers and establish a satisfied customer base. The customer base, in turn, becomes a valuable asset that provides substantial benefits in the future. True loyalty programs invest now for the future, commit now to the customer and trust rather than demand trust. However, many loyalty programs fail because they produce liabilities rather than assets.13 These programs often produced short-term revenue while producing substantial future obligations to customers. In 2005, Garanti Bank’s loyalty program rebated YTL222 million in bonuses and disbursed the equivalent of YTL172 million in free purchases.14 Rather than demonstrating trust by committing to the customer, the firm asked the customer to trust that, in return for current revenues, the firm would provide future rewards. If true brand loyalty created an asset, the customer would need, over time, to form an attachment to the brand, which might stem from such factors as learning, increased switching costs, habit or customization. Credit Card Division Strategy To develop a sustainable growth strategy, the management of Akbank’s credit card division needed to answer the following questions: Given this unpredictable environment, what factors should be taken in consideration when designing a strategy? In what areas should the next growth opportunities be planned? Should other countries in the region be targeted? What criteria will most accurately assess potential market opportunities elsewhere?

13 Steve M. Shugan, “Brand Loyalty Programs: Are they Shams?” Marketing Science, Vol. 24 No. 2, pp. 185–193. 14 Yasemin Balaban, “Pazar 5 Yilda 4’e Katlandi,” Capital, July 1, 2005, accessed June 2008. http://www.capital.com.tr/haber.aspx?HBR_KOD=2954, accessed June 2008.

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Page 25 9B09M002

Exhibit 2 MARKET POTENTIAL FOR FINANCIAL SERVICES IN SELECTED COUNTRIES AND IN SELECTED

TURKISH COMMUNITIES

2007 US$ mln Turkey US $ mln % of region

% of globe

Germany 25,530 2007 5,015 3.01% 0.89% United Kingdom 19,305 2008 5,239 3.06% 0.90% France 18,644 2009 5,472 3.11% 0.90% Italy 16,524 2010 5,715 3.17% 0.91% Spain 9,534 2011 5,970 3.22% 0.92% Russia 7,067 2012 6,235 3.27% 0.93% Netherlands 5,424 Turkey 5,015 Poland 4,628

Pakistan 3,476 Turkey, 2007 US $ mln

% of country

Switzerland 3,285 Belgium 3,233 Istanbul 1,927 38.4 Sweden 3,227 Izmir 602 12.0 Egypt 3,189 Ankara 577 11.5 Saudi Arabia 3,143 Bursa 298 5.9 Ukraine 2,900 Adana 266 5.3 Austria 2,685 Mersin 233 4.7 Iran 2,621 Antalya 227 4.5 Norway 2,365 Konya 204 4.1 Greece 2,326 Samsun 122 2.4 Denmark 2,260 Gaziantep 114 2.3 Portugal 1,922 Kayseri 100 2.0 Czech Rep. 1,739 Diyarbakir 99 2.0 Finland 1,735 Eskisehir 98 2.0 Romania 1,689 Sanli-Urfa 79 1.6 Ireland 1,592 Malatya 69 1.4 Israel 1,295 Kazakhstan 1,174 UAE 774 Uzbekistan 475

Source: Philip M. Parker, The 2007-2012 World Outlook for Financial Services , ICON Group International, Inc., San Diego, CA, 2006,

Page 26 9B09M002

Exhibit 3

THE CREDIT CARD SECTOR IN TURKEY

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Disposable Income (YTL mln) 162,616 212,492 243,816 254,855 264,100 272,865Consumer Credit (YTL mln)Total lending 24,140 46,453 99,082 152,302 178,996 190,000 Consumer credit balances 14,317 23,749 40,457 62,334 68,086 75,000 Consumer credit outstanding 3,317 10,482 19,344 32,217 37,000 34,000 Credit card outstanding 2,774 8,275 18,749 28,265 35,000 28,500Value Lost to Fraud (YTL mln) 7 24 22 24 20 12 Counterfeit cards 3 10 10 11 10 6 Card stolen or lost 2 7 6 6 6 3Total Credit Cards SectorNumber of transactions (mln) 636 829 1,133 1,300 1,348 1,395 1,482 1,578 1,687 1,808 1,943 Transaction value (YTL mln) 25,613 39,414 64,627 85,281 112,099 122,419 131,927 142,307 153,652 166,212 180,135 Personal Credit Cards Number of transactions (mln) 630 821 1,122 1,287 1,334 1,380 1,467 1,562 1,672 1,792 1,926 Transaction value (YTL mln) 25,357 39,020 63,981 84,428 110,978 121,195 130,648 140,969 152,247 164,731 178,569 Corporate Credit Cards Number of transactions (mln) 6 8 11 13 14 15 15 16 16 16 16 Transaction value (YTL mln) 256 394 646 853 1,121 1,224 1,279 1,338 1,405 1,481 1,567 Smart Cards (mln) 7 12 14 18.1 26 35 47.3 64 84.5 109.9 140.6

Expenditure by Sector, 2007 Credit Card Debit CardGrowth rates, % 2006/07 2002-07 2002/0712 CAGR 2007/12 Food and drink 8,814 144

CAGR TOTAL CAGR TOTAL Motoring 24,484 229Total Credit Cards Sector Other retailers 37,950 699Number of transactions 3.5 17.0 119.3 6.8 39.3 Financial 4,285 19Transaction value 9.2 36.7 378.0 8.0 47.1 Other services 6,733 68Personal Credit Cards Household 6,121 57Number of transactions 3.4 17.0 119.2 6.9 39.6 Mixed business 17,016 212Transaction value 9.2 36.7 378.0 8.1 47.3 Travel 2,693 68Corporate Credit Cards Clothing and footwear 12,854 302Number of transactions 4.9 18.6 134.4 1.6 8.2 Entertainment 122 28Transaction value 9.2 36.7 377.9 5.1 28.0 Hotels 1,347 64Smart Cards 34.6 38.0 400.0 32.1 301.8 Total 122,419 1,890

ForecastActual

Actual Forecast

Note: YTL mln= millions of yeni türk lirasi (in English, new Turkish lira); CAGR=compound annual growth rate. Source: Euromonitor International, 2008.

Page 27 9B09M002

Exhibit 4

CREDIT CARD MARKET SHARE BREAKDOWN

Units Volume Units Volume Units Volume

Akbank 10.5% 13.5% 9.7% 13.7% 11.2% 17.1%Denizbank 3.2% 2.2% 4.6% 2.3% 4.8% 2.1%Finansbank 7.6% 5.4% 7.8% 5.6% 8.3% 5.3%Fortis Bank 10.5% 13.5% 9.7% 13.7% 11.2% 17.1%Garanti Bank 15.6% 20.5% 16.7% 22.0% 18.0% 24.2%Isbank 11.8% 13.6% 11.0% 12.7% 12.0% 13.0%Sekerbank 1.5% 1.2% 0.7% 0.5% 0.6% 0.5%TEB 0.3% 0.2% 0.3% 0.2% 0.3% 0.2%Vakifbank 6.8% 3.7% 6.7% 3.3% 6.0% 2.8%Yapi Kredi 17.2% 23.7% 19.0% 23.7% 20.2% 26.5%

YE 2004 YE 2005 YE 2006

Source: Haluk Akdogan “Turkish Banks” ING Equity Research, London, UK, July 2007

CREDIT CARDS VOLUME TRENDS

Cards, thousands 2002 2003 2004 2005 2006 Avg. Monthly Rate(APR) in 2004

Yapi Kredi 2,300 2,870 3,199 5,359 6,886 7.47% (137%)Garanti Bank 1,970 2,300 2,325 4,496 5,837 7.39% (135%)Isbank 1,404 1,887 3,143 3,297 3,880 6.99% (125%)Akbank 970 1,450 1,784 3,700 3,644 6.90% (123%)Finansbank 1,011 1,123 1,217 1,722 2,223HSBC 1,070 1,240 1,567 1,914 1,922Vakifbank 786 975 1,125 1,270 1,883Denizbank 630 960 1,120 1,394 1,514Disbank 381 730 800 894 1,060Turkiye Cumhuriyeti 250 400 890 963 1,011Halk Bank 440 578 875 937 894Citibank 200 260 430 493 598Oyak Bank 250 270 301 356 381Koçbank 280 350 600 692 -Others 3,568 4,342 7,156 2,298 498Total 15,706 19,863 26,681 29,978 32,433

Note: YE=year-end; APR=annual percentage rate Source: Country Market Insight: Financial Cards-Turkey Euromonitor International Ltd. London, UK, 2008.

Page 28 9B09M002

Exhibit 5

AKBANK: SELECTED RATIOS1

Sep 2004 Dec 2004 Mar 2005 Jun 2005 Sep 2005 Dec 2005 Mar 2006 Jun 2006 Sep 2006 Dec 2006Balance sheet ratios (%) Loans to assets 36 37.1 36.7 38.3 40 42.2 46.9 49.4 48.6 49.5Bond portfolio to assets 45.3 43.6 41.5 41 43.9 38.4 34.1 35.9 35.1 35.6Loans to deposits 58.8 65 63.1 63.4 63.3 70.3 76.2 77.9 76.6 82.9Equity to assets 17.6 17.8 16.3 12.6 12.3 12.1 12.2 11.1 11.8 12.3Asset quality (%) NPLs as % of gross loans 1.3 1.6 1.7 1.7 1.7 1.6 1.6 1.6 1.8 2.1Coverage 100 100 100 100 100 100 100 100 100 100Accrued interest on loans 1.4 1.5 1.6 1.5 1.6 1.2 1.3 1.6 1.7 1.7Non core stakes to assets 0.1 0 0 0 0 0 0 0 0 0Fixed assets to assets 1.9 1.9 1.7 1.4 1.3 1.3 1.2 1.2 1.2 1.2Earnings quality (%) Loan interest as % of total 40 43.6 53.3 52.7 51.8 52.2 56.6 59.3 59.1 59.7Fees as % of revenues 11.7 12.4 16.5 17.2 16.9 17.2 17.8 20.3 20.9 21.5Trading as % of revenues 6.5 9.5 4 5.3 5.9 6.3 7.2 0.1 1.9 3.9Cost income (%) Cost income ratio 28.5 33.3 32 30 33 35.8 31.3 36.4 38.7 42Cost to NII plus fees 32.1 38.7 35 33.3 37.2 41.1 38.3 41.8 43.6 47.1Fees coverage of cost 41 37.1 51.5 57.5 51.2 48 56.8 55.8 53.9 51.2Profitability (%) NIM 8 7.6 7 6.3 5.6 5.3 5 4.8 4.6ROE 18.1 19.1 21.4 21.2 23.9 26.1 25.5 24.5 24.4ROA 3.2 3.3 3.4 3.1 3.1 3.2 3 2.9 2.9Sequential growth (%) Loans 12.5 9 7.2 23.3 13.8 13.6 10.8 13.2 -1.5 3.7Deposits 3.6 -1.5 10.3 22.9 13.9 2.2 2.2 10.8 0.2 -4.2Assets 7.3 5.9 8.4 18.1 8.9 7.7 -0.3 7.6 0.2 1.7Net interest income 11.4 -6.5 -7 11.9 -0.4 -6.6 3.8 -2.8 -4.3 4.8Fees and commissions 0.4 39.4 -5.3 27.9 -8.3 12.1 3.8 15.5 -8.6 15.3Net income 28.8 -61.8 157.4 21 -16.7 -13.8 63.7 -15.5 -25.6 14.7Productivity (YTLm) Loans per branch 18.6 20.2 21.4 26.5 29.8 33.5 37.1 41.2 40.5 41.5Deposits per branch 31.7 31.1 34 41.8 47 47.7 48.7 52.8 52.9 50.1Loans per employee 1.15 1.24 1.33 1.56 1.75 1.98 2.18 2.38 2.28 2.3Deposits per employee 1.95 1.91 2.11 2.47 2.77 2.81 2.86 3.06 2.98 2.77Other Branch network 637 641 647 646 654 660 660 674 675 683Headcount 10,345 10,413 10,401 10,938 11,119 11,186 11,233 11,648 11,974 12,333CardsATMs 1,443 1,436 1,451 1,472 1,494 1,504 1,494 1,551 1,551 1,551Debit cards 3,880,620 4,110,217 4,277,480 4,492,473 3,968,892 4,200,223 4,283,771 4,437,140 4,437,140 4,437,140Credit cards 2,686,236 2,811,060 2,810,949 2,811,690 2,864,705 2,905,155 3,064,863 3,160,134 3,261,211 3,504,709Credit cards volumes (YTL m) 2,102 2,311 2,216 2,548 2,704 2,915 2,885 3,464 3,949 4,236

Note: NPL=non=performing loans; NII-net interest income; NIM=net interest margin; ROE=return on equity; ROA=return on assets; YTLm=YTL millions. 1 Source: ING equity research, London, UK, July.

Page 29 9B09M002

Exhibit 6

SELECTED CREDIT CARDS DATA

2005 2006 2007Credit cards with installments 721,057 1,176,535 1,396,197 Credit cards without installments 1,617,161 1,931,896 2,416,721 Personnel credit cards 8,252 12,373 16,890 Corporate credit cards 47,933 55,167 57,816 TOTAL CARD LOANS 2,346,470 3,175,452 3,887,624- Standard loans 2,203,734 2,963,888 3,651,369 - Close monitoring loans 142,736 211,564 236,255 - Close monitoring as % of total 6.1% 6.7% 6.1%

2007 % of totalPast-due up to 30 days 240,286 6.2%Past-due 30-60 days 84,419 2.2%Past-due 60-90 days 25,305 0.7%Loans under follow-up 280,451 7.2%Writen-off 41,499 1.1%

2003 2004CC operating income 271,713 271,713CC operating expense 204,682 179,004Net CC operating profit 67,031 92,709Profit margin 25% 34%

Note: CC=credit card Source: Compiled by the author from Akbank website www.akbank.com, accessed June 2008.

Akbank

Education

political sphere

countrys political

political stability

political uncertainty

political climate

credit card business

main political party

competitive credit card