PASHA BANK ANNUAL REPOT 2024

EXPLANATIONS ON ACCOUNTING POLICIES (Continued) VII. EXPLANATIONS ON EXPECTED CREDIT LOSS (Continued) Within the framework of the credit rating methodology, the Bank uses LGD ratios to be calculated by using the PDs corresponding to the external/internal ratings and the coefficient of approximation used within the framework of Basel and BRSA applications. In the calculation of the expected loss provision, for banks and central governments the ratings given by the internationally accepted independent rating institutions are taken as basis. For corporate loans and financial customers other than banks, internal rating model of the Bank are used to evaluate customers. In determining the internal rating grades, the rating scale published by independent credit institutions is taken as a basis, and sub-notches are used to better differentiate customers with low grade bands. In the determination of PD values, independent credit rating agency methodology based on the historical default rates and Bank’s calibration methodology with a forward-looking perspective taking macroeconomic expectations into consideration is used. For customers having a better rating than the Türkiye’s rating, the country’s rating is applied as a cap. Thus, a prudent approach is applied that doesn’t allow to assign a better rating than country’s one for customers residing in that country. The bank portfolio consists of large companies and financial institutions that are small in number but have a high volume of loan demand. Due to the low number of observations involving bank internal default data, a global rating methodology based on publicly published global methodology documents is used instead of a model based on internal data. The methodology is based on both a financial assessment based on information from the client’s balance sheets and a qualitative assessment, including questions such as management strategy and structure. This assessment is the base module, which is the basis of the Bank’s rating methodology. Then, subsequent adjustment factors such as the parental support, government support, early warning signals and country ceiling are applied in the form of grade increases/decreases on the base module in a modular structure. Validation studies on the discriminative power and reliability of the model are conducted periodically. Risk parameters used in the TFRS 9 calculations incorporate forward-looking macroeconomic information. When including macroeconomic information, models and projections that reflect the relationships between the model’s risk parameters and macroeconomic variables are considered. The key macroeconomic indicators used to create these forecasting models are gross domestic product (GDP) and the ratio of non-performing loans in the banking sector. The macroeconomic forecasting models include multiple scenarios, and the relevant scenarios are taken into account when calculating expected credit losses. For LGD ratios, conversion rates of the collaterals received for the financial asset are taken into consideration in the framework of certain coefficients considering the general banking practices and the information published by Basel and BRSA. Personal or corporate warranties received for collaterals are not taken into account in LGD ratio calculation. For EAD to be calculated for the risks that are monitored in the off-balance sheet, the Bank includes to the calculation of the relevant risks within the framework of a credit conversion factor (CCF) application. CCF ratio applied as 100% for cash supply non cash loans and 50% for the rest. For cash loans, the calculated default amount is determined by discounting the expected principal and interest repayments, as well as income accruals, using the effective interest method. With the respect of criteria that mentioned in above paragraph, the expected credit loss provision (ECL), which is ultimately calculated for a financial asset, is calculated as follows: ECL = PD * LGD * EAD * (if any CCF) Expected credit loss calculation is calculated over financial assets that has counterparty risk which in scope of TFRS 9 and off- balance sheet risks that are present each reporting period. 147 Financial Information and Risk Management Review PASHA Yatırım Bankası A.Ş. Notes to the Unconsolidated Financial Statements As of and for the Year Ended 31 December 2024 (Continued) (Convenience translation of publicly announced financial statements originally issued in Turkish) (Amounts are expressed in thousands of Turkish Lira (“TL”) unless otherwise stated.)