Posted by meb at February 1st, 2007

By Emma Ross-Thomas
ISTANBUL – Reuters
A wave of Turkish banking acquisitions is coming to an end, but foreign banks not here yet are expected to keep buying brokerages in a market where client interest and potential for big deals is growing.

Last year UBS bought a brokerage in the European Union applicant as did Morgan Stanley.

Merrill Lynch has bought a tiny bank and brokerage, joining other players including HSBC and Deutsche, while Lehman has appointed a chief  executive for Turkey and plans to open an office here this year.

“Most of the major London houses will be here,” Ahmet Erelçin, head of HSBC’s brokerage arm in Turkey told Reuters.

Foreign banks want to be able to trade themselves – rather than paying local brokers to do it – but also want to be here to make it easier to grab M&A and IPO business.

“We have certainly taken a bet on the near-term and medium-term prospects of Turkey and feel that it has very much emerged in many ways. … It has become possible to make meaningful projections,” Gülnaz Arıcanlı, Morgan Stanley’s Turkey country head, told Reuters.

She imagines the set-up will grow to the size of Spain’s in about a decade and says Morgan Stanley could expand here to become a bank, either by acquiring one or getting a license.

Turkey has been growing around 8 percent a year on average since a crisis in 2001, and last year is expected to have grown 5 percent. Amid tamer inflation and interest rates the government expects foreign direct investment above $20 billion this year, while further out share offerings and corporate bond issues are expected to grow.

Turkey’s stock market, though vulnerable to political instability – particularly in an election year like 2007 – is also an emerging market favorite as its average daily volume of almost $1 billion makes it more liquid than many peers.

“The FDI volume has picked up … and there are some mega deals. In time IPOs will be good business. By being here they’ll be able to chase up mandates,” Mehmet Sami, board member of brokerage firm Ata Invest, said.

“And if they believe the economy is going to improve there’ll be a big corporate bond market,” he added.

Some say costs are also a factor in moving to Istanbul, a city of more than 12 million and the country’s financial hub.

“Most of these large houses are operating as wholesale brokers from London and … as a result they were paying substantial fees here and in the end they have calculated that if they buy a brokerage house in Turkey … they are better off,” Erelçin said.

Setting up shop here also provides useful local research and allows them to sell share offerings rather than needing a local partner.

Fragmented, foreign-dominated:

Foreigners are expected to shake up the market, which with more than 100 brokerages is very fragmented.

The largest brokerage, Is Securities – which plans its own IPO – has only a 6 percent share of the market, while the top 20 firms move about 60 to 70 percent of the total.

“I think you will begin to see further concentration probably among the top seven or eight, with internationals occupying most of those spots,” Arıcanlı said.

Brokerage fees have already fallen in recent years and competition will remain strong as the number of Turkish retail investors is not expected to take off any time soon. Foreigners own about 65 percent of Istanbul’s freefloat.

Dissuading potential local investors from the riskier stock market are high interest rates as one-month lira deposit accounts earn about 15 percent a year.

That will change eventually, but the central bank keeps signaling interest rates will not budge any time soon.