With Turkish equities outperforming all of the major national exchanges and a strong rise in corporate debt issuances, local capital markets enjoyed a banner year in 2012. The strong performance lent support to a government drive to deepen and broaden capital markets while modernising trading systems and better integrating them internationally.

Important legal changes are also under way: a new capital markets law was enacted in December 2012 that aims to improve corporate governance practices and sets the stage for an overhaul of the country’s exchanges, which are being consolidated into a single national company under a new name, Borsa Istanbul.

With ambitions to turn Istanbul into a financial centre serving the broader region, the government is building an entirely new financial district on the city’s Asian side, dubbed the Istanbul International Financial Centre (IFC). But most participants remained firmly focused on the numerous domestic challenges that lie ahead. Many Turkish firms remain reluctant to use capital markets, preferring private relationships with local or foreign banks. By early 2013, the climate had become more difficult, with interest rates rising slightly as global capital shifted to developed markets.

Size & Structure

Turkey has a mid-sized equities market, with a total capitalisation of TL609bn (€263bn) at the end of March 2013, of which about TL195bn (€84.2bn) was free float. Those figures correspond to about 43% and 14% of 2012 GDP, respectively. By comparison, in the four BRIC countries as of the end of 2011, total equity market capitalisation ranged from 40-55% of GDP, according to the World Bank, while free float capitalisation ranged from 9% to 25% of GDP. Turkey also has a small but fast-growing market in corporate debt, and a developed market in secondary trading and repo of government bonds.

Borsa Istanbul, formerly called the Istanbul Stock Exchange, is the country’s only exchange for equities and debt securities. It is controlled mainly by the government and partly by exchange members. However, the capital markets law enacted in December 2012 includes a restructuring of the exchange, which will see it demutualised and prepared for privatisation, with a 41.6% stake earmarked for deals with “global exchanges and technology and liquidity providers”, according to Borsa Istanbul. Another 49% stake will be held by the government but could be privatised later.

As part of the restructuring, the Istanbul Stock Exchange was merged with the Istanbul Gold Exchange and renamed Borsa Istanbul. It was set to merge in 2013 with the country’s second-largest exchange, TurkDex, which specialises in derivatives. TurkDex, located in Izmir, was founded by the city’s commodities exchange, one of more than a hundred, mostly tiny, commodities exchanges spread across the country.


The reforms included in the new law are meant to help deepen and broaden the capital markets by prompting more firms to list, offering a wider variety of financial instruments and promoting integration with international markets (see analysis). Government officials have already been courting interest from major world exchanges in the forthcoming privatisation, most notably from NYSE Euronext, with which Borsa Istanbul already has limited links. In December 2012, Borsa Istanbul launched its own derivatives market and struck a deal allowing NYSE Liffe, NYSE’s London-based derivatives market, to offer trading in futures and options on 30 large Turkish stocks.

The equity market has several tiers: a main market, a secondary one for small-cap companies, a watch-list market for listings under special monitoring, an “emerging companies” space for very small companies and a “free trade” market for businesses with no formal listing. All firms with shares traded on the bourse, even without listings, must register with the Capital Markets Board (CMB), the sector regulator.


Trading on Borsa Istanbul in equities and derivatives is conducted among member brokers, while bond and repo trading is among member banks and brokers. There are 99 broker and 40 bank members, and many banks participate both directly and through affiliated brokers. Foreign participants include owners and part-owners of major Turkish banks (BBVA, BNP Paribas, Citibank, HSBC, ING, Unicredit and National Bank of Greece) and several groups that own smaller Turkish banks with exchange memberships (Crédit Agricole, Deutsche Bank, JP Morgan Chase, Merrill Lynch, the Royal Bank of Scotland and Société Générale). Other international groups own Turkish brokers, such as Credit Suisse, Erste Bank, Morgan Stanley, Renaissance Capital, Raymond James and Standard Chartered.

The many multinationals involved reflects the dominance of the equity market by foreign investors, who owned nearly two-thirds of listed shares as of the end of 2012. Even many of the independent, locally owned brokers serve mainly foreign investors.

Boosting Participation

Local investors include individuals, insurers, banks and asset management companies, which manage mutual funds and pension funds that are marketed mainly by banks. Although the local investor pool is small, the government is making considerable efforts to promote domestic investment in capital markets and to overcome Turkish investors’ reluctance to invest in equities, which was acquired over decades of seeing local markets boom and bust. The highlight of this effort is a reform in which the government matches 25% of payments into personal private pension funds, with certain limits and restrictions on early withdrawal (see Insurance chapter).

As of March 2013 there were 36 asset management companies operating in Turkey, many of which were related to brokers or larger banking and investment groups. Brokers and asset management companies are licensed and regulated by the CMB, which also regulates exchanges, pension and mutual funds, investment trusts and ratings agencies.

Equities Recover

Equities staged a dramatic recovery in 2012 after a dismal 2011, with the dollar-based version of the Borsa Istanbul’s broadest index, the BIST 100, peaking in January 2013 at within 4% of its record high, hit in November 2010. In February 2013 Turkey succumbed to a global correction in emerging markets as bullishness in developed economies pulled away capital and drove interest rates up slightly. But in March and early April the Turkish bourse appeared to be stabilising, defying a continuing downward trend among other emerging markets.

The 2012 recovery, which saw the BIST 100 index gain 62%, put Turkey in the international financial headlines as the most successful major equity market of the year. The rally, however, followed a 37% drop in the index in 2011, and fell short of recapturing the bourse’s late 2010 highs. The decline and recovery were driven largely by Turkey’s vulnerability to the European debt crisis. During 2011 foreign investors retreated, fearing that growth in 2010-11 was overly dependent on Turkish banks’ short-term borrowing from European lenders.

The recovery got under way early in 2012 after the European Central Bank moved to backstop shaky European banks and governments. The rally then gathered momentum in the summer, as evidence accumulated that the Turkish economy was coping relatively well. Gains continued as the US decided in September to boost monetary stimulus and the ratings agency Fitch raised Turkey to investment grade in November. The upgrade, the first by any major ratings agency since 1994, marked an important historical milestone and pushed down the spreads over developed-market benchmarks that Turkish borrowers pay for foreign capital (see analysis).

The outperformance in 2012 and early 2013 largely reflected the strong earnings recovery of Turkish companies in 2012 after a relatively weak 2011. Profits of BIST 100 members on a trailing four-quarter basis came to TL40bn (€17.3bn) as of end-March 2013, up 33% from a year earlier, according to Borsa Istanbul. Further advances could prove difficult as the profit recovery story had largely played out by April 2013.

Average price-earnings ratios on a trailing four-quarter basis were 12.78 for the BIST 100 at the end of March 2013. That was roughly on par with the Polish bourse and above the average of about 11 for emerging markets globally, according to Bloomberg. The BIST 100 index had an average trailing dividend yield of 1.92% as of the end of March 2013, somewhat better than the 1.75% average among emerging economies globally.

As Özgür Altuğ, a chief economist at the Istanbul office of BGC Partners Securities, an independent broker, told OBG, “After last year’s outperformance, valuations are not as encouraging as they were. Last year you could buy almost anything and it would go up. This year stock selection will be more important.”

Equity trading volumes were disappointing in 2012, but the first quarter of 2013 was promising. Average daily volumes on the equity main market were $1.21bn in 2012, down from $1.45bn in 2011, according to Borsa Istanbul data. In the first quarter of 2013, average daily volumes grew to $1.69bn, the highest since the first quarter of 2011, when they averaged $2bn daily.

Many Tiny Ipos

The performance for Turkish initial public offerings (IPOs) in 2012 and early 2013 was less impressive. Although 26 firms held IPOs during the year, most of them were so small that altogether they raised just TL619m (€267.3m). That reflected a further drop in the average size of IPOs from 2011, when 27 IPOs raised TL1.3bn (€561.3m). The 2012 IPOs added one-tenth of a percent to total capitalisation.

A single secondary public offering (SPO) in 2012 raised much more. In November, the government privatised by SPO a 24% stake in Halkbank, the country’s sixth-largest bank by assets, raising TL4.5bn (€1.9bn) for the state budget. That sale was successful for investors, as Halkbank’s shares shot up nearly 30% from the SPO price by the end of March 2013.

The total value of share issues by Turkish companies, including off-exchange capital injections and share swaps, and not including sales of existing shares such as the Halkbank stake sale, came to around TL8.1bn (€3.5bn) in 2012, according to the CMB. That was up a slim 2% from 2011 and well down from the peak years of 2008 and 2010, when Turkish companies issued shares valued at TL11.7bn (€5.1bn) and TL11.4bn (€4.9bn), respectively.

By far the biggest share issue of 2012 was a share swap in March between Anadolu Efes, the Turkish brewing company, and London-based SAB Miller, valued by the CMB at TL3.3bn (€1.4bn).

Promoting The Exchange

The numerous small IPOs in 2012 showed the success of a Borsa Istanbul campaign to promote public listings among small and medium-sized companies. The effort included the launch of the exchange’s emerging companies market in 2011 and a continuing series of conferences around the country where exchange officials present the case for going public to local company owners. As part of the government’s ambitious targets for the Turkish republic’s 100th anniversary, Borsa Istanbul has set a goal of reaching 1000 listed companies by 2023.

On the other hand, the lack of larger IPOs reflects the great difficulties the government and Borsa Istanbul have faced in convincing larger Turkish companies to go public, which could be crucial to the government’s ambitions to turn Istanbul into a regional financial centre. As Ahmet Yıldırım, CEO of Yapı Kredi Yatırım, told OBG, “Although the awareness campaign launched by the government has potential, the lack of IPOs among large companies means that the capital markets continue to offer a limited number of investable assets.”

Besides being small, most of the companies that debuted in 2012 underperformed the market, and many lost value after their IPOs. For example, the largest IPO of 2012, a TL120m (€51.8m) offering in November by Tümosan, a maker of tractors, was followed by a 25% drop from the IPO price in the first three months of trading. Tümosan shares rebounded some but were still more than 10% off their IPO price by early April 2013.

The Bloomberg Turkey IPO Index performed decently in the first quarter of 2012, but since then it has told a tale of disappointment and frustration. It dropped 21% between March 2012 and March 2013, while the BIST 100 gained 35%. Analysts say the fault lay not with the companies being listed on the exchange, but with aggressive pricing that left buyers struggling to justify valuation multiples higher than those of veteran equities. BGC’s Altuğ said he believed the new CMB chairman, Vahdettin Ertaş, would be less eager to push through small IPOs. “This isn’t what the government wants – investors losing money. I think the government learned its lesson,” he said.

The IPO market quieted down in early 2013, with only one IPO held in the first quarter: that of Halk GYO, a real estate investment trust spun off by Halkbank. Halk GYO raised TL250m (€108m), the largest IPO since the last peak in late 2010. The capital raising represented a first step in the government’s ambitious plan to build the planned IFC, which is both a real estate project and a vision of Turkey as a global capital markets powerhouse (see analysis). Halk GYO will build five buildings for the project including Halkbank’s future headquarters. However, Halk GYO failed to break Turkey’s string of flat-footed trading debuts. Its shares lost 9% of their value in their first six weeks of trading, while the BIST 100 gained 7.5% during the same period.

Upcoming Ipos

Pegasus Airlines was set to be the second IPO of 2013 in mid-April. The airline is owned by Esas Holding, the investment vehicle of billionaire Şevket Sabancı. Also reportedly eyeing a possible IPO in 2013 was Turkish Aerospace Industries, a builder of military aircraft, and Kuveyt Türk Katılım Bankası, the Turkish unit of Kuwait Finance House, an Islamic banking group. The government was also planning two more large privatisations by SPO in 2013: a 24% stake in Vakıfbank, Turkey’s seventh-largest bank, and a 6.7% stake in Türk Telekom, the largest telecoms firm. Further out, the government was planning a privatisation by IPO of a minority stake in the second-largest bank, Ziraat Bank, expected in 2014. The government was also reported to be considering a major privatisation by IPO of a group of toll-roads and bridges. In February 2013 the prime minister, Recep Tayyip Erdoğan, rejected a Turkish-Malaysian consortium’s winning $5.7bn bid for the assets in a privatisation tender, saying the amount was too little (see Transport chapter).

Erkin Şahinöz, managing director and CIO of Rhea Portföy Yönetimi, told OBG that he saw growing demand for public equity listings and bond issues coming especially from small and mid-cap manufacturers based in Anatolia. “They are becoming more institutionalised, more regulated. In the past no one outside these companies had a clue about their financials. Now they are getting independent audits.”

Private Equity

Part of the explanation for the aggressive pricing of Turkish IPOs is that IPO underwriters must compete with an active private equity (PE) sector, where investors generally pay significantly higher multiples than the public market would stomach.

Although PE investors are choosy and have their own strict demands in terms of management participation and exit strategy, the privacy they offer is often very important to Turkish business owners. PE investors have focused especially on retail, fast-moving consumer goods, health care and insurance. They are less active in other kinds of manufacturing or outside Istanbul. Most firms target exits through sales to strategic investors or other PE firms. Since the number of suitable targets is limited, competition for them can be intense. Alim Telci, general manager of Halk Portföy Yönetimi, told OBG, “PE firms are becoming more involved in Turkey’s economy, and there have been some success stories. However, they face challenges. Many of the enterprises that equity players have targeted are overvalued.”

Exit Strategies

PE firms generally do not yet look to exit through IPOs due to the lower valuations on the public market. There have been two exceptions, however. London-based BC Partners, which paid $3.25bn in 2008 for control of the Turkish supermarket chain Migros, made a partial exit in April 2011 by selling a 17% stake on the Istanbul exchange for $515m. In December 2012 BC Partners confirmed a report that it was discussing a possible sale of the rest of its stake in Migros to Walmart, the US retail group.

In the other PE exit by IPO, the offering was not in Turkey, but in Malaysia and Singapore, where public equity valuations are higher. Abraaj Group, a Dubai-based PE fund manager, had purchased a 50% stake in hospitals group Acıbadem Sağl›k Grubu in 2007 for an undisclosed sum. In December 2011, Abraaj struck a deal to roll Acıbadem into Malaysian hospitals group IHH Healthcare and then exit through an IPO of that firm. Abraaj grossed $693m from the sale of its 50% stake, while Acıbadem’s founder sold a 25% stake for about half that in cash and IHH Healthcare shares.

PE has been a favoured route for Gulf investment in Turkey, which has increased in recent years as the government has worked on developing closer ties with governments in the Gulf region. Atilla Kurama, CEO of Turkish PE firm Gözde Girişim Sermayesi, told OBG, “Capital needs to feel comfortable – a point illustrated by the rise in foreign investment inflows from Gulf countries, which have formed stronger cultural bonds with Turkey over the past 10 years.”

Corporate Bonds

Turkey’s small domestic corporate bond market grew rapidly in 2012 as government efforts to encourage local debt issuance began to pay off. A total of 235 issues of corporate debt securities worth TL42.3bn (€18.3bn) were listed on Borsa Istanbul in 2012, up from 58 issues worth a total of TL18.6bn (€8bn) in 2011. Another 63 issues worth TL11.2bn (€4.8bn) were listed on the exchange in the first quarter of 2013. Traded volumes have also been rising quickly from a low base. Average daily traded volumes of private debt securities on Borsa Istanbul were TL14m (€6m) in 2011, TL29m (€12.5m) in 2012 and TL42m (€18.1m) in the first quarter of 2013.

The domestic corporate bond market has grown almost from scratch since 2010, when the government cut red tape that had nearly completely discouraged issuance. The lack of a domestic bond market had pushed Turkish banks and non-financial corporations (NFCs) to rely on foreign borrowing, increasing the economy’s vulnerability to funding shocks. In addition to the 2010 reforms, the government has supported corporate bond issuance with a relatively tight fiscal stance that limits supply of sovereign bonds and pushes safety-conscious investors to look for next-safest alternatives. It has also increased the average maturity of sovereign debt, allowing corporate bonds to fill demand for shorter-term issues.

However, NFCs have so far merely dipped their toes into local debt markets. They accounted for just nine of the 235 private debt security issues listed locally in 2012, raising only TL674m (€291m). That is less than 2% of the net amount NFCs borrowed from banks during the year, after repayments. NFCs made another six issues worth TL725m (€313.1m) in the first quarter of 2013. Most NFC bonds have terms of one to three years, and short-term commercial paper issues are rare.

The Role of Lenders

Banks are not only much bigger financers of Turkish businesses than are domestic capital markets, they are also the largest users of domestic capital markets. The corporate bond market is developing mainly as an alternative source of funding for lenders. Banks accounted for 165 of the 235 private debt security issues listed on Borsa Istanbul in 2012, raising TL38.3bn (€16.5bn), or 91% of the gross funds raised on the domestic private bond market during the year. Another 61 of the issues worth TL3.4bn (€1.5bn) were made by other financial companies, most of them bank affiliates. Banks issue mainly short-term commercial paper, with terms of up to six months. Only around 10% of banks’ domestic marketable debt issuance is in bonds, which have terms up to three years.

Larger banks were paying around 6% annual interest in early 2013 on domestic bank bills, down from more than 10% in early 2012. However, rates on domestically raised funds were still relatively high compared to what banks paid on international Eurobond markets. For example, in February 2013 Denizbank issued three-year domestic lira bonds with a 7.72% coupon and five-year lira Eurobonds with a 7.3% coupon.

In the equity market, banks accounted for 34% of total market capitalisation as of the end of March 2013 and for 40% of all trading volumes in the first quarter of 2013. The high weighting means that Turkish equity indexes tend to follow the fortunes of the banks. For example, the outperformance of the market in 2012 was largely driven by the profit windfall that banks enjoyed thanks to falling global and local interest rates.

Islamic Bonds

Autumn 2012 saw the biggest event in years in Turkey’s relatively developed sovereign debt market: the launch of sovereign sukuks, or Islamic bonds (see analysis). The government raised $1.5bn with a 5. 5-year dollar sukuk issued in September, paying a 2.8% profit rate, and another TL1.62bn (€700m) with a local two-year lira sukuk, paying a 3.7% profit rate.

Banks are the main participants in the well-developed local market for secondary trading and repo of sovereign debt. Average daily traded volumes of sovereign bonds and bills on Borsa Istanbul showed a similar trend to equity markets, falling in 2012 to TL1.4bn (€604.5m) from TL1.9bn (€820.4m) in 2011, but recovering in the first quarter of 2013 to TL1.8bn (€777.2m). Total outstanding volume of local sovereign debt stood at TL387bn (€167.1bn) at the end of 2012, according to CMB data, still dwarfing the TL30bn (€13bn) of outstanding private local debt securities.


The government’s commitment to promoting capital markets and its generally practical approach bode well for the sector’s development. Although its ambition to develop Istanbul into one of the world’s top financial centres is lofty, the project is proving to be a positive catalyst for down-to-earth reforms that will be useful in the near term to strengthen markets.

Developing a larger local investor pool, especially in equity markets, is a crucial component of the government’s broader efforts to increase domestic savings. Promotion of private pensions will help, but Turkey could also benefit from efforts to encourage more retail investment and a more equity-conscious culture.

Much of the work can be done by maintaining the policies that have brought down interest rates and inflation, and by the passage of time. As Tolga Macit Güsar, the executive vice-president at Garanti Portföy Yönetimi, told OBG, “If a market has high interest rates and inflation for 20 years, investor habits move to fixed income. Undoing that takes time. Investors must learn to trust that inflation rates will remain low. As that trust continues to develop, you will see a growing share of domestic investment in non-fixed-income assets.”