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CAPITAL MARKET

Economy plunges as government ponders bank mergers

Market sentiment saw no change during the two-week period ending June 25. The SAX index fell further, reaching 107.86 on the back of thin trading and plummeting prices of major blue-chips. During this time period, only Figaro and VÚB appreciated in value by 26.9% and 20.3%, respectively. On the other hand, Slovakofarma dropped by 16.3% to 3,350 Sk. In this respect, we recommend that investors carefully watch announcements regarding the launch of Slovakofarma's new cholesterol-reducing product, or intensifying of expectations for a crown depreciation, as both events should benefit the company's bottom line and consequently the share price.

Market sentiment saw no change during the two-week period ending June 25. The SAX index fell further, reaching 107.86 on the back of thin trading and plummeting prices of major blue-chips. During this time period, only Figaro and VÚB appreciated in value by 26.9% and 20.3%, respectively. On the other hand, Slovakofarma dropped by 16.3% to 3,350 Sk. In this respect, we recommend that investors carefully watch announcements regarding the launch of Slovakofarma's new cholesterol-reducing product, or intensifying of expectations for a crown depreciation, as both events should benefit the company's bottom line and consequently the share price.

According to a preliminary estimate by the Slovak Statistical Office (ŠÚSR), the Slovak GDP was 166.2 billion Sk in the 1Q 98, which represents a nominal increase by 11.8% and a real growth of 6.2%. The growth was fuelled by the continuing investment boom. Investments went up by 12.9% in real terms during this period. The average wage was 9,033 Sk, 10.4% up from 1Q97. According to our estimate the real wage growth was 3.1%, well below the expected labor productivity growth of approximately 8%.

While a continued investment boom and a workable gap between labor productivity and wage growth are positive, we warn that the country's foreign debt is increasing rapidly. Also, it is yet to be seen whether the investments will enhance the country's export performance. If it only brings below-par returns, the foreign debt burden will be a significant drag on the country's future economic performance.

The Trend business weekly recently published a list of the top 100 largest non-financial companies for '97.

Overall, the list recorded a significant slowdown in growth of top the companies' total sales. In 1995, their annual sales increase was 34%, in 1996 it was 22%, while last year it dropped to 12%. The top companies' annual exports increased by 27% in 1995, by 18% in 1996, but only by 11% last year.

Similarly, average pre-tax profit margin (pre-tax profit/sales) of these companies showed a continual decline from 13.4% in 1993 to 4.4% last year. The main reasons for these developments are lack of capital, profit-siphoning by major shareholders, and a decline in competitiveness on the domestic and foreign markets.

Corporate developments

Prime Minister Vladimír Mečiar, suggested on June 16 that Slovakia's four largest financial houses should merge into two, proposing mergers of VÚB and Slovenská Sporiteľňa (SLSP) on the one hand, and IRB and Slovenská Poisťovňa (SP) on the other (see page 6). Our attitude towards the planned mergers is skeptical. We believe that the merger of VÚB and Slovenská Sporiteľňa would create a bank controlling 70% of the market and hence would have adverse effects on competition. Furthermore, both banks are state controlled and we doubt that they would adopt any significant cost-cutting measures, which we view as the only potential benefit of the merger. In our opinion, the proposed merger is a weak attempt on behalf of the government, to solve the problems of the banking sector without allowing the participation of foreign institutions. Another interpretation is that the current government wants to privatize (i.e. sell to domestic investors close to the current government), the banks and the insurer before the election. As neither Slovenská Poisťovňa nor Slovenská Sporiteľňa can be privatized for legal reasons before 2003, the mergers would allow the government to circumvent the law that prohibits their privatization.

Slovenská Poisťovňa, the country's largest insurer, announced it would issue new shares, but didn't disclose any further information regarding the new investors. In light of this announcement and the recent purchase by SP into the troubled IRB, which in our opinion is not consistent with maximizing the value of SP's shares, we recommend that investors avoid exposure to the stock until SP makes its future plans more transparent.


Vladimír Zlacký is an equity analyst with ING Barings.

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