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CAPITAL MARKET

Market continues modest fall as blue chips prices drop

Market developments
The bearish mood on the Slovak equity market continued in the last two weeks of November, due to the stagnant or moderately decreasing prices of all blue chip companies. Except for sporadic direct sales, trading volumes were thin. Foreign investor's low interest in Slovak equities was manifest in the fact that the turbulent period on other emerging markets (such as Southeast Asia) didn't affect the Bratislava Stock Exchange the way it did the more volatile neighboring markets.
The secondary domestic bond market showed some signs of life, but most of the trades do not represent market reality. Over the past few weeks coupon washing has become popular on the Slovak market. Some rather significant volumes have been traded this way, which enables market players to avoid paying taxes on coupons by selling them for a period when a coupon is paid to a foreign partner.

Market developments

The bearish mood on the Slovak equity market continued in the last two weeks of November, due to the stagnant or moderately decreasing prices of all blue chip companies. Except for sporadic direct sales, trading volumes were thin. Foreign investor's low interest in Slovak equities was manifest in the fact that the turbulent period on other emerging markets (such as Southeast Asia) didn't affect the Bratislava Stock Exchange the way it did the more volatile neighboring markets.

The secondary domestic bond market showed some signs of life, but most of the trades do not represent market reality. Over the past few weeks coupon washing has become popular on the Slovak market. Some rather significant volumes have been traded this way, which enables market players to avoid paying taxes on coupons by selling them for a period when a coupon is paid to a foreign partner.

Corporate developments

IRB

At a meeting with the National Bank of Slovakia's (NBS) Governor, Vladimír Masár, the main shareholders of IRB, the third largest commercial bank in Slovakia, decided that the bank's basic capital should be raised by 1 billion Sk ($30 million) to 2 billion Sk and that new shares should be guaranteed by a strong strategic investor. The decision has yet to be approved by the general shareholders's meeting (EGM) on December 19. The EGM should also elect a new Supervisory Board. IRB's main shareholders now include the National Property Fund (FNM), the state privatization agency (35 percent stake), and a group of companies with strong links to VSŽ (about a 40 percent stake). The IRB has total assets of 48.2 billion Sk ($1.4 billion), reported a 1.36 billion Sk ($41 million) loss last year and a 1.16 billion Sk ($34 million) for 1-3Q97. The bank's main problems are a bad loan portfolio and low equity capital.

The reported 1997 loss is primarily due to the high price of money on the interbank market, as the bank has become a net borrower. Furthermore, the bank's loan portfolio includes significant chunks extended to non-private and semi-private institutions and loans that were provided for other than profit-maximizing purposes. Accordingly, the income stream from interest payments is low.

The announced entrance of a strong partner is positive news for minority shareholders only if the partner is a strong foreign banking institution, able to impose strong management control in the bank and take drastic measures to create provisions for classified loans, representing 24 percent of all the bank's loans. The market has factored the bank's poor performance into its share price and and the stock is currently trading at a historic low of 500 Sk, which is half of its nominal value. The market may react positively once the new partner is announced, provided it is a renowned financial institution. The new shareholder will have to subscribe new shares at a value of at least 1,000 Sk, since according to Slovak legislation it is impossible to issue shares under nominal value.

VÚB

The country's largest commercial bank, VÚB, made a 1-3Q97 net profit of 259.4 million Sk ($7.7 million) compared to a loss of 1.3 billion Sk ($38.7 million) in the same period last year. The bank registered a loss of 2.66 billion ($79.2 million) on its interbank market operations. VÚB is also a net borrower on the market. The bank made a profit of 1.93 billion ($57.5 million) on forex operations and profit of 1.07 billion Sk ($31.7 million) on securities operations. VÚB created provisions for bad loans worth 3.3 billion Sk ($98.3 million) and released provisions worth 1.75 billion Sk ($52.2 million) implying that net transfer to provisions totaled 1.55 billion Sk ($46.1 million).

The share is currently trading below its nominal value of 998 Sk and we don't expect the price to increase before the privatization of the bank is finished. With its current management and political involvement, the bank will not be able to take radical steps to increase the prudence of credit assessment and profitability by rationalizing its operating expenses. Since there is only a small chance that the bank will be privatized by a strong foreign financial institution in the foreseeable future, we do not believe that there is longer-term upward potential for this share.

SLOVENSKÉ LODENICE

Slovenské Lodenice, the Komárno-based shipbuilder, announced revenues of 2.22 billion Sk ($66.5 million) for the first three quarters of 1997. The company reached a pre-tax profit of 38 million Sk ($1.1 million) compared to a 25 million Sk loss in the same period last year. This translates to a net profit of around 25 million Sk. We expect that the net profit for FY97 will be 35 million Sk. At the current price of 450 Sk per share, the company trades at a low PER of 8.1. We believe that the market has already incorporated the expected low interim results into the price, which saw a sharp fall over the last few weeks.

SPP

The state-run gas utility, Slovak Gas Industry (SPP) acquired a 6.28 percent stake in Nafta Gbely recently. The most likely price of the purchase was about 2,000 Sk per share. Based on the Security Depository statement, the stakes of other major shareholders remained unchanged. We expect that the SPP will participate in an investment project worth some 30 billion Sk ($880 million), aimed at expanding Nafta's gas storage capacity to 7 billion m3, of which 6 billion m3 will be rented out to foreign companies.

ŽELEZIARNE PODBREZOVÁ

The European Union (EU) announced that it will impose an anti-dumping duty of 7.5 percent on the imports of steel pipes from Slovakia that exceed the agreed volume of 25,000 tons per year. This concerns the sole Slovak producer of steel pipes, Železiarne Podbrezová. The company exported 48,000 tons of steel pipes last year and it plans to increase its sales to the EU in spite of the imposed duty since it believes that its products will remain price competitive. The company disagreed with the EU's decision, saying at a November 20 conference in Bratislava that it didn't think it had made a mistake.


Prepared by ING Bank N.V, Bratislava branch in cooperation with ING Baring Securities (Slovakia), o.c.p., a.s.

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