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CAPITAL MARKET

Market takes a hit after news about Slovakofarma, Slovnaft shakes confidence

Trading volumes and prices continued to decline on the BSE floor market during the second half of June. The SAX stock market index slumped to its year low of 166 due to heavy losses in Slovnaft and Slovakofarma. The images of both companies have been seriously damaged in recent days. Slovakofarma's share price fell almost 900 Sk to 3,571 Sk after it was announced that it is one of the owners of ProTV, the unsuccessful contender for the STV2 channel privatization. It has also been publicly stated that Slovakofarma promised to invest 250-300 million Sk ($7.5-9 million) in ProTV. This is certainly not in the interest of minority shareholders, since the representatives of ProTV have stated that their project was not intended to "make money." We believe that this is also a negative signal that current well respected management is partially losing ground in Slovakofarma to the interests of politicians involved in the company privatization.

Trading volumes and prices continued to decline on the BSE floor market during the second half of June. The SAX stock market index slumped to its year low of 166 due to heavy losses in Slovnaft and Slovakofarma. The images of both companies have been seriously damaged in recent days. Slovakofarma's share price fell almost 900 Sk to 3,571 Sk after it was announced that it is one of the owners of ProTV, the unsuccessful contender for the STV2 channel privatization. It has also been publicly stated that Slovakofarma promised to invest 250-300 million Sk ($7.5-9 million) in ProTV. This is certainly not in the interest of minority shareholders, since the representatives of ProTV have stated that their project was not intended to "make money." We believe that this is also a negative signal that current well respected management is partially losing ground in Slovakofarma to the interests of politicians involved in the company privatization.

It was a surprise when the FNM sold a 15% stake in Slovnaft to management-employee company Slovintegra for the price of 384.6 million Sk. This equates to a very low per share price of 155 Sk compared to the current market price of Sk 818. As a result, Slovnaft has basically ceased trading and its price has fallen to 807 Sk. (See a related story, page 6) Nevertheless, we consider this sell-off to be good news for minority shareholders, as it removes the threat of control passing to a third party buyer.

The share price of VSŽ kept between 620 Sk and 630 Sk. According to VSŽ Supervisory Board chairman Alexander Rezeš, Slovak engineering, metallurgical, chemical and banking companies will participate in the proposed consortium for automobile production, with VSŽ having the largest stake in the consortium. The car plant will probably be located in Košice and should produce mid-sized cars for Eastern European markets.

A strategic partner may be a yet unspecified Japanese car producer and the construction of the production plant should begin in 1999. The government's intention to introduce tax holidays for strategic investors in the auto industry seems designed to assist VSŽ in its effort to woo the Japanese car maker.

Commercial bank VÚB published its 1Q97 results. The bank made a pre-tax profit of 432.5 million ($12.9 million, EPS is 104 Sk) on revenues of 6.3 billion ($188 million). Provisions were increased by 377.5 million Sk. VÚB's assets totaled 193.2 billion Sk ($5.77 billion), as of the end of last March. According to the National Bank of Slovakia, all banks except for state-owned VÚB, IRB, Slovenská sporiteľňa and Konsolidačná banka achieved a capital adequacy ratio of 8 percent at the end of 1996. The entire sector's capital adequacy ratio was 7.73 percent. The central bank also stated that the main negative trends in the banking sector were the growing level of uncollected interest and the high level of non-performing loans in bank portfolios.

Považské Strojárne traded quite intensively and its price continued to increase, peaking at 295 Sk, but it is likely that this share price was intentionally pushed up. Doprastav shares could be facing a similar situation (their price surged from 200 Sk to 1,150 Sk during the last four weeks). The OTC market reported a transfer of half a million shares of the Restitution investment fund at the face value of 1000 Sk per share. 8.3 percent of Slovenská poisťovňa shareholders' equity was transferred at 1,360 Sk per share via the same market.

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

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