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CAPITAL MARKET REPORT

VÚB ends with disappointing first half

There was a decline in trading at the end of August and the beginning of September, resulting in lower volumes and increased price fluctuation on the Slovak capital market. VÚB Kupón, VÚB, VSŽ, Biotika, Nafta and investment funds dominated the BCPB (stock exchange) floor and OTC trades. We noticed that the strong interest in VÚB shares that fuelled the market has settled down, probably due to the disappointing news that VÚB lost 752m Sk in 1H96. The results contain some abnormal factors such as the allocation of advance income tax payments worth 530.6m Sk as costs, and the decision to include part of the interest revenue in the income statement on an annual basis.

There was a decline in trading at the end of August and the beginning of September, resulting in lower volumes and increased price fluctuation on the Slovak capital market. VÚB Kupón, VÚB, VSŽ, Biotika, Nafta and investment funds dominated the BCPB (stock exchange) floor and OTC trades. We noticed that the strong interest in VÚB shares that fuelled the market has settled down, probably due to the disappointing news that VÚB lost 752m Sk in 1H96. The results contain some abnormal factors such as the allocation of advance income tax payments worth 530.6m Sk as costs, and the decision to include part of the interest revenue in the income statement on an annual basis.

Adjusting these factors would result in a profit of 216m Sk. We expect that VÚB earnings will be adversely affected this year by the need to substantially increase loan loss provisions, which are estimated to be deficient by 9.1bn Sk in 1995. VÚB shares are still trading above the 2,000 Sk level, but we anticipate that the price will decrease.

The battle for the VÚB Kupón investment fund is not finished yet, and its price has remained around 720 Sk due to a public offer. However, the Ministry of Finance intervened, halting purchases resulting from the public offer. If Wood & Co., who made this public offer, does not succeed in collecting a controlling stake in the fund, they may sell their stake at a price up to par value. The fund's portfolio still contains some very interesting stakes in the Czech companies, and its discount to the fund's net asset value is 48.6%. Other Slovak investment funds (such as Regionfond, Creditanstalt) are being subjected to take-overs by well funded groups, often at prices higher than the per share net asset value.

This is a good opportunity for investors to sell these shares from their portfolios at an exceptional price, as the occasion may not be repeated. The fund's new strategic owners would normally gradually sell off the shares in the portfolio and leave the fund ransacked. IRB announced a slump in pre-tax profit from 81m Sk to 3.2m Sk for 1H96. The bank's loan portfolio is currently 38.3bn Sk, approximately 9% of total Slovak loans. The bank is fully provisioned for its old loans according to its international auditors, but it has expensive funding sources which are cutting into its profit margin. We expect that IRB's net profit for 1996 will about 50m Sk, but as in the case of VÚB, the decision will depend on management and the auditors. Chemolak reported a net profit of 47m Sk for 1H96, 77% of 1H95's figure. The net profit was in accordance with the 1996 annual plan.

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

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