Evolution of BVB Listed Companies, Compared to Their CEE Peers

Septembrie 2008

MARIUS PANDELE - Head of Research VANGUARD

The poorest half-year of the Bucharest Stock Exchange in the past ten years has inflicted considerable damage on the portfolio of a significant number of institutional or individual investors. Without generating the wave of panic and mistrust witnessed in the ‘90s, the first half of 2008 registered 40% drop in the BET index, even exceeding 40% for the BET-FI index.

Among countries within the region, the Romanian Stock Exchange has witnessed the sharpest decrease, rather similar to the one registered in Bulgaria and far exceeding the ones reported by more developed capital markets, such as Vienna, Warsaw or Prague. Even Belgrade and Zagreb-based Stock Exchanges, although located in countries outside the perimeters of the European Union, managed to abate the downward spiral.

There are multifarious reasons for said plunge, starting with the precarious macroeconomic situation that poses serious risks to companies operating in Romania and for investors implicitly, and continuing with the greatly inflated prices reached by a number of stocks quoted on BSE at the middle and even at the end of last year.

From a macroeconomic standpoint, Romania is in a worse condition than Poland, the Czech Republic or Hungary. This issue has been clearly visible lately, when many important strategic investors (the most widely diffused case being the one of Daimler) chose other countries for large-scale projects. The HR crunch led to unprecedented salary increases for the local work force, but on the other hand, to a decline in quality thus making our country less attractive to foreign companies. Furthermore, high land prices have increased the costs of starting a large-scale business in Romania. These two drawbacks add to already poor macro-economic indicators such as the rate of inflation, current account deficit, the absorption rate of European funds etc.

For the listed companies, the local macroeconomic environment unhappily combined with the global economic turmoil, has resulted in the steepest half-yearly decline since the summer of 1998, when the BET index slid by some 65% throughout a similar period of time.

Naturally, as usual in times like these, some sectors were more damaged than others by the “market’s wrath”. As expected, the most affected field was the financial one, i.e. financial investment companies whose portfolio mainly comprises of stocks pertaining to companies listed on the Bucharest Stock Exchange, thus being greatly influenced by the recent downswing. These were affected by the current market decline twice, as issuers and as companies holding other issuers’ stocks in their portfolio.

The BET-FI index recorded the sharpest half-yearly decrease in its history (in 1998, it had not been launched yet), this reaching over 45% at the beginning of July. Although the P/NAV ratio has reached extremely low levels, even if most assets appear under book value in the portfolio, i.e. below market value, prices have continued to decrease. Investors took into account projections of declining profit and net assets rather than recommendations made by brokers, based solely on comparing the price with current net asset values.

Apart from the five financial investment companies, SSIF Broker was also embroiled in this economic downturn. SSIF Broker oriented most of its activity towards financial investments, its core activity, financial intermediation, holding a less significant weight in the overall activity. After having reaped record-breaking profit in 2007, the company is now suffering threefold because of the stock market crash: as listed issuer influenced by the market’s general trend, as an investor in the stocks of other listed issuers, and finally yet importantly, as a brokerage company influenced by lower transaction values thus cashing lower commissions as well.

As for the banking system, a rater paradoxical situation can be noticed not only in Romania but in Eastern and Central Europe as well. Although at the root of the current global financial crisis and of the stock market crash implicitly, lies, apart form the real estate sector, the banking sector as well, banks in the region were not too badly affected by this crisis. The reported financials were very good, stock exchange quotes obtaining better results than the average.

Most banks within the region have shown smaller decreases compared to benchmark indices in their country of origin. From this viewpoint, Austrian banks stand out the most, achieving a high level of maturity and being present in most CEE countries. As a matter of fact, Austria-based Oberbank AG is the only bank whose quote has marked an upward trend over the past 52 weeks. Raiffeisen International has suffered a sharper drop, although the Austrian financial group is among the most important ones in the region. Bulgaria-based banks have also achieved better results than the benchmark index, the difference between the price evolution and the evolution of the Sofix index even exceeding the one in Austria. In the case of Poland, Hungary and Romania, the situation is more balanced, banking issuers posting results both above and below benchmark indices, in fairly equal portions.

The evolution of banks denotes some sort of independence from events occurring on a global scale with regard to this sector. At the moment, there are only few first-class banks worldwide carrying out important operations in Central-Eastern Europe. Among the top 20 banks worldwide, based on market value, only one has important operations in this region: Unicredit. ABN AMRO, Citigroup, BNP Paribas and Intesa Sanpaolo, carry out rather common operations at most, the rest having a relatively insignificant presence. Under these circumstances, it is quite normal for the problems caused by the subprime crisis in USA, and which have initially affected premier banks in America and Europe, to have little impact in Central and Eastern Europe. Regarding most financial institutions in the area, mother-banks have not been greatly affected by the crisis; therefore, it is perfectly normal for their branches to not be affected as well. However, we should mention that BRD, whose majority shareholder faced a major embezzlement case recently, was not affected by the current situation, achieving great financial results and a better performance of the stock exchange quote relative to other banks and relative to the market’s average. However, compared to the regional average, BRD and other Romanian banks had extremely poor performances, registering stronger decreases than most of the banks analyzed. We believe that this situation will go from bad to worse if the National Bank is still planning to tighten credit policies, this having a negative impact on the evolution of banking assets.

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