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The euro has provided
risks and opportunities for the Austrian capital market and its
participants. They have become an adjunct of euroland, which means
less domestic interest in their home products. But, on the other
hand, Austrian investors and institutions have more scope to expand
on sectoral and product lines into an 11-country currency zone.
So far the main impact has been negative. Volumes on the
Vienna stock exchange fell by between 15% and 20% in 1999. And
Austrian banks and fund managers haven't been the first to win or
buy market share in euroland. But the results haven't been
disastrous, say Austrian bankers and traders. They're still making
a living and riding out this down cycle.
One problem has been the generally unfashionable nature of
most Vienna-listed stocks: financials and heavy industry. The few
exceptions have been the listings of technology growth stocks such
as Cybertron and Libro - although Libro had a shaky start.
The trick has been for Vienna-based financial firms to be
innovative and carve out their niche. The slightly unfortunate
result, for the Viennese banks, is that they all see their niche in
central and eastern Europe.
The Vienna stock exchange is fighting for its very survival.
It isn't alone in this: most established securities exchanges would
be stupid to assume that they will survive the onslaught of the
internet and trading-oriented ECNs (electronic communication
networks).
So the Wiener Börse has taken two daring but enlightened
steps: it has linked itself to Frankfurt's Xetra electronic trading
platform for listed shares, and it has created its own trading
platform for listed warrants.
Volume in traded warrants has so far been pathetic: a meagre
five or six deals a day, totalling some e200,000 in premium
turnover. On the other hand the traders say it is the world's best
warrant trading system, able to make thousands of quotation updates
each hour, with an effective order limit system, and, we are told,
totally transparent pricing. What more could a retail investor
want? Austrian warrant investors, who are used to a less
transparent over-the-counter (OTC) market, are beginning to
appreciate the virtues of the electronic platform, although it
still attracts only 3% or 4% of their business.
Erich Obersteiner, a board member of the Vienna exchange,
believes that acceptance of the system will advance by leaps and
bounds.
Three market-makers are committed to this market. One is
Citibank, the market leader in Europe's speculative listed warrant
industry, with around 50% to 60% of the huge e100 million-a-day
German market. By mid-December Citibank had listed close to 300 of
the warrants in Vienna that it already trades in Frankfurt. They
are mostly on foreign equities and foreign indices, including stock
indices, currencies, gold and other commodities.
Tax-free appeal
Continental Europeans from Bordeaux to Burgenland love to
speculate in such warrants, particularly since winnings are
tax-free if they hold on to them more than a year. The question
remains, however, whether the Vienna platform, based on OM "click"
software, will be compelling enough to attract enough business, not
only from the Austrian OTC market, but also from Swiss electronic
exchange SWX, from the Frankfurt OTC market, and the
extraordinarily successful market in Stuttgart.
Yes Stuttgart. Faced with the extinction of Stuttgart as a
regional exchange, a Stuttgart broker, Bruker (now named Euwax
Broker) devised a user-friendly trading procedure for the retail
market. This is not hi-tech, it's a telephone market. Bruker
founder Dieter Lendle doesn't believe in a switch to electronic
trading, since telephone orders put into Deutsche Börse's Boss-Cube
order routing system can be confirmed just as quickly - within
about 20 seconds. The virtue of Stuttgart is its
retail-friendliness, compared with Frankfurt's more institutional
OTC market. Stuttgart has an estimated 50% plus of the German
traded options market, while Frankfurt has 45% and Düsseldorf
another 3% or 4%. "We're the sixth biggest exchange in the world by
premium volume," says Lendle in Stuttgart.
This is what Vienna is up against. And warrant business
hasn't tended to migrate from one country to another. The Swiss
exchange's electronic SWX system for warrants hasn't stolen
business from Germany. "Why should German investors come to Vienna
to buy warrants?" asks a Viennese banker. The only factors that
might slowly attract that business are the speed and cheapness of
the Viennese exchange. Vienna market-makers are planning to commit
themselves to a maximum bid-offer spread. In Frankfurt and
Stuttgart broker's commission is eight basis points, and the
bid-offer spread is not transparent.
Citibank, Erste Bank and Centro International Bank in Vienna
are the only active warrant market-makers, although nine are
listed. Citibank is simply listing the same warrants as in
Frankfurt and the market-making is also done from there, with no
arbitrage possibilities between the two cities.
These three market-makers helped the Wiener Börse to design
the trading system. It was done under some time pressure and still
needs work. For example, not enough small Austrian players such as
the regional banks have access, since they need to have the OM
derivatives trading software used for Vienna's derivatives exchange
ÖTOB. A solution may be found this year, perhaps using one broker,
Euro Invest Bank, as an intermediary.
The Wiener Börse's link-up with Frankfurt's Xetra share
trading system, agreed last January and implemented in November,
has resulted in a change in trading patterns. Obersteiner at Wiener
Börse is pleased that 25% of trading takes place in the extended
trading hours from 1500 to 1730. "That proves Xetra was the right
decision," he says. "We're quite happy with the turnover since we
expected a decrease, and turnover has been at least that of the
previous month."
But it's clear to the indigenous Austrian banks that they
can't rely on their home market. Like the Dutch they have to
venture abroad to survive.
Erste Bank, Bank Austria Creditanstalt, and RZB are battling
it out in Austria, with a few changes of emphasis. Erste Bank is
reducing its low-margin lending to big companies and going for the
middle market. "Our net interest income grew by 4% in the first
nine months of 1999," says Erste Bank chairman Andreas Treichl. The
bank has three core strategies, Treichl says: "To be a retailer; to
develop the savings bank sector; to expand into the surrounding
countries."
In Austria, retail means also expanding the fund management
business - "We have over a quarter of the fund management business
in Austria," says Treichl - and life insurance, "we're the number
one life insurer", he adds.
Bank Austria Creditanstalt, with its two-brand policy in
Austria, is delighted that Erste Bank is moving to the mid-market,
leaving less competition for the big accounts. "We're ready to move
in where Erste Bank is withdrawing from certain lending
relationships, where it makes sense," says Alarich Fenyves, deputy
chairman of Bank Austria Creditanstalt International. But the two
banks compete head on in fund management - Bank Austria group has
some e20 billion under management representing investments in
mutual funds, and insurance. Bank Austria has an agreement with
Wiener Städtische insurance, one of its core shareholders, says
Fenyves. Creditanstalt had an agreement with insurer Generali but
the divorce is complete.
The two big Austrian banks also compete head on for fee
income from investment banking. Bank Austria Creditanstalt is the
natural market leader - Bank Austria, traditionally a socialist
bank and Creditanstalt traditionally conservative, tended to get
mandates in turn from the coalition government. Those relationships
have persisted with recent privatization mandates.
A case in point is the forthcoming privatization of Telekom
Austria. Merrill Lynch is global coordinator; Bank Austria's
Creditanstalt Investmentbank (CAIB) says it has the joint
coordinator role. Erste Bank is still jockeying for a position and
believe the decision is still open. "The deal is too big for one
Austrian bank," says Michael Buhl, managing director for investment
banking at Erste Bank (he moved there from CAIB last January).
Erste Bank completed restructuring of investment banking last
year, combining equity and fixed income. "It's really worked out,"
says Buhl. "We've become number one in the new-issue business. We
had been first on the trading side for some time."
New issues brought last year include two ultimately
successful technology issues - Cybertron and Libro, a capital
increase for RHI and the co-lead for Austrian Airlines. Erste Bank
is also active on Germany's Neuer Markt, having led two initial
public offerings, for Fabasoft and Euromed.
Austrian bankers argue that CAIB had its eye off the ball
last year, because of losses in Russia and the need to cut costs in
London, and that Erste Bank has moved into the gap. But CAIB
nevertheless advised Austria Tabak on the purchase of Swedish Match
last year, and brought technology companies to market on Easdaq -
video game company Uproar and internet shopping mall Yline.
On the retail side it seems there are few opportunities for
further consolidation among Austrian banks. The post office bank
PSK is the only big bank for sale.
A domestic market of 8 million people isn't enough for these
banks. Erste, Bank Austria and RZB all see their future as a bank
of the region, taking in countries of central and eastern Europe,
and to some extent their west European neighbours.
Popular in the east
Bank Austria's CAIB has managed to establish itself as the
investment bank of choice in Hungary and Poland. It has done the
lion's share of privatization in Bulgaria, including the $750
million sale of oil company Neftochim to OMV, LukOil and others. It
advised KBC of Belgium on its purchase of Czech bank CSOB. "We have
more staff abroad (700) than we do in Austria (130)," says Willi
Hemetsberger, chairman of CAIB. He believes euroland banking
consolidation is leaving more opportunity for niche players: "We
try to have a boutique character and be among the top three in any
of our target markets." It's the middle ground that poses the big
challenge, he says, for anyone who isn't a global player.
Bank Austria has shrunk from buying market share in central
Europe, although it has 43% of a joint venture with Polish bank
PBK. Competitors say CAIB has lost market share in Hungary because
of management problems there. Its former highly successful
Hungarian country head Andras Simor was called to Vienna to run the
entire investment bank, but that didn't work out and he's back in
Budapest as chairman of the stock exchange. Competitors wonder also
whether it makes sense for CAIB to do only Austrian business in
Vienna and all its foreign securities business out of London, where
the costs are higher.
Hemetsberger argues that London is where the institutional
clients are, and it is also the best pool of skilled people. "In
London we've built up a good financial products know-how, serving
our clients for the region," he says. CAIB also has its financial
institutions group and telecom specialists in London. In the
central and eastern European countries Bank Austria isn't competing
so much with other Austrian banks as with the likes of ING, ABN
Amro and Citibank, says Fenyves. Its presence in London and New
York, Hong Kong and Singapore, is to serve clients with its
expertise in central Europe. It launched a website,
caibon.com, in November to provide research and data. "It's
the first site which offers detail on companies throughout the
region in one spot," says Hubertus Hofkirchner, CEO of
caibon.com. It is trying to create a "community" of users,
with forums for emerging market investors. Some time next year it
wants to add e-trading. The site has 30 people in Vienna and others
on the ground in central Europe. For the moment the service is
free. Whether
caibon.comwill develop an investment banking capability on
the net is open to question. "To do such things as IPOs in emerging
Europe," says Hofkirchner doubtfully, "you'd need the analytics of
an investment bank. However, caibon will be an important placement
force, also for IPOs."
Caibon naturally concentrates on the countries where CAIB is
strongest. That doesn't include Russia, where Bank Austria and CAIB
experienced losses in 1998. CAIB's operation has been cut there
from 120 to 20 people. But new markets for CAIB have been Greece
and Turkey. "We're a classic investment bank," says Hemetsberger,
"without any lending business. We can prove to clients that there
are true Chinese walls [between us and the commercial bank]." On
the other hand it's useful to have a treasury department to talk to
in Bank Austria, says Hemetsberger. (Creditanstalt's treasury
department was merged with that of Bank Austria in 1998.)
Retail presence
RZB has the biggest retail presence of the Austrian banks in
central Europe. It is strong in Hungary and Slovakia, and is in the
Czech Republic, Poland, Slovenia and Croatia. But as an investment
bank "it is third or fourth choice for secondary market
quotations", says a competitor.
Erste Bank was a latecomer in central Europe. It bought the
operations of Investmentbank Austria in Budapest and Warsaw. But it
is poised to become a major retail presence in the Czech Republic
if it concludes a deal to take over savings bank Ceska Sporitelna.
Sporitelna, founded by Erste Bank in 1826 as the Kaiserliche
Böhmische Sparkasse, has a 35% share of retail deposits. It has 70%
of the debit card market and operates 80% of the ATMs (automated
teller machines). "It's exactly in the business we like," says
Treichl. Securing it would entirely change the nature of Erste
Bank. Competitors say the bank is too big for Erste to swallow and
will take up excessive management time. "You can't build that kind
of market share, it's a perfect fit," says Buhl at Erste Bank.
The deal turns on how much the Czech government is prepared
to underwrite the credit risk left in Sporitelna's loan portfolio.
Erste Bank is prepared to tackle management and operational risk,
says Treichl, but not bad credits. These amount to around Kr150
billion ($4.2 billion) of mixed quality, of which about 30% are
doubtful or worse (about Kr12 billion has already been taken off
the balance sheet). How will the other 70% of this loan book be
treated? Will it be kept on balance sheet but underwritten, with an
incentive for Erste Bank to work off the loans, or will the
government simply assume the risk? That decision will affect what
Erste Bank can do with Sporitelna's Kr250 billion of deposits -
find new assets in and outside the Czech Republic, or preside over
a workout.
If Erste Bank doesn't get Sporitelna - insiders were putting
the chance at 50-50 in mid-December - then there aren't other banks
it's interested in. But its strategy is clear: it wants to be a
retail and investment bank in the countries bordering Austria -
that includes southern Germany, Switzerland and northern Italy.
Erste Bank has a trading culture, reinforced by its purchase of
Girocredit from Bank Austria in 1998. Through the link with Xetra,
Erste Bank is fostering expertise in small and mid-size companies
in Germany. "We're an equal player with any German bank," says Buhl
at Erste.
And Erste is developing a sector approach to European stocks.
"Austrian retail clients have strongly bought into euroland stocks
and derivatives," says Buhl. That has to some extent balanced the
Vienna market downturn. Erste is also successfully marketing
services to smaller fund managers in Germany and Switzerland
"because we treat them as more important" than do the big German or
Swiss banks. Unlike Bank Austria, Erste Bank has a "strong trading
book in European, US and Japanese stocks", says Buhl. CAIB doesn't
offer execution in euroland and overseas stocks because it
specializes in central and eastern Europe. Erste Bank's expansion
plans are coordinated to some extent with its core shareholders -
Swedbank, Artesia, and Commerzbank. Swedbank, for example, has been
left the major role in Poland while Artesia has a small but useful
broker-dealer in New York. Commerzbank was a co-lead with Erste for
the Euromed IPO on the Neuer Markt.
Each of the three big Austrian banks has introduced issuers
to the Neuer Markt and to pan-European exchange Easdaq, although
Easdaq seems almost dead. It seems inevitable that the Austrian
banks will simply become euroland banks with a specialist eastern
focus.
There are smaller Vienna-based players whose capital-market
strategy is more or less the same as the big banks'. Centro
International Bank - owned 45% by Bank Handlowy, 35% by RZB, and
10% each by Dresdner Bank and First Union Bank of the US - is a
specialist in equity and warrants trading with an emphasis on
central and eastern Europe. In 1997 it became a member of the
German stock exchange. It is one of three market-makers in
warrants, having some former Girocredit traders as the core of its
team. Michael Spiss, a Centro board member from January 1, is
philosophical about the downturn in markets it covers. "We don't
have the sectors that are the centre of investors' attention, but
you can't tell me that the Austrian market is too small. We're
faced with a generation of momentum-based investors. In fact
Austria has the most value, but people are focusing on growth and
new technology. Everyone is asking what are the structural
deficiencies of the Austrian market, but I don't think there are
any. There's good trading and settlement. At the moment we lack a
domestic investor base, and a performing market."
A venturesome approach
Euro Invest Bank is a small, locally capitalized operation
venturing to such places as Kiev, Bucharest and Sofia. It is also
looking at Turkey. It is concentrating on M&A, corporate
finance and financial engineering in these countries. And despite
the market downturn in Vienna it has been finding domestic advisory
business. It is well positioned if business improves.
AOT of Amsterdam has a joint venture with Euro Invest, but in
fact has withdrawn its own operation from Vienna, for strategic
reasons. It decided to concentrate on exchange-traded rather than
OTC products.
The Vienna market risks becoming a small appendix of the
euroland capital market, unless it can distinguish itself as the
centre of trading for central and east European securities. The
CECE index futures and options listed on the Wiener Börse are
unfortunately illiquid. There is a little volume in the Polish
index, recently the others haven't traded at all.
But the players aren't chucking in the towel. Citibank this
year intends to market its Vienna-listed warrants in central and
eastern Europe. CAIB is marketing what it calls émigré central
European stocks listed in Vienna. The artists' materials are in
place for a Viennese renaissance. When coalition talks, hamstrung
since the inconclusive election in October, are resolved, and
Austria's external debt overhang is taken in hand, and the world's
mania for growth stocks has somewhat abated, the attention of
investors may turn again to the orphaned and undervalued market of
Vienna.
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Turnover by type of security (January-December 1998) - in
thousands of euro
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(converted from Austrian Schillings @ 13.7603)
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|
Month
|
Domestic
|
Foreign
|
|
Investment
|
Warrants
|
Participation
|
Bonds
|
Total
|
|
shares
|
shares
|
|
certificates
|
|
certificates
|
|
|
| J-98 |
2,449,497 |
36,608 |
|
179 |
1,434 |
58,423 |
67,088 |
2,613,229 |
| F-98 |
2,489,069 |
38,697 |
|
106 |
297 |
134,539 |
73,564 |
2,736,272 |
| M-98 |
2,956,609 |
54,438 |
|
450 |
401 |
155,861 |
82,943 |
3,250,701 |
| A-98 |
3,120,307 |
56,989 |
|
142 |
415 |
166,193 |
69,562 |
3,413,608 |
| M-98 |
2,393,485 |
39,560 |
|
134 |
172 |
128,923 |
65,816 |
2,628,090 |
| J-98 |
2,453,911 |
38,913 |
|
526 |
165 |
59,322 |
67,766 |
2,620,605 |
| J-98 |
2,632,892 |
49,826 |
|
38 |
296 |
61,497 |
66,021 |
2,810,570 |
| A-98 |
2,797,497 |
38,413 |
|
18 |
221 |
55,392 |
61,979 |
2,953,520 |
| S-98 |
2,880,107 |
41,240 |
|
38 |
345 |
33,849 |
89,422 |
3,045,001 |
| O-98 |
2,358,550 |
29,548 |
|
121 |
612 |
30,480 |
52,498 |
2,471,807 |
| N-98 |
1,762,096 |
28,701 |
|
82 |
579 |
39,349 |
60,713 |
1,891,521 |
| D-98 |
1,502,561 |
27,162 |
|
148 |
295 |
24,893 |
84,136 |
1,639,196 |
| Total |
29,796,583 |
480,095 |
|
1,982 |
5,231 |
948,722 |
841,507 |
32,074,120 |
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Turnover by type of security (January-November 1999) - in
thousands of euro
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|
Month
|
Domestic
|
Foreign
|
|
Investment
|
Warrants
|
Participation
|
Bonds
|
Total
|
|
shares
|
shares
|
|
certificates
|
|
certificates
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|
|
| J-99 |
1,926,607 |
20,293 |
|
137 |
318 |
5,611 |
63,943 |
2,016,910 |
| F-99 |
2,511,599 |
16,971 |
|
112 |
173 |
9,775 |
68,538 |
2,607,167 |
| M-99 |
2,033,542 |
23,330 |
|
79 |
263 |
9,6884 |
64,524 |
2,131,621 |
| A-99 |
2,300,440 |
29,091 |
|
152 |
223 |
2,535 |
65,462 |
2,397,903 |
| M-99 |
1,868,640 |
25,107 |
|
262 |
228 |
3,631 |
55,242 |
1,953,110 |
| J-99 |
1,764,221 |
26,298 |
|
51 |
151 |
4,391 |
57,652 |
1,852,764 |
| J-99 |
1,594,960 |
30,181 |
|
81 |
214 |
2,675 |
61,669 |
1,689,782 |
| A-99 |
1,620,376 |
20,976 |
|
10 |
181 |
3,685 |
59,009 |
1,704,237 |
| S-99 |
1,637,149 |
26,228 |
|
49 |
173 |
2,270 |
53,639 |
1,719,507 |
| O-99 |
1,055,041 |
16,803 |
- |
419 |
2,147 |
54,920 |
1,129,330 |
| N-99 |
1,510,687 |
25,629 |
|
45 |
110 |
2,593 |
50,513 |
1,589,577 |
| Total |
19,823,260 |
260,908 |
|
979 |
2,453 |
49,197 |
655,110 |
20,791,907 |
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Source: Vienna Stock Exchange
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Turn up the volume
Middle Europe is full of gamblers and speculators. That is
the implication of the enormous success of listed warrants in
Amsterdam, Paris, Zurich, Frankfurt, Stuttgart and Vienna. For a
small outlay private investors can gamble on the rise or fall of
the Dax index, gold, the French franc, individual stocks, the
S&P index, the Dow, the Nikkei, almost anything that moves. The
latest fad is for reverse convertibles. These pay a high coupon and
redeem at par, unless the share price falls below the strike: then
you're left with the share.
For years it has been a rather untransparent market, with
wide bid-offer spreads and opaque pricing by the warrants issuer,
traditionally the sole market-maker. Investors didn't mind too much
because avoiding tax was the objective: if you hold the instrument
for a year you avoid capital gains tax. If your put and call
combination is suffciently option-like, you can make a Libor-plus
return that looks like a capital gain and hence is "tax-effcient".
But increased competition and the demand for more
transparency has forced a change. Stuttgart vies with Frankfurt to
attract retail investors. Extraordinarily, Stuttgart is winning.
Most private German warrant investors ask to deal through the
Stuttgart system. It's friendlier and safer, with an effective
limit watching mechanism, Limitminder, that protects you against
excessive loss.
Vienna's electronic warrant trading system, introduced on
October 22, has all the virtues of the Stuttgart model - although
Stuttgart is telephone-based. All it needs is volume. Frank Langer,
global head of warrants trading at Citibank in Frankfurt, calls the
Vienna model "the best warrants trading system in the world".
The system is fully electronic, anonymous, is able to update
rapidly the thousands of prices quoted each hour. Customers can
even hit other customers' bids and offers, provided they are within
the dealer's bid-offer spread.
Citibank has committed itself to making markets in warrants
in Vienna exactly as it does in Frankfurt. The same warrants are
listed in Vienna as in Frankfurt, and the prices are identical,
with a typical bid-offer spread of two basis points on Dax index
warrants.
So far, few warrants on Austrian stocks or the Austrian index
have been listed, but that is coming. "This year we'll list
warrants on Bank Austria, OMV, VA Tech and the ATX [Austrian stock
index]," says Walter Kozupek, a Citibank warrants trader in Vienna.
And this year Citibank will also begin marketing these products in
central and eastern Europe.
Erste Bank and Centro International Bank are also active
market-makers. They are prepared to hang in there until liquidity
picks up. Société Générale intends to join them as a market-maker
some time this year.
Rather surprisingly Bank Austria and its CA IB Investmentbank
(CAIB) take a different view. "All in good time," says Willi
Hemetsberger, chairman of CAIB. "Warrants are a bull market play
and Vienna is about as far from a bull market as you can get. These
warrants are being listed, but they hardly trade." Hemetsberger was
once a derivatives man, having been the star of options trading at
GiroCredit before joining Citibank as head of European structured
derivatives. Now he puts derivatives in perspective: "Three years
ago I predicted that within five years there will be no derivatives
departments. Derivatives aren't in themselves a product. Every
young corporate Wnance guy knows about derivatives and that each
capital market instrument can be dissected into cashXows over time
contingent on something."
CAIB has listed warrants, in fact it listed one in November
on a basket of Turkish stocks. But traditionally Creditanstalt has
found it difficult to place warrants with its customers - "warrants
never had a breakthrough in Bank Austria or Creditanstalt," says a
former insider.
Although the Wiener Börse signed up to Frankfurt's Xetra
system for stock trading last January it decided to use its own
platform for warrants. Now Frankfurt is planning to release a new
version of Xetra in April that will handle its thousands of listed
warrants. But the Viennese aren't holding their breath. Xetra was
designed for big-ticket wholesale trades not the hurly-burly of
retail warrant trading. The new Xetra will be an expensive
solution. On the other hand, 400 banks are signed up to Xetra,
while Vienna's system is limited to the members of the Vienna
futures exchange ÖTOB.
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