The composite route to success?
Ever since the east-west political barriers came crashing down, there has been speculation that Vienna might become a financial centre for the countries of eastern Europe. Austrian finance minister Viktor Klima frequently expresses such a hope. And chancellor (head of government) Franz Vranitzky is on record as saying that one of the greatest opportunities for the Vienna stock exchange is to list eastern European stocks.
Echoing these sentiments, Gerhard Grund, head of investment banking at RZB and board member of Ötob, Austria’s futures and options exchange, says: “A visionary might say everyone buys Chinese securities through the Hong Kong stock exchange [and that] Vienna if we handle it the right way could become a kind of Hong Kong for central and eastern Europe.”
Although Grund emphasizes that such statements are indeed no more than visionary, it may make strategic sense for Austrian bankers to consider them seriously. Creditanstalt, Bank Austria and RZB are among the most active banks in central and eastern Europe. Creditanstalt, for instance, has investment banking and securities operations in Belarus, Bulgaria, Croatia, the Czech Republic, Hungary, Macedonia, Poland, Romania, Russia, Slovakia and Slovenia. RZB is developing a similar network and now employs over 2,000 people in the region. Other Austrian banks, such as GiroCredit, are also looking east. “Since the bank broke off its cooperation agreement with Bank Austria [it] has worked to establish its own sales network in the east,” says Georg Bucher, assistant to the board of GiroCredit. “The bank plans to double [the number of] its offices in the region to six by the end of 1997.”
There are sound reasons for this enthusiasm. Although demand for banking services in Austria is flat, banks with successful operations in eastern Europe are prospering. Creditanstalt’s 17% rise in first-half profits for 1996 largely springs from operations in the region.
Austrian banks also have a strong record of lead-managing central European share issues. In Budapest alone, Creditanstalt has acted as lead manager or joint lead manager for share issues by such companies as MOL, Gideon Richter, OTP, Danubius Hotels and Pharmavit. Bank Austria’s record is just as strong.
Wolfram Littich, head of the securities division at GiroCredit, says: “If Austrian banks can continue to win mandates as lead manager and they use this role to promote Vienna as an alternative listing destination then there is some chance for the stock exchange. I am not saying that lead managers can make the final decision about where to list but they are certainly able to influence the choice more than any other outside party.”
Ernst Karner, senior vice-president for deposits and securities exchange at First Austrian, says: “In central Europe we are now in the second phase where primary listing is very much done at the local stock exchange. That is good and I think that the underlying market should be at the domestic exchanges. These companies want to attract local investors and such a listing is the only way that they are likely to do so.”
Marco Musolin, chairman of Creditanstalt Investment Bank, agrees but stresses that companies in the region that are able to list abroad would not choose Vienna unless there were a special marketing or strategic reason to do so. Musolin argues that London will remain the market of choice for such companies to raise equity capital.
“Stocks in the blue-chip companies will be targeted by institutional investors,” he says. “These investors will not want to go through the schilling to get to the zloty or the forint. Blue chips may launch GDRs or ADRs in London or New York or their shares may be traded on a system like Seaq.” Creditanstalt last year relocated its central and east European equity sales and trading team to London.
A dismal record
According to some observers, the biggest obstacle to development is the Vienna stock exchange itself: its record as a listing venue for central and eastern European companies is dismal. In 1990 there were more Hungarian companies listed in Vienna than there were in Budapest but many of them subsequently filed for bankruptcy and those that haven’t are no longer actively traded at the exchange. “People lost a lot of money on Hungarian shares,” says Karner. “We invested too early. The companies made profit forecasts that were much too optimistic and restructuring was much slower than expected.”
An effort is now being made to lift Vienna’s profile. Ötob has started listing derivatives on eastern European stocks (see box, page 86) and by mid 1997 Ötob and the stock exchange will operate under the same holding company. The link is part of a capital-markets promotion launched in November by finance minister Klima and stock exchange president Gerhard Randa. In its own jargon, the programme is designed to make Vienna’s capital markets “euro-fit”.
The jargon translates into a two-pronged statement of goals. The first involves reforms to make Vienna among the most investor-friendly exchanges in Europe from a legal and technical standpoint. Goal two involves improving access for small and medium-sized companies to cement the stock exchange’s role as the primary listing destination for corporate Austria after EU economic and monetary union. If the reforms work they could make Vienna attractive for eastern European companies; the risk is that the emphasis on the Austrian domestic market will divert attention from the tantalizing opportunities to the east.
There is agreement that the technical reforms are essential to growth. “The foundations for any growth at the merged exchange must be efficient and transparent trading, settlement and supervisory systems,” insists Grund of RZB. Johannes Attems, a board member of Österreichische Kontrollbank (öKB) and a leading member of the group that launched the reform programme, is blunter: “We cannot hope to survive in the international arena unless the systems supporting the exchange are easy to understand and operate without fault.”
The consensus has allowed the technical reform progamme to proceed rapidly. The electronic quote order system (Eqos) permits trading on a market-making basis for the most liquid stocks on the exchange. An amendment to stock exchange legislation permits the exchange to offer remote membership via the Eqos system. öKB will shorten settlement time to T+3 this year. Listed companies already use Hermes, an information system, to publish real-time price-sensitive information either free of charge at the Hermes web site or via news agencies.
Insider-trading legislation based on EU directives was passed in time for Austria’s entry to the EU. In late November, the Austrian parliament agreed a new law that tightens up on this. Anton Stanzel, who supervises the exchange from the finance ministry, explains that the bill introduces an independent regulatory authority for the exchange that will draw its funding mainly from banks and securities houses but also from the government, issuers and portfolio managers.
Misplaced priorities
The second goal is no less essential for the exchange but it may hinder Ötob’s development to the east by focusing resources on defending a market that even the Vienna reformers admit is weak. The exchange has a market capitalization-to-GDP ratio of 16%, lower than famously small exchanges in Spain and Italy. Average daily trading volume is a mere $54 million, $20 million less than the unremarkable Brussels stock exchange. The ATX, the Vienna stock exchange’s benchmark index, is still some 30% below its all-time high, despite the global equities boom. Moreover only 4% of Austrians hold shares and Austrian equities account for less than 2% of the portfolios of Austrian institutional investors. Anton Stagl, executive managing director for securities trading at First Austrian, sums up the situation as a sort of Catch-22: “The overall performance of the equity market is not that good because of [a lack of] investors and investors don’t come because the performance is not that good.”
Recent events confirm a pattern of stagnation if not decline. Last year, the only IPO on the Vienna stock exchange came in December from KTM, a small but growing motorcycle company. Deutsche Morgan Grenfell together with Creditanstalt prepared the prospectus. Although there was a small number of secondary issues by privatized companies, others such as SEZ, a successful small company in the semiconductor business, listed abroad rather than in Vienna. The technical reforms have improved access and transparency, but the Austrian press has focused on delays in their implementation and on alleged market manipulation by a Bank Austria trader that led to hasty adjustments in the calculation of closing prices under the Eqos system.
Attems, though, reckons that the low level of share ownership and low market capitalization are signs that growth is inevitable as long as the exchange makes itself attractive to investors and potential listing candidates. Although the final details of the maintenance reforms are still under discussion most recently at a gathering of interested parties on November 28 they do address this problem of kick-starting interest in the exchange by both investors and companies.
The drive is aimed at domestic private investors and institutional investors both from Austria and abroad. But the focus is on institutions. Robert Rauscher, head of securities at Creditanstalt, says: “The world’s largest capital markets are driven by institutional investors. These investors are of vital importance to their liquidity as much as 60% of the trades in London are done by institutional investors. Only 1.7% of the portfolio of [Austrian] insurance companies is invested in [equities] in Austria. We have to chase that market.”
Partly in response to such sentiments, the government has altered the rules on investments to allow Austrian pension funds to invest up to 40% of their holdings in shares. Insurance companies are now able to invest up to 30%.
Despite the legal change, Austrian pension funds and insurance companies are unlikely to rush to the Vienna stock market. “These companies are very conservative in their investment strategies,” warns Rauscher. This is borne out by calculations that show that the typical investment profile of an Austrian portfolio is around 80% bonds and 20% equities. US or UK portfolios, by comparison, are typically weighted towards equities. Moreover even when Austrian funds do invest more in equities it will be difficult for them to justify investing the bulk of their equity allocation in the Austrian market. First Austrian’s Karner points out the problems: “If you invest in the US during a period of slow growth no-one can say: ‘Why do you invest?’ Because you can answer by saying: ‘It is 30% of the market worldwide’. But if you invest 30% or 40% in Austria and the market performance is weak, you have plenty of explaining to do when the market capitalization is [less than 0.5.%] of world capitalization.”
There is a second, bigger, barrier to attracting more Austrian institutional investors. “The main problem is that there are no large private pension funds in Austria,” says Karner. When the size of pension funds is compared with GDP and with the stock exchange’s market capitalization, Austria has the smallest private-sector pension industry in the EU. This will change. Reforms of the Austrian state pension system are much discussed. When these take place, the industry will boom. Some even suggest that growth will start sooner. “People are now less convinced that the government will provide well for them in their old age,” says Karner. “The pension fund system could then slowly become more attractive.” It is, however, unlikely that such slow growth will fuel a quick injection of the cash that the stock exchange needs.
Only slow growth likely
The drive to capture remote members and new international institutional investors is also likely to lead to slow rather than rapid growth. Investment is limited by the size of the Austrian equity market. Only two stocks traded in Vienna rank among the 100 leading European stocks. This gives Austria a natural weighting of between 1.5% and 2.5% in European equity funds. Although there are Austrian country funds, Creditanstalt’s Musolin admits that “the Austrian equity market is really too small for a country fund”.
Attems and other reformers point out that the expected growth of sector funds could lead to a rise in the number of Austrian shares that make it into European-wide funds. Most of Vienna’s 10 most heavily traded stocks matched by Ötob contracts would at least be candidates for inclusion.
That is to look ahead. At the moment, the response to the remote membership progamme suggests that international investors are not going to rush into Austria in the way they did in 1985. Bankers who have attended the roadshows in London and Paris are at most mildly interested in remote membership. “We will probably take remote membership but to be honest it is not near the top of our list of priorities,” says the head of operations at a London trading room. Another says: “At the moment the best thing about the remote membership scheme is the downward trend it has caused in Austrian brokers’ fees.” He adds: “However, we probably will join by the end of 1998.” Attems is not surprised at this negative reaction: “There are not going to be bankers queuing at the door of the exchange,” he says, “but it will have remote members before the end of 1997 and the number will grow steadily.”
Those who want to focus efforts on bringing eastern and central European equities to Vienna point out that there is no lack of interest in that region on the part of international institutional investors certainly nothing to compare with their indifference to Austrian equities. Even opponents of the idea admit as much. Rauscher says: “The Austrian stock exchange prospered in the mid-1980s because it was an emerging market driven by investors who were not averse to high risks. Now those investors have turned their attention to eastern Europe.”
Like Austrian institutions, Austrian private investors don’t rush into equity. In this area, though, smarter companies have tried to alter that perception. Rauscher refers to the TV commercials for the Deutsche Telekom flotation as a successful exercise in altering perceptions. One of these showed a character in a wine cellar saying: “Buy these shares now and keep them. The stock will mature. It will be ready to sell after three years.”
Some indicators point to limited success in attracting private investors. Surveys show that 14% to 16% of Austrians are interested in owning shares. New issues like KTM have been oversubscribed. And although the Austrian privatization programme has not had quite the same effect on shareholder numbers as the British or German programmes, it has shown that the right shares can make safe investments.
In Paris, Erich Becker, a board member of Österreichische Industrieholding (ÖIAG), the holding organization charged with privatizing Austria’s public utilities, showed that shares in major ÖIAG companies such as ÖMV, VA Tech, BUAG and VA Stahl have consistently outperformed the ATX. A small investor who participated in ÖIAG privatizations and cashed in his shares on October 31 1996 would have made a return of 63.2% on his initial investment.
Rauscher says: “Let’s be conservative and say that only 8%-10% will actually buy. That would still more than double the size of the market today.” Those who think this way hope that the finance ministry will introduce tax incentives to transform interest into investment. Rauscher says: “Private retail investors are mostly tax-driven. I would support tax breaks similar to those in France or Sweden. Such breaks could provide initial support and then be cancelled if all goes well.” However, even if the reforms do attract small investors, the exchange cannot prosper on their money alone.
Austrian companies are little more excited about the Vienna stock exchange than are investors. What must seem like a vote of no confidence came on November 20 when SEZ listed in Zürich rather than Vienna. Investors were rewarded with a quick price rise, the shares shot up from Sfr960 at listing to over Sfr1,800 by early December. Officials at the Zürich exchange like to think SEZ chose Switzerland because similar companies such as Esec, Christ and Micronos have enjoyed successful launches there over the last two years. Sergio Terribilini at SEZ’s lead manager, Bank Vontobel, agrees: “The main reason for choosing Zürich was the difference between the two capital markets. For high-tech companies Zürich offers better analysts, better access to international investors and a track record of successful listings.”
Home’s not always best
Terribilini concedes that not many Austrian companies will follow SEZ to Zürich but adds: “The real point is that all companies wherever they are located now look around before deciding where to list. There is no automatic reason for the management to choose the company’s home stock exchange.” What must worry the Viennese reformers is that Terribilini is talking about small or medium-sized companies rather than blue chips, which have long been expected to list abroad when they need to raise capital. Their response is that the reform programme should correct some of the disadvantages that an Austrian listing under the old system held for SEZ. Those who are willing to discuss a programme to encourage eastern European listings take Terribilini’s view of the market.
Grund of RZB says: “If the market wants to prosper in 10 or 15 years’ time, it must develop a niche rather than focus simply on the domestic market in the same way that Brussels has developed a niche market for pan-European holding companies.” However, Randa at the stock exchange stresses that “the key competence of the Vienna stock exchange is and will remain the Austrian capital market … Thus highest priority is given to Austrian companies.”
The domestic reform plan involves launching a small-companies market (called Fit) modelled on Paris’s Nouveau Marché and London’s Alternative Investment Market. Manfred Heider, deputy secretary-general of the Vienna stock exchange, claims that over 200 small Austrian companies support the plan and expects that between 10 and 15 of them will list on Fit when it opens in mid-1997.
However, such interest is only likely to be sustained if the government continues to threaten to alter the tax structure affecting company financing. At the moment banks are encouraged to offer subsidized loans to small companies to such an extent, Littich says, that: “We would give loans to a small company that a US banker would not even talk to. A lot of small Austrian companies have very high leverage. While loans stay cheap, there is no reason for them to come to the [equity] market. Rauscher adds: “The subsidies are now likely to go. There is no more room for them in the budget. When they are cut, companies will have to turn to the capital market for their medium-term and long-term funding.”
Banks aren’t charities
The fact that the capital markets promotion programme attracts criticism for focusing too heavily on small companies is important ammunition for those who would rather that a new market if it has to be launched at all has a different orientation. According to exchange proposals circulating in early December, newly listed small companies would receive market support from at least one stock exchange member which would provide evaluations on a regular basis and undertake to maintain liquidity in the shares. But for some bankers, that is simply too much to ask:
“We are not charities,” says one Austrian banker. “Why should we have to quote prices on some company that no-one is going to want to trade?” Musolin stresses that increasingly banks are only going to support measures that will improve their profitability. This sort of measure may have a negative rather than a positive impact in the short term. If the banks refuse to offer quotes without matching orders there is not likely to be much liquidity. Littich says: “Let’s not pretend that there are no liquidity problems with some of the top-tier companies on the Austrian market. If an exchange like New York, with high turnover in its primary market, has problems with turnover in its small-cap companies, Austria certainly isn’t ready for this sort of experiment.”
Such comments are given extra bite by the fact that the same proposal envisages investors in the new market being obliged to hold on to their shares for a lock-in period of either three or six months.
Clearly Fit on its own does not attack both poles of Austria’s problem. Taken as a package, though, some believe the reforms might work. First Austrian’s Stagl says: “It is possible to criticize this reform and the others. There is always a risk that they will fail. But when you operate in the markets you quickly learn that there is also a possibility of success. It may be that investors will recognize that Austrian securities are undervalued at the same time that the changes in tax structure turn the attention of corporate Austria towards the exchange.”
All these plans may indeed materialize. So far, though, the November venture from Ötob has succeeded far more in attracting the interests of international investors, Austrian and international banks and the blue-chip companies of eastern Europe by offering innovative products. This rather side-steps the assumption that an Austrian exchange’s primary duty is to service Austrian companies and investors simply because it is located in Vienna.
