Prague’s Fading Bourse Triggers Komercni Push to Buy Abroad

The only publicly-traded Czech bank is advising clients to buy shares in the U.S., France and Germany as Prague Stock Exchange (PX) trading wanes and the benchmark index posts Europe’s worst slump after Cyprus.

“Our primary strategy is to move clients abroad, where there are more stocks and better opportunities,” Radek Neumann, chief stock trader at Komercni Banka AS, owned by Societe Generale SA (GLE), said in a July 19 interview. “The lack of liquidity, a weak economy and the fact that Czech companies have no growth stories means investors are moving elsewhere.”

Prague’s PX index slid 13 percent this year, the sixth-biggest drop among 94 indexes tracked by Bloomberg and trailing only the Cypriot stock gauge’s 19 percent drop in Europe. Share turnover fell 36 percent in the first six months from a year earlier to 3.4 billion euros ($4.5 billion), data from the Federating of European Securities Exchanges, or FESE, shows. In Germany, volumes shrank 4.1 percent to 513.8 billion euros while in Poland they rose 16 percent to 26.8 billion euros.

The Czech bourse, which traded thousands of stocks in the 1990s when the government sold stakes in companies following the fall of communism, now lists 25 companies, including 13 on its main index. Prague has hosted one initial public offering since 2008, compared with 116 new listings on the Warsaw Stock Exchange. Six straight quarters of shrinking economic output, plans by the largest party in parliament to raise taxes for big companies and a new trading platform which has limited liquidity all have damped appeal for the market, Neumann said.

Photographer: Vladimir Weiss/Bloomberg

A Komercni Banka AS logo sits on the front of a branch in Prague, Czech Republic. Close

A Komercni Banka AS logo sits on the front of a branch in Prague, Czech Republic.

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Photographer: Vladimir Weiss/Bloomberg

A Komercni Banka AS logo sits on the front of a branch in Prague, Czech Republic.

Market Makers

Volumes in Prague extended a five-year slump after the exchange moved trading in November to the Xetra platform from the previous SPAD system. The bourse, a member of Wiener Boerse AG’s CEE Stock Exchange Group along with markets in Austria, Hungary and Slovenia, said the switch was designed to ease access for foreign investors and allow Czech brokerages to trade in countries using the same software, including Germany.

Rather than boosting volumes, Xetra has fragmented trading into smaller transactions and curbed the role of market makers, or brokers obliged to maintain liquidity, according to Neumann. The bank’s clients now make about 40 percent of stock purchases abroad, up from about 5 percent in 2007, he said.

“The drop in volumes has been magnified by the switch to Xetra,” said Neumann. “SPAD was optimal for institutional investors as they were certain to trade the needed amount of securities within a few moments. There is currently no such certainty and the Czech market has become a domain of small investors, while the large ones have been moving elsewhere.”

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People stand on bridges crossing the flooded Vltava River in Prague. Close

People stand on bridges crossing the flooded Vltava River in Prague.

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Photographer: Matej Divizna/Getty Images

People stand on bridges crossing the flooded Vltava River in Prague.

Size, Liquidity

The size and liquidity of markets in France, Germany and the U.S. allow investors to be more “creative,” Neumann said.

Prague-based Komercni Banka, one of two banks listed on the PX index, has dropped 8.1 percent this year, reducing its market value to 140 billion koruna ($7.2 billion). The lender is the third-largest in the Czech Republic by assets after the local units of KBC Groep NV (KBC) and Erste Group Bank AG.

Jiri Kovarik, the spokesman for the Prague Stock Exchange, said the European Union’s debt and economic crisis is a bigger factor for investors than the Xetra system.

“We don’t believe the drop in volumes is caused by our new trading system,” Kovarik said by phone on July 24.

Czech shares are cheaper than Polish equities, with the PX gauge trading at 11.8 times estimated earnings, compared with 12.5 times for Warsaw’s WIG20 index. CEZ AS, the biggest Czech power producer, is the cheapest among 16 sector peers tracked by Bloomberg after tumbling 32 percent this year to 463.5 koruna by 4:27 p.m. in Prague. The slump prompted ING Groep NV to raise CEZ to buy from hold on July 1.

Photographer: Vladimir Weiss/Bloomberg

Pedestrians walk past the Czech central bank in Prague, Czech Republic. The central bank last stepped into the market to weaken the koruna 10 years ago. Close

Pedestrians walk past the Czech central bank in Prague, Czech Republic. The central... Read More

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Photographer: Vladimir Weiss/Bloomberg

Pedestrians walk past the Czech central bank in Prague, Czech Republic. The central bank last stepped into the market to weaken the koruna 10 years ago.

Warsaw Packed

“Attractive” dividends and valuation give CEZ room to rebound, Stanislaw Ozga, an analyst at PKO Bank Polski SA in Warsaw, wrote in an e-mail today. Ozga started covering CEZ on June 28 with a buy rating and a price estimate of 509.4 koruna.

Companies from the EU’s post-communist nations have favored listings in Warsaw, home to the biggest exchange, rather than with the Vienna-led group. CEE Stock Exchange’s share turnover dropped 80 percent in January to June from a peak in 2007, compared with declines of 57 percent for Deutsche Boerse AG and 15.5 percent in Poland, FESE data show.

While listings fell to 28 from 31 in Prague and to 103 from 118 in Vienna between June 2007 and June 2013, the number of companies traded in Poland surged to 888 from 301, surpassing Germany with 731 stocks, FESE data show. The Belgian, Dutch, French and Portuguese bourses, operated by NYSE Euronext, have a combined 1,065 listings, little changed from six years earlier.

’Dreadful’ Volumes

“Czech volumes have been dreadful compared to Poland, which is a much more dynamic market with constant listings,” said John Milton, a director at Ipopema Securities SA that trades shares in Warsaw, Prague and Budapest, in a phone interview on July 23.

The Czech recession deepened in the first quarter as gross domestic product contracted 1.3 percent from the previous three months, the statistics office in Prague said on June 28.

A three-year fiscal-austerity program has cut government and consumer spending, while the euro area’s debt crisis hurt demand for Czech exports, which account for about 80 percent of GDP, worsening the outlook for company profits. The economy will grow 0.3 percent in this year and 1.6 percent in 2014, estimates from the International Monetary Fund show.

CSOB Asset Management AS reduced holdings of Czech shares in its emerging European equity fund to less than 17 percent in June from 20.8 percent at the end of 2011, Pavel Kopecek, a fund manager, said in e-mailed comments on July 23. The Prague-based investment arm of KBC is the country’s third-biggest money manager with 156 billion koruna ($7.9 billion) of assets.

Political Levy

“While the Czech bourse offers interesting opportunities, the companies’ small size and low liquidity often prevent institutional investors from accumulating larger stakes,” said Kopecek. “They diversify by moving to neighbouring markets.”

The Czech Social Democrats, or CSSD, have pledged to raise taxes on energy, financial and telecommunications companies to 30 percent from 19 percent and to scrap a law allowing taxpayers to divert part of pension taxes to private accounts. CEZ touched an eight-year low on July 17 as the stock’s selloff was boosted by speculation the country may be heading toward early general elections, which the CSSD would win, according to opinion polls.

“Local funds are looking at this and reducing positions,” said Komercni Banka’s Neumann. “Investors from other countries with a stronger free-market mindset see this as political interference and don’t want to invest in this environment.”

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net

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