Espirito Santo Plunges After Posting 3.6 Billion-Euro Loss

Jul 31, 2014 12:00 pm ET

(Updates with shareholders in ninth paragraph.)

July 31 (Bloomberg) -- Banco Espirito Santo SA’s stock plunged by the most on record and the bonds slumped after it was ordered to raise capital following a 3.6 billion-euro ($4.8 billion) first-half net loss.

The Bank of Portugal required the lender to raise the money after it set aside 4.25 billion euros in the first half, mostly to cover souring loans to other members of the Espirito Santo Group. That cut Banco Espirito Santo’s common equity Tier 1 ratio to 5 percent, less than the 7 percent regulatory minimum, according to a statement yesterday. The central bank is also probing the lender’s former managers and suspended executives in charge of audit, compliance and risk management.

“It’s a very substantial capital increase in a difficult environment,” said Benjie Creelan-Sandford, an analyst at Macquarie Bank Ltd. in London who estimates the lender may need to raise about about 3 billion euros. “There is a question whether there are investors given the size of the capital increase needed or if they will need to resort to state aid. It is there as a last resort.”

The stock sank 42 percent, the most on record, to 20.1 euro cents in Lisbon, valuing the bank at about 1.1 billion euros. The lender’s 750 million euros of 7.125 percent subordinated bonds plunged 21.2 cents on the euro to 54.6 cents, to yield 17 percent, according to data compiled by Bloomberg. Its senior, unsecured 4 percent notes dropped 6.16 cents to 89.2 cents on the euro, to yield 6.9 percent.

Payments Missed

Banco Espirito Santo shares have slumped 67 percent this month as three parent companies linked to the Espirito Santo family requested protection from creditors. Bank of Portugal Governor Carlos Costa has tried to reassure depositors and investors that Banco Espirito Santo could withstand any losses resulting from loans to Espirito Santo Group companies after some of that group’s units missed commercial paper payments.

“Over the course of the past few weeks, both shareholders and potential investors have shown interest in participating in a capitalization plan, some of them willing to take relevant stakes in the bank,” Vitor Bento, who was named chief executive officer on July 14, said in a statement. “A process to increase the bank’s capital will be initiated immediately.”

Costa said on July 18 that tapping the recapitalization fund for Portuguese lenders was “a last resort” and that he expects the bank will raise funds privately.

Brazil’s Banco Bradesco SA, which owns 3.9 percent of the bank, doesn’t plan to contribute to the fundraising, according to a person with knowledge of the matter who asked not to be identified because he wasn’t authorized to speak publicly. A spokesman for France’s Credit Agricole SA, which owns about 15 percent of Banco Espirito Santo, declined to comment.

Government Injection?

“We would expect European regulators to want to hear news on a capital increase arranged privately in the very near term, likely within the next few days, or else a recapitalization using government funds likely will be launched,” Eva Olsson, a credit analyst at Mitsubishi UFJ Securities in London, said in a note today.

The loss reported yesterday is Banco Espirito Santo’s biggest since at least 1999, following a loss of 517.6 million euros in 2013. It was the only one of the three biggest publicly traded Portuguese lenders that didn’t request state aid after the country received a European Union-led bailout in May 2011.

The Bank of Portugal said there are indications of “seriously harmful acts of management” at the lender and a failure to comply with the central bank’s directives. It said it’s reviewing the actions of various individuals, including Ricardo Salgado, who was replaced by Bento as CEO this month.

PwC Team

The central bank said it appointed an oversight commission for the bank made up of employees of PricewaterhouseCoopers until shareholders approve a new audit committee.

The central bank will also restrict the voting rights of Espirito Santo Financial Group SA, or ESFG, in Banco Espirito Santo. ESFG, Rioforte Investments SA and Espirito Santo International SA have all filed for protection from creditors.

Espirito Santo International fully owns Rioforte, which owns 100 percent of Espirito Santo Irmaos SGPS SA. That company owns 49 percent of ESFG, which owns a 20.1 percent stake in lender Banco Espirito Santo. The Espirito Santo Group includes businesses linked to the Espirito Santo family, descendants of the bank’s founder.

Banco Espirito Santo has “direct exposure” of 1.57 billion euros to companies of Grupo Espirito Santo through loans, securities and guarantees, according to yesterday’s filing. That doesn’t include exposure to the group’s insurance companies. As of June 30, Banco Espirito Santo retail and institutional clients had subscribed about 3.1 billion euros of debt securities issued by Grupo Espirito Santo units.

Angola Unit

The bank yesterday said it recognized a loss of 767 million euros related to bonds it issued this year which were packaged in several products and purchased by retail clients through financial intermediaries.

“You can’t say that all issues have been taken off the table,” Creelan-Sandford said. “There is still uncertainty in Angola for instance.”

The Angolan central bank has informed Banco Espirito Santo’s Angolan unit that it needs to carry out a capital increase, the Portuguese lender said yesterday. If Banco Espirito Santo decides not to inject capital, it risks losing control over the operation, according to the filing. The Portuguese company holds 55.7 percent of the BESA unit, which raised $500 million in new capital in December.

The Portuguese lender on July 22 said it picked Deutsche Bank AG to provide advice about how to strengthen its balance sheet. The Portuguese bank last month raised 1.04 billion euros in a rights offering, its second capital increase in two years.

Short-selling of Banco Espirito Santo shares is banned in the Lisbon exchange until the end of today, according to the Portuguese regulator.

--With assistance from John Glover and Shelley Smith in London and Anabela Reis in Lisbon.