CORRECTED-Portugal's BES steadies nerves, losses still a puzzle

Fri Jul 11, 2014 5:59am EDT

(Corrects to show that the 2.1 billion euros capital buffer includes June capital raise)

* Investors still in dark over potential losses

* Concerns over links to family-controlled companies

* BES says it has enough reserves to absorb any losses

By Andrei Khalip and Laura Noonan

LISBON/LONDON, July 11 (Reuters) - Banco Espirito Santo steadied market jitters about its vulnerability to the troubled business empire of its founding family on Friday but investors are still in the dark about the size of any potential losses.

Portugal's largest listed bank is at the centre of a firestorm after concerns about its links to a web of companies controlled by the powerful Espirito Santo clan sparked a rout in global markets this week, prompting some European companies to pull fundraisings and reviving memories of the region's debt crisis.

Under pressure to clarify its position and stop the situation spiralling out of control, BES released a statement in the early hours of Friday saying that it had exposures worth 1.15 billion euros and believed it had enough reserves to absorb any losses.

BES said it had 2.1 billion euros in capital above minimum regulatory requirements as of March 31, taking into account a further 1 billion via a rights issue.

The move stabilised markets but shares in the bank are still suspended and sentiment both for it and the wider euro zone remain cautious as investors await further updates and any signs that BES's woes will spread across Europe.

While BES gave the most detailed breakdown yet of its exposure to other Espirito Santo group companies it said that it had to wait for the restructuring plan of the Espirito Santo Group, its largest shareholder, before it can assess the potential losses.

The restructuring is expected soon.

"Although we welcome the latest disclosure from BES which goes some-way to enhancing the transparency on its exposure to the wider Espirito group, we still think that the situation facing the bank remains precarious given the opacity around its parent's capital shortfall and the likely restructuring approach," Ciaran Callaghan, a credit analyst at Merrion Stockbrokers in Dublin, said in a note.

Shares in the bank plunged more than 17 percent to their lowest price in a year on Thursday before Portugal's stock market regulator halted trading pending the statement from the bank.

European markets recovered some of their composure edging higher on Friday with Portugal's PSI index up nearly 2 percent.

The country's sovereign and corporate debt also made up lost ground with yields on 10-year sovereign paper down 6 basis points (bps) after losing 20 bps on Thursday. Bond yields move in the opposite direction to their price.

BES's junior debt recovered much of Thursday's losses and its senior unsecured bonds fared even better, trading up 5 basis points after falling 2 bps on Thursday.

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Banco Espirito Santo has been under scrutiny for weeks after reporting "material irregularities" at a holding company of the Espirito Santo family, which founded the bank in the 19th Century.

The scandal marks a slide in fortune for a bank viewed as one of the most resilient lenders in Portugal. BES was the only one of the top listed banks in Portugal not to receive an injection of state capital during the country's sovereign debt crisis.

Phoebus Theologites, chief investment officer at SteppenWolf Capital, said there was little risk of contagion for the rest of the euro zone for now, and Portugal's central bank could engineer a merger if it felt this could help.

"The Portuguese central bank will stabilise the situation and even if the worst should come to pass, a merger will take care of the problem," he said.

"This correction only serves as a reminder that nothing is yet fixed in the euro zone and that, no matter how much money the ECB ends up printing, it will not jump-start the euro zone's economies because the euro zone's troubled banks will need to absorb much of this money for their balance sheets."

"But this does not mean we will get contagion or a crash."

BES raised around one billion euros in a rights issue last month. That saw the Espirito Santo family lose control of the bank and prompted its patriarch, Ricardo Espirito Santo Salgado, to step down as the bank's chief.

The family is still the bank's largest shareholder with a 25 percent stake in the bank held via a holding company, the Espirito Santo Financial Group (ESFG), whose interests range from insurance to hotels and property.

ESFG asked for its shares to be suspended on Thursday due to "material difficulties" at its own largest shareholder, Espirito Santo International (ESI).

Further detail on BES's financial situation will be given on July 25 when the bank releases its half-year results. Shareholders will meet six days later to vote on a new chief executive and new directors, after family members said they would step down from the bank's 25-man board. (Writing by Carmel Crimmins; Additional reporting by Aimee Donnellan and Sudip Kar-Gupta in London; Editing by Giles Elgood)

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