Fitch: Espirito Santo Fallout Risk Remains But Contained For Now

Mon Jul 14, 2014 12:55pm EDT

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(The following statement was released by the rating agency) BARCELONA/LONDON, July 14 (Fitch) The immediate fall-out from the troubles at the Espirito Santo group for other Portuguese banks appears contained for now, Fitch Ratings says. Nevertheless, uncertainty over the group, which includes Banco Espirito Santo (BES, unrated by Fitch), one of Portugal's largest banks, leaves the banking system vulnerable to declining confidence. We believe that direct risks for the large Portuguese banks we rate - Banco BPI, Santander Totta, Millennium bcp and Caixa Geral - are limited since each bank's total exposure to the wider Espirito Santo group is likely to be manageable relative to its Fitch Core Capital. Within the Portuguese banking system there are also interbank positions with BES, but these will be at least partly collateralised or short term and should also be manageable. Funding cost volatility is likely to remain for Portuguese banks until the Espirito Santo group situation is clarified and resolved. We expected a reduction in deposit costs to be a key driver for improved Portuguese bank profitability this year, but to the extent that the BES uncertainty puts pressure on funding costs, earnings improvement will be deferred. The funding gap for Portuguese banks has steadily decreased as a result of deleveraging. The four large banks rated by Fitch have combined unsecured debt maturities for 2014 of an estimated EUR2bn, which does not look onerous in relation to their liquidity, and the banks also benefit from continued access to the ECB. The impact on banks in the wider periphery should only be temporary, but it highlights the fragility of investor sentiment for the region and could raise funding costs. Continued uncertainty might dampen investor sentiment for peripheral banks' equity issuance, many of which are committed to building up buffers in anticipation of the AQR and stress tests. Espirito Santo International owns 49% of Espirito Santo Financial Group, which is listed on Euronext, and owns a 20.1% stake in BES after selling down 4.99% today. The bank has said it has a sufficient capital cushion to absorb potential losses on its exposure to the wider group, a statement confirmed by the central bank on 11 July. BES had a EUR2.1bn capital buffer at end-March 2014, taking into account its June capital raising, which more than covers the reported EUR1.2bn exposure at end-June. Contact: Roger Turro Director Financial Institutions +34 93 323 8406 Fitch Ratings Espana, S.A.U. Paseo de Gracia, 85, 7th Floor 08008 Barcelona Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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