BES edges closer to state aid as investors baulk at losses

LISBON/LONDON Thu Jul 31, 2014 10:22am EDT

Two men speak outside an investment office of Portuguese bank Banco Espirito Santo in downtown Lisbon July 31, 2014.  REUTERS/Rafael Marchante

Two men speak outside an investment office of Portuguese bank Banco Espirito Santo in downtown Lisbon July 31, 2014.

Credit: Reuters/Rafael Marchante

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LISBON/LONDON (Reuters) - Banco Espirito Santo's hopes of raising capital without taking state aid suffered a major blow on Thursday as investors took fright at massive losses and revelations of potential illegal activity at Portugal's largest listed bank.

Its shares, which were suspended from trading on Wednesday evening, plummeted to an all-time low within five minutes of trade resuming in Lisbon at 0514 ET on Thursday. They later pared losses, but were still down 28 percent by mid-morning.

The shares had been suspended to give investors time to digest details of a 3.6 billion euro half-year loss that will force the bank to raise capital and the suspension of top officials over suspected "harmful management".

"The results and the recapitalization need are close to the worst scenario envisaged by the market, the capital ratio has fallen way below what is requested," said Joao Lampreia, an analyst Banco Big in Lisbon, who expects the bank will need to raise around 3 billion euros.

BES, founded by Portugal's only banking dynasty over 100 years ago, was the only Portuguese bank to avoid taking a bailout during the financial crisis. Its new management, who were appointed on July 14 after the Espirito Santo family lost control, want to retain that status.

That goal will likely be harder to achieve following Wednesday's announcement.

"Bank of Portugal and BES’ new CEO have commented that private investors are willing to step in. But would the state and/or junior bondholders have to get involved?" Citi analyst Stefan Nedialkov wrote in a note to clients.

Portugal's central bank said on Wednesday night that private capital was its preferred solution for BES, which had a common equity tier one ratio of just 5 percent at the end of June, below the regulatory minimum 7 percent.

It said public funds are available should the bank need them. Portugal, which emerged from its sovereign bailout in May and has been eyeing economic recovery, has 6.4 billion euros of funds for any bank recapitalization.

BES said late on Wednesday it would raise enough money to give it a cushion above what it was legally required to hold, but did not immediately say how much cash it would seek. It said it would call a shareholders' meeting to approve the recapitalization plans "within a reasonable time frame".

In a note to clients, Nomura analysts said the bank would need at least 1 billion euros of new equity to meet minimum requirements and as much as 3 billion euros to restore its previous cushion.

BES last raised capital on June 11, selling 1 billion euros of discounted shares to existing investors. Even before Thursday's share price falls, those investors had suffered losses of about 50 percent.

Last week more than 20 investors held talks with the Bank of Portugal about a possible investment, people familiar with the discussions told Reuters. U.S. hedge fund DE Shaw and clients of Goldman Sachs have already taken a combined stake of 5 percent.

The sources, speaking on the condition of anonymity as discussions are private, also stressed that Bank of Portugal had repeatedly made it clear that state aid was an absolute last resort.

One hedge fund manager who is considering an investment said a bailout was not inevitable. “If there really was no prospect of getting any cash, the stock should probably be at zero,” he said.

He said there was precedent for a bank raising far more capital than it has, pointing to Italy’s Monte dei Paschi raising 5 billion euros despite its market value being just over 2.5 billion euros when it approached investors.

(Additional reporting by Daniel Alvarenga in Lisbon; Editing by Erica Billingham)

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