(Corrects in seventh paragraph to show losses on family loans
of 1.2 bln euros, not 2.1 bln euros)
* BES loses 3.6 bln euros, says will raise capital quickly
* BES warns of possible illegal activity at bank
* Bank continued to lend to family firms as woes mounted
* Bank of Portugal suspends BES risk, compliance, audit
* PwC to monitor bank until new internal auditors in place
By Laura Noonan and Andrei Khalip
LONDON/LISBON, July 30 Laws may have been broken
at Portugal's Banco Espirito Santo during a
catastrophic six months that saw it lose 3.6 billion euros ($4.8
billion), the bank's new management said on Wednesday, as they
vowed to raise new cash to bolster finances and to investigate
The Bank of Portugal announced hours later that BES's top
risk management, compliance, supervision and audit officials had
been suspended over suspected "harmful management" that may have
contributed to the bank's massive losses. The regulator also
barred ESFG, the holding company of the bank's founding family,
from exercising any voting rights from its 20 percent stake in
The bank's losses - which prompted it to say it would
immediately begin a process to raise more capital - came as
BES's new management team sought to draw a line under a torrid
few months dominated by fears about the bank's exposure to the
troubled business empire of the Espirito Santo family.
Instead, the team, which was appointed on July 14, had to
give fresh details of irregularities they had discovered in the
way the bank dealt with family companies in the recent past.
The revelations included the fact that 120 million euros was
loaned to a family company in June without passing through the
bank's related party lending controls that are in place to
approve such transactions.
The bank also said it had to take 856 million euros of
provisions after it discovered two letters issued by the bank in
favour of creditors of a family holding company, ESI, which were
not registered in the bank's accounting records at the end of
In total, 1.2 billion euros of provisions were taken because
of the bank's exposure to the Espirito Santo Group, which lost
control of the bank in June but remains its largest shareholder
with a 20 percent stake. Another 590 million euros hit was taken
to cover repayment of debt issued by Espirito Santo Group
companies to BES clients.
The bank also booked losses of 198.2 million euros for its
troubled Angola unit and noted that it could lose its majority
stake in the bank if it does not participate in the "substantial
reinforcement of its equity" that it needs.
The Bank of Portugal said "forensic auditing" they ordered
at BES will establish whether the bank's former chief executive,
chief financial officer and other top executives that have
stepped down bear individual responsibility for the losses. "In
case illegal practices are confirmed ... possible consequences
of criminal nature may follow," the regulator added.
"Regardless of this assessment of individual
responsibilities, the acts harmful to BES interests are
incompatible with officials in charge of auditing, compliance,
risk management and supervision bodies remaining in their
Senior officials at consultancy PwC will lead a "supervision
commission" at BES until shareholders name new internal auditing
officials, the Bank of Portugal said.
In its results statement, the bank said it would do all it
could to ensure that it was reimbursed for any losses caused as
a result of any potential illegal behaviour. The bank's former
chief executive, Ricardo Espirito Santo Salgado, could not
immediately be reached for comment.
BACK FOR MORE
The bank vowed to swiftly raise capital since the losses
pushed BES's capital ratio to just 5 percent at the end of June,
below the minimum 7 percent level required by regulators.
Bank of Portugal stressed that there was no immediate threat
to the bank. "All the necessary conditions are in place for the
bank to continue its activities and for the full protection of
the rights of depositors," it said.
BES said it would raise enough money to give it a cushion
above what it is 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 recapitalisation
plans "within a reasonable time frame".
"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," said Vitor Bento, the bank's chief
The central bank said it would prefer if capital were raised
from private sources, but that the country does have funds for a
public bailout if needed.
BES last raised capital on June 10, selling 1 billion euros
of shares to existing investors. A month later, as fears mounted
about its exposure to the ailing Espirito Santo empire, BES said
it had enough capital to withstand any losses on its 1.2 billion
euros of lending to family companies.
Since then, three of the family's holding companies have
applied for creditor protection in Luxembourg.
An investor who has been examining BES's situation said it
could raise more private cash even though shareholders who put
in money in June have seen their investments plummet by about 50
"To raise more capital, the market needs to get reassurance
that the potential leakage points are known and there's not
another possible source," he said.
The bank is also preparing a strategic restructuring plan
that Bento said could lead to the sale of some of its
"Whilst this has been a difficult time for all stakeholders,
we are now focused on taking the necessary steps for the future
and to place the bank on a sustainable financial footing for the
future," he added.
($1 = 0.7465 Euros)
(Reporting by Laura Noonan and Andrei Khalip; Additional
reporting by Sergio Goncalves in Lisbon; Editing by Andrew Hay
and Mohammad Zargham)