(Adds government comment on economic impact, Bradesco not
interested in increase)
By Laura Noonan and Andrei Khalip
LISBON/LONDON, July 31 Portugal's hopes of
drawing a line under the financial and governance troubles of
Banco Espirito Santo were dashed on Thursday as investors took
fright at massive losses and revelations of potential illegal
activity at the country's largest listed bank.
Shares in Banco Espirito Santo, or BES, plunged 42 percent a
day after the bank posted a 3.6 billion euro loss and higher
than expected provisions to cover its exposure to companies
owned by its founding Espirito Santo family. The bank's ambition
of raising capital, without seeking state aid, is now an uphill
Among the revelations were two letters issued by the bank in
favour of Espirito Santo creditors but never registered in the
Portugal's central bank suspended top officials at the bank,
but investors worry about what other surprises may lie ahead.
Brazil's Banco Bradesco which has a 3.9 percent
BES stake, said on Thursday that it had "no interest" in the
Cabinet Affairs Minister Luis Marques Guedes expressed
concern that the crisis around BES and the Espirito Santo
family's other holdings will hamper the country's recovery from
its worst recession in four decades.
"The economy gets necessarily affected by a grave situation
in such a major economic group," Marques Guedes told reporters
though he said the economy should keep growing.
BES was the only Portuguese bank not to take a bailout
during the financial crisis. Its new management, who were
appointed on July 14 after the Espirito Santo family lost
control, want to keep that status.
Late on Wednesday, Portugal's central bank said public funds
were available if any bank needed them. Portugal, which ended
its international bailout in May and has been eyeing economic
recovery, has 6.4 billion euros of funds for any bank
Yet the central bank reiterated that private capital was its
preferred solution for BES, which had a common equity tier one
ratio of just 5.0 percent at the end of June, below Portugal's
regulatory minimum 7.0 percent.
"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.
BES has not said how much capital it would seek. Joao
Lampreia, an analyst at Banco BiG in Lisbon, estimated it would
be around 3 billion euros.
BES has been swept up in a growing financial drama involving
its founding family. Three of the Espirito Santo holding
companies have filed for bankruptcy protection in past weeks
after revealing debts and accounting regularities.
BES last raised capital on June 11, selling 1 billion euros
of discounted shares to existing investors in an exercise that
diluted the family's once-majority stake in the bank. Top family
members who had run the bank stepped down as Portugal's central
bank has tried to come to grips with how deeply exposed the
lender was to one of the country's most prominent families.
In its Wednesday statement, BES said its bigger than
expected losses were partly the result of 4.25 billion euros of
impairment charges. Those included 1.2 billion euros of
provisions taken because of the bank's exposure to Espirito
Santo companies as well as repayment of debt issued by those
companies to BES' own 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.
BES is now expected to undergo a major restructuring and to
hold a shareholders' meeting to approve the recapitalisation
plans "within a reasonable time frame".
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.
One hedge fund manager who is considering investing said a
bailout was not inevitable. "If there really was no prospect of
getting any cash, the stock should probably be at zero," he
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