LISBON, June 11 Portugal's largest listed bank, Banco Espirito Santo (BES), is expected on Wednesday to announce strong demand in a capital increase of up to 1.045 billion euros despite finding "material irregularities" at one of its holding companies.
When BES unveiled its cash call to boost capital ratios in May, it also recognised "reputational risks" from a holding company belonging to the Espirito Santo banking family which indirectly controls the bank.
That has sparked an unusual focus on the powerful Espirito Santo family in Portugal and has opened up the question of whether it will maintain control of the bank that has roots stretching bank more than 100 years.
But, despite the fact that the bank sold commercial paper issued by the troubled holding company - Espirito Santo International - through its branch network, demand in the cash call has been solid, traders and analysts said.
BES' shares have risen 18 percent since May 28, when the rights in the capital hike started to trade, which indicates strong demand for the operation, analysts say. The results will be announced on Wednesday.
"The demand for shares since trade in the rights started leads to the belief that the operation has been successful, allowing for an important boost to BES' core capital," said Andre Rodrigues, an analyst at Caixa Banco de Investimento.
BES shares closed 1 percent higher at 1.112 euros per share on Tuesday, far above the price of 0.65 euros for the new shares, which represented a discount of 34 percent.
Analysts say the reason for the strong demand was because the problems at the Espirito Santo family's holding companies have been isolated from BES.
"The risk was that the problems at the holding companies could have led to provisions at BES, but the provisions remained in ESFG, according to the information that is know," said Albino Oliveira, analyst at brokerage Fincor in Lisbon.
ESFG, or Espirito Santo Financial Group, currently holds 27.5 percent in BES. In turn, ESFG is 49 percent owned by Espirito Santo International.
ESFG has guaranteed ESI's debt and took on a provision of 700 million euros last year to cover it. It has said it is not necessary to take on any further provisions.
After the rights issue is complete, a key question for investors is whether the Espirito Santo family will retain control of BES, which it has held together with French bank Credit Agricole.
ESFG and Credit Agricole have both said they will reduce their holdings in BES. ESFG has said its share will fall to 25 percent from 27.5 percent and Credit Agricole to 15 percent from 20.1 percent.
"After this capital increase, doubts will persist about governance, over the capacity of the Espirito Santo family to maintain control of the bank, and over the future position of key shareholders like Credit Agricole," said Andre Rodrigues.
(Reporting By Sergio Goncalves, writing by Axel Bugge, editing by David Evans)