(Recasts with shares rebounding, adds quotes)
LISBON Aug 7 Portugal's largest listed bank Millennium bcp said it was repaying 1.85 billion euros ($2.5 billion) in government loans as planned, easing concerns about the sector following the state rescue of a rival lender.
The confirmation on Thursday of BCP's earlier plan to make the repayment now and to pay another 750 million euros by early 2016 lifted its shares, which had been hammered by fears that the rescue of Banco Espirito Santo on Sunday would hurt BCP and other lenders.
"Although it's only a confirmation, at this moment it can be seen as alleviating the worst fears about the BES situation, showing that in the short run at least it had no impact," Luis Goncalves, a trader at GoBulling brokers, said.
BCP also reiterated that after the repayment, its fully implemented common equity Tier 1 ratio would be 9 percent and 12.5 percent under phased-in criteria, both well above the 7 percent demanded by regulators.
BCP completed a 2.25 billion euro capital increase last month to raise enough cash to repay the bulk of state loans held in so-called contingent convertible bonds, which carry high interest and weigh on earnings.
The bank issued 3 billion euros of convertible bonds at the height of Portugal's debt crisis in 2012 and has so far paid back 400 million euros.
BCP shares were up 6 percent by 1217 GMT after recovering from morning losses of over 15 percent, which came on top of a 15 percent slide on Wednesday.
Banco BPI was up 2.4 percent, also rebounding from steep losses.
But traders warned the market remained volatile due to a high degree of uncertainty over the fallout from the BES rescue for Portuguese lenders. Investors are concerned that lenders may have to foot part of the rescue bill, while some also fear that other banks may have problems.
Under the BES rescue plan, the state injected 4.9 billion euros via Portugal's bank recapitalisation fund to carve out a healthy new bank. The fund, which is financed by all banks, is the formal owner of the new bank and must sell it soon to repay the state.
(1 US dollar = 0.7476 euro) (Reporting by Andrei Khalip; Editing by Mark Potter and Jane Baird)