July 25, 2014 / 1:25 PM / 3 years ago

BES expected to need big provisions for exposure to largest shareholder

LISBON, July 25 (Reuters) - Banco Espirito Santo is expected to hike provisions for exposure to its largest shareholder Espirito Santo Financial group, after the Espirito Santo family company sought creditor protection.

ESFG, which holds a 20 percent stake in Portugal’s largest bank by market value, sought protection on Thursday, creating uncertainty about the implications for BES.

The bank’s links to the Espirito Santo family group and its troubled holding companies have wiped out around 50 percent from BES’ market value in the last month. The shares fell 9 percent on Friday after a two-day rebound.

Problems have been escalating for the family that founded the bank more than a century ago since accounting irregularities were identified in one of its holdings earlier this year.

Analysts said EFSG’s move to seek creditor protection could ultimately require BES to make provisions against possible losses.

ESFG has borrowed more than 800 million euros ($1.07 billion) from BES and also had set aside 700 million euros to make sure that commercial paper (short-term debt) issued by family companies and placed with retail clients of the bank would be repaid.

“We expect the bank to reflect significant provisions when it reports half-year results,” wrote Ciaran Callaghan, senior credit analyst at Merrion Stockbrokers. “We doubt that BES will be able to rely on ESFG to help reimburse retail clients for much of their losses.”

BES is due to publish its earnings on Wednesday after having postponed the release from Friday

“All eyes are on the results, which are supposed to show what the consequences of ESFG and other holdings seeking creditor protection are for BES,” Albino Oliveira, an analyst at Fincor brokers, said. “It’s a guessing game before then.”

Carlos Tavares, the head of Portugal’s CMVM securities market regulator, said on Thursday the results would likely contain additional important information to what is currently known to the market, but would not specify.

BES on Friday declined to comment on the outcome of ESFG’s creditor protection move for its accounts, but reaffirmed its commitment to repay all the retail clients.

One analyst in Lisbon, who declined to be named, estimated BES’ first-half-loss could exceed a billion euros if it has to make new provisions. A number of analysts had estimated the bank’s first-half loss at up to 200 million euros ($268.90 million).

“At the upcoming results on July 30, there may be some initial steps to provision and ring-fence the exposure to the wider Espirito Santo group,” Nomura analysts wrote on Friday, adding: “Given the scale of the exposure, BES could seek to strengthen the capital buffer by raising additional equity.”

Bank of Portugal Governor Carlos Costa has already said he expects international investors to step in if BES were to need additional capital.

BES has said it has a 2.1 billion euro capital buffer over the minimum regulatory capital requirement, which should be enough to absorb its exposure to family debt.

The bank already raised 1 billion euros in a capital increase completed on June 11.

Another analyst in Lisbon, who did not want to be named, said the ESFG move had been largely priced in, but if BES losses next week reflect a much larger exposure to the family holdings than initially thought, BES shares could take a new heavy blow.

“Additional direct exposure and the risk of litigation by institutional clients against the bank is what could really drive the stock down,” the analyst said.

Also on Thursday, a judge named the family’s patriarch and former BES chief Ricardo Salgado as a suspect in a separate, long-running money-laundering investigation.

There are also concerns about BES’ Angolan business BESA which has a loan-book covered by an Angolan state guarantee until mid-2015. ($1 = 0.7438 Euros) ($1 = 0.7447 Euros) (Reporting By Andrei Khalip and Laura Noonan. Editing by Jane Merriman)

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