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Summary

  • The overwhelming disaster of the Espirito Santo Group has contaminated Banco Espirito Santo.
  • From a bank with no possible survival to a good bank: everything happened in four days.
  • A special legislation to assist troubled banks of the European Union was used for the first time with this Portuguese bank.

After an unexpected first-half net loss of 3.58 billion euros ($4.8 billion), Banco Espirito Santo (OTCPK:BKESY) had to be rescued last Monday in an operation of €4.9 billion.

BES shares recently had a dramatic decline due to the link between the bank and the huge problems of the Espirito Santo Group. In two months until the last day of trading (August 1, 2014) BES lost 90% of its market capitalization.

BES has been bailed out by the Portuguese state through the Portuguese Central Bank with the agreement of European authorities including the ECB. By a recent European banking law, the bank was rescued by splitting into a "good bank" (renamed already Novo Banco) and a "bad bank," which will include all operations related to the group and some international banks held by BES. While bad bank losses will be borne by the bank's shareholders, Novo Banco is clean and has all the clients and loans that are performing well.

Both ESFHF and the BES shares are no longer listed on the Stock Exchange.

The main holdings of the group - Espirito Santo International, Rioforte, and Espirito Santo Financial Group - have filed for creditor protection in Luxembourg in recent weeks. Therefore, the Espirito Santo family is now watching the liquidation process of all its vast assets. About the bad bank, Espirito Santo Financial Group (OTC:ESFHF) owned a 20% stake of BES, and has been hit hard as well as other important banking institutions like the French bank Credit Agricole (OTCPK:CRARY). After presenting devastating losses last Wednesday night, BES shares lost on the following two days around 65% of its value. On Friday, the European Central Bank has cut all types of credit to BES and a solution had to be founded quickly and strongly enough to solve the problem. I have to state that while ESFHF had already filed for credit protection, the most harmed shareholder by far was Credit Agricole who held a stake of 14.6% in BES. CRARY lost 708 million euros on its stake in BES and its results in the quarter ending in June 2014 declined 98% to EUR 17 million. Credit Agricole wasn't just a very important shareholder, it had been the closest partner of the Espirito Santo family in BES since the '90s, and it wasn't aware of what appeared to be bad practices and questionable management of the Grupo Espirito Santo.

This is an operation that has no impact on clients as Novo Banco's requested fresh capital came from a fund of all Portuguese banks (€0.5B) together with a state loan of €4.4B. The bank has now only one shareholder - The so called Resolution Fund - which will pay the mentioned loan with the future sale of Novo Banco.

As the Bank Resolution Fund is recent it could only participate with a small amount that had to be complemented by a Portuguese state loan of €4.4B which matures in three months at a rate of interest of 2.95%, and can be successively renewed for the same period, up to a maximum of two years. At each renewal, the interest rate worsens by 0.05%, to create a stimulus for prompt release of the loan.

This European legislation was approved in 2012 and is expected to reinforce the tools for bank stability, which are at the disposal of ECB. It has to be stressed that this operation concerning Banco Espirito Santo is the first under this new methodology. It's really the first test and we hope it will meet expectations. In fact, the crucial aspect lies on the price of the estimated sale of the Novo Banco, which is expected to be worth more than €4B.

Fortunately, Portugal still had €6.4B specially designed for the country's bank bailout. That money was given in May 2011 by creditors (IMF, EU and ECB). The whole program ended successfully last May.

Novo Banco now has assets of €80.2B ($107.5B). I think that it's possible that within a few months some potential buyers should appear. The outlook seems positive as more bad surprises are unlikely, and the new management team has the ability to bring the bank back to profitability. The new CEO of Novo Banco is Vítor Bento, a renowned economist who has management experience at the highest level.

Last Monday - the first day as Novo Banco - was calm and clients were confident in the outlined operation and believed that the new bank has a promising future.

The goal is to sell Novo Banco quickly at a good price, which would confirm that its value is high and that the government loan could be paid without problems for the Portuguese budget.

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Source: Banco Espirito Santo: The Way An Insolvent Bank Turns Into A Good Bank