Banco Totta & Acores (BTA), one of Portugal's leading banks, was in turmoil last January. Its shares were in free fall, its chairman had resigned in a huff and investors were on the point of revolt after the announcement of a proposed dividend abysmally below market expectations.
Historically one of Portugal's most profitable banks, Banco Totta was the first to be returned to the private sector under a government decree that effectively overturned the nationalization policy of Portugal's 1974 revolution.
The market knew that last year - Banco Totta's first full year of operation under new ownership - would be a difficult period of adjustment. But the bank's fall in net profit to Esc15.6 billion ($90.28 million) from Esc17.2 billion in 1995 came as a bitter disappointment. It was generally accepted that sharply higher bad-debt provisions - part of a balance-sheet clean-up - were going to eat into profits. However, shareholders felt they had been let down by a proposed Esc135 a share dividend. The market expectation had been Esc190 (with profits of Esc18 billion forecast by the bank's management during a roadshow for international investors), a payout that would have been in line with the previous year's, thus topping the 6.8% T-bill yield by about two basis points instead of what would be a yield of 200bp or so below the 10-year bond.
Selling point
"One of the selling points of bank privatization was the promise to shareholders of better dividend yields than they could expect to earn on T-bills," says Graca Graca Moura, Banco Portugues de Investimento (BPI) bank analyst.
The day the dividend was announced by Luis Champalimaud - who had just been appointed head of the financial services empire that includes Banco Totta - bank chairman Alipio Dias handed in his resignation. Dias, a long-serving Banco Totta executive, had always been identified with a generous dividend policy.
That was on a Friday. The following Monday Banco Totta's shares tumbled 10% on the Lisbon stock exchange. The collapse did not slow until they had shed 25% of their value. The market was desperate for some sign of hope from Banco Totta that would halt the blood letting, the most severe a Portuguese bank had experienced since reprivatization.
Enter Antonio Champalimaud, Luis's father, an almost sightless near-octogenarian, a former exile and the richest man in Portugal, with a personal fortune estimated at $1.5 billion. Two years ago Champalimaud paid Esc153 billion in a controversial deal to acquire a controlling stake in Banco Totta, the country's third-largest bank, from Banesto (Banco Espanol de Credito), the Spanish bank which was at that time the target of a Pta313.4 billion ($92.4 million) rescue operation undertaken by Banco Santander.
In a dramatic statement that overrode his son's tight-fisted dividend proposal, Champalimaud said he would ask the bank's shareholders to consider accepting a "significantly higher dividend". The market heaved a sigh of relief. This was assurance that the godfather of Portuguese banking was still at the helm, with his shareholders' best interests at heart.
Once more Champalimaud showed that he was still in the driver's seat. "No-one takes any major policy decision without consulting Antonio Champalimaud," says a banker at Banco Totta. "The group has a strategic council that formulates strategy and it is headed by Champalimaud."
The bank's shareholders finally accepted a compromise Esc145 per share dividend with the promise of better times to come. "In the end the dividend yield was unchanged from the previous year at 5.7%, below market expectations but still at the higher end of the banking sector," says BPI's Moura.
Banco Totta's dividend episode dispelled any doubts the market might have had about Antonio Champalimaud's ability and willingness to wield his stick when key strategic matters were at stake.
Champalimaud lost an earlier banking empire when he was hounded into exile in 1974 by Portugal's left-wing revolutionary leaders. It was the second time in his career he had found himself on the verge of financial ruin. This time, sensing a pending upheaval in the final years of Portuguese dictator Antonio Salazar's rule, he had taken the precaution of building a base in Brazil, where he set up one of the country's largest cement businesses.
Champalimaud was the leading figure among a handful of old-guard entrepreneurs whose pre-revolution family businesses accounted for a sizeable chunk of Portugal's GDP. Others included the Espirito Santo dynasty, which staged a dramatic return by buying back its old firm, Companhia de Seguros Tranquilidade, the country's leading insurer, as well as the family-owned Banco Espirito Santo, reprivatized in 1991. It has built this into a broad-based financial services group that includes retail banking, a mortgage lender, insurance and a leading stockbroker and investment bank.
Banco Espirito Santo's rise has been spectacular among the reprivatized family banks. Analyst Inigo Lecubarri, research director at Salomon Brothers in London, says it has the best brand recognition of all Portuguese banks, which represents true franchise value. "The bank holds a leading position in financial services, such as insurance, leasing, asset management and investment banking," he says.
The intertwined Portuguese banking aristocracy also includes the Mello family, to which Antonio Champalimaud is linked through his first marriage to Jose de Mello's sister. Mello's vast holdings in chemicals, tobacco, shipping and insurance were once equivalent to 5% of Portugal's GDP. After his return from exile in Brazil, Jose de Mello rebuilt his fortunes at a whirlwind pace through investment banking company MDM, set up with former partners Deutsche Morgan Grenfell and Morgan Guaranty.
There followed a complex comeback to banking. In 1992 Mello regained control of his insurance firm, Companhia de Seguros Imperio. In 1995 Imperio acquired the troubled publicly-owned bank Uniao de Bancos Portugueses (UBP). The group's retail banking activities were transferred to UBP, whose name was changed to Banco Mello Comercial, then Banco Mello. It is now Portugal's leading medium-sized bank. Through Imperio, the Mello family controls 51% of the bank.
Ambitious target
Banco Mello has completed its integration process; Isabel Botelho of its strategic planning department says the aim is to boost return on equity (ROE) to 15% by next year, an ambitious target since last year's ROE was below 1%. The bank managed to post net income of Esc503 million last year, a sharp turnround from an Esc1.83 billion loss the previous year.