Central bank steps into BES row

By:
Duncan Kerr
Published on:

One of Europe’s oldest and most powerful banking dynasties is embroiled in a battle over succession plans at the top of Portugal’s Banco Espírito Santo, causing a rift in the bank’s boardroom that has forced the country’s central bank to intervene.

The Espírito Santo family has been at the heart of BES for more than 100 years, but in recent weeks a rift over the bank’s future leadership has emerged between chief executive Ricardo Espírito Santo Silva Salgado and his cousin, José Maria Espírito Santo Silva Ricciardi, chief executive of the investment bank, BES Investimento.

Ricciardi has ambitions to succeed Salgado as chief executive of BES when his tenure ends in 2015. However, on November 7 a shareholder meeting was convened and Salgado won a vote of confidence from the main shareholders, knocking Ricciardi’s plans to take the helm of Portugal’s largest listed bank by market capitalization.

Since BES was founded, the Espírito Santo family’s control has been broken only once, when it was nationalized during the 1974 revolution.

Blow

Shareholder support for the current chairman will have come as a blow to Ricciardi, not least because his 90-year-old father and the patriarch of the Espírito Santo family, Comandante António Ricciardi, voted in support of Salgado. Comandante Ricciardi did this to prevent what he has described in the Portuguese press as an “immediate institutional rupture” in the bank should the vote have gone against Salgado.

Banco de Portugal is understood to have been sufficiently concerned about the rift to have intervened to ask that the issue be resolved and a statement of reconciliation issued.

Ricardo Salgado
On November 11, Salgado and José Maria Ricciardi issued a joint statement that said: “Mr Ricardo Espírito Santo Salgado clarifies that, when it comes to start the succession process, [he] considers that Mr. José Maria Espírito Santo Ricciardi meets all the conditions to be a possible member to his succession.”

The second part of the joint statement, said: “Mr José Maria Espírito Santo Ricciardi, according to a set of clarifications obtained, confirms the vote of confidence in the executive leadership of Mr Ricardo Espírito Santo Salgado, conditions presented at the meeting of the Conselho Superior of Grupo Espírito Santo” on November 7.

BES does not yet have a succession plan in place and there is no formal shortlist of potential candidates that could challenge José Maria Ricciardi. Such issues might reasonably raise questions about the future direction of the bank.

The battle in BES’s boardroom came when the bank was in the throes of marketing Portugal’s first subordinated capital bond in four years. BES successfully sold €750 million of 10-year non-call-five lower tier 2 bonds on November 21, a transaction that reportedly attracted €3 billion of orders from around 300 investors.

BES says this level of investor demand reflected “the markets’ confidence” in the bank. Furthermore, institutional investors BlackRock, Capital Research and Management, and Silchester International Investors have increased their collective shareholding in BES from 5% to over 11% since the beginning of the year.

BES and the Portuguese banking sector still face some acute challenges, not least from rising corporate insolvencies and high unemployment. On October 25, BES reported a net loss of €381 million in the first nine months of the year, driven in large part by a 42% rise in impairment costs to about €1.1 billion. BES said that banking income fell 23.7% to €1.43 billion in the first nine months of the year.

BES is well capitalized, with a core tier 1 ratio of 10.4% under Banco de Portugal’s requirements, and 9.7% core tier 1 ratio under the European Banking Association’s tougher criteria. However, the bank’s capital strength might come under pressure.

Negative outlook

In a report from rating agency Moody’s Investors Service at the end of October, it warned that the outlook for Portugal’s banking sector remained negative because of a weak operating environment that could provoke further asset-quality deterioration.

The European Central Bank’s asset-quality review, which started last month and is expected to take 12 months to complete, will focus in on this, prompting banks under the review to ensure they have made adequate loan-loss provisions.

BES, which is known locally as the “welfare state of the Espírito Santo family” was founded in 1869 by entrepreneur José Maria do Espírito Santo e Silva, who ran a business trading loans and foreign currencies from his Caza de Cambio in Lisbon. In recent years, BES has been expanding its international presence in Africa and Latin America particularly, as well as its global investment banking business.

Most notably, BES acquired a 50.1% stake in investment bank Execution Noble in 2010 as part of a plan to combine its investment banking activities in Brazil, central Europe and Africa with Execution’s London, New York and Hong Kong business.

In the first nine months of the year, BES Investimento reported a 7.7% fall in banking income on the same period in 2012 to €178 million, with pre-tax income plunging 51.5% to €15.5 million because of credit impairments.