Banco Espírito Santo (BES): special focus
October 2014Bankers in Lisbon say the demise of BES is a watershed moment for the country: the turning point when old Portugal became new Europe. Ricardo Salgado tried every trick he knew to save his empire, but found that the Portuguese establishment could not – or would not – save him. How did Salgado’s efforts to shore up Espírito Santo through the commercial paper market hasten, rather than avert, his downfall?
|They were valuing (the assets) using discounted cash flow, which gives a different value about, let’s say, 10 times the actual value of the market price. He wanted me to write a paper saying that not only was this possible but that it was appropriate Professor Joao Duque|
The failure of BES provided a jolt to asset prices, including a widening of Portuguese sovereign spreads, and the euro zone recovery is faltering. However, Portugal’s strengthened fundamentals indicate it is now in better shape to handle such risks. ECR data suggest it should even be reclassified as investment grade.
The failure of Portuguese lender Banco Espírito Santo (BES) points to lingering fault lines in the financial regulatory framework and knock-on effects for banks outside the EU.
The Banco Espírito Santo saga is a sharp reminder, as the ECB’s asset quality review moves towards its conclusion, of how closely the fortunes of European banks and sovereigns remain bound together.
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.
Portuguese banks were the golden boys of European finance for years, reaping the rewards of a consumer lending boom. But Portugal has landed with a bump, with GDP growth no longer outstripping the rest of Europe. The banks are suffering, both in wholesale finance and in retail, where intense competition makes it difficult to turn a profit. Even market leader Banco Comercial Português is feeling the pinch. With opportunities for domestic mergers limited, it has expanded abroad, with mixed results.
When a private bank due to be sold to a foreign group ends up in state hands it's hardly a sign that all's well with the European single market. This was the outcome of the stand-off between the European Commission and the Portuguese government over the Champalimaud banking group. Spain's BSCH attempted to take a stake in the group, sparked off a huge row about cross-border M&A and ended up with only some of the pickings. Other key assets have ended up under state control, even if only temporarily. From every angle the Champalimaud affair is an example of the wrong way to make takeovers. For octogenarian banker António Champalimaud it was a final chapter in a lifetime of battles with bureaucrats
Banco Espirito Santo attempted to negotiate a merger with Banco Português de Investimento. After weeks of wrangling the deal collapsed, officially because the two banks lacked the special chemistry needed to make it work - a euphemism widely interpreted to mean that the two management teams failed to agree on power-sharing. BPI had serious corporate governance misgivings about merging with another publicly-quoted bank that is effectively a family business.
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.