Espirito Santo notice follows ECB’s audits
BANCO Espirito Santo, which jolted markets worldwide with its disclosures of potential losses, shows efforts by European regulators to overhaul the balance sheets of lenders are working.
Portugal’s second-largest bank by market value said on Thursday that it could face up to à1.2- billion (R17.5-billion) of potential losses on loans to its parent companies, days after one of them missed repayments on short-term debt.
The Bank of Portugal said the problems at the group first emerged in an audit it carried out at the end of last year, one of a series of inspections conducted by the central bank during the country’s bailout programme.
Scrutiny of lenders is set to increase as the European Central Bank (ECB) leads its unprecedented year-long audit of banks.
The asset quality review is forcing companies across Europe to take losses on loans that may not be repaid and bolster capital.
The eurozone’s central bank will take responsibility for supervising banks in November, weeks after the results of the comprehensive assessment are due.
“This may serve to encourage other institutions to take the asset quality review seriously,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee, Scotland. “There is of course enormous pressure on the ECB to demonstrate that this process is both comprehensive and effective.”
Portugal’s Espirito Santo family has controlled the bank for most of its 94-year history. It was the only one of the country’s three largest lenders not to seek help after Lisbon accepted a bailout by the EU and the International Monetary Fund in 2011. Un- der the plan, the Bank of Portugal carried out regular audits on the country’s banks.
Espirito Santo Financial Group, one of the bank’s parent companies, said in March that it would set aside à700- million to cover potential losses linked to the group’s nonfinancial activities. Two months later, Banco Espirito Santo announced a à1- billion rights offering.
In a filing that month, the bank disclosed “materially relevant irregularities in the accounts” of holding firm Espirito Santo International that could be damaging.
“The good news is that the comprehensive vetting and stress testing of eurozone banks’ balance sheets are disciplining the sector to a much greater extent,” said Nicholas Spiro, MD of Spiro Sovereign Strategy in London. “The bad news is that the losses came to light just weeks after Espirito Santo’s latest rights issue, undermining the credibility of Portuguese regulators.”
Banco Espirito Santo’s woes roiled markets globally. The Markit iTraxx Europe Senior Financial Index of credit-default swaps insuring 25 banks and insurers rose to 72 basis points on Thursday from a more than six-year low of 57 basis points last month. European stocks and Portuguese bonds rebounded on Friday after Thursday’s sell-off. Shares of the bank fell 5.5% to 48.1 euro cents after resuming trading on Friday. The stock had been suspended on Thursday following a 17% drop.
The Lisbon-based lender said it had a buffer of à2.1- billion above the regulatory minimum following last month’s rights offering. The Bank of Portugal urged depositors on Friday to remain calm, saying the safety of funds had not been undermined.— Bloomberg