Portugal’s central bank has announced a plan to rescue Banco Espirito Santo (BES).
The group will be split into two – a “good bank” with the healthy assets and a “bad bank” with the riskier ones.
The “good bank”, which will be called Novo Banco, will be loaned 4.9 billion euros ($6.6 billion) from what is left of Portugal’s bailout fund.
The move had been expected after BES on Friday reported a record loss of 3.6 billion euros for the first half of the year.
Since June, when concerns about the financial health of the company first came to light, its shares have plunged 89%.
BES, which is Portugal’s largest listed lender, will be delisted from the stock market on Monday, with shareholders set to lose almost all their investment.
All of BES’s depositors will be protected.
BES will be delisted from the stock market, with shareholders set to lose almost all their investment
“The plan carries no risk to public finances or taxpayers,” said Carlos Cosa, Portugal’s central bank governor at a late night news conference in Lisbon.
“There was an urgent need to adopt a solution to guarantee the protection of deposits and assure the stability of the banking system,” he added.
Novo Banco will consist of the bank’s core business of taking deposits and lending to home-buyers and companies.
It is so far unclear what will happen to the “bad bank”, most of which relates to other businesses in the Espirito Santo Group, which include tourism, health and agriculture.
The cash injection for Novo Banco comes from a so far unused part of Portugal’s bailout fund from the EU and the International Monetary Fund (IMF).
The idea is that Novo Banco will be run by the “resolution fund” – set up as part of the eurozone’s banking reforms and funded by Portugal’s financial institutions. The bank will eventually be sold off, with the proceeds used to pay back the 4.9 billion euro loan from the bailout fund.
In a statement, Novo Banco’s chief executive, Vitor Bento said “the key uncertainties that have been hanging over the institution for some time have now been removed”.
“Novo Banco is also taking with it… a dedicated workforce, a strong customer focus and comprehensive banking services that help to drive the Portuguese economy,” he added.
Vitor Bento was installed as chief executive of BES just three weeks ago as part of a management reshuffle designed to restore confidence in the bank.
The European Commission said it approved of the rescue plan.
“The adoption of this resolution measure is adequate to restore confidence in financial stability and to ensure the continuity of services and avoid potential adverse systemic effects,” it said in a statement.
Portugal itself only recently emerged from a three-year bailout plan. It was lent 78 billion euros in total by the EU and the IMF on the condition that it implemented severe austerity measures.
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Portuguese bank Banco Espirito Santo (BES) has reported a bigger-than-expected loss of 3.6 billion euros ($4.8 billion) for the first six months of 2014.
The troubled bank said “extraordinary events” had resulted in costs totaling 4.25 billion euros during the period.
The loss wipes out BES’s existing capital buffer of nearly 2.1 billion euros – cutting it to below the minimum level required by regulators.
The lender said it will begin a process to raise cash to meet capital rules.
“Over the course of the past few weeks, both shareholders and potential investors have shown interest in participating in a capitalization plan, some of them willing to take relevant stakes in the bank,” Chief Executive Vitor Bento said in a statement.
Banco Espirito Santo has reported a bigger-than-expected loss of $4.8 billion for the first six months of 2014
The larger-than-expected loss comes as BES – Portugal’s largest private bank – has been under increased scrutiny.
There have been concerns over the financial strength of the bank’s parent company and its ability to deal with its debt problems.
The fears were fanned after parent companies linked to the Espirito Santo family sought protection from creditors.
That has hurt the bank’s share price, which has slumped almost 40% in July.
The worries had also prompted the governor of Portugal’s central bank to issue a statement earlier this month aimed at reassuring depositors and investors about the health of BES.
The central bank had said at the time that investors had “no reason to doubt” the security of funds, and savers had “no need to be worried”.
The lender has also been trying to restructure its senior management.
Earlier this month, it accelerated the appointment of new executives, originally due to start at the end of July.
The Bank of Portugal ordered the changes to be fast-tracked after worries about the financial strength of the bank’s parent company hit global stock markets.
Speculation surrounding accounting regularities at the parent company of BES, Espirito Financial Group, led to three family members being replaced.
Espirito Santo Financial Group, which holds a 25% stake in BES, previously said economist Vitor Bento would be the new chief executive of the bank from the end of July and Joao Moreira Rato, who heads Portugal’s IGCP debt agency, would become the chief financial officer.
Meanwhile, Jose Honorio becomes deputy chief executive officer.
The three replace the Espirito Santo family members, including its patriarch Ricardo Espirito Santo Salgado, who announced his resignation as chief executive of BES last month.
Santo Salgado, who ran the bank for 23 years, was arrested last week in connection with a money laundering and tax evasion investigation.
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In a bid to ease investor’s concerns, Portugal’s central bank has stated that Banco Espirito Santo does not need extra funds.
Banco Espirito Santo (BES), Portugal’s largest bank, itself has said it has sufficient finances to deal with its parent company’s debt problems.
Worries about the financial strength of the bank’s parent company hit global stock markets on Thursday.
Portugal’s central bank said investors had “no reason to doubt” the security of funds, and savers had “no need to be worried”.
On Thursday, shares in both BES and Espirito Santo Financial Group – which holds a 25% stake in BES – fell sharply on worries about the financial health of the Espirito Santo group.
Banco Espirito Santo has said it has sufficient finances to deal with its parent company’s debt problems
Lisbon stock market regulators suspended trading in BES shares after they plunged by more than 17%. After the ban was lifted around midday on Friday, the shares gained close to 4% to 0.53 euros.
The overall Portuguese market was more than 2% higher meanwhile, after losing 4% on Thursday.
On Thursday evening, BES said it was “waiting for the release of the restructuring plan of Espírito Santo Group in order to assess the potential losses related to its exposure”.
“BES Executive Committee believes that the potential losses resulting from the exposure to Espírito Santo Group do not compromise the compliance with the regulatory capital requirements.”
Portugal’s PM Pedro Passos Coelho echoed the central bank’s message that BES was not in need of support.
Pedro Passos Coelho said: “There is no reason for the state to intervene in a bank which has solid capital and which has a comfortable margin to deal with any eventuality, even the most adverse.”
The events triggered a fresh outbreak of nerves about European banks, sending stock markets in Europe and the US lower.
There were concerns that BES’ troubles could have a wider impact on Portugal which only two months ago exited the bailout program.
At the height of the financial crisis, Portugal was forced to take a 78 billion euro ($106 billion) bailout from its European partners and the International Monetary Fund (IMF).
Portugal’s government borrowing costs fell to an eight-year low of 3.58% in April this year, but worries surrounding BES and the health of the country’s financial sector pushed these back up towards 4% on Thursday.
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