ACTIVITY AND RESULTS OF BANCO ESPÍRITO SANTO GROUP

Transcription

BANCO ESPÍRITO SANTO
BANCO ESPÍRITO SANTO, S.A.
Public Traded Company
Headquarters: Avenida da Liberdade, n.º 195, 1250 – 142 Lisbon - Portugal
Registered in Lisbon C.R.C no. 500 852 367
Share Capital: EUR 3 499 999 998.00
ACTIVITY AND RESULTS OF BANCO ESPÍRITO SANTO GROUP
AND BANCO ESPÍRITO SANTO
1ST QUARTER 2009
(Unaudited financial information prepared under the IFRS as adopted by the European Union)
(In accordance with the provisions of Art. 10 of CMVM Regulation no. 5/2008 )
1Q09 Activity and Results
Index
I . MANAGEMENT REPORT
1.
Banco Espírito Santo Group Activity and Results in 1Q09
2.
Economic Overview
3.
Results
4.
5.
3.1
Net Interest Income
3.2
Fees and Commissions
3.3
Capital Markets and Other Results
3.4
Operating Costs
3.5
Provisions
3.6
Profitability
Activity
4.1
General Overview
4.2
Main business areas (Operating Segments)
Financial Strength and Other Indicators
5.1
Credit Quality
5.2
Liquidity, Solvency and Financial Strength
5.2.1 Liquidity
5.2.2 Solvency – Basel II (New Prudential Framework)
5.2.3 Financial Strength: Capital Ratios
6.
5.3
Productivity and Efficiency
5.4
Bank of Portugal Reference Indicators
Activity and Results of Banco Espírito Santo
6.1
Business Performance and Asset Quality
6.2
Operating Conditions and Productivity
7.
BES Own Shares
8.
Responsibility for the Information
II. INTERIM FINANCIAL STATEMENTS AND NOTES
o
Consolidated Interim Financial Statements and Notes
2
I. MANAGEMENT REPORT
3
1. BANCO ESPÍRITO SANTO GROUP ACTIVITY AND RESULTS IN 1Q09
•
The result for the first quarter, which was affected by the global crisis, reached EUR 101.3 million,
representing a reduction of 30.6% YoY and an increase of 50% QoQ, equivalent to an annualised ROE
of 9.3%.
•
The performance of the international area (net income: EUR 55.2 million; 50% YoY growth) represents
54% of the 1Q09 consolidated result (vs. 36% in 2008FY).
•
Accelerated growth of on-balance sheet client funds, which increased by 10.2% (Dec 08: 3.0%); lending
to clients grew by 7.1% (Dec 08: 9.7%), with particular highlight for lending to companies, which grew
by 11.2% (Dec 08: 13.4%).
•
Commercial banking income grew by 18.7%, supported by the performance of net interest income
(+22.1%). The contribution of the international area was decisive for this growth, with banking income
for this area increasing by 48.1% and net interest income by 61.1%.
•
Operating costs increased by 5.5%, due to the effect of writing down actuarial deviations determined
during the financial year 2008. Excluding pension costs, a reduction of 0.2% in costs relative to the
first quarter of 2008 would have been registered.
•
A significant improvement in productivity and efficiency, with the commercial cost to income
(excluding trading gains) having reached 52.5% (2008FY: 58.2%).
•
The credit provision charge was increased to 0.80% (2008FY: 0.57%), as a result of the current
recessionary cycle and in line with the evolution of the ratio of loans overdue by more than 90 days,
which increased to 1.20% (Dec 08: 1.09%). The provisioning ratio for loans overdue by more than 90
days was 210% and the level of provision for total credit increased from 2.38% (Dec 08) to 2.52%.
•
The BES Group received the authorisation from the Bank of Portugal to use, beginning 1Q09, the
Internal Ratings Based (IRB) approach for credit risk and TSA approach to operational risk, placing the
bank in the leadership position in terms of risk management and in line with the international best
practice. Core TIER I and TIER I ratios according to these methods were 5.8% and 6.6%, respectively;
taking the capital increase into consideration, these would have been 7.8% and 8.6%.
•
BES’ capital increase, which began in March and was concluded in mid-April, was an absolute success
(138.9% subscribed), demonstrating investor confidence in the strategic choices of BES and in its track
record of creating value.
4
Key Indicators
Mar. 08
Change
Mar. 09
ACTIVITY (EUR million)
Total Assets (1)
6.5%
12.9%
7.1%
10.2%
4.2%
0.0%
92 889
67 892
48 523
34 862
53 093
7 212
98 908
76 641
51 957
38 416
55 339
7 212
ROE
14.8
9.3
-5.5 pp
ROA
0.85
0.54
-0.31 pp
Net Assets
Customer Loans (including securitised)
On Balance Sheet Customer Funds
Total Customer Funds
Equity
PROFITABILITY (%)
SOLVENCY (%)
After share
capital increase
Bank of Portugal Ratios (2)
- Total
10.1%
9.9%
11.9%
- TIER I
6.8%
6.6%
8.6%
- CORE TIER I
6.0%
5.8%
7.8%
1.02
228.9
2.33
0.51
1.20
209.5
2.52
0.80
0.18 pp
-19.3 pp
0.19 pp
0.29 pp
1.41%
10 339
50.1%
59.0%
1.34%
10 666
48.5%
52.5%
-0.07 pp
3.2%
-1.63 pp
-6.58 pp
774
797
23
717
737
20
57
60
3
PROVISIONS (%)
Overdue loans >90 days/ Customer Loans
Overdue loans coverage > 90 days
Credit Provisions / Customer Loans
Cost of Risk
(3)
PRODUCTIVITY
Operating Costs / Average Net Assets (%)
Total Assets
(1)
per Employee
(4)
(€,000)
Cost to Income (%)
Cost to Income (ex-markets) (%)
NETWORK
Number of Branches
- Domestic
- International
(1) Net Assets + Asset Management + Off-balance sheet funds + Securitised credit
(2) Data for 2008 under Standard method; data for 2009 calculated under IRB Foundation
(3) Credit Provisions / Customer Loans(annualised)
(4) Considering employees of the BES Group financial companies
5
2. ECONOMIC OVERVIEW
The first quarter of 2009 was characterised by a sharp fall in real activity in the US and European
economies, extending the trend observed at the end of 2008, which impacted the world economy
although some emerging economies still reported economic growth. This development resulted from a
significant contraction in global demand, again as a consequence of the deterioration of the financial
crisis in the previous quarter, and translated into a contraction in international trade flows and a sharp
decline in industrial activity. In this context, such economies reported a real annualised change in GDP for
the first quarter of around -5%. Over the same period, China reported the smallest year-on-year change in
GDP of 6.1%.
In a context of greater risk aversion and contraction of liquidity at global level, the economies of Eastern
Europe were subject to an increased risk of slowdown in economic activity, due to their greater difficulty
in accessing funding from abroad and the higher currency risk for foreign investors. In this way,
annualised declines in GDP for the period in question are projected as lying between 4% (e.g. in Poland)
and 8% (e.g. in Hungary).
Notwithstanding the unfavourable evolution of real activity, the end of the quarter witnessed an
improvement in capital market sentiment, including a significant recovery of issuance in credit markets.
This improvement in sentiment resulted above all in the adoption of new financial stabilisation and
economic stimulus measures by central banks and governments, which contributed to a reduction in
systemic risk and the increased expectation of a recovery in activity from the second half of the year
onwards. The main equity indices performed positively in March and also in April, but failed to avoid an
overall decline for the first quarter. In the United States, the Dow Jones, NASDAQ and S&P500 indices fell
by 13.3%, 3.1% and 11.7% respectively. Within the Euro zone, the DAX, CAC40 and IBEX indices fell by
15.1%, 12.8% and 15% respectively. The prospect of a more rapid recovery in the economies of China and
Brazil translated into overall gains during the quarter in the Shanghai Composite and Bovespa indices of
30.3% and 9% respectively.
Within the Euro zone, the 3-month Euribor rate fell from 2.89% to 1.51%, accompanying the reduction in
the key benchmark rate and the heavy injections of liquidity into the market by the European Central
Bank (ECB) (the refi rate fell from 2.5% to 1.5% during the quarter, with the ECB making an additional rate
cut of 25 basis points in April). The yield on 10-year government bonds remained stable over the period,
with an increase of only 4 basis points to 2.994%. The euro depreciated by 5.2% against the US dollar to
EUR/USD 1.32 at the end of the quarter.
During this quarter, the Portuguese economy may have recorded a quarterly reduction in GDP of around
2%, above all due to the unfavourable evolution of exports and investment. The Portuguese PSI-20 equity
index fell by 2.6% during this period, albeit while recovering during March and into April.
6
3. RESULTS
BES Group’s net income for 1Q09 reached EUR 101.3 million, corresponding to a return on equity (ROE) of
9.3%. Despite the fact that the net income generated during the quarter was 30.6% lower YoY, we would
highlight the growth relative to the results for the two previous quarters (4Q08 and 3Q08) of 50% and 43%
respectively.
Considering that activity during this quarter remained subject to a particularly adverse economic and
financial context, the performance achieved takes on a special significance, highlighting the correctness
of the strategic choice of organic growth, the consistency of the Group’s international expansion strategy
and its solidity.
Income Statement
EUR million
1Q08
1Q09
Chg %
Net Interest Income
258.3
315.3
22.1
+
150.7
170.3
13.0
=
Banking Income ex-Markets
409.0
485.6
18.7
+
Capital Markets and Other
73.1
40.1
-45.1
=
Banking Income
482.1
525.7
9.0
-
Operating Costs
241.5
254.7
5.5
=
Gross Results
240.6
271.0
12.6
-
Net Provisions
68.2
115.4
69.1
56.1
96.6
72.2
Securities
2.3
7.9
….
Other
9.8
10.9
11.2
172.4
155.6
-9.8
20.3
45.0
121.2
152.1
110.6
-27.3
6.2
9.3
50.0
145.9
101.3
-30.6
Credit
=
Income before Taxes and Minorities
-
Income Tax
=
Income before Minorities
-
Minority Interests
=
Net Income
7
Main factors that affected net income in 1Q09:
•
notably positive evolution of recurrent revenue generation, with commercial banking income growing
by 18.7%, supported by significant growth of net interest income (+22.1%), which was broadly backed
by net interest income originating from international activities (+61%);
•
a recovery in fees and commissions (+13%), inverting the declining trend of the previous year, as a
result of the internationalisation strategy pursued;
•
income generation from capital markets and other results amounting to EUR 40.1 million, declined (45.1%YoY) but contrasts with the losses recorded in 4Q08 (EUR -33.9 million) and in 3Q08 (EUR -19.4
million), despite continued market instability;
•
controlled growth of costs (+5.5%), the evolution of which was determined by the increase in pension
costs due to the amortisation of actuarial differences;
•
credit provisions amounting to EUR 96.6 million (+72.2%) determined by the current economic
recession, which severely impacted credit risks of private individuals and companies;
International Activity
The Group’s strategy of expanding international activity into countries with affinities with Portugal
continued to result in highly positive results, which have led in sustained fashion to the growth in
importance of the contribution from the International area, which grew to represent 54.5% of net income
(2008: 35.6%).
The net income generated in this area reached EUR 55.2 million, increasing by almost 50% YoY, and in
contrast to the domestic area, for which net income fell to EUR 46.1 million (-57.7%), being heavily
affected by the levels of provisioning and the increase in tax burden.
The effects of the crisis were also reflected in the strengthening of loan provisions for the International
area, which rose from EUR 5.5 million in the first quarter of 2008 to EUR 18.7 million, due essentially to
increases in Spain and the USA.
8
Income Statement: Domestic and International Breakdown
EUR millon
International
Domestic
1Q08
1Q09
Chg %
1Q08
1Q09
Chg %
Net Interest Income
205.4
230.0
12.0
52.9
85.3
61.1
+
123.3
136.7
10.8
27.4
33.6
23.0
=
Banking Income ex-Markets
328.7
366.7
11.6
80.3
118.9
48.1
+
52.0
14.8
-71.4
21.1
25.3
19.8
=
Banking Income
380.7
381.5
0.2
101.4
144.2
42.2
-
Operating Costs
194.9
205.8
5.6
46.6
48.9
5.1
=
Gross Results
185.8
175.7
-5.5
54.8
95.3
73.8
-
Net Provisions
62.1
96.7
55.6
6.1
18.7
….
50.6
77.9
54.1
5.5
18.7
….
Securities
2.3
8.0
….
0.0
- 0.1
….
Other
9.2
10.8
16.6
0.6
0.1
-75.5
123.7
79.0
-36.1
48.7
76.6
57.0
13.3
31.6
….
7.0
13.4
91.1
110.4
47.4
-57.1
41.7
63.2
51.3
1.3
1.3
-0.6
4.9
8.0
63.5
109.1
46.1
-57.7
36.8
55.2
49.7
Credit
=
Income before Taxes and Minorities
-
Income Tax
=
Income before Minorities
-
Minority Interests
=
Net Income
The Angola and United Kingdom units made decisive contributions to the performance of the
International area, with these increasing by 76.2% and 160.5% respectively.
INTERNATIONAL AREA’S CONTRIBUTION (1) TO NET INCOME
(EUR million)
Brazil: 4.8
(6 .3)
Ang ola: 16.1
(9.2)
Spain: 6.7
(7.0)
France / L ux
2.1
(2.2)
USA: 1.8
(3.4)
Macao: 1.6
(0.3)
C.Verde: 0.4
(0.1)
UK: 21.7
(8 .3)
(1)
( ) 1Q08
After minority interests and consolidation adjustments
9
3.1.
Net Interest Income
Financial intermediation activity during the first quarter developed within the context of a sharp
reduction in interest rates, with the 3-month Euribor rates falling from 2.89% (Dec 08) to 1.51% (Mar 09).
This trend had begun at the start of the last quarter of 2008, at which point this rate was 5.28% (Sep 08).
Net interest income reached EUR 315.3, representing an increase of EUR 57 million (+22.1%) YoY, due both
to the volume effect (EUR 28.8 million), and to the price and mixed effect (EUR 28.2 million).
By comparison with 4Q08, a period which also witnessed a sharp reduction in market interest rates, net
interest income continued to develop well, with an annualised growth rate of 3%.
NET INTEREST INCOME AND NET INTEREST MARGIN
EUR million
1Q08
Average
Balance
Interest Earning Asstes
1Q09
Avg Rate (%)
59 200
Average
Balance
NII
6.05
890
64 919
Avg Rate
(%)
NII
5.34
854
Customer Loans
43 573
6.16
667
47 981
5.59
661
Other Assets
15 627
5.74
223
16 938
4.63
193
-
-
-
1 218
-
-
Interest Earning Asstes & Other
59 200
6.05
890
66 137
5.24
854
Interest Bearing Liabilities
58 339
4.35
632
66 137
3.31
539
Deposits
Other Funds
Other
22 092
36 247
861
2.93
5.23
-
161
471
-
25 537
40 600
-
2.75
3.66
-
173
366
-
Interest Bearing Liabilities & Other
59 200
4.29
632
66 137
3.31
539
Other
Euribor 3 M - Quarter avg
NII / NIM
4.48
1.76
2.01
258
1.93
315
Net interest margin reached 1.93% in the 1st quarter of 2009 (+17 bp YoY), explained both by the policy of
updating credit spreads as a function of the deterioration of risk and shortage of liquidity and because of
the mismatch in the frequency of re-pricing of portfolios, assets and liabilities, to the new market rates.
10
In parallel, the Group intensified its policy of prudent management of assets and liabilities implemented
by the ALCO (Assets and Liabilities Committee) and monitored on a permanent basis by senior
management with the objective of ensuring:
•
a policy of updating of lending spreads to reflect the increasing credit risk deriving from the
deterioration of the economic situation;
•
a policy of launching innovative and attractive offers for raising funds from clients.
3.2.
Commissions generated by services amounted to EUR 170.3 million, corresponding to an increase of 13%
and to a value of 7% above the quarterly average for FY2008.
FEES AND COMMISSIONS
EUR million
1Q08
1Q09
Chg %
8.7
8.8
1.2
Securities related fees
13.9
12.5
-10.4
Guarantees
12.3
13.8
12.0
Account management
20.6
21.0
1.9
Commissions on loans and other (1)
30.8
36.9
20.0
3.1
16.2
428.7
27.2
22.7
-16.4
8.0
8.0
0.1
Bancassurance
13.6
12.1
-10.8
Other
12.5
18.3
45.0
150.7
170.3
13.0
Collections
Documentary credit
Asset management (2)
Cards
Total
(1)
Includes corporate finance , exports financing, commissions on loans and factoring
(2)
Includes investment funds and portfolio management
As in the previous financial year, commissions on documentary credits continued to show dynamic
growth (+429%), based on the strong position of the Group among International companies, reinforced
through the creation of the International Premium Unit (UIP), which is specially dedicated to the segment;
loan-related services increased by 20% with the contribution of corporate and project finance having
been decisive.
11
Also of note was the increase in guarantees granted, due fundamentally to a volume effect, as were the
reductions in proceeds from operations associated with securities (-10.4%), asset management (-16.4%)
and bancassurance (-10.8%), which were affected by the poor performance and lack of dynamism of the
capital markets.
For many years, the Group has devoted particular attention to the quality of the services which it
provides: it has created a new complaints monitoring system, substantially improved clarity and detail of
information made available to clients, both at service points and in transaction information, and has
implemented a service level monitoring system. As a result of its quality and service strategy, we are
satisfied to note that according to the report on supervision of conduct for 2008 drawn up by the Bank of
Portugal, the number of complaints submitted to the same Bank of Portugal by clients of BES is clearly
below the market average.
3.3.
Capital Markets and Other Results
Capital markets and other results were positive, amounting to EUR 40.1 million, a value which compares
with the EUR 73.1 million achieved in 1Q08, but contrasts with the losses recorded in 4Q08 (-EUR 33.9
million) and in 3Q08 (-EUR 19.4 million).
This quarter was characterised by the maintenance of expansionary monetary policies adopted by the
main central banks, reflected both in the significant reduction in key interest rates, and in the
implementation of long-term debt repurchase policies by both the FED and the Bank of England.
The Group’s maintenance of its position in this area allowed it to obtain positive results with interest rate
instruments, that more than compensated the losses in fixed income and equity.
Results associated with credit instruments were negative in 1Q09, reflecting the increase in spreads
associated to the securities portfolio, in line with the deteriorating economic environment and with the
deleveraging of the economies.
As for equity markets, the results were negative in the quarter and are related with the general fall of the
Stock Exchange indices verified until mid-March, when the recovery started.
12
3.4.
Operating Costs
Operating costs increased by 5.5% YoY, being influenced above all by growth in staff costs (+10.6%) and to
a lesser degree, by depreciation.
OPERATING COSTS
EUR million
1Q08
Change
1Q09
absolute
% YoY
124.9
138.1
13.2
10.6%
Admin costs
98.9
95.0
-3.9
-3.9%
Depreciation
17.7
21.6
3.9
22.2%
241.5
254.7
13.2
5.5%
194.9
205.8
10.9
5.6%
46.6
48.9
2.3
5.1%
Staff costs
Total
Domestic
International
Staff costs were contingent on the growth in pensions, which were 2.7 times the value of the 1st quarter
of 2008, due to amortisation of actuarial differences determined in that financial year and which
originated from the depreciation of fund assets. Excluding pension charges, both staff costs and total
operating costs would have been slightly below the values of the 1Q08.
STAFF COSTS
EUR million
1Q08
Salaries and other
Pensions
Long term service benefits
Total
Total excluding pensions
1Q09
Change
absolute
0.2
% YoY
116.1
116.5
0.2%
7.8
20.6
12.8 165.4%
0.8
124.9
1.0
138.1
0.2
13.2
20.7%
10.6%
117.1
117.5
0.4
0.3%
13
The evolution in general administrative expenditure reflects the effects of initiatives with a view to their
containment/reduction for the current financial year. The most visible impacts were on temporary staff (41%), consultancy and auditing (-37%), advertising (-31%) and studies and consultations (-18%).
Write-downs increased by EUR 3.9 million, of which EUR 2.4 million related to investments in information
systems, with the remainder deriving from depreciation of properties and equipment, following the
expansion of the branch network carried out over the last two financial years.
3.5.
Provisions
Strengthening of provisions during the quarter amounted to EUR 115.4 million, representing an additional
effort of 69% and corresponding to an amount equivalent to 22% of the banking income generated during
the period (1Q08: 14%).
With regard to credit, and in the context of the global recession and consequent deterioration of overdue
loan ratios, the associated provisioning charges rose to 0.80% (2008FY: 0.57%), translating into a charge in
provisions of EUR 96.6 million (+72%).
While the ongoing fall in markets, notably in securities markets, did not have a significant impact on the
fair value reserve relative to Dec 08, it gave rise to the need to strengthen provisions by EUR 7.9 in order
to deal with the impairment of securities.
3.6.
Profitability
The annualised quarterly result corresponds to a return on equity (ROE) of 9.3% and a return on assets
(ROA) of 0.54%, with these values very close to those achieved in FY2008.
Profitability
%
1Q08
2008
1Q09
Return on Equity (ROE)
14.8
9.8
9.3
Return on Assets (ROA)
0.85
0.56
0.54
14
4. ACTIVITY
4.1.
General Overview
The Group’s activity during the quarter continued to provide signs of sure and robust progress, despite
the current context of economic contraction, in Portugal and abroad.
Firstly, it is important to highlight the significant growth in deposits of 14.8% and debts securities placed
with clients (+12.6%), partially absorbed by a reduction in the balance of funds represented by certificates
of deposit, with the result that on-balance sheet customer funds increased by 10.2%. We believe that this
progress reveals the confidence which our clients have shown in the BES Group.
Total customer funds increased by 4.2%, influenced by the reduction in off-balance sheet funds of 7.2%.
MAIN BUSINESS INDICATORS
EUR million
31 March
2008
2009
Chg %
Total Assets (1)
92 889
98 908
6.5
Assets
67 892
76 641
12.9
Gross Loans (including securitised)
48 523
51 957
7.1
Loans to Individuals
17 467
17 416
-0.3
14 714
14 668
-0.3
2 753
2 748
-0.2
Corporate Loans
31 056
34 541
11.2
Total Customer Funds (A+B)
53 093
55 339
4.2
34 862
38 416
10.2
28 516
22 069
31 272
25 328
9.7
14.8
6 447
5 944
-7.8
6 346
7 144
12.6
18 231
16 923
-7.2
124
123
-1
- Mortgage
- Other Loans to Individuals
On-Balance Sheet Customer Funds (A)
Customer Deposits and similar
Deposits
(2)
Certificates of deposit
Debt Securities placed with Clients (3)
Off-Balance Sheet Funds (B)
Transformation Ratio (%)
(4)
p.p.
(1) Net Assets + Asset Management + Other off-balance Sheet liabilities + non consolidated Securitised credit
(2) Includes: "Customer deposits and Certificates of Deposits
(3) Includes: funds associated to securitizations and bonds at Fair Value
(4) Assuming on-balance sheet credit / (Total customer funds- Off-balance sheet funds)
15
With regard to credit, it is important to highlight the increase in loans to companies of 11.2% YoY, which
contrasts with the evolution of loans to private individuals, which was slightly below the balance for 1Q08
(-0.3% YoY).
The maintenance within corporate lending of balances substantially higher YoY, despite current
restrictions on liquidity, demonstrates the continued efforts of the BES Group to support national
business, notably small and medium-size companies, which represent the largest number of companies in
the country.
The strengthening of the Group’s equity base will certainly allow it to continue to provide the support
indispensable for ensuring that companies continue to count on BES as its financial partner of choice.
Regarding the activity of foreign units, we highlight the 26% increase in loans to clients. Total assets
amounted to EUR 26.7 billion, corresponding to an increase of some 7.1% relative to the previous financial
year.
The Group’s strategy of greater balance between growth in lending activity (+7.1%) and rising of onbalance sheet customer funds (+10.2%) allowed it to achieve a slight improvement in the transformation
ratio, which rose from 124% to 123%.
BREAKDOWN BETWEEN DOMESTIC AND INTERNATIONAL ACTIVITY
EUR million
Domestic
Mar. 08
(1)
Mar. 09
International
Var %
Mar. 08
Mar. 09
Var %
67 952
72 195
6.2
24 937
26 713
7.1
Loans (including securitized)
40 661
42 054
3.4
7 862
9 903
26.0
Total customer funds
38 292
40 696
6.3
14 801
14 643
-1.1
Total Assets
(1) Net Assets + Asset Management + Other off-balance Sheet liabilities + non consolidated Securitised credit
4.2.
Main business areas (Operating Segments)
BES Group general overview
The BES Group develops its activity with value proposals aimed at companies, institutions and private
individual clients. Its decision-making centre is located in Portugal, making the national territory its
priority and natural market of operation. Its historic links with Brazil and Africa, the internationalisation
of national companies, the growing interdependence of economies and the emigration of Portuguese
16
citizens to various countries around the world has received special attention from the Group, which has
an international structure that makes a significant contribution to its activity and results.
For this purpose, the BES Group has various operating units, both within Portugal (where it has 737
branches) and at international level (60 branches). Banco Espírito Santo represents the main unit of the
Group and consists of a network of branches in Portugal and branches in London, New York, Spain,
Nassau, the Cayman Islands, the Cape Verde Islands, a financial branch in the Free Zone of Madeira and
12 representative offices. In addition to this unit, the Group also includes BES Investimento, BES Angola,
BES Açores, Banco BEST, Espírito Santo Bank (Miami), BES Oriente, BES Vénétie, Espírito Santo Activos
Financeiros (ESAF), BES Seguros (non-life insurance division) and BES Vida, among other companies.
In monitoring performance by business area, the Group considers the following Operating Segments: (1)
Domestic Commercial Banking, which includes the Retail, Corporate and Institutional and Private Banking
sub segments; (2) International Commercial Banking; (3) Investment Banking; (4) Asset Management; (5)
Markets and Strategic Investments; and (6) the Corporate Centre. Each segment includes the structures
of BES which are directly dedicated to it, as well as the units of the Group, the activity of which is most
closely identified with each one of these segments. The individual and autonomous monitoring of each
operational unit of the Group (considered from the viewpoint of an investment centre) is supplemented,
at the level of the Executive Committee, by the definition of strategies and commercial plans for each
Operating Segment.
As a complement to this, the Group uses a second segmentation of its activity and results according to
geographical criteria, separating activity and results achieved in the units located in Portugal (Domestic
Area) from those achieved outside it (International Area).
4.2.1.
Retail Banking
This segment includes activity with individuals and small businesses, most notably property financing of
mortgages and consumption, financing of small businesses, sight and savings deposits, pension plans
production and other insurance products for private individuals, commissions for account management
and means of payment and placement services for investment funds, the purchase and sale of securities
and custody.
17
RETAIL BANKING
EUR million
1Q08
On-Balance Sheet Customer Funds
Gross Customer Loans
Commercial Banking Income
Other Operating Results
Banking Income
Operational Costs
Provisions
Income Before Tax
Cost to Income
1Q09
Chg %
7 343
9 361
27.5
18 421
160.2
0.5
160.7
104.0
29.5
27.2
64.7
18 111
150.4
4.8
155.2
102.4
18.7
34.1
66.0
-1.7
-6.1
….
-3.4
-1.5
-36.6
25.4
The results of this significant operating segment represents an increase in the respective pre-tax profits
to EUR 34.1 million (+25.4% in constant terms).
This evolution is the fruit of a rigorous policy of managing operating costs, which recorded a reduction of
1.5% YoY (despite the expansion programme for the commercial network, which continued throughout
2008) and of the impact of credit risk management policies, which contributed to a substantial
improvement in credit impairment (-36.6%).
This segment shows a development in banking income, conditioned by the sharp fall in the Euribor rate
relative to the corresponding period last year (with an impact on net interest income) and by the
reduction in commissions linked to asset management and bancassurance (in which, despite the increase
in commercial productivity, the performance of markets led to a reduction in fees and commissions). The
measures implemented to counter this trend allowed the reduction in retail banking income to 3.4% YoY.
The first quarter of 2009 was thus characterised by the maintenance of high levels of commercial
dynamism, despite the difficult current economic situation, with the BES Group having successfully
implemented its strategy of winning and maintaining the loyalty of clients, with special emphasis on
higher value-added clients.
The various initiatives to acquire new clients (both through the branch network and through special fund
raising channels, such as the Assurfinance and Cross-Segment channels) allowed the bank to gain 37 000
new clients during the first quarter of 2009, of which 33 000 new retail clients, with the affluent client
acquisition growth continuing at high levels: +27.6% YoY.
18
One of the pillars of client base growth is, as mentioned, the branch network, which at the end of the first
quarter of 2009, consisted of a total of 737 units in Portugal (net growth of 20 units relative to the same
period of 2008). At the end of the first quarter of 2009, the network included 41 on-site branches resulting
from partnerships with insurance agents under the Assurfinance programme. The expansion of the
network operated by the Group during the three-year period 2006-2008 was based on strict profitability
criteria, which translated on the one hand into the opening of units with low-cost operating models, and
on the other hand, focusing on regions with significant purchasing power. The new branches showed a
global result in line with the relevant business plan and are contributing significantly to the evolution of
the retail business: new branches contributed 19% of new client acquisitions in 2009 and 24% of customer
funds.
It is important to highlight three fundamental activity drivers within the retail segment:
•
major concentration on fund raising, as expressed by growth of 27.5% YoY in on-balance sheet retail
funds. This trend is equally evident in the commercial results achieved by the Bancassurance area,
with pension plans production growing by 24.8% YoY (with the Group having achieved a market share
of pension plans production of 27.1% over the last 12 months, remaining as leader for this important
product). Placement of structured products and subordinated bonds should also be highlighted,
having grown by 113.4% YoY. This growth has contributed to the progressive optimisation of the
transformation ratio in this business area and for the Group as a whole;
•
growth in credit with a high degree of selectivity: selectivity in granting credit translated into a
reduction in the loan portfolio of 1.7%. Affluent clients, with a lower degree of risk, accounted for 55%
of production of mortgages and 31% of consumer credit during the quarter. In the specific case of
small business loans, also serviced by the retail network, pricing policy was adjusted to the evolution
of risks in accordance with the models applicable to this segment;
•
there was a sustained increase in cross-selling, a critical growth driver in retail banking, with the
Group succeeding in maintaining a high level of growth of product sales relative to the corresponding
period of last year (+22%). The launch of products adjusted to the current economic context should be
highlighted here, notably an unemployment insurance policy with more than 6,000 policies sold by the
end of April. By way of example, we may also highlight the performance of subscription of service
accounts (+9%, with growth of 128.5% in higher value formulas) and of life insurance policies, where
production policies with protection from serious illnesses grew by 144.0% YoY.
19
The Assurfinance programme continued to make a strong contribution to the commercial development
of retail by gaining some 6 500 new clients and placing 3 600 credit cards (T-cards). The Assurfinance
programme also made an important contribution to growth of customer funds in the Business Area, with
on-balance sheet client funds growth of 44.2% YoY (notably through the network of on-site branches,
located primarily in traditionally more thrifty regions).
In the area of direct channels, the programme for strengthening functionality and use was maintained.
The number of users of internet banking for individual clients – BESnet – reached 981 000 clients in March
2009, representing growth of 6.9% relative to the corresponding period of the previous year.
At the same time, there was a substantial increase in use, with the number of frequent users growing by
16.6%, and the total number of log-ins by 20.4%, relative to the corresponding period of the previous year.
The Direct Channels area continued to strengthen the commercial capacities of its platforms, in close
connection with the servicing function, with appropriate and exclusive products for the Internet and
telephone channels. During the first quarter of 2009, on-line subscriptions of savings products amounted
to EUR 1 112 million, representing growth of 273.9% relative to the corresponding period last year.
Banco BEST continued to pursue its strategy of continuous improvement of all forms of interaction with
clients, with the following initiatives of particular note: (i) expansion of the offer of multi-currency
products, with clients offered the possibility of holding accounts not only in EUR and USD, but also in GBP
and Swiss Francs ii) provision of the SMS Guardian service, which allows increased security in the use of
credit cards; (iii) a revision and significant improvement in the functionalities of the streamer for trading;
(iv) expansion of forms of access to the Best Trading Pro service, with access made available by WEB and
Mobile, and (v) the launch of the BEST Trading Challenge, a viral marketing platform. According to data
recently published by the CMVM, Banco BEST maintained its leadership in distributing foreign investment
funds in Portugal, with a market share of 27.2% (data for 3Q08) and in the area of trading, leadership of
the online derivatives market in Portugal, achieving a market share of 40% (data for February 2009).
Banco Espírito Santo dos Açores recorded net income of EUR 0.4 million for the first quarter of 2009
which, if compared to the figure of EUR 1.2 million for the corresponding period of 2008, represents a
decrease of 64.6%. This decline in the result was principally due to the increase in provisions, which in
March 2009, reported growth of EUR 1.1 million relative to March 2008. Banking income amounted to EUR
3.7 million, with growth of 10.2% over the same period. Relative to the corresponding month of the
previous year, loans to clients grew by 10.5% to EUR 374.6 million, with mortgages growing by 16.0%.
Client deposits in turn registered an increase of 10.9%, amounting to EUR 272.2 million.
20
4.2.2
Corporate and institutional Clients
This business area includes activities with large companies, and with small and medium-sized companies
through a commercial structure dedicated to this segment (28 Business Centres), as well as business with
institutional and municipal clients.
Among the relevant products, we would highlight short-, medium- and long-term lending, leasing,
factoring, discounting, albeit which is currently used less, as well as deposits, guarantees, custody
services, documentary credits and management of means of payment.
CORPORATE AND INSTITUTIONAL CLIENTS
EUR million
1Q08
Banking Income
Operational Costs
Provisions
Income Before Tax
Cost to Income
1Q09
Chg %
6 204
7 981
28.6
17 642
105.6
6.6
112.2
14.4
18.5
79.3
12.8
19 161
123.4
4.1
127.5
14.9
45.0
67.6
11.7
8.6
16.9
-37.9
13.6
3.5
143.2
-14.8
The Companies and Institutional Clients segment, where the Banco Espírito Santo Group has a significant
presence, provided the largest contribution to the consolidated pre-tax results for the quarter, of EUR
67.6 million
Relative to the first quarter of 2008, this segment achieved significant growth in on-balance sheet client
funds (+28.6%), as a consequence of policies aimed at balancing loans and fundraising.
Loans to clients grew by 8.6% YoY, with the maintenance of a selective and rigorous lending policy, with
priority given to companies with good risk profiles and innovative characteristics and in supporting the
internationalisation of domestic business through the promotion and support of various Group structures
dedicated to this segment, including the recently created unit specialising in support for
internationalisation, the International Premium Unit.
21
Various initiatives contributed to the maintenance of policies which support the national business
structure, among which, it is important to highlight BES’ role in the subsidised ‘PME Investe’ credit lines,
included in the National Strategic Reference Framework (QREN), under which Banco Espírito Santo has to
date approved more than EUR 660 million.
Within the context of support for the internationalisation of domestic business, the deep links between
the domestic commercial network and the commercial network within Spain have allowed commercial
fundraising and business development activities with Iberian clients to be maintained, with notable
results: the number of active clients in Portugal and Spain reached a total of 1 432 – with around 658
Spanish companies with a presence in Portugal and 774 Portuguese companies with a presence in Spain,
representing 66% of the potential universe of companies with good risk profiles which are present in both
countries.
The quarter was also characterised by important revenue diversification initiatives, drawing on the knowhow of various specialised units within the Group, and which translated, e.g. into the commissions
generated in trade finance operations (which, at Group level, more than quadrupled relative to the first
quarter of 2008) and in investment banking advisory operations (for which commissions grew by 161.0% in
the Companies and Institutional Clients segment). These initiatives, together with those of a partial
impact on the pricing policy of the sharp increase in financing costs of the financial sector and the
evolution of risks, allowed the achievement of corresponding growth in banking income of 13.6%.
The current economic situation led to a deterioration of loan default by clients within the financial
system. The measures implemented to strengthen management of credit risk significantly reduced the
negative impact of this situation, but naturally, the level of impairment within this operational segment
increased, leading to a reduction of 14.8% YoY of the respective pre-tax income figures.
Corporate Internet Banking - BESnetwork - showed a sharp increase, reaching 73 000 users during the
first quarter, with growth of 11.3% relative to the corresponding period of the previous year. The number
of log-ins grew by 14% as total operations carried out grew by 17.6%, resulting from an increase in clients
as well as in the number of available functions.
4.2.3. Private Banking
This includes activities with private clients, covering all proceeds, costs and asset products as well as
fundraising associated with these clients, notably deposits, discretionary management, custody services,
securities transactions and insurance products.
22
PRIVATE BANKING
EUR million
1Q08
1Q09
Chg %
794
1 510
90.2
939
11.7
0.7
12.4
5.8
0.2
6.4
46.8
896
9.3
1.3
10.6
5.7
-0.3
5.2
53.8
-4.6
-20.5
85.7
-14.5
-1.7
…
-18.8
Banking Income
Operational Costs
Provisions
Income Before Tax
Cost to Income
The development of Private Banking activities was characterised by significant dynamism despite adverse
market conditions. During the quarter, as a result of the volatility registered in the markets, a significant
increase in demand for intermediated solutions was observed, with the volume of on-balance sheet client
funds in this area increasing by 90.2% YoY. Notwithstanding the market instability described above, the
value of assets under management at the end of the first quarter of 2009 remained above EUR 7.1 billion
as the result of the various commercial initiatives in progress. Despite this commercial trend, pre-tax
income for the segment fell by 18.8% to EUR 5.2 million and commercial banking income for the segment
fell by a corresponding 20.5%. Within net interest income, this trend resulted from the direct impact of
the fall in the Euribor rate on the margin for sight deposits and the heavy competitive pressure on
interest rates paid on savings deposits, as well as from the impact on banking services resulting from the
re-intermediation of funding and declines in markets.
During the quarter, the BES Group began to implement a wide-ranging programme to redesign its
approach to the Private Banking segment, both in terms of the reorganisation of central structures, and
of optimisation of the commercial network and reinforcement of the competitive advantages of GBES,
with a view to guaranteeing improved adaptation to the profile, needs and expectations of the different
client sub segments serviced by this important Business Area.
These structural initiatives add to the programme currently in progress of member-get-member
initiatives, internal cross-selling initiatives with the various areas of GBES, as well as those of growing
coordination with Banco Espírito Santo de Investimento (where an Individual Client Department was
created at the end of 2008, with a view to providing clients with products and services complementary to
23
traditional proposals in the fields of discretionary management, stock broking, private equity, structured
credits, bond portfolios, portfolios of structured instruments and derivatives and financial consultancy).
4.2.4.
International Commercial Banking
This segment includes units located abroad, the banking activity of which is directed towards companies
and private individuals, excluding investment banking and asset management, which are included in the
corresponding segments. Notable among the units included in this segment are Banco Espírito Santo
Angola (BESA) and the branches of BES in Spain, London, New York and the Cape Verde Islands. Of the
products and services which it provides, we would highlight deposits, credit, leveraged finance, structured
trade finance and project finance operations.
INTERNATIONAL COMMERCIAL BANKING
EUR million
Variáveis
1Q08
1Q09
Chg %
11 510
11 649
1.2
8 805
66.6
10.6
77.2
33.9
5.4
37.9
43.9
10 867
98.1
17.9
116.0
39.2
15.9
60.9
33.8
23.4
47.3
68.9
50.3
15.6
194.4
60.7
Banking Income
Operational Costs
Provisions
Income Before Tax
Cost to Income
This segment recorded a highly positive performance, which translated into significant growth in credit
activity (+23.4%), with a 50% increase in banking income which, together with containment of costs, led to
growth in income generated to EUR 60.9 million (+61%) YoY.
Activities within Spain are carried out by BES’ branch which operates as a platform for the Group in
supporting the activity of Portuguese and Spanish companies operating within the Iberian Peninsula.
During the first quarter of 2009, lending to clients grew moderately, reflecting the adoption of prudent
criteria in granting loans. The attempt to adjust lending spreads and the containment of costs deserved
particular attention during the first months of 2009. The branch achieved a positive result of EUR 6.5
million, due to reduction in costs and favourable evolution of net interest income.
24
Banco Espírito Santo Angola (BESA) continued to consolidate its presence in the Angolan market in a
sustained manner, as one of the institutions with the best profitability and efficiency indices. In
maintaining this position, BESA was one of only three banks operating within the Angolan market which
in 2008 raised their shares of the lending and deposit markets. This performance was the result of a
strategy of betting on solidity, trust and excellence in the service provided to clients. During the first
quarter of 2009, BESA received the distinguished Banco do Planeta [Planet Bank] award, from the Comité
Internacional de Desenvolvimento do Planeta Terra [International Committee for the Development of
Planet Earth], coordinated by the UN via UNESCO. This award is made to the banking institution which
has distinguished itself the most in supporting the dissemination of messages on protecting the
environment and sustainability. The first quarter of 2009 was distinguished by the start up of direct
channels, notably the entry into operation of Internet banking in the consultation component (with the
transaction component scheduled for the second quarter of 2009). The commercial structure of BESA
currently consists of 29 branches, of which 19 in Luanda, with the Bank having the short-term objective of
a presence in every provincial capital, as well as two Company Centres and a Private Banking Centre in
Luanda. On 31 March 2009, BESA’s net assets amounted to EUR 3 659 million, representing growth of
160% relative to the corresponding period of the previous year. On this same date, Client Funds amounted
to EUR 1 697 million, representing an increase of 81% relative to the corresponding period of the previous
year. Lending and the securities portfolio (consisting of sovereign public debt) increased to EUR 1 428
million and to EUR 1 561 million respectively, corresponding to respective growth of 144% and 188%,
relative to the first quarter of 2008 (EUR 586 million and EUR 543 million respectively). The growth in
question results from the consolidation of a medium- and long-term strategy which has been
implemented by BESA in all of the segments in which it operates. Of note are the various initiatives by
BESA, in conjunction with the other units of the Group, with a view to promoting the entry into Angola of
European companies, notably Portuguese, Spanish, French and German ones. Banking income for the
quarter amounted to EUR 45 million, compared to EUR 27 million for the corresponding period of the
previous year (+ 68%), with contributions from the increase in net interest income (55%) and fees and
commissions (223%). BESA has shown high levels of efficiency, translating into a cost-to-income ratio of
31.4%, which compares with 38.9% for the first quarter of 2008. The result for the quarter thus increased
to EUR 28.7 million, which compares with EUR 15.7 million for the corresponding period of the previous
year, representing growth of 83%.
The New York branch concentrates its activity on wholesale banking, mainly in the USA and Brazil, with
this presence having proven itself crucial in raising funds from US institutional and corporate clients,
most notably through the active placement of the certificate of deposit programme and the commercial
paper programme. Despite the unfavourable evolution of markets, the branch recorded 23% growth in
net assets during the period, consolidating its position within the international strategy of the BES Group.
It should be highlighted that the branch acted prudently, having avoided participation in any of the socalled toxic operations which have affected the banking sector in the USA.
25
For the first quarter of 2009, ES Bank (USA) reported net income of EUR 0.6 million (1Q08: -EUR 0.1 million)
based on the evolution of net interest income and client service income. Lending to clients declined by
1.5% (in USD) as the result of orientation towards better risk areas, notably mortgage and corporate
lending. In 2009, the Bank shall focus (i) on the increase in net interest margins through the quality of its
loan portfolio, (ii) in generating commissions resulting from private client products and services, and (iii)
diversification and sources of financing and its deposit base, as defined in its strategic plan.
The activity of the London branch concentrated on the bank’s wholesale business in the European
market. As a specialised credit unit, the Branch acted with a high degree of selectivity, which translated
into a conservative policy of risk monitoring and management and the continued strengthening of
provisioning. In terms of wholesale funding and despite the sharp restriction on liquidity, the Branch
maintained a significant role in raising funds for the Group, with growth of 33% since the start of the year.
During this first quarter, we would highlight the growth in banking income (+57%) which, together with
rigorous control of operating costs (-12%), allowed significant growth in results (+82%). Also of note were
the international Trade Finance operations in close collaboration with BES in Portugal, within the context
of the bet on and expansion of the Global Trade Finance business abroad.
The activities of the Commercial Bank (corporate banking, property and structured financing) of Banco
Espírito Santo et de la Vénétie during the quarter, translated by an increase in banking income 9.4%
relative to the corresponding period of the previous year, were not sufficient to avoid a deterioration in
overall banking income (-6.1%), due to the combined effect of a sharp reduction in interest rates and the
substantial increase in refinancing costs. As foreseen, and as a result of the measures taken within the
context of the expansion and diversification of our activities, costs increased by 7% relative to the first
quarter of 2008. As a consequence, gross operating income for the first quarter of 2009 fell by 16.7%
relative to the corresponding period of the previous year.
Banco Espírito Santo do Oriente (Macau) recorded an increase in lending activity throughout the first
quarter of the year, relative to the closing months of 2008. This growth is related to the participation of
BESOR in financing operations, approved in 2008, for the leisure sector in Macao, as well as in
infrastructures and renewable energy in Southeast Asia. Notwithstanding greater selectivity and rigour in
granting loans, due to the deterioration in the global recession outlook, the realisation of the operations
cited above translated into growth in the loan portfolio of 187.5 million Patacas, relative to the values
recorded in December 2008. The raising of client deposits remains a priority strategy for 2009, with a set
of initiatives having been developed for institutional clients, as well as with local reserve funds, which
permitted the growth of 335.2 million Patacas relative to the corresponding period of the previous year,
representing positive growth of 77.8%.
26
Activity in the Cape Verde Islands began in mid-2006, with the opening of a branch of BES, in line with the
strategy defined for international expansion into markets with cultural and economic affinities with
Portugal. The main guidelines are concentrated on corporate banking and public/private sector
investment in infrastructure (ports, roads, electricity and water) as well as in the tourism sector, most
notably for Portuguese companies with economic relationships in the Cape Verde Islands. During the
period under consideration, the branch recorded a sharp increase in its assets (+99%) and results, even if
these are still modest in absolute terms, but of constant growth over the last few quarters.
4.2.5.
Investment Banking
This Business Area includes the assets, liabilities, proceeds and costs of the operational units of Banco
Espírito Santo de Investimento (BESI), covering the whole of the investment banking activities of the
Group within Portugal and abroad. In addition to banking activity in wholesale lending, deposits and other
forms of fundraising, it includes project finance consultancy services, mergers and acquisitions,
restructuring and consolidation of liabilities, preparation and public or private placement of issues of
shares, bonds and other fixed-income and equity instruments, stock broking and other investment
banking services.
INVESTMENT BANKING
EUR million
1Q08
1Q09
Chg %
1 793
1 877
4.7
1 487
38.4
6.6
45.0
22.7
2.7
19.6
50.4
1 788
42.1
8.2
50.3
23.6
12.3
14.4
46.9
20.2
9.6
24.2
11.8
4.0
…
-26.5
Banking Income
Operational Costs
Provisions
Income Before Tax
Cost to Income
Despite the extremely unfavourable economic environment and the high degree of volatility of the
financial markets, BES Investimento succeeded in maintaining growth of its activities relative to the
corresponding period of the previous year. Consolidated banking income amounted to EUR 50.3 million,
reflecting growth of 11.8% relative to the corresponding period of the previous year. Domestic market
activity developed better than expected, representing 51% of the Bank’s total activity.
At international level, the highlight was Brazil, where activity continued to benefit from the strong trend
observed in certain sectors of activity, particularly in infrastructure development, as was the start of
27
activity of the Bank’s New York branch on 31 December 2008, which is already developing significant
activities in the areas of Project Finance, Mergers and Acquisitions and Capital Markets.
During the first quarter of 2009, BES Investimento concluded various operations and maintained notable
positions in the various business areas in which it operates.
In the area of Mergers and Acquisitions, the Group concluded the following operations: in Portugal, (i)
advisor to Magnum in acquiring a majority stake in Vendap; (ii) advisor to Babcock & Brown in the
disposal of Gascan to Explorer, (iii) advisor to ZON in the sale of 40% of LISBOA TV – Informação e
Multimédia, S.A. to SIC, and (iv) advisor to SP Televisão in the acquisition of 100% by TDN from SIC; within
Brazil: (v) advisor to Europ Assistance Portugal in the acquisition of 40% of the share capital of Europ
Assistance Brazil held by the Icatu Group; and (vi) advisor to Europ Assistance Brazil on establishing a
joint venture with Bradesco Seguros.
In the area of Project Finance, several operations were realised, most notable of which were: (i) Naturener
Glacier Financing, LLC - Mandated Lead Arranger in the back leverage financing for US$ 19 million,
relating to a wind farm located in Montana (USA); (ii) Vias do Baixo Tejo, S.A. - Mandated Lead Arranger
for a financing of EUR 463 million for the development of the road concession of Baixo Tejo (Portugal); (iii)
Efacec Power Transformers, Inc. – Mandated Lead Arranger of a financing for US$ 114 million for the
construction of a transformer plant located in Georgia (USA); (iv) Eólica dos Candeeiros, Lda. - Mandated
Lead Arranger for a financing of EUR 37.9 million relating to a wind farm (Portugal); (v) Royal Victoria
Hospital –– Mandated Lead Arranger of a financing of C$ 225 millions for phase 1 of the extension of
Barrie Hospital in Toronto (Canada); (vi) OHL - Mandated Lead Arranger of a bridge loan for a total
amount of R$ 200 million for the concession projects for 5 federal highways in Brazil.
In the area of Securitisation, it concluded the following operation: Tagus STC (EnergyOn No. 1) – Arranger
and Joint Leader of an operation for a total amount of EUR 1258.6 million relating to the assignment by
EDP Serviço Universal, S.A. of the rights to receive positive adjustments in electricity tariffs relating to
2007 and 2008.
Notable in the area of Acquisition Finance was the Bank’s participation as Joint Mandated Lead Arranger
in the financing of the acquisition of Farma APS / Generis by Magnum Industrial Partners, for a global
amount of EUR 75 million.
In the area of Capital Markets – Fixed Income, the Group organised and led 7 Commercial Paper
Programmes, for a global amount of EUR 141 million, among which, we highlight those of Martifer
Renewables (EUR 49 million) and Jerónimo Martins (EUR 50 million). The Group reported an exceptionally
high level of activity in the Eurobond market, having acted as (i) Joint Lead Manager in the issue by Banco
Espírito Santo, guaranteed by the Portuguese Republic, for an amount of EUR 1500 million; (ii) Senior CoLead Manager in the issue by Millennium BCP guaranteed by the Portuguese Republic, for an amount of
28
EUR 1500 million and; (iii) Co-Lead Manager in the issue by Caixa Geral de Depósitos, for an amount of
EUR 1250 million. We would also highlighted participation as Co-Manager in the EUR 1 billion issue by EDP
Finance B.V. In the domestic bond market, the Bank led the organisation and structuring of a bond loan of
EUR 30 million for Djebel.
Within Brazil, the Bank was Joint Bookrunner in the commercial paper issues of Bradespar (BRL 690
million) and the OHL group (BRL 200 million). The Group’s Risk Management activity (derivatives with
clients) within Brazil was also notable.
Within the context of significant declines in transaction volumes in the Iberian market, the Bank remained
the leading Stockbroker in Portugal, with a market share of 12.2% (11.7% in 2008) and the fifth largest on
the Madrid stock exchange, with a market share of 6.2% (5.6% in 2008).
Of note in the area of Private Equity was the last capital increase to EUR 95.7 million of the Espírito Santo
Infrastructure Fund – I (ESIF). At the end of the 1st quarter, the volume of funds under management
amounted to EUR 216 million, of which 61% corresponded to third-party funds.
During the first quarter of 2009, BES Investimento received the following distinctions:

“Best Investment Bank in Portugal” in 2009, from the magazine World Finance

“North America Transport Deal of the Year 2008” from the magazine Project Finance International,
relating to its leadership of the financing of the SH-130 highway concession in Texas (USA)

“North America PPP Deal of the Year 2008” from the magazine Project Finance International, relating
to its leadership of the financing of the A-30 highway concession in Canada

“North America Project Bond Deal of the Year 2008” from the magazine Project Finance
International, relating to its leadership of the structuring of a Direct Pay Letter of Credit for the
construction and operation of the High Occupancy Toll Lanes for a motorway in Virginia (USA)

“Latin America Deal of the Year 2008” from the magazine Euromoney, relating to its leadership of the
financing of Line 4 of the São Paulo metro

“European Solar Deal of the Year 2008”, from the magazine Euromoney, relating to its leadership of
the structuring of the financing for a portfolio of solar-photovoltaic farms in Spain
4.2.6.
Asset Management
This segment includes all of the asset management activities of the Group carried out by Espírito Santo
Activos Financeiros (ESAF), within Portugal and abroad (Spain, Brazil, Angola, Luxembourg and the United
Kingdom). ESAF’s product range covers all kinds of funds – mutual funds, real estate funds and pension
funds, besides providing discretionary portfolio management services.
29
ASSET MANAGEMENT
EUR million
1Q08
Asset Management
Banking Income
Operational Costs
Provisions
Income Before Tax
Cost to Income
20 892
13.6
0.1
13.7
5.2
0.0
8.5
38.0
1Q09
18 590
12.3
-0.3
12.0
5.4
0.0
6.6
45.0
Chg %
-11.0
-9.6
…
-12.4
3.8
…
-22.4
At the end of the first-quarter of 2009, the global volume of assets under management (including asset
management and other off –balance sheet liabilities) amounted to some EUR 18.6 billion, reflecting a
decrease of 11% relative to the first quarter of 2008.
Of note was the launch during the quarter of the special equity investment fund, Fundo de Investimento
Mobiliário Espírito Santo Estratégia Acções – Fundo Especial de Investimento. The objective of the Fund is
to provide its participants with access to an investment strategy directed towards the purchase of shares
and bonds convertible into shares of European Union, Swiss, Norwegian and U.S. companies.
BES also provides a discretionary portfolio management service which makes it a key bank in financial
advisory services, providing all of its clients with services which traditionally were only available for
operations involving large investments. In this way, clients may benefit from specialised management,
the main characteristic of which is conservative asset management and a target return above traditional
savings vehicles, available in euros and in foreign currencies. On the basis of these principles, the
evolution of the amounts in question has been favourable, amounting at the end of the quarter in
question to some EUR 1700 million.
With regard to international activity, we highlight BESAF (Brazil), the activity of which exceeded EUR 150
million under management in the 1st quarter, representing growth of over 10% relative to 31 December
2008.
In Angola, asset management activities are carried out by BESAACTIF, Sociedade Gestora de Fundos de
Investimento, the first fund management company operating in Angola, which received authorisation and
established a closed Property Investment Fund with a duration of 5 years, adhesion to which exceeded
expectations.
30
In addition, the pension fund management company BESAACTIF Pensões – Sociedade Gestora de Fundos
de Pensões, S.A. in which ESAF has an indirect equity stake of 35% together with Banco Espírito Santo
Angola, S.A. was formally established.
4.2.7.
Markets and Strategic Investments
This segment includes the global financial management activity of the Group, namely fund raising in the
financial markets, investment in capital market instruments (equities and bonds) and investments of a
strategic nature, as well as all the activity relating to management of interest rate and currency risk and
the management of short or long positions in financial instruments which permit the exploitation of price
oscillations in the markets in which such instruments are traded. It also includes activity with nonresident institutional investors.
MARKETS AND STRATEGIC INVESTMENTS
EUR million
1Q08
Banking Income
Operational Costs
Provisions
Income Before Tax
Cost to Income
13.0
48.0
61.0
8.7
12.1
40.2
14.3
1Q09
49.9
4.1
54.0
11.5
23.8
18.7
21.3
Chg %
283.8
-91.5
-11.5
32.2
96.7
-53.5
As described above, and despite all the turbulence which has characterised markets, the Group
succeeded in generating positive results in its trading activity, complemented by a good performance for
financial income, benefiting from the repricing mismatch between funds and applications. This area also
benefited from fees and commissions from non-resident institutional clients.
Provisions amounted to EUR 23.8 million (+97%), which ultimately also affected net income for this
segment, which amounted to EUR 18.7 million (-54%).
31
5. FINANCIAL STRENGTH AND OTHER INDICATORS
5.1.
Credit Quality
The global crisis had inevitable repercussions on the levels of overdue loans made by the Group, both in
terms of domestic and of international activity.
ASSET QUALITY
Mar. 08
Loans to customers (gross)
Overdue loans
Overdue loans > 90 days
Overdue and doubtful loans (BoP)
Provisions for credit
(EUR mn)
(EUR mn)
(EUR mn)
(a)
(EUR mn)
(EUR mn)
Overdue loans / Loans to customers (gross)
Overdue loans > 90 days / Loans to customers (gross)
Overdue and doubtful loans / Loans to customers (gross)
Coverage of overdue loans
Coverage of overdue loans > 90 days
Coverage of overdue and doubtful loans
Coverage of customer loans
P&L Credit provisions / Gross loans
P&L Credit provisions net of recoveries of write offs
(a)
Dec. 08
Mar. 09
Change
absolute
relative (%)
44 418
546.8
451.5
636.6
1033.3
48 198
636.9
524.2
762.0
1148.1
48 279
745.6
580.1
839.4
1215.5
3 861
198.8
128.6
202.8
182.2
1.23
1.02
1.43
189.0
228.9
162.3
2.33
1.32
1.09
1.58
180.3
219.0
150.7
2.38
1.54
1.20
1.74
163.0
209.5
144.8
2.52
0.31 p.p.
0.18 p.p.
0.31 p.p.
-26.0 p.p.
-19.4 p.p.
-17.5 p.p.
0.19 p.p.
0.51
0.47
0.57
0.52
0.80
0.76
0.29 p.p.
0.29 p.p.
8.7%
36.4%
28.5%
31.9%
17.6%
(a) According to Circular-letter no. 99/03/2003 of BdP
Consequently, total overdue loans increased by EUR 198.8 million relative to March 2008, of which EUR 68
million originated by international operations, causing the corresponding overdue loans ratio to rise from
1.23% to 1.54%.
Observing that as a general rule, the recognition of credit impairment precedes the appearance of the
expired loan (normally, the objective evidence of default is known before default by clients), during periods
of crisis such as the one we are currently experiencing, it causes a reduction in levels of provisioning for
overdue loans. This trend was already visible at the end of the previous financial year and has continued
to occur in 2009, with the provisioning coverage of overdue loans by more than 90 days having fallen by
19.4 basis points, albeit remaining at 209.5%.
32
Also with regard to provisioning of risks, we highlight the favourable evolution of total balance sheet
provisions over total credit which has consistently increased and which now stands at 2.52% (Mar 08:
2.33%).
5.2.
Liquidity, Solvency and Financial Strength
5.2.1.
Liquidity
Notwithstanding the climate of instability and volatility which persisted in financial markets, the first
quarter of 2009 witnessed a high level of activity in the primary debt market, which received a major
boost from the measures adopted by European and US governments. These measures, which have been
implemented since October 2008, aim to re-establish levels of confidence in the markets among investors,
in particular in the financial sector, and the creation of conditions more favourable for the normal
functioning of economic activity.
In particular, the mechanism for granting guarantees to issues in the financial sector developed by
various governments, gave rise to a new type of financial instrument, which dominated the market during
the first three months of the year, representing around 75% of the total debt issued by financial
institutions. In addition, non-financial companies also accessed the capital markets through debt
issuance on a scale significantly superior to that registered in previous years.
Following the approval of the guarantee concession of the Portuguese State, obtained at the end of
November 2008, in January 2009, BES carried out a 3-year bond issue with the guarantee of the
Portuguese Republic for an amount of EUR 1500 million. The amount issued represents around 50% of the
medium- and long-term debt to be reimbursed in 2009.
The balanced evolution of the balance sheet during the first quarter of 2009 and the strong recorded
trend in client funds (with growth of around 10.2% relative to March of the previous year) guaranteed the
stability of the Group’s financing structure and the maintenance of comfortable levels of liquidity.
In addition, the Group has strengthened its portfolio of securities eligible for rediscount with Central
Banks or in the repo markets, with this amounting to EUR 8.6 billion (EUR 4.4 billion eligible for rediscount
with the ECB) at the end of March 2009, already considering the level of the applicable regulatory haircut
applicable to current market prices.
33
5.2.2
Solvency – Basel II (New Prudential Framework)
Using the facility available under the new prudential framework introduced by Decree-Laws 103/2007 and
104/2007, which implemented the principles commonly designated as “Basel II” in Portuguese law, the
Group was authorised by the Bank of Portugal to use, as of 1Q09, the Internal Ratings Based (IRB)
approach for credit risk and the Standardized Approach – TSA method for operational risk.
The long certification process has now been concluded, placing the BES Group in a leadership position in
terms of risk management and in line with the best practices at the international level.
According to the regulations, the recently approved IRB approach implies utilisation of internal estimates
of default probabilities as well as estimates of loss given defaults and conversion factors for the retail
segments (IRB Advanced). For the remaining segments the same authorisation will allow the utilisation of
internal estimates for default probabilities (IRB Foundation).
34
5.2.3
Financial Strength: Capital Ratios
The following table presents the relevant information about risk-weighted assets, equity and capital
ratios in accordance with the BIS II Standard for 31 December 2008 and BIS II IRB for 31 December 2008
and 31 March 2009:
RISK WEIGHTED ASSETS AND CAPITAL
(Bank of Portugal)
EUR million
Dec. 08
Basel II
Standard
Risk Weighted Assets
A
Banking Book
Trading Book
Operational Risk
Mar. 09
Basel II IRB (2)
(1)
Basel II IRB (2)
59 711
55 705
59 095
53 791
2 878
3 042
49 987
2 878
2 840
52 790
3 159
3 146
B
6 277
6 273
5 838
Core capital
C
- Core Tier I
- Other
D
3 948
3 412
536
3 946
3 412
534
3 901
3 415
486
Regulatory Capital
(Preferred shares / Core Capital)
Additional and Deductions
(15%)
(15%)
(15%)
2 329
2 327
1 937
Mar. 09
with capital
increase
Basel II IRB (2)
Core Tier I
D/A
5.7%
6.1%
5.8%
7.8%
Tier I
C/A
6.6%
7.1%
6.6%
8.6%
Total
B/A
10.5%
11.3%
9.9%
11.9%
(1) Provisional data;
(2) IRB calculations based on internal models
During the quarter, the Group reduced Tier 2 through the purchase of subordinated debt which it had
issued. Given the regulatory approaches in effect (Standard in December 2008 and IRB in March 2009),
the Tier 1 capital ratios stayed at same levels. Considering the share capital increase that concluded in
April, the BES Group solvency has been substantially reinforced.
Capital Increase by BES
On 16 March 2009, the General Meeting of Banco Espírito Santo approved a capital increase, with the
objective of making the capital ratios of the Bank compliant with the levels required by recent regulatory
changes, allowing the BES Group to strengthen its competitive position and to maintain sustained growth
of its business.
The capital increase, which was finalised on 9 April 2009, was carried out in a process with three phases:
35
•
1st phase – reduction in share capital from EUR 2 500 million to EUR 500 million, through the reduction
in the nominal value of all of the 500 million shares representing the share capital, from EUR 5 to EUR
1, and the corresponding and immediate establishment of a special reserve for the amount of EUR 2
000 million, with the particular purpose of permitting a capital increase through new inflows of funds,
which would be reincorporated into the share capital at the end of the process;
•
2nd phase – realisation of a capital increase for amount of EUR 1 200 million through the issuance of
666 666 666 new shares with a nominal value of EUR 1 each, through public subscription and preemptive rights for shareholders, at a subscription price of EUR 1.80. 663 136 969 shares were
subscribed through the exercise of pre-emptive rights, with 3 529 697 shares becoming available for
pro-rata allocation. Supplementary requests for shares in the pro-rata allocation amounted to 242
742 619 shares. The financial liquidation of the shares subscribed in exercising subscription rights and
shares attributed in the pro-rata allocation took place on 14 and 15 April respectively. Finally, the
capital increase witnessed a total volume of 926 million shares subscribed, corresponding to 138.9%
of the issued shares;
•
3rd phase – execution of a new capital increase of EUR 2 333 million, through the incorporation of
reserves (including the special reserve of EUR 2 000 million, established during the 1st phase described
above and issuance and reserve premiums), through an increase in the nominal value of all of the
shares.
After the conclusion of this process, the capital of the Bank, of an amount of EUR 3 500 million, was
represented by 1 166 666 666 shares with a nominal value of EUR 3 each, raising Group equity from EUR 4
662 million (31 March 2009) to EUR 5 862 million. After strengthening Group equity, the Core Tier I and
Tier I ratios amounted to 7.8% and 8.6% respectively.
The BES share price performance to the end of the quarter already reflected the effects of the capital
increase, which began on 16 March. On 16 April 2009, the day on which the new shares were admitted to
trading, the closing BES share price was EUR 3 584, corresponding to a market capitalisation for the Bank
of EUR 4 181 million.
Main Equity Exposures in the Available for Sale Portfolio
The main equity exposures in the “available for sale” portfolio show potential overall losses of EUR 189.2
million. In accordance with the current prudential framework, these potential losses are deducted from
core equity (Core Tier I) adjusted by deferred tax assets, while potential capital gains on securities are
eligible as Tier II capital for only 45% of the respective gross value.
36
MAIN EQUITY EXPOSURES IN THE AVAILABLE FOR SALE PORTFOLIO
EUR mn
Gross potential gains and losses
Mar. 08
Dec. 08
Mar. 09
369.3
-20.5
-5.2
EDP
16.2
-75.8
-84.9
Portugal Telecom
-14.1
-91.2
-105.4
9.1
8.0
6.3
380.5
-179.5
-189.2
Banco Bradesco
B. Marocaine Com. Exterieur
At the start of February, the international rating agency Standard & Poor’s reconfirmed the A/A-1 ratings
of Banco Espírito Santo and of BES Investimento, albeit while having in the meantime changed the
outlook to negative. This downgrading of the outlook reflects the possibility of deterioration in the
Portuguese economy being more pronounced than expected, a situation which would place greater
pressure on asset profitability and quality. This revision of outlook also reflects the fact that the rating of
the Portuguese Republic was also downgraded by S&P, from AA- to A+ during January 2009, above all
translating once again a stronger than expected potential deceleration in the Portuguese economy. Also
according to S&P, BES’ ratings continued to be supported by a solid position in the Portuguese market, by
a high level of operational efficiency and cross-selling capacity, as well as a suitably sustained track
record for asset quality throughout the economic cycle.
In a report of March 2009, Fitch Ratings in turn reaffirmed the ratings of BES as A+ with a stable outlook,
highlighting the recurrent level of returns presented by Portuguese Banks in general from their domestic
activity and the growing potential contribution of the international area.
Already in April 2009, the rating agency Moody’s placed the Portuguese Banks, including BES, under
review for a possible downgrade of rating. At present, BES has an Aa3 rating for long-term debt, a P-1
rating for short-term debt and a C+ rating for Financial Strength. The grounds provided for the review are
once again related to the deceleration of the Portuguese economy and the potential pressure which this
could exert on the profitability and solvency levels of the Portuguese Banks in question.
5.3.
Productivity and Efficiency
Growth in activity and the moderate increase in costs continued to translate into productivity gains,
notably with a decline in the ratio of operating costs per average unit of net assets under management,
which fell from 1.41% (Mar 08) to 1.34%.
37
PRODUCTIVITY AND EFFICIENCY INDICATORS
1Q08
2008
1Q09
YoY%
Cost to Income
50.1%
53.0%
48.5%
-1.6
p.p.
Cost to Income (commercial)
59.0%
58.2%
52.5%
-6.5
p.p.
Operating Costs / Average Net Assets
1.41%
1.40%
1.34% -0.07
p.p.
10 339
10 492
Total Assets* per Employee (EUR '000)
10 666
3.2%
* Net Assets + Asset Management + Other Off-Balance Sheet Items + Securitised Loans
Efficiency, measured by Cost to Income, showed a notably positive trend, even when evaluated with the
inclusion of trading results, with a significant reduction of 6.5 percent in commercial Cost to Income
(without markets).
38
5.4.
Bank of Portugal Reference Indicators
The table below lists the reference indicators introduced by Bank of Portugal Instruction no. 16/2004 for
the end of the first quarter of 2009, by comparison with the figures for the corresponding quarter of the
previous year.
BANK OF PORTUGAL REFERENCE INDICATORS
%
Mar. 08
Mar. 09
Solvency ( e)
10.1
9.9
6.8
6.6
1.4
1.7
-0.9
-0.8
14.1
14.0
/ Average Net Assets
2.8
2.8
Income before Taxes and Minorities / Average Net Assets
1.0
0.8
50.1
48.5
25.9
26.3
Regulatory Capital / Risk Weighted Assets
Tier I Capital / Risk Weighted Assets
Asset Quality
Overdue & Doubtful Loans
(a)
/ Gross Loans
Overdue & Doubtful Loans Net of Provisions (b) / Net Loans (b)
Profitability
Income before Taxes and Minorities / Average Equity ( c)
Banking Income
(d)
Efficiency
Admin Costs (d) + Depreciation / Banking Income (d)
Staff Costs / Banking Income
(a)
(d)
Calculated according to BoP Circular Letter no. 99/03/2003.
(b)
Credit net of provisions for overdue loans and for doubtful loans.
(c)
Includes average Minorities.
(d)
Calculated according to BoP Instruction no. 16/2004.
(e)
March 2009 data is provisionary and calculated according to the standard method
The indicators included in the reference grid confirm the previous evolution: (i) solvency ratios declined
due to the increase in risk assets associated with the new Basel II regulations and with business
expansion, albeit while lying above the minimum values recommended by the Bank of Portugal; (ii) credit
quality indicators deteriorated, most notably due to the fact that balance sheet provisions exceeded
overdue and doubtful debts; (iii) profitability indicators fell relative to the corresponding period of the
previous year, due to lower capital gains on trading and strengthening of provisions; and (iv) efficiency
levels showed significant improvements, despite the increase in staff costs relative to banking income,
due to pension costs.
39
6. ACTIVITY AND RESULTS OF BANCO ESPÍRITO SANTO
6.1.
Business performance and asset quality
As disclosed in due time, on 31 December 2008, Besleasing e Factoring, Instituição Financeira de Crédito,
S.A., was merged into Banco Espírito Santo; prior to the merger this firm was already part of the BES
Group and its activity had been consolidated using the full consolidation method.
As a result of this operation, the figures relating to 31 March 2009 of Banco Espírito Santo already reflect
this new reality and therefore their comparison with the data for 31 March 2008 must take this fact into
account.
The development of the activity of BES was pursued within the trend line already described for BES
Group, where we highlight the positive performance of the business more directly related with the clients.
MAIN ACTIVITY INDICATORS
EUR million
31 March
2008
2009
Chg %
Net Assets
57 831
70 683
22.2
Gross Loans (including securitised)
41 430
47 330
14.2
Total Customer Funds
44 484
28 221
16 263
46 040
32 086
13 954
3.5
13.7
-14.2
Off-Balance Sheet Funds
Hence customer loans, including securitisation, grew by 14.2% (Mar. 08: 22,9%), with the corporate lending
component being particularly strong (+24,7%). On-balance sheet customer funds also registered a
significant increase, rising by 13.7%. The results of disintermediation activities reflect the impact of the
devaluation of debt and capital assets due to the world financial crisis.
As referred further up in the analysis of the consolidated figures, as a general rule, the recognition of
credit impairment precedes the appearance of the expired loan (normally, the objective evidence of
default is known before default by clients), and during periods of crisis such as the one we are currently
experiencing, it causes a reduction in levels of provisioning for overdue loans. This trend was already
visible at the end of the previous financial year and has continued to occur in the current quarter, with
40
the provisioning coverage of overdue loans by more than 90 days having fallen by 23.9 p.p, to close to
200%.
Also with regard to provisioning of risks, we highlight the favourable evolution of total balance sheet
provisions over total credit which has consistently increased and which now stands at 2.82% (Mar 08:
2.66%).
ASSET QUALITY
Mar. 08
Loans to customers (gross)
Overdue loans
Overdue loans > 90 days
(a)
Overdue and doubtful loans (BoP)
Provisions for credit
(EUR mn)
(EUR mn)
(EUR mn)
(EUR mn)
(EUR mn)
Overdue loans / Loans to customers (gross)
Overdue loans > 90 days / Loans to customers (gross)
(a)
Overdue and doubtful loans / Loans to customers (gross)
Coverage of overdue loans
Coverage of overdue loans > 90 days
Coverage of overdue and doubtful loans
Coverage of customer loans
P&L Credit provisions / Gross loans
(a) According to Circular-letter no. 99/03/2003 of BdP
6.2.
Dec. 08
Mar. 09
Change
absolute relative (%)
34 741
482.4
415.7
595.8
925.1
39 677
605.4
506.7
736.3
1055.4
39 390
702.0
559.4
816.7
1110.9
4 649
219.5
143.7
220.9
185.8
1.39
1.20
1.71
191.8
222.5
155.3
2.66
1.53
1.28
1.86
174.3
208.3
143.3
2.66
1.78
1.42
2.07
158.2
198.6
136.0
2.82
0.39
0.22
0.36
-33.6
-23.9
-19.2
0.16
0.54
0.53
0.77
13.4%
45.5%
34.6%
37.1%
20.1%
p.p.
p.p.
p.p.
p.p.
p.p.
p.p.
p.p.
0.23 p.p.
Operating Conditions and Productivity
Concerning the activity developed during the 1st quarter of 2009, the most notable fact was the very
positive performance of commercial banking income (+20.5%), with net interest income growing by 26.8%
YOY.
Notwithstanding the capacity for recurrent revenue generation, the prolonged instability which the
financial markets continue to experience and its inevitable reflexes on the devaluation of financial
instruments led to the recognition of losses of approximately EUR 46 million, which, together with the
increase in provision charges, were responsible for a net result for the 1st quarter of 2009 of EUR 1.9
million only.
The increase in operating costs was mainly underpinned by the evolution of staff costs, and to a lesser
degree by that of amortisation and depreciation. Staff costs are influenced by the increase in the
amortisation of actuarial deviations of post-retirement benefits recognised in 2008.
41
The reinforcement of provisions during the quarter amounted to EUR 87.5 million, representing an
additional effort of 57.7% and corresponding to an amount equivalent to 28.8% of the banking income
generated during the period
(1Q08: 17.3%). With regard to credit, the respective provisions were
strengthened by EUR 29.3 million, while it was necessary to reinforce provisions for the securities portfolio
by EUR 6.8 million in order to deal with the impairment of this type of assets.
INCOME STATEMENT
EUR million
1Q08
+
=
+
=
=
-
Net Interest Income
Coomercial Banking Income
Banking Income
Operating Costs
Operating Income
Net Provisions
Credit
Securities
Other
=
=
Income before Taxes
Taxes
Net Income
1Q09
193.3
96.9
290.2
29.0
319.2
183.4
135.8
55.5
46.8
0.9
7.8
80.3
22.7
57.6
245.1
104.5
349.6
- 46.2
303.4
198.5
104.9
87.5
76.1
6.8
4.6
17.4
15.5
1.9
Chg %
26.8
7.8
20.5
-259.3
-4.9
8.2
-22.8
57.7
62.6
….
-41.0
-78.3
-31.7
-96.7
The adverse conditions experienced since the end of the 3rd quarter of 2008 and the reduction of banking
income had a negative impact on efficiency levels, in particular on the Cost to Income (including markets),
which increased to 65.4% in March 2009, from 57.5% in March 2008. Productivity registered significant
improvements, namely in the ratio of operating costs per average unit of net assets under management,
which fell to 1.16%, from 1.27% in March 2008. A 12.1% increase in the ratio of total assets per employee is
also worthy of note.
PRODUCTIVITY AND EFFICIENCY INDICATORS
1Q08
Cost to Income (with Capital Markets)
Cost to Income (without Capital Markets)
Operating Costs / Average Net Assets
Total Assets* per Employee (EUR '000)
1Q09
ch
57.5%
63.2%
65.4%
56.8%
8.0
-6.4
p.p.
1.27%
11 889
1.16%
13 322
0.11
12.1%
p.p.
p.p.
* Net Assets + Asset Management + Other Off-Balance Sheet Items + Securitised Loans
42
7. BES OWN SHARES
On 31 March 2008, BES held EUR 29 273 000 accounted in “Treasury Stock”, corresponding to 2 428 829
shares traded within the scope of the Share Based Incentive System (SIBA), which is duly explained in the
Notes to the Financial Statements.
8.
RESPONSIBILITY FOR THE INFORMATION
The form and content of this report comply with the regulatory requirements applicable to the
publication of quarterly accounts, their preparation being the exclusive responsibility of the Board of
Directors of Banco Espírito Santo, S.A., Sociedade Aberta.
Lisbon, 23 April 2009
THE BOARD OF DIRECTORS
43
44
BANCO ESPÍRITO SANTO, S.A..A.
Consolidated Balance Sheet
Mar,08
Dec,08
Mar,09
(EUR '000)
(EUR '000)
(EUR '000)
Assets
Cash and deposits at central banks
Deposits with banks
Financial assets held for trading
Financial assets as fair value through profit or loss
Available-for-sale financial assets
Loans and advances to banks
Loans and advances to customers
(Provisions)
Held-to-maturity investments
Financial assets with repurchase agreements
Hedging derivatives
Non-current assets held for sale
Investment properties
Propety and equipment
Intangible assets
Investments in associates
Current income tax assets
Deferred income tax assets
Pother assets
TOTAL ASSETS
1 191
507
4 028
1 920
5 740
6 466
43 384
807
390
425
924
753
119
596
2 027
664
3 690
2 161
7 094
4 531
47 049
318
410
162
813
111
983
474
3
2
7
6
47
937
530
864
071
148
648
063
230
562
832
863
400
245
052
(1033 312)
(1 148 065)
(1 215 453)
494 872
448 061
301 538
549 840
89 739
582 561
19 004
25 424
2 141 328
2 160 196
936 290
148 372
638 487
124 216
644 506
52 721
141 753
3 120 916
2 484 594
673 217
171 880
654 020
122 593
635 932
56 707
159 276
3 418 118
67 892 381
75 186 728
76 640 521
Liabilities
( 148)
4 810 458
(1 440 505)
2 673 301
(of which of the European System of Central Banks)
Financial liabilities held for trading
Other financial liabilitiesat fair value through profit loss
Deposits from banks
Due to customers
Debt securities issued
Financial liabilities to transfered assets
Hedging derivatives
Non core liabilities held for sale
Provisions
Current income tax liabilities
Deleted income tax liabilities
Capital instruments
Subordinated debt
Other liabilities
1 526 364
7 186 724
22 069 173
25 857 650
385 682
233 189
142 097
75 186
122 663
2 089 659
1 574 748
1 914 423
7 681 738
26 386 754
24 596 682
727 475
12 827
131 211
89 515
37 448
2 828 983
1 316 270
1 825 214
11 083 477
25 328 016
26 245 659
483 638
12 827
132 445
85 118
70 423
2 550 367
1 488 487
62 770 087
70 533 784
71 978 972
2 500 000
668 851
( 35 377)
600 000
222 036
883 574
145 930
137 280
2 500 000
668 851
( 29 838)
600 000
( 266 334)
624 472
402 284
153 509
2 500 000
668 721
( 29 273)
600 000
( 291 306)
941 246
101 295
170 866
5 122 294
4 652 944
4 661 549
67 892 381
75 186 728
76 640 521
Deposits from central banks
TOTAL LIABILITIES
1 506 952
( 24 182)
Equity
Share capital
Share premium
Other capital instruments
Treasury stock
Preference shares
Fair value reserve
Other reserves and retained earnings
Profit for the period attributable to equity holders of the bank
Prepaid dividends
Minority interests
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
Chief Account
The Board of Directors
45
BANCO ESPÍRITO SANTO, S.A.
Consolidated Statement of Income
Interest and similar income
Interest expense and similar charges
Net interest income
Dividend income
Fee and Comission income
Fee and comission expense
Net gains from financial assets at fair value through profit or loss
Net gains from available-for-sale financial assets
Net gains from foreign exchange differences
Net gains from sale of other assets
Other operating income and expense
Mar,08
Mar,09
(EUR '000)
(EUR '000)
1 087 764
1 146 145
829 495
830 832
258 269
315 313
17 695
1 627
171 623
183 745
28 932
22 687
( 31 061)
4 153
74 512
( 39 856)
9 883
( 14 140)
( 708)
( 580)
( 2 018)
98 544
469 263
526 119
124 850
138 100
General and administrative expenses
98 877
95 041
Depreciation and amortisation
17 703
21 627
4 209
4 460
56 086
96 599
impairment on other financial assets net of reversals
2 212
7 101
Impairment on other assets net of reversals
5 739
7 254
Operating income
Staff costs
Provisions impairment net of reversals
Loans impairment net of reversals
Negative consolidation differences
Equity accounted earnings
Net income before income tax and minorities
-
-
12 860
172 447
( 377)
155 560
Income tax
Current tax
34 846
Deffered tax
( 14 502)
Net income
152 103
ow: Net income after discontinued operations
Minority interests
Consolidated net income for the period
Chief Accountant
32 292
12 714
110 554
( 443)
( 562)
6 173
9 259
145 930
101 295
The Board of Directors
46
II. INTERIM FINANCIAL STATEMENTS
AND NOTES
47
GR UPO B ANCO E SPÍR ITO SANTO
CONSOLIDATE D INCOME S TATE ME NT
FOR THE THR E E MONTHS PE R IOD E NDE D 31 MAR CH 2009 AND 2008
(in thousands of euro)
Notes
31 .03.2009
5
5
Net interest income
Dividend income
Fee and commission income
Fee and commission expense
Net gains/ (losses) from financial assets at fair value through profit or loss
Net gains from available-for-sale financial assets
Net gains from foreign exchange differences
Net gains/ (losses) from sale of other assets
Other operating income and expense
6
6
7
8
9
10
Operating income
Staff costs
General and administrative expenses
Depreciation and amortisation
Provisions net of reversals
Loans impairment net of reversals
Impairment on other financial assets net of reversals
Impairment on other assets net of reversals
11
13
25 and 26
33
21
1 9 and 20
24, 26 and 28
Operating expenses
Gains on disposal of investments in subsidiaries and associates
Share of profit of associates
1
27
Profit before income tax
31 .03.2008
1 1 46 1 45
830 832
1 087 764
829 495
31 5 31 3
258 269
1 627
1 83 745
( 22 687)
4 1 53
( 39 856)
( 1 4 1 40)
( 1 41 2)
98 544
1 7 695
1 71 623
( 28 932)
( 31 061 )
74 51 2
9 883
( 708)
( 2 01 8)
525 287
469 263
1 38 1 00
95 041
21 627
4 460
96 599
7 1 01
7 254
1 24 850
98 877
1 7 703
4 209
56 086
2 21 2
5 739
370 1 82
309 676
832
( 377)
1 2 860
1 55 560
1 72 447
32 292
1 2 71 4
34 846
( 1 4 502)
45 006
20 344
1 1 0 554
1 52 1 03
1 01 295
9 259
1 45 930
6 1 73
1 1 0 554
1 52 1 03
0.20
0.20
0.29
0.29
Income tax
Current tax
Deferred tax
34
34
Profit for the period
Attributable to equity holders of the B ank
Attributable to minority interest
E arnings per share of profit attributable to the equity holders of the Bank
Basic ( in E uros)
Diluted ( in E uros)
38
14
14
The following notes form an integral part of these consolidated financial statements
48
GR UPO B ANCO E SPÍR ITO SANTO
CONSOLIDATE D STATE ME NT OF COMPR E HE NSIVE INCOME
FOR THE THR E E MONTHS PE R IOD E NDE D 31 MAR CH 2009 AND 2008
Notes
31 .03.2009
31 .03.2008
Changes in fair value, net of taxes
E xchange differences
Share based payment scheme, net of taxes (see Note 1 2)
( 24 854)
( 4 81 9)
66
( 424 665)
( 1 8 91 4)
1 77
Gains and losses recognised directly in equity
( 29 607)
( 405 751 )
1 1 0 554
1 52 1 03
Total gains and losses recognised in the period
80 947
( 253 648)
Attributable to equity holders of the B ank
Attributable to minority interest
70 469
1 0 478
( 263 671 )
1 0 023
80 947
( 253 648)
Profit for the period
49
GR UPO B ANCO E SPÍRITO SANTO
CONSOLIDATE D B ALANCE SHE E T AS AT 31 MARCH 2009 AND 31 DE CE MB E R 2008
Notes
Ass ets
Cash and deposits at central banks
Deposits with banks
Other financial assets at fair value through profit or loss
Loans and advances to banks
Derivatives for risk management purposes
Non-current assets held for sale
Property and equipment
Intangible assets
Investments in associates
Current income tax assets
Other assets
15
16
17
18
19
20
21
22
23
24
25
26
27
34
28
Total ass ets
Liabilities
Deposits from central banks
Deposits from banks
Due to customers
Non-current liabilities held for sale
Provisions
Current income tax liabilities
Deferred income tax liabilities
Subordinated debt
Other liabilities
29
17
30
31
32
23
24
33
34
35
36
Total liabilities
E quity
Share capital
Share premium
Treasury stock
Preference shares
Fair value reserve
Other reserves and retained earnings
Profit for the year attributable to equity holders of the Bank
37
37
37
37
38
38
Total equity attributable to equity holders of the B ank
Minority interest
38
Total equity
Total equity and liabilities
31 .03.2009
31 .1 2.2008
937 230
530 562
3 864 832
2 071 863
7 1 48 400
6 648 245
47 063 052
2 484 594
673 21 7
1 71 880
654 020
1 22 593
635 932
56 707
1 59 276
3 41 8 1 1 8
2 027 31 8
664 41 0
3 690 1 62
2 1 61 81 3
7 094 1 1 1
4 531 983
47 049 474
2 1 60 1 96
936 290
1 48 372
638 487
1 24 21 6
644 506
52 721
1 41 753
3 1 20 91 6
76 640 521
75 1 86 728
2 673 301
1 81 9 21 4
1 1 083 477
25 328 01 6
26 245 659
489 638
1 2 827
1 32 445
85 1 1 8
70 423
2 550 367
1 488 487
4 81 0 458
1 91 4 423
7 681 738
26 386 754
24 596 682
727 475
1 2 827
1 31 21 1
89 51 5
37 448
2 828 983
1 31 6 270
71 978 972
70 533 784
2 500 000
668 721
( 29 273)
600 000
( 291 306)
941 246
1 01 295
2 500 000
668 851
( 29 838)
600 000
( 266 334)
624 472
402 284
4 490 683
4 499 435
1 70 866
1 53 509
4 661 549
4 652 944
76 640 521
75 1 86 728
50
-BANCO ESPÍRITO SANTO
Grupo Banco Espírito Santo
Notes to the interim consolidated financial statements as at
31 March 2009
(Amounts expressed in thousands of euro, except when indicated)
NOTE 1 – ACTIVITY AND GROUP STRUCTURE
Banco Espírito Santo, S.A. (Bank or BES) is a commercial bank headquartered in Portugal, Avenida da
Liberdade, no. 195, in Lisbon. The Bank is authorised by the Portuguese authorities, central banks and
other regulatory authorities, to operate in Portugal and in the countries where its international branches
are located.
BES’s foundation dates back to the last quarter of the 19th century. The Bank began operations as a
commercial bank in 1937, following the merger of Banco Espírito Santo and Banco Comercial de Lisboa,
from which resulted Banco Espírito Santo e Comercial de Lisboa. By public deed of 6 July 1999, the Bank
changed its name to Banco Espírito Santo, S.A.
BES is listed on the Euronext Lisbon. As at 31 March 2009, the Bank’s subsidiary BES Finance, Ltd had
600 thousand preference shares listed on the Luxembourg Stock Exchange.
Since 1992, BES is part of the Espírito Santo Group, therefore its financial statements are consolidated
by BESPAR SGPS, S.A., headquartered in Rua de São Bernardo, no. 62 in Lisbon, and by Espírito Santo
Financial Group, S.A. (ESFG), with headquarters in Luxembourg.
BES Group has a network of 797 branches throughout Portugal (31 December 2008: 803), international
branches in London, Madrid, New York, Nassau, Cayman Islands and Cape Verde, a branch in the
Madeira Free Zone and twelve overseas representative offices.
Group companies where the Bank has a direct or indirect holding greater or equal to 20%, over which the
Group exercises control or has significant influence, and that were included in the consolidated financial
statements, are as follows:
53
a) Subsidiaries consolidated directly into the Bank:
54
b) Sub-Groups:
55
a)
The percentage in the table above represents the Group’s economic interest. These companies were accounted for following
the equity method, as the Group exercises a significant influence over them, in accordance with the accounting policy
described in Note 2.2.
Additionally, the Group consolidates special purpose entities, established within the scope of
securitisation transactions which are referred to in Note 42.
56
The main changes in BES Group that occurred during the first quarter of 2009 are highlighted as follows:
- Subsidiaries companies
•
During January 2009, BES Angola increased its share capital to 788 897 thousands of Kwanzas
(equivalent as at that date to USD 10 530 thousands), through the issuance of 53 000 new shares
with a nominal value per share of 750 Kwanzas (equivalent to 10 USD). The share capital increase
was fully subscribed by a new shareholder. Following this share capital increase, BES Group
shareholding in BES Angola was reduced from 79.96% to 75.94% and, indirectly, shareholding in
BESAACTIF was reduced from 79.33% to 76.83%;
•
During January 2009, BESAACTIF Pensões – Sociedade Gestora de Fundos de Pensões, SA, was
set-up. This company is owned by ESAF (35%) and by BES Angola (62%), being the shareholding
within BES Group of 76.83%;
•
As at March 2009, Morumbi Capital Fund was liquidated. The gain to the Group arising from this
transaction amounted to euro 832 thousands.
- Associates (see Note 27)
•
As at January 2009, BES acquired 6.58% of Synergy Industry and Technology, S.A. share capital;
•
As at February 2009, ES Tech Ventures acquired 20% of Nutrigreen, S.A. share capital.
The movements referring to acquisitions and disposals of investments in subsidiaries and associates are
presented as follows:
57
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
2.1. Basis of preparation
In accordance with Regulation (EC) no. 1606/2002 of 19 July 2002 from the European Council and
Parliament, and its adoption into Portuguese Law through Decree-Law no. 35/2005, of 17 February 2005
and Regulation no. 1/2005 from the Bank of Portugal, Banco Espírito Santo, S.A. (BES or the Bank) is
required to prepare its consolidated financial statements in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union (EU).
IFRS comprise accounting standards issued by the International Accounting Standards Board (IASB) and
its predecessor body as well as interpretations issued by the International Financial Reporting
Interpretations Committee (IFRIC) and its predecessor body.
The consolidated financial statements as at and for the period ended 31 March 2009 were prepared in
accordance with the IFRS effective and adopted by the EU until 31 March 2009. The accounting policies
applied by the Group in the preparation of these interim consolidated financial statements as at 31
March 2009 are consistent with the ones used in the preparation of the annual consolidated financial
statements as at and for the year ended 31 December 2008.
These interim consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) – IAS 34 Interim Financial Reporting and do not include all the
information required in the preparation of a complete set of consolidated financial statements which will
be prepared for the year ending 31 December 2009
During the first quarter of 2009, the Group adopted:
- the amendment to IAS 1 – Presentation of Financial Statements, which requires financial information to
be presented in the financial statements based on the nature of the underlying transactions and
introduces the statement of “comprehensive income”. Following this amendment, the Group presented
the Statement of Comprehensive Income for the period of three months ended 31 March 2009 and 2008;
- the amendments to IAS 16 – Property, Plant and Equipment, to IAS 19 – Employee benefits, to IAS 23 –
Borrowing Costs, to IAS 28 – Investments in Associates, to IAS 32 – Financial Instruments: presentation,
to IAS 38 – Intangible Assets, to IAS 39 – Financial Instruments: recognition and measurement and to IAS
40 – Investment property. The adoption of these amendments had no significant impact on the
consolidated financial statements of the Group;
58
- IFRIC 13 – Customer loyalty programmes, IFRIC 15 – Agreements for construction of real estate, IFRIC 16
– Hedge of a net investment in a foreign operation, IFRIC 17 – Distributions of non-cash assets to owners
and IFRIC 18 – Transfers of assets from customers. The adoption of these interpretations had no
significant impact on the consolidated financial statements;
- IFRS 8 – Operating segments, which sets out the requirements for disclosures of information about an
entity’s operating segments. The reporting operating segments in accordance with this standard are
presented in Note 4 – Segmental Reporting.
In the preparation of the consolidated financial statements as at 31 December 2008, the Group adopted
the amendments to IAS 39 – Financial Instruments: Recognition and Measurement and to IFRS 7 Financial Instruments – Disclosures, regarding the reclassification of financial assets between categories,
published by IASB in October 2008. Resulting from these amendments, the Group has adapted its
accounting policy regarding reclassifications between categories (see accounting policy described in Note
2.6). The impact from the adoption in 2008 of these amendments is presented in Note 22.
Additionally, the Group also adopted in 2008 the IFRIC 11 – IFRS 2 – Group and Treasury Share
transactions and IFRIC 14 – IAS 19 – The limit on a defined benefit asset, minimum funding requirements
and their interaction. The adoption of these interpretations had no significant impact in the consolidated
financial statements of the Group.
These interim consolidated financial statements are expressed in thousands of euro, except when
indicated, and have been prepared under the historical cost convention, except for the assets and
liabilities accounted at fair value, namely, derivative contracts, financial assets and financial liabilities at
fair value through profit or loss, available-for-sale financial assets, and recognised financial assets and
liabilities that are hedged, in a fair value hedge, in respect of the risk that is being hedged.
The preparation of financial statements in conformity with IFRS requires the application of judgment
and the use of estimates and assumptions by management that affects the process of applying the
Group’s accounting policies and the reported amounts of income, expenses, assets and liabilities. Actual
results in the future may differ from those reported. The areas involving a higher degree of judgement or
complexity, or areas where assumptions and estimates are significant to the consolidated financial
statements are disclosed in Note 3.
These consolidated financial statements were approved in the Board of Directors meeting held on 23
April 2009.
59
2.2. Basis of consolidation
These interim consolidated financial statements comprise the financial statements of Banco Espírito
Santo, S.A and its subsidiaries (“the Group” or “BES Group”), and the results attributable to the Group
from its associates.
These accounting policies have been consistently applied by the Group companies, during all the periods
covered by the consolidated financial statements.
Subsidiaries
Subsidiaries are entities over which the Group exercises control. Control is presumed to exist when the
Group owns more than one half of the voting rights. Additionally, control also exists when the Group has
the power, directly or indirectly, to govern the financial and operating policies of the entity, so as to
obtain benefits from its activities, even if its shareholding is equal or less than 50%. Subsidiaries are fully
consolidated from the date on which control is transferred to the Group until the date that control
ceases.
Accumulated losses of a subsidiary attributable to minority interest, which exceed the equity of the
subsidiary attributable to the minority interest, is attributed to the Group and is taken to the income
statement when incurred. If the subsidiary subsequently reports profits, these profits are recognised by
the Group until the losses attributable to the minority interest, previously recognised have been
recovered.
Associates
Associates are entities over which the Group has significant influence over the company’s financial and
operating policies but not its control. Generally when the Group owns more than 20% of the voting
rights it is presumed that it has significant influence. However, even if the Group owns less than 20% of
the voting rights, it can have significant influence through the participation in the policy-making
processes of the associate or the representation in its executive board of directors. Investments in
associates are accounted for by the equity method of accounting from the date on which significant
influence is transferred to the Group until the date that significant influence ceases.
60
If the Group’s share of losses of an associate equals or exceeds its interest in the associate, including
any long-term interest, the Group discontinues the application of the equity method, except when it has
a legal or constructive obligation of covering those losses or has made payments on behalf of the
associate.
Special purpose entities (“SPE”)
The Group consolidates certain special purpose entities (“SPE”), specifically created to accomplish a
narrow and well defined objective, when the substance of the relationship with those entities indicates
that they are controlled by the Group, independently of the percentage of the equity held.
The evaluation of the existence of control is made based on the criteria established by SIC 12 –
Consolidation of Special Purpose Entities, which can be summarised as follows:
•
In substance, the activities of the SPE are being conducted in accordance with the specific needs
of the Group’s business, so that the Group obtains the benefits from these activities;
•
In substance the Group has the decision-making powers to obtain the majority of the benefits
from the activities of the SPE;
•
In substance, the Group has rights to obtain the majority of the benefits of the SPE, and
therefore may be exposed to the inherent risks of its activities;
•
In substance, the Group retains the majority of residual or ownership risks related to the SPE so
as to obtain the benefits from its activities.
Goodwill
Goodwill resulting from business combinations that occurred until 1 January 2004 was offset against
reserves, according to the option granted by IFRS 1, adopted by the Group on the date of transition to
the IFRS.
From 1 January 2004, the purchase method of accounting is used by the Group to account for the
acquisition of subsidiaries and associates. The cost of acquisition is measured at the fair value,
determined at the acquisition date, of the assets and equity instruments given and liabilities incurred or
assumed plus any costs directly attributable to the acquisition.
Goodwill represents the difference between the cost of acquisition and the fair value of the Group’s
share of identifiable net assets acquired.
61
In accordance with IFRS 3 – Business Combinations, goodwill is recognised as an asset at its cost and is
not amortised. Goodwill relating to the acquisition of associates is included in the book value of the
investment in those associates, determined using the equity method. Negative goodwill is recognised
directly in the income statement in the period the business combination occurs.
The recoverable amount of the goodwill recognised as an asset is reviewed annually, regardless of
whether there is any indication of impairment. Impairment losses are recognised directly in the income
statement.
Acquisition of minority interest
The goodwill resulting from the acquisition of minority interest in a subsidiary represents the difference
between the acquisition cost of the additional investment in the subsidiary and the book value, at
acquisition date, of the net assets acquired, as recognised in the consolidated financial statements.
Foreign currency transactions
The financial statements of each of the Group entities are prepared using their functional currency
which is defined as the currency of the primary economic environment in which that entity operates.
The consolidated financial statements are prepared in euro, which is BES’s functional and presentation
currency.
The financial statements of each of the Group entities that have a functional currency different from the
euro are translated into euro as follows:
•
Assets and liabilities are translated into the functional currency using the exchange rate
prevailing at the balance sheet date;
•
Income and expenses are translated into the functional currency at rates approximating the
rates ruling at the dates of the transactions;
•
The exchange differences resulting from the translation of the equity at the beginning of the
year using the exchange rates at the beginning of the year and at the consolidated balance
sheet date are accounted for against reserves, net of deferred taxes. The exchange differences
arising from the translation of income and expenses at the rates ruling at the dates of the
62
transactions and at the balance sheet date are accounted for against reserves. When the entity
is sold such exchange differences are recognised in the income statement as a part of the gain
or loss on sale.
Balances and transactions eliminated in consolidation
Inter-company balances and transactions, including any unrealised gains and losses on transactions
between Group companies, are eliminated in preparing the consolidated financial statements, unless
unrealised losses provide evidence of an impairment loss that should be recognised in the interim
consolidated financial statements.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of
the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction
provides evidence of an impairment loss.
2.3. Foreign currency transactions
Foreign currency transactions are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign
currencies are translated to euro at the foreign exchange rates ruling at the balance sheet date. Foreign
exchange differences arising on translation are recognised in the income statement.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency
are translated using the exchange rate at the date of the transaction. Non-monetary assets and
liabilities denominated in foreign currencies that are stated at fair value are translated to euro at the
foreign exchange rates ruling at the dates the fair value was determined. The resulting exchange
differences are accounted for in the income statement, except if related to equity instruments classified
as available-for-sale, which are accounted for in equity, within the fair value reserve.
63
2.4. Derivative financial instruments and hedge accounting
Classification
Derivatives for risk management purposes include (i) hedging derivatives and (ii) derivatives used to
manage the risk of certain financial assets and financial liabilities designated at fair value through profit
or loss that were not classified as being hedging derivatives.
All other derivatives are classified as trading derivatives.
Recognition and measurement
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered
into (trade date). Subsequent to initial recognition, the fair value of derivative financial instruments is remeasured on a regular basis and the resulting gains or losses on re-measurement are recognised
directly in the income statement, except for derivatives designated as hedging instruments. The
recognition of the resulting gains or losses of the derivatives designated as hedging instruments
depends on the nature of the risk being hedged and of the hedge model used.
Fair values are obtained from quoted market prices, in active markets, if available or are determined
using valuation techniques, including discounted cash flow models and options pricing models, as
appropriate.
Hedge accounting
•
Classification criteria
Hedge accounting is used for derivative financial instruments designated as hedging instruments,
provided the following criteria are met:
(i)
At the inception of the hedge, the hedge relationship is identified and documented, including the
identification of the hedged item and of the hedging instrument and the evaluation of the
effectiveness of the hedge;
(ii) The hedge is expected to be highly effective, both at the inception of the hedge and on an ongoing
basis;
64
(iii) The effectiveness of the hedge can be reliably measured, both at the inception of the hedge and on
an ongoing basis;
(iv) For cash flows hedges, the cash flows are highly probable of occurring.
•
Fair value hedge
In a fair value hedge, the book value of the hedged asset or liability, determined in accordance with the
respective accounting policy, is adjusted to reflect the changes in its fair value that are attributable to
the risks being hedged. Changes in the fair value of the derivatives that are designated as hedging
instruments are recorded in the income statement, together with any changes in the fair value of the
hedged asset or liability that are attributable to the risk being hedged.
If the hedge no longer meets the criteria for hedge accounting, the derivative financial instrument is
transferred to the trading portfolio and the hedge accounting is discontinued prospectively. The
cumulative adjustment to the carrying amount of a hedged item for which the effective interest rate
method is used is amortised to the income statement over the period to maturity.
•
Cash flow hedge
When a derivative financial instrument is designated as a hedge of the variability in highly probable
future cash flows, the effective portion of changes in the fair value of the hedging derivatives is
recognised in equity. Amounts accumulated in equity are recycled to the income statement in the
periods in which the hedged item will affect the income statement. The gain or loss relating to the
ineffective portion is recognised immediately in the income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss recognised in equity at that time is recognised in the income
statement when the hedged transaction also affects the income statement. When a hedged transaction
is no longer expected to occur, the cumulative gain or loss reported in equity is recognised immediately
in the income statement and the hedging instrument is reclassified for the trading portfolio.
During the period covered by these financial statements the Group did not have any transactions
classified as cash flow hedge.
Embedded derivatives
Derivatives that are embedded in other financial instruments are treated as separate derivatives when
their economic characteristics and risks are not closely related to those of the host contract and the
host contract is not carried at fair value through profit or loss. These embedded derivatives are
measured at fair value with changes in fair value recognised in the income statement.
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2.5. Loans and advances to customers
Loans and advances to customers include loans and advances originated by the Group, which are not
intended to be sold in the short term. Loans and advances to customers are recognised when cash is
advanced to borrowers.
Loans and advances to customers are derecognised from the balance sheet when (i) the contractual
rights to receive their cash flows have expired, (ii) the Group has transferred substantially all risks and
rewards of ownership or (iii) although retaining some but not substantially all of the risks and rewards of
ownership, the Group has transferred the control over the assets.
Loans and advances to customers are initially recorded at fair value plus transaction costs and are
subsequently measured at amortised cost, using the effective interest rate method, less impairment
losses.
In accordance with the documented strategy for risk management, the Group contracts derivative
financial instruments to manage certain risks of a portion of the loan portfolio, without applying,
however, the provisions of hedge accounting as mentioned in Note 2.4. These loans are measured at fair
value through profit or loss, in order to eliminate a measurement inconsistency resulting from
measuring loans and derivatives for risk management purposes on different basis (accounting
mismatch). This procedure is in accordance with the accounting policy for classification, recognition and
measurement of financial assets at fair value through profit or loss, as described in Note 2.6.
Impairment
The Group assesses, at each balance sheet date, whether there is objective evidence of impairment
within its loan portfolio. Impairment losses identified are recognised in the income statement, and are
subsequently reversed through the income statement if, in a subsequent period, the amount of the
impairment losses decreases.
A loan or a loan portfolio, defined as a group of loans with similar credit risk characteristics, is impaired
when: (i) there is objective evidence of impairment as a result of one or more events that occurred after
its initial recognition and (ii) that event (or events) has an impact on the estimated future cash flows of
the loan or of the loan portfolio, that can be reliably estimated.
The Group first assesses whether objective evidence of impairment exists individually for each loan. In
this assessment the Group uses the information that feeds the credit risk models implemented and
takes in consideration the following factors:
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•
the aggregate exposure to the customer and the existence of non-performing loans;
•
the viability of the customer’s business model and its capability to trade successfully and to
generate sufficient cash flow to service their debt obligations;
•
the extent of other creditors’ commitments ranking ahead of the Group;
•
the existence, nature and estimated realisable value of collaterals;
•
the exposure of the customer within the financial sector;
•
the amount and timing of expected recoveries.
When loans have been individually assessed and no evidence of loss has been identified, these loans are
grouped together on the basis of similar credit risk characteristics for the purpose of evaluating the
impairment on a portfolio basis (collective assessment). Loans that are assessed individually and found to
be impaired are not included in a collective assessment for impairment.
If an impairment loss is identified on an individual basis, the amount of the impairment loss to be
recognised is calculated as the difference between the book value of the loan and the present value of
the expected future cash flows (considering the recovery period), discounted at the original effective
interest rate. The carrying amount of impaired loans is reduced through the use of an allowance
account. If a loan has a variable interest rate, the discount rate for measuring the impairment loss is the
current effective interest rate determined under the contract rules.
The changes in the recognised impairment losses attributable to the unwinding of discount are
recognised as interest and similar income.
The calculation of the present value of the estimated future cash flows of a collateralised loan reflects
the cash flows that may result from foreclosure less costs for obtaining and selling the collateral.
For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar
credit risk characteristics, taking in consideration the Group’s credit risk management process. Future
cash flows in a group of loans that are collectively evaluated for impairment are estimated on the basis
of the contractual cash flows of the loans in the Group and historical loss experience. The methodology
and assumptions used for estimating future cash flows are reviewed regularly by the Group with the
purpose of reducing any differences between loss estimates and actual loss experience.
When a loan is considered by the Group as uncollectible and an impairment loss of 100% was recognised,
it is written off against the related allowance for loan impairment.
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2.6. Other financial assets
Classification
The Group classifies its other financial assets at initial recognition in the following categories:
•
Financial assets at fair value through profit or loss
This category includes: (i) financial assets held for trading, which are those acquired principally for the
purpose of selling in the short term and (ii) financial assets that are designated at fair value through
profit or loss at inception.
The Group classifies, at inception, certain financial assets at fair value through profit or loss when:
•
Such financial assets are managed, measured and their performance evaluated on a fair value
basis;
•
Such financial assets are being hedged (on an economical basis), in order to eliminate an
accounting mismatch; or
•
Such financial assets contain an embedded derivative.
Note 23 includes a summary of the assets and liabilities that were classified at fair value trough profit or
loss at inception.
The structured products acquired by the Group corresponding to financial instruments containing one or
more embedded derivatives meet either of the above mentioned conditions, and, in accordance, are
classified under the fair value trough profit or loss cathegory.
•
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments
and fixed maturities that the Group’s management has the positive intention and ability to hold until its
maturity and that are not classified, at inception, as at fair value through profit or loss or as availablefor-sale.
•
Available-for-sale financial assets are non-derivative financial assets (i) intended to be held for an
indefinite period of time, (ii) designated as available-for-sale at initial recognition or (iii) that are not
classified in the other categories referred to above.
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Initial recognition, measurement and derecognition
Purchases and sales of: (i) financial assets at fair value through profit or loss, (ii) held-to-maturity
investments and (iii) available-for-sale financial assets, are recognised on trade-date – the date on which
the Group commits to purchase or sell the asset.
Financial assets are initially recognised at fair value plus transaction costs except for financial assets at
fair value through profit or loss, in which case these transaction costs are directly recognised in the
income statement.
Financial assets are derecognised when (i) the contractual rights to receive their cash flows have
expired, (ii) the Group has transferred substantially all risks and rewards of ownership or (iii) although
retaining some but not substantially all of the risks and rewards of ownership, the Group has transferred
the control over the assets.
Subsequent measurement
Financial assets at fair value through profit or loss are subsequently carried at fair value and gains and
losses arising from changes in their fair value are included in the income statement in the period in which
they arise.
Available-for-sale financial assets are also subsequently carried at fair value. However, gains and losses
arising from changes in their fair value are recognised directly in equity, until the financial assets are
derecognised or impaired, at which time the cumulative gain or loss previously recognised in equity is
recognised in the income statement. Foreign exchange differences arising from equity investments
classified as available-for-sale are also recognised in equity, while foreign exchange differences arising
from debt investments are recognised in the income statement. Interest, calculated using the effective
interest rate method and dividends are recognised in the income statement.
Held-to-maturity investments are carried at amortised cost using the effective interest rate method, net
of any impairment losses recognised.
The fair values of quoted investments in active markets are based on current bid prices. For unlisted
securities the Group establishes fair value by using (i) valuation techniques, including the use of recent
arm’s length transactions, discounted cash flow analysis and option pricing models and (ii) valuation
assumptions based on market information.
Financial instruments which fair value cannot be reliably measured are carried at cost. Financial
instruments held by the Group under these circumstances are included in the available-for-sale financial
69
assets portfolio and correspond to equity instruments issued by unlisted entities and for which no recent
transactions in the market were identified. However, for these instruments, the Group performs a
detailed analysis in order to assess whether there is objective evidence of impairment. In this assessment,
the Group considers the entities economical and financial performance and their capability to service
their obligations.
When the fair value of these financial instruments, determined through valuation techniques such as
discounted cash flows, exceeds their book value, the Group has chosen not to re-measure these financial
instruments. This conservative approach is based on the: (i) significant subjectivity inherent to this
analysis; (ii) difficulty in obtaining reliable information to estimate future cash flows, and (iii) relevance of
the respective amounts, which are not considered material by the Group in the financial statements
context.
Reclassifications between categories
The Group only reclassifies non-derivative financial assets with fixed or determinable payments and fixed
maturities, from the available-for-sale financial assets category to the held-to-maturity investments
category, if it has the intention and ability to hold those financial assets until maturity.
Reclassifications between these categories are made at the fair value of the assets reclassified on the
date of the reclassification. The difference between this fair value and the respective nominal value is
recognised in the income statement until maturity, based on the effective interest rate method. The fair
value reserve at the date of the reclassification is also recognised in the income statement, based on the
effective interest rate method.
In October 2008, IASB issued an amendment to IAS 39 Financial Instruments: Recognition and
Measurement and IFRS 7 Financial Instruments: Disclosures. This amendment to IAS 39, permits, in rare
circumstances, to reclassify non-derivative financial assets (other than those designated at fair value
through profit or loss by the entity upon initial recognition) out of the fair value through profit or loss
category, to the held-to-maturity investments, available-for-sale financial assets and loans and
receivables categories.
The amendment also permits an entity to transfer from the available-for-sale category to the loans and
receivables category.
Financial assets may be reclassified to the (i) held-to-maturity investments category if the entity has the
intention and ability to hold those financial assets until maturity and to the (ii) loans and receivables
category if the entity has the intention and ability to hold those financial assets for the foreseeable future
and if those financial assets are not traded in an active market.
Following the issuance of this amendment to IAS 39, the Group reclassified, during the last quarter of
2008, non-derivative financial assets, with fixed or determinable payments and fixed maturities, out of
the fair value through profit or loss category to the held-to-maturity investments category.
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In accordance with the transitions rules of this amendment to IAS 39, the reclassifications of financial
assets performed until 31 October 2008 were made at the fair value of the assets reclassified on 1 July
2008 and any reclassifications of a financial asset made in periods beginning on or after 1 November 2008
were made at the fair value of the assets reclassified on the date of the reclassification. The difference
between this fair value and the respective nominal value will be recognised in the income statement until
maturity, based on the effective interest rate method.
Impairment
The Group assesses periodically whether there is objective evidence that a financial asset or group of
financial assets is impaired. If there is objective evidence of impairment, the recoverable amount of the
asset is determined and impairment losses are recognised through the income statement.
A financial asset or a group of financial assets is impaired if there is objective evidence of impairment as
a result of one or more events that occurred after their initial recognition, such as: (i) for equity
securities, a significant or prolonged decline in the fair value of the security below its cost, and (ii) for
debt securities, when that event (or events) has an impact on the estimated future cash flows of the
financial asset or group of financial assets, that can be reliably estimated.
For held-to-maturity investments, the amount of the impairment loss is measured as the difference
between the asset’s carrying amount and the present value of estimated future cash flows (considering
the recovery period) discounted at the financial asset’s original effective interest rate. The carrying
amount of the impaired assets is reduced through the use of an allowance account. If a held-to-maturity
investment has a variable interest rate, the discount rate for measuring any impairment loss is the
current effective interest rate determined under the contract. For held-to-maturity investments if, in a
subsequent period, the amount of the impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment loss was recognised, the previously recognised
impairment loss is reversed through the income statement.
If there is objective evidence that an impairment loss on available-for-sale financial assets has been
incurred, the cumulative loss recognised in equity – measured as the difference between the acquisition
cost and the current fair value, less any impairment loss on that financial asset previously recognised in
the income statement – is taken to the income statement. If, in a subsequent period, the amount of the
impairment loss decreases, the previously recognised impairment loss is reversed through the income
statement up to the acquisition cost if the increase is objectively related to an event occurring after the
impairment loss was recognised, except in relation to equity instruments, in which case the reversal is
recognised in equity.
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2.7. Sale and repurchase agreements
Securities sold subject to repurchase agreements (repos) at a fixed price or at the sales price plus a
lender’s return are not derecognised. The corresponding liability is included in amounts due to banks or to
customers, as appropriate. The difference between sale and repurchase price is treated as interest and
accrued over the life of the agreements using the effective interest rate method.
Securities purchased under agreements to resell (reverse repos) at a fixed price or at the purchase price
plus a lender’s return are not recognised, being the purchase price paid recorded as loans and advances
to banks or customers, as appropriate. The difference between purchase and resale price is treated as
interest and accrued over the life of the agreements using the effective interest rate method.
Securities lent under lending agreements are not derecognised being classified and measured in
accordance with the accounting policy described in Note 2.6. Securities borrowed under borrowing
agreements are not recognised in the balance sheet.
2.8. Financial liabilities
An instrument is classified as a financial liability when it contains a contractual obligation to transfer
cash or another financial asset, independently from its legal form.
Non-derivatives financial liabilities include deposits from banks and due to customers, loans, debt
securities, subordinated debt and short sales. Preference shares issued are considered to be financial
liabilities when the Group assumes the obligation of reimbursement and/or to pay dividends.
The financial liabilities are recognised (i) initially at fair value less transaction costs and (ii) subsequently
at amortised cost, using the effective interest rate method, except for short sales and financial liabilities
designated at fair value through profit or loss, which are measured at fair value.
The Group designates, at inception, certain financial liabilities as at fair value through profit or loss when:
•
Such financial liabilities are being hedged (on an economical basis), in order to eliminate an
accounting mismatch; or
•
Such financial liabilities contain embedded derivatives.
The structured products issued by the Group meet either of the above mentioned conditions and, in
accordance, are classified under the fair value trough profit or loss category.
72
The fair value of quoted financial liabilities is based on the current price. In the absence of a quoted
price, the Group establishes the fair value by using valuation techniques based on market information,
including the own credit risk of the issuer.
If the Group repurchases debt issued, it is derecognised from the balance sheet and the difference
between the carrying amount of the liability and its acquisition cost is recognised in the income
statement.
2.9. Equity instruments
An instrument is classified as an equity instrument when it does not contain a contractual obligation to
deliver cash or another financial asset, independently from its legal form, being a contract that
evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Transaction costs directly attributable to the issue of equity instruments are recognised under equity as
a deduction from the proceeds. Amounts paid or received related to acquisitions or sales of equity
instruments are recognised in equity, net of transaction costs.
Distributions to holders of an equity instrument are debited directly to equity as dividends, when
declared.
Preference shares issued are considered as equity instruments if the Group has no contractual
obligation to redeem and if dividends, non cumulative, are paid only if and when declared by the Group.
2.10. Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is
a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net
basis, or realise the asset and settle the liability simultaneously.
2.11. Assets acquired in exchange for loans
Assets acquired in exchange for loans are initially reported in ‘Other assets’ and are initially recognised
at the lower of their fair values less costs to sell and the carrying amount of the loans.
73
Subsequently, those assets are measured at the lower of their carrying amount and the corresponding
fair values less costs to sell and are not depreciated. Any subsequent write-down of the acquired assets
to fair value is recorded in the income statement.
The value of assets acquired in exchange for loans is periodically reviewed by the Group, based on
valuations performed by experts.
When these assets are available for immediate disposal, in accordance with IFRS 5 – Non current assets
held for sale, they are classified as Non-current assets held for sale and booked in accordance with the
accounting policy described in note 2.23.
2.12. Property and equipment
Property and equipment are stated at deemed cost less accumulated depreciation and impairment
losses. At the transition date to IFRS, 1 January 2004, the Group elected to consider as deemed cost, the
revalue amount of property and equipment as determined in accordance with previous accounting
policies of the Group, which was broadly similar to depreciated cost measured under IFRS, adjusted to
reflect changes in a specific price index. The value includes expenditure that is directly attributable to
the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as
appropriate, only when it is probable that future economic benefits associated with the item will flow to
the Group. All other repairs and maintenance are charged to the income statement during the period in
which they are incurred.
Land is not depreciated. Depreciation of other assets is calculated using the straight-line method over
their estimated useful lives, as follows:
74
When there is an indication that an asset may be impaired, IAS 36 requires that its recoverable amount
is estimated and an impairment loss recognised when the net book value of the asset exceeds its
recoverable amount. Impairment losses are recognised in the income statement.
The recoverable amount is determined as the greater of its net selling price and value in use which is
based on the net present value of future cash flows arising from the continuing use and ultimate
disposal of the asset.
2.13. Intangible assets
The costs incurred with the acquisition, production and development of software are capitalised, as well
as the costs incurred to acquire and bring to use the specific software. These costs are amortised on a
straight line basis during their expected useful lives, which is usually between three to six years.
Costs that are directly associated with the development of identifiable specific software applications by
the Group, and that will probably generate economic benefits beyond one year, are recognised as
intangible assets. These costs include employee costs from the Group companies specialised in IT
directly associated with the development of the referred software.
All remaining costs associated with IT services are recognised as an expense as incurred.
2.14. Leases
The Group classifies its lease agreements as finance leases or operating leases taking into consideration
the substance of the transaction rather than its legal form, in accordance with IAS 17 – Leases. A lease is
classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership.
All other leases are classified as operating leases.
Operating leases
Payments made under operating leases are charged to the income statement in the period to which
they relate.
Finance leases
•
As lessee
Finance lease contracts are recorded at inception date, both under assets and liabilities, at the cost of the
asset leased, which is equal to the present value of outstanding lease instalments. Instalments comprise
75
(i) an interest charge, which is recognised in the income statement and (ii) the repayment of principal,
which is deducted from liabilities. Financial charges are recognised as costs over the lease period, in order
to produce a constant periodic rate of interest on the remaining balance of liability for each period.
•
As lessor
Assets leased out are recorded in the balance sheet as loans granted, for the amount equal to the net
investment made in the leased assets. Interest included in instalments charged to customers is recorded
as interest income, while repayments of principal, also included in the instalments, is deducted from the
amount of the loans granted. The recognition of the interest reflects a constant periodic rate of return
on the lessor's net outstanding investment.
2.15. Employee benefits
Pensions
To cover the liabilities assumed by the Group within the framework stipulated by the ACT "Acordo
Colectivo de Trabalho" for the banking sector, pension funds were set up designed to cover retirement
benefits on account of age, including widows and orphans benefits and disability for the entire work
force and also health-care benefits for employees hired until 31 March 2008. Employees hired after 31
March 2008 are covered by the Social Security general scheme.
During 2008, the Bank obtained the necessary authorizations from the Portuguese Insurance Institute to
change the Pension Fund contract in order to allow the coverage of all pension liabilities and health care
benefits.
The pension liabilities and heath care benefits are covered by funds that are managed by ESAF – Espírito
Santo Fundos de Pensões, S.A., a Group’s subsidiary.
The pension plans of the Group are classified as defined benefit plans, since the criteria to determine the
pension benefit to be received by employees on retirement are predefined and usually depend on factors
such as age, years of service and level of salary.
In the light of IFRS 1, the Group decided to adopt, at transition date (1 January 2004), IAS 19
retrospectively and has recalculated the pension and other post-retirement benefits obligations and the
corresponding actuarial gains and losses, to be deferred in accordance with the corridor method allowed
by this accounting standard.
The liability with pensions is calculated semi-annually by the Group, as at 31 December and 30 June for
each plan individually, using the projected unit credit method, and is reviewed annually by qualified
76
independent actuaries. The discount rate used in this calculation is determined by reference to the Iboxx
index for AA Eurobonds with a term to maturity approximating the terms of the related pension
liabilities (15 years).
Actuarial gains and losses determined semi-annually and resulting from (i) the differences between
financial and actuarial assumptions used and real values obtained and (ii) changes in the actuarial
assumptions, are recognised as an asset or liability and are recognised in the income statement using
the corridor method defined by IAS 19.
This method establishes that the actuarial gains and losses accumulated at the beginning of the period
that exceed the greater of 10% of the pension liabilities or the fair value of the plan assets, as at the
beginning of the period, are charged to the income statement over a period that cannot exceed the
average of the remaining working lives of the employees participating in the plan. The Group has
determined on the basis of the above criteria to amortise the actuarial gains and losses that fall outside
the corridor during a 15 year period. The actuarial gains and losses accumulated at the beginning of the
period that are within the corridor are not recognised in the income statement.
At each period, the Group recognises as a cost in the income statement a net total amount that
comprises (i) the service cost, (ii) the interest cost, (iii) the expected return on plan assets, (iv) a portion of
the net cumulative actuarial gains and losses determined using the corridor method, and (v) the effect of
curtailment losses related with early retirements, which includes the early amortisation of the
respective actuarial gains and losses.
The effect of the early retirements corresponds to the increase in pension liabilities due to retirements
before the normal age of retirement, which is 65 years.
The Group makes payments to the funds in order to maintain its solvency and to comply with the
following minimum levels: (i) the liability with pensioners shall be totally funded at the end of each year,
and (ii) the liability related to past services cost with employees in service shall be funded at a minimum
level of 95%.
The Group assesses at each reporting date and for each plan separately, the recoverability of any
recognised asset in relation to the defined benefit pension plans, based on the expectation of reductions
in future contributions to the funds.
77
Health care benefits
The Group provides to its banking employees health care benefits through a specific Social-Medical
Assistance Service. This Social-Medical Assistance Service (SAMS) is an autonomous entity which is
managed by the respective Union.
SAMS provides to its beneficiaries services and/or contributions on medical assistance expenses,
diagnostics, medicines, hospital confinement and surgical operations, in accordance with its financing
availability and internal regulations.
The annual contribution of the Group to SAMS amounts to 6.5% of the total annual remuneration of
employees, including, among others, the holiday and Christmas subsidy.
The measurement and recognition of the Group’s liability with post-retirement healthcare benefits is
similar to the measurement and recognition of the pension liability described above.
Long-term service benefits
In accordance with the ACT "Acordo Colectivo de Trabalho" for the banking sector, the Group has
assumed the commitment to pay to current employees that achieve 15, 25 and 30 years of service within
the Group, long-term service premiums corresponding, respectively, to 1, 2 and 3 months of their
effective monthly remuneration earned at the date the premiums are paid.
At the date of early retirement or disability, employees have the right to a premium proportional to
what they would earn if they remained in service until the next payment date.
These long-term service benefits are accounted for by the Group in accordance with IAS 19 as other
long-term employee benefits.
The liability with long-term service benefits is calculated semi-annually, at the balance sheet date, by the
Group using the projected unit credit method. The actuarial assumptions used are based on the
expectations about future salary increases and mortality tables. The discount rate used in this
calculation is determined by reference to the Iboxx index for AA Eurobonds with a term to maturity
approximating the terms of the related pension liabilities (15 years).
78
In each period the increase in the liability for long-term service premiums, including actuarial gains and
losses and past service cost is charged to the income statement.
Share based incentive scheme (SIBA)
BES and its subsidiaries established a share based payment scheme (SIBA) that allows its employees to
acquire BES shares with deferred settlement financed by it. The employees have to hold the shares for a
minimum of two to four years after which they can sell the shares in the market and repay the debt.
However, the employees have, after the referred period, the option to sell the shares back to BES at
acquisition cost.
The shares held by the employees under SIBA are accounted for as treasury stock of BES, this scheme
being classified as an equity settlement share based payment in accordance with IFRS 2 – Share based
payments.
Each option under the scheme is fair valued on grant date and is recognised as an expense, with a
corresponding increase in equity, over the vesting period. Annually the amount recognised as an expense
is adjusted to reflect the actual number of options that vest.
The equity instruments granted are not remeasured for subsequent changes in their fair value.
Variable remuneration payment plan
During the first semester of 2008, following the General Shareholders Meeting held on 31 March 2008,
BES and its subsidiaries established a benefits payment scheme - Variable remuneration payment plan
(PPRV – 2008/2010)
Under this incentive scheme, employees of BES and its subsidiaries have the right to a future cash
payment, corresponding to the appreciation of BES shares above a pre-established price (strike price). In
order to receive this payment, the employees have to remain in the Bank for a minimum period of three
years.
This variable remuneration payment plan is within the scope of IFRS 2 – Share based payments and
corresponds to a cash settlement share based payment.
The fair value of this benefit plan at inception, determined at its grant date, will be taken to the income
statements as staff costs over a period of three years. The recognised liability under the plan is re-
79
measured at each balance sheet date, being the fair value changes recognised in the income statement
under the caption net gains from financial assets at fair value through profit or loss.
Bonus to employees and to the Board of Directors
In accordance with IAS 19 Employee benefits, the bonus payment to employees and to the Board of
Directors is recognised in the income statement in the period to which they relate.
2.16. Income tax
Income tax for the period comprises current tax and deferred tax. Income tax is recognised in the
income statement except to the extent that it relates to items recognised directly in equity, in which
case it is also recognised in equity. Income tax recognised directly in equity relating to fair value remeasurement of available-for-sale financial assets and cash flow hedges is subsequently recognised in
the income statement when gains or losses giving rise to the income tax are also recognised in the
income statement.
Current tax is the tax expected to be paid on the taxable profit for the period, calculated using tax rates
enacted or substantively enacted at the balance sheet date at each jurisdiction.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and their
respective tax basis, and is calculated using the tax rates enacted or substantively enacted at the
balance sheet date in any jurisdiction and that are expected to apply when the related deferred income
tax asset is realised or the deferred income tax liability is settled.
Deferred tax liabilities are recognised for all taxable temporary differences except for goodwill, not
deductible for tax purposes, differences arising on initial recognition of assets and liabilities that affect
neither accounting nor taxable profit and differences relating to investments in subsidiaries to the
extent that probably they will not reverse in the foreseeable future. Deferred tax assets are recognised
to the extent it is probable that future taxable profits will be available against which deductible
temporary differences can be deducted.
The Group offsets deferred taxes assets and liabilities for each subsidiary, whenever (i) the subsidiary has
a legally enforceable right to set off current tax assets against current tax liabilities, and (ii) they relate to
income taxes levied by the same taxation authority. This offset is therefore performed at each subsidiary
level, being the deferred tax asset presented in the consolidated balance sheet the sum of the
subsidiaries’ amounts which present deferred tax assets and the deferred tax liability presented in the
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consolidated balance sheet represents the sum of the subsidiaries’ amounts which present deferred tax
liabilities.
2.17. Provisions
Provisions are recognised when: (i) the Group has present legal or constructive obligation, (ii) it is
probable that settlement will be required in the future and (iii) a reliable estimate of the obligation can
be made.
Restructuring provisions are recognised when the Group has approved a detailed and formal
restructuring plan and such restructuring either has commenced or has been announced publicly.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group
from a contract are lower than the unavoidable costs of meeting its obligation under the contract. The
provision is measured at the present value of the lower of the expected cost of terminating the contract
and the expected net costs of continuing with the contract.
2.18. Interest income and expense
Interest income and expense are recognised in the income statement under interest and similar income
and interest expense and similar charges for all non-derivative financial instruments measured at
amortised cost and for the available-for-sale financial assets, using the effective interest rate method.
Interest income arising from non-derivative financial assets and liabilities at fair value through profit or
loss is also included under interest and similar income or interest expense and similar charges,
respectively.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts
through the expected life of the financial instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset or financial liability. The effective interest rate is calculated at
inception and it is not subsequently revised.
When calculating the effective interest rate, the Group estimates cash flows considering all contractual
terms of the financial instrument (for example, prepayment options) but does not consider future credit
losses. The calculation includes all fees and commissions paid or received that are an integral part of the
effective interest rate, transaction costs and all other premiums or discounts.
In the case of financial assets or groups of similar financial assets for which an impairment loss was
recognised, interest income is calculated using the interest rate used to measure the impairment loss.
81
For derivative financial instruments, except for (i)derivatives for risk management purposes (see Note
2.4), the interest component of the changes in their fair value is not separated out and is classified under
net gains/(losses) from financial assets and financial liabilities at fair value through profit or loss. The
interest component of the changes in the fair value of derivatives for risk management purposes is
recognised under interest and similar income or interest expense and similar charges.
2.19. Fee and commission income
Fees and commissions are recognised as follows:
• Fees and commissions that are earned on the execution of a significant act, as loan syndication
fees, are recognised as income when the significant act has been completed;
• Fees and commissions earned over the period in which the services are provided are recognised as
income in the period the services are provided;
• Fees and commissions that are an integral part of the effective interest rate of a financial
instrument are recognised as income using the effective interest rate method.
2.20. Dividend income
Dividend income is recognised when the right to receive payment is established.
2.21. Segmental reporting
Since 1 January 2009, the Group adopted IFRS 8 – Segmental reporting, for disclosures of the financial
information by operating segments (see Note 4).
A business segment is a group of assets and operations engaged in providing products or services that
are subject to risks and returns that are different from those of other business segments.
A geographical segment is engaged in providing products or services within a particular economic
environment that are subject to risks and return that are different from those of segments operating in
other economic environments.
82
2.22. Earnings per share
Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the period, excluding the average
number of ordinary shares purchased by the Group and held as treasury stock.
For the diluted earnings per share, the weighted average number of ordinary shares outstanding is
adjusted to assume conversion of all dilutive potential ordinary shares, such as convertible debt and
share options granted to employees. Potential or contingent share issuances are treated as dilutive
when their conversion to shares would decrease net earnings per share.
2.23. Non-current assets held for sale
Non-current assets or disposal groups (group of assets to be disposed of together and related liabilities
that include at least a non-current asset) are classified as held for sale when their carrying amounts will
be recovered principally through sale (including those acquired exclusively with a view to its subsequent
disposal), the assets or disposal groups are available for immediate sale and its sale is highly probable.
It is inherent to the banking activity the risk that not all the credit granted by the Group will be
reimbursed. For credits with a mortgage as collateral, the Group takes legal actions in order to execute
the mortgage and receive real estate properties and other assets in exchange for loans. In accordance
with Portuguese legislation, namely “Regime Geral das Instituições de Crédito e Sociedades Financeiras”,
banks are forbidden to acquire properties which are not essential for its own use (Decree Law 298/92,
article 112º, from 31 December and subsequent amendments) being allowed, however, to acquire real
estate properties for reimbursement of loans, which must be sold in a 2 years period, subject to a
postponable term after a formal authorization from the Bank of Portugal, in accordance with the terms
established by it (article 144º).
Under these terms, in a first stage, while properties do not meet the conditions to be disposed of, the
Group books these assets as non-current (other assets) being measured at the lower of the fair value less
costs to sell and the initial carrying amount. When these assets are available for immediate disposal and
the sale is highly probable, they are reclassified as non-current assets held for sale, and booked in
accordance with the measurement criteria established in IFRS 5.
83
The valuations for these properties are performed in accordance with one of the following methodologies,
applied in accordance with the specific situation of the asset:
a) Market method
The market value comparison criterion is based on transaction prices for similar and comparable
properties, obtained through market data.
b) Income method
The property value is estimated through the net present value of the future rents generated by the
property, calculated using the discounted cash flow method.
c)
Cost method
The cost method is an approach which decomposes the property value in its fundamental
components: Urban Land Value and Urbanity Value; Building Value; and Indirect Costs Value.
The valuations performed are conducted by external expert entities. The valuation reports are internally
reviewed in order to assess its adequacy by comparing the disposal amounts with the revaluated
amounts.
2.24. Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less
than three months’ maturity from the inception date, including cash and deposits with banks.
Cash and cash equivalents exclude restricted balances with central banks.
84
NOTE 3 – CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS IN APPLYING
ACCOUNTING POLICIES
IFRS set forth a range of accounting treatments and require management to apply judgment and make
estimates in deciding which treatment is most appropriate. The most significant of these accounting
policies, are discussed in this section in order to improve understanding of how their application affects
the Group’s reported results and related disclosure. A broader description of the accounting policies
employed by the Group is shown in Note 2 to the Consolidated Financial Statements.
Because in many cases there are other alternatives to the accounting treatment chosen by
management, the Group’s reported results would differ if a different treatment were chosen.
Management believes that the choices made by it are appropriate and that the financial statements
present the Group’s financial position and results fairly in all material respects.
3.1. Impairment of available-for-sale financial assets
The Group determines that available-for-sale financial assets are impaired when there has been a
significant or prolonged decline in the fair value below its cost or when it has identified an event with
impact on the estimated future cash flows of the assets. This determination requires judgement based on
all available relevant information, including the normal volatility of the financial instruments prices.
Considering the high volatility and the reduced markets liquidity felted throughout 2008, the Group has
considered the following parameters when assessing the existence of impairment losses:
(i) Equity securities: declines in market value above 30% in relation to the acquisition cost (20% in March
2008) or market value below the acquisition cost for a period longer than twelve-months (six-months in
March 2008);
(ii) Debt securities: objective evidence of events that have an impact on the estimated future cash flows
of these assets.
In addition, valuations are generally obtained through market quotation or valuation models that may
require assumptions or judgement in making estimates of fair value.
Alternative methodologies and the use of different assumptions and estimates could result in a higher
level of impairment losses recognised with a consequent impact in the income statement of the Group.
85
3.2. Fair value of derivatives
Fair values are based on listed market prices if available; otherwise fair value is determined either by
dealer price quotations (both for that transaction or for similar instruments traded) or by pricing models,
based on net present value of estimated future cash flows which take into account market conditions
for the underlying instruments, time value, yield curve and volatility factors. These pricing models may
require assumptions or judgments in estimating fair values.
Consequently, the use of a different model or of different assumptions or judgments in applying a
particular model may have produced different financial results from the ones reported.
3.3. Impairment losses on loans and advances
The Group reviews its loan portfolios to assess impairment on a regular basis, as described in Note 2.5.
The evaluation process in determining whether an impairment loss should be recorded in the income
statement is subject to numerous estimates and judgments. The frequency of default, risk ratings, loss
recovery rates and the estimation of both the amount and timing of future cash flows, among other
factors, are considered in making this evaluation.
Alternative methodologies and the use of different assumptions and estimates could result in a different
level of impairment losses with a consequent impact in the consolidated income statement of the
Group.
3.4. Securitizations and special purpose entities (SPE)
The Group sponsors the formation of special purpose entities (SPEs) primarily for asset securitisation
transactions and for liquidity purposes.
The Group does not consolidate SPEs that it does not control. As it can sometimes be difficult to
determine whether the Group does control an SPE, it makes judgements about its exposure to the risks
and rewards, as well as about its ability to make operational decisions for the SPE in question (see Note
2.2).
The determination of the SPEs that needs to be consolidated by the Group requires the use of estimates
and assumptions in determining the respective expected residual gains and losses and which party
86
retains the majority of such residual gains and losses. Different estimates and assumptions could lead
the Group to a different scope of consolidation with a direct impact in net income.
3.5. Held-to-maturity investments
The Group follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or
determinable payments and fixed maturity as held-to-maturity. This classification requires significant
judgement.
In making this judgement, the Group evaluates its intention and ability to hold such investments to
maturity. If the Group fails to keep these investments to maturity other than for the specific
circumstances – for example, selling an insignificant amount close to maturity – it will be required to
reclassify the entire class as available-for-sale. The investments would therefore be measured at fair
value instead of amortised cost.
Held-to-maturity investments are subject to impairment tests made by the Group. The use of different
assumptions and estimates could have an impact on the income statement of the Group.
3.6. Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant interpretations and
estimates are required in determining the worldwide amount for income taxes. There are many
transactions and calculations for which the ultimate tax determination is uncertain during the ordinary
course of business.
Different interpretations and estimates would result in a different level of income taxes, current and
deferred, recognised in the period.
The Tax Authorities are entitled to review the Bank and its subsidiaries located in Portugal’s
determination of annual taxable earnings, for a period of four years or six years in case there are tax
losses brought forward. Hence, it is possible that some additional taxes may be assessed, mainly as a
result of differences in interpretation of the tax law. However, the Board of Directors of the Bank, and
those of its subsidiaries, are confident that there will be no material tax assessments within the context
of the financial statements.
87
3.7. Pension and other employees’ benefits
Determining pension liabilities requires the use of assumptions and estimates, including the use of
actuarial projections, estimated returns on investment, and other factors that could impact the cost and
liability of the pension plan.
Changes in these assumptions could materially affect these values.
NOTE 4 – SEGMENT REPORTING
As at 1 January 2009, BES Group adopted IFRS 8 – Operating Segments, for disclosure of information
about the entity's operating segments. In order to comply with the requirements of IFRS 8 the Group
adopted new criteria in the preparation of this information.
BES Group activities are focused on the financial sector and are directed to companies, institutionals and
private costumers. The Group’s decision centre is in Portugal, which makes it its privileged market. The
historical link with Brazil and Africa, the globalization of the Portuguese companies and the Portuguese
emigration to several countries, led to an internationalisation of the Group, which already has an
international structure contributing significantly to the Group’s activities and results.
The Group’s products and services includes deposits, loans to retail and corporate costumers, fund
management, broker and custodian services, investment banking services and the commercialization of
life and non-life insurance products. Additionally, the Group makes short, medium and long term
investments in the financial and currency exchange markets with the objective of taking advantages from
the prices changes or to have a return from its available resources.
The Group has BES as its main operating unit- with 707 branches in Portugal and with branches in
London, New York, Spain (26 branches), Nassau, Cayman Islands, Cape Verde and Madeira Free Zone and
12 representation offices – with BES Investmento (investment banking); BES Angola; BES Açores (18
branches); Banco BEST (12 branches); Espírito Santo Bank; BES Oriente; BES Vénétie; Espírito Santo
Activos Financeiros (ESAF); BES Seguros (non life insurance) and BES Vida, among other companies.
When evaluating the performance by business area, the Group considers the following Operating
Segments: (1) Domestic Commercial Banking, including Retail, Corporate, Institutionals and Private
Banking; (2) Asset Management; (3) International Commercial Banking; (4) Investment Banking; (5) Capital
Markets and Strategic Investments; and (6) Corporative Centre. Each segment includes the BES
structures that directly or indirectly relate to it, and also the autonomous units of the Group whose
activities are most related to one of these segments. In addition to the individual evaluation of each
88
operating unit of the Group (considered as an investment centre), the Executive Commission defines
strategies, commercial programs and performance evaluation for each operating segment.
Complementary, the Group, uses a second segmentation of its activities and results according to
geographic criteria, segregating the activity and the results generated from the units located in Portugal
(domestic activities) from the units located abroad (international activities).
4.1.
Operating Segments Description
Each of the operating segments includes the following activities, products, customers and Group
structures:
Domestic Commercial Banking
This operating segment includes all the banking activity with corporate and institutional costumers
developed in Portugal, based in the branch offices network; corporate centres and other channels and
includes the following:
Retail: corresponds to all activity developed by BES in Portugal with private costumers and small
business, fundamentally originated by the branches network, agent network and electronic channels.
The financial information of the segment relates to, among other products and services, mortgage
loans, consumer credit, financing the clients’ activity, deposits repayable on demand and term
deposits, retirement plans and other insurance products to private costumers, commissions over
account management and electronic payments, the investment funds cross-selling and brokerage
and custodian services.
Corporate and Institutional: includes BES activities in Portugal with small, medium and large
companies, through its commercial structure dedicated to this segment, which includes 28 corporate
centres. Also includes activities with institutional and municipal costumers. The main products
considered on this segment are: discounted bills, leasing, factoring and short and long term loans;
includes deposits and guarantees, custodian services, letters of credit, electronic payments
management and other services.
Private Banking: includes private banking activity of BES, all profit, loss and assets and liabilities
associated to customers classified as private by BES. The main products considered on this segment
are: deposits; discretionary management, selling of investment funds, custodian services, brokerage
services and insurance products.
89
International Commercial Banking
This operating segment includes the units located abroad, which banking activities is focused to
corporate and retail customers, excluding investment banking and asset management, which are
integrated in the corresponding segments.
Among the units comprising this segment are BES Angola and Spain, London and New York Branches of
BES. The main products included in this segment are deposits, credit, leveraged finance, structured trade
finance and project finance operations. This segment, in the context of the funding strategy, has been
assuming a relevant role, mainly within institutional customers.
Investment Banking
Includes assets, liabilities, profits and losses of the operating units that consolidate in BES Investimento,
which comprises all the investment banking activities of the Group originated in Portugal and abroad. In
addition to the lending activity, deposits and other forms of funding, it includes advisory services, mergers
and acquisitions, restructuring and debt consolidation, initial public offerings (shares and bonds),
brokerage and other investment banking services.
Asset Management
This segment includes the asset management activities developed by ESAF in Portugal and abroad (Spain,
Brazil, Angola, Luxembourg and United Kingdom). ESAF’s products includes all tips of funds - investment
funds, real estate funds and pension funds, and also includes discretionary management services and
portfolio management.
Capital Markets and strategic investments
This segment includes the financial management of the Group, namely the investments in capital
markets instruments (equity and debt), whether they are integrated in trading, fair value, available for
sale or held to maturity financial assets portfolios. Also included in this segment is the Group’s
investment in minority strategic positions, as well as all the activity inherent to interest rate and
exchange rate risk management, long and short positions on financial instruments management of,
which allow the Group to take advantage of the price changes in those markets where these instruments
are exchanged.
90
Corporative Centre
This area does not correspond to an operating segment. It refers to an aggregation of corporative
structures acting throughout the entire Group, such as, areas related to the Board of Directors,
Compliance, Financial and Accounting, Risk management, Investor Relations; Internal Audit; Organization
and Quality, among others.
4.2.
Allocation criteria of the activity and results to the operating segments
The financial information presented for each segment was prepared in accordance with the criteria
followed for the preparation of internal information analysed by the decision makers of the Group, as
required by IFRS.
Measurement of profit or loss from operating segments
The Group uses net income before taxes as the measure of profit or loss for evaluating the performance
of each operating segment.
Autonomous Operating Segments
As mentioned above, each autonomous operating unit (branches abroad, affiliated and associated
entities) is evaluated separately, as these units are considered investment centres. Additionally,
considering the characteristics of the business developed by these units, they are fully included in one of
the operating segments, assets, liabilities, equity, income and expenses.
BES Structures dedicated to Segments
BES activity comprises most of its operating segments and therefore its activity is disaggregated.
For the purpose of allocating the financial information, the following principles are used: (i) the origin of
the operation, i.e. the operation is allocated to the same segment as the commercial structure that
originated it, even though, in a subsequent phase, the group makes a strategic decision in order to
securitize some of these originated assets; (ii) the allocation of a commercial margin to mass-products,
established in a high level when the products are launched; (iii) the allocation of a margin directly
negotiated by the commercial structures with the clients for non-mass-products; (iv) the allocation of
direct costs from commercial and central structures dedicated to the segment; (v) the allocation of
indirect cost (central support and IT services) determined in accordance with specific drivers and with the
ABC model; (vi) the allocation of credit risk determined in accordance with the impairment model.
The transactions between independent and autonomous units of the Group are made at market prices;
the price of the services between the structures of each unit, namely the price established for funding
between units, is determined by the margins process referred above (which vary in accordance with the
strategic relevance of the product and the balance between funding and lending); the remaining internal
91
transactions are allocated to the segments in accordance with ABC without any margin from the
supplier.
The interest rate risk, exchange risk, liquidity risk and others, except for credit risk, are included in the
Financial Department, whose mission is to make the Bank’s financial management. The related activity
and results are included in Capital Markets and Strategic Investments segment.
Interest and similar income/expense
Since the Group’s activities are exclusively related to the financial sector, the major income results from
the difference between interest received on assets and interest paid from liabilities. This situation and the
fact that the segments evaluation is based on negotiated margins or determined previously to each
product, leads to the results on the intermediation activity being presented, as permitted by IFRS 8
paragraph 23, as the net value of interest under the designation of Financial Income.
Consolidated Investments under the equity method
Investments in associated companies consolidated under the equity method are included in Capital
Markets and Strategic Investments segment, in case of BES associates. For other companies of the
Group, the same entities are included in the segment they relate to.
Non Current Assets
Non current assets, according to IFRS 8, include Other Tangible Assets, Intangible Assets and Other
Assets which do not meet the criteria to be classified as Non Current Assets Held for Sale. BES includes
these assets on the Capital Markets and Strategic Investments segment; the non current assets held by
the subsidiaries are allocated to the segment in which these subsidiaries develop their business.
Income tax is a part of the Group net income but does not affect the evaluation of most of the Operating
Segments. Deferred income taxes are included in Capital Markets and Strategic Investments segment.
Post Employment Benefits
Assets under post employment benefits are managed in a similar way to deferred income taxes assets,
and are included in the Capital Markets and Strategic Investments segment.
The factors that influence the amount of responsibilities and the amount of the funds assets correspond,
mainly, to external elements; it is Group’s policy not to include these factors on the performance
evaluation of Operating Segment, which activities relate to costumers.
92
Domestic and International Areas
In the disclosure of financial information by geographical areas, the operating units that integrate the
International Area are: BES Angola and its branches, BES Oriente, Espírito Santo Bank; Espírito Santo
Vénétie, London, Spain, New York and Cape Verde branches and the operating units located abroad from
BES Investimento and ESAF.
The financial elements related to the international area are presented in the financial statements of
those units with the respective consolidation and elimination adjustments.
Retrospective Information
In 2009, the Group adopted IFRS 8 – Operating Segments, which differ substantially from the rules
employed until this date in the preparation of the financial statements. As a consequence, the
information related to 2008 was reorganized and prepared to be consistent and compliant with IFRS 8.
The primary segments reporting are presented as follows:
The secondary segment information is prepared in accordance with the geographical distribution of the
Group’s business units, as follows:
93
NOTE 5 – NET INTEREST INCOME
This balance is analysed follows:
31 .03.2009
Interest from loans and advances
Interest from financial assets at fair value through profit or loss
Interest from deposits with banks
Interest from available-for-sale financial assets
Interest from derivatives for risk management purposes
Other interest and similar income
Interest from debt securities
Interest from amounts due to customers
Interest from deposits from central banks and other banks
Interest from derivatives for risk management purposes
Interest from subordinated debt
Other interest expense and similar charges
31 .03.2008
661 389
91 353
38 846
55 1 49
276 296
23 1 1 2
666 770
97 558
87 226
55 668
1 70 389
1 0 1 53
1 1 46 1 45
1 087 764
240 466
1 70 984
87 941
37 561
291 463
2 41 7
320 71 9
1 56 220
1 20 1 30
29 947
1 97 945
4 534
830 832
829 495
31 5 31 3
258 269
Interest from loans and advances includes an amount of euro 6 545 thousands (31 March 2008:
euro 3 839 thousands) related to the unwind of discount regarding the impairment losses of loans and
advances to customers that are overdue (see Note 21).
Interest from derivatives for risk management purposes includes, in accordance with the accounting
policy described in Notes 2.4 and 2.18, interests from hedging derivatives and from derivatives used to
manage the risk of certain financial assets and financial liabilities designated at fair value through profit
or loss in accordance with the accounting policy described in Notes 2.5, 2.6 and 2.8.
94
NOTE 6 – NET FEE AND COMMISSION INCOME
31 .03.2009
Fee and commission income
From banking services
From guarantees granted
From transactions with securities
From commitments assumed to third parties
Other fee and commission income
Fee and commission expense
From banking services rendered by third parties
From transactions with securities
From guarantees received
Other fee and commission expense
31 .03.2008
1 1 8 374
30 357
7 01 6
5 025
22 973
1 1 3 930
1 5 448
1 5 879
4 221
22 1 45
1 83 745
1 71 623
1 5 364
3 733
303
3 287
1 5 225
6 81 4
31
6 862
22 687
28 932
1 61 058
1 42 691
95
NOTE 7 – NET GAINS / (LOSSES) FROM FINANCIAL ASSETS AT FAIR VALUE THROUGH
PROFIT OR LOSS
This balance is analysed as follows:
Gains
31 .03.2009
Losses
Total
Gains
31 .03.2008
Losses
Total
Assets and liabilities held for trading
Securities
Bonds and other fixed income securities
Issued by government and public entitie
Issued by other entities
50 502
8 675
26 1 85
721
24 31 7
7 954
30 291
2 834
37 204
1 673
( 6 91 3)
1 1 61
Shares
1 4 532
24 547
( 1 0 01 5)
9 61 1
21 354
( 1 1 743)
2 1 21
830
1 291
4 581
42 1 1 4
( 37 533)
75 830
52 283
23 547
47 31 7
1 02 345
( 55 028)
1 1 48 289
2 41 4 589
562 301
1 36 556
284 797
1 1 32 1 86
2 340 971
603 556
1 37 627
247 385
1 6 1 03
73 61 8
( 41 255)
( 1 071 )
37 41 2
421 61 7
2 401 260
572 068
76 353
1 86 608
309 372
2 330 299
551 302
79 693
270 978
1 1 2 245
70 961
20 766
( 3 340)
( 84 370)
4 546 532
4 461 725
84 807
3 657 906
3 541 644
1 1 6 262
4 622 362
4 51 4 008
1 08 354
3 705 223
3 643 989
61 234
50 330
60 547
( 1 0 21 7)
98 71 7
1 91 546
( 92 829)
1 78
1 08
70
2 539
1 2 1 35
( 9 596)
47 405
1 37 1 87
( 89 782)
26 575
42 304
( 1 5 729)
97 91 3
1 97 842
( 99 929)
1 27 831
245 985
( 1 1 8 1 54)
Other variable income securities
Derivative financial instruments
E xchange rate contracts
Interest rate contracts
E quity/Index contracts
Credit default contracts
Other
Financial ass ets and liabilities at fair value
through profit or loss
Securities
Shares
Other financial assets
Financial liabilities
(1 )
(1 )
(1 )
1 2 01 5
3 831
8 1 84
4 526
336
4 1 90
30 033
42 489
( 1 2 456)
84 41 6
62 747
21 669
1 39 961
244 1 62
( 1 04 201 )
21 6 773
309 068
( 92 295)
4 762 323
4 758 1 70
4 1 53
3 921 996
3 953 057
( 31 061 )
includes the fair value change on hedged assets/liabilities or at fair value option
As at 31 March 2009, this balance includes a positive effect of euro 4 282 thousands related to the
change in fair value of financial liabilities designated at fair value through profit or loss attributable to
the entity’s credit risk component (31 March 2008: positive effect of euro 41 519 thousands).
96
NOTE 8 – NET GAINS FROM AVAILABLE-FOR-SALE FINANCIAL ASSETS
31 .03.2008
31 .03.2009
Gains
Issued by government and public entities
Shares
Los ses
Total
Gains
Loss es
Total
2 351
3 1 61
2 997
2 351
1 64
549
2 642
444
8 586
1 05
( 5 944)
28 541
70 584
( 42 043)
84 398
4 047
80 351
33
361
( 328)
-
-
-
34 086
73 942
( 39 856)
87 589
1 3 077
74 51 2
During the first quarter of 2009, the Group sold 110 million ordinary shares of Citigroup (realised lost:
euro 42.3 million).
During the first quarter of 2008, the Group sold (i) 8.5 million ordinary shares of Bradesco (realised gain:
euro 47.0 million), (ii) 25.2 million ordinary shares of EDP (realised gain: euro 17.1 million) and (iii) 7.6
million shares of Portugal Telecom (realised gain: euro 8.1 million).
Related party transactions are described in Note 41.
NOTE 9 – NET GAINS FROM FOREIGN EXCHANGE DIFFERENCES
31 .03.2008
31 .03.2009
Gains
Foreign exchange translation
Los s es
Total
Gains
Los s es
Total
472 742
486 882
( 1 4 1 40)
223 226
21 3 343
9 883
472 742
486 882
( 1 4 1 40)
223 226
21 3 343
9 883
This balance includes the exchange differences arising on translating monetary assets and liabilities at
the exchange rates ruling at the balance sheet date in accordance with the accounting policy described in
Note 2.3.
97
NOTE 10 – OTHER OPERATING INCOME AND EXPENSE
Other operating income
Technological services
Call center services
Gains on repurchased debt securities
Non recurring gains on credit operations
Non recurring gains on advisory services
Other
Other operating expense
Direct and indirect taxes
Contributions to the Deposits Guarantee Fund
Donations
Penalties from non-compliance with contractual agreements
Losses with mortgage loans
Losses with discretionary management
Other
31 .03.2009
31 .03.2008
263
99 768
5 31 8
1 756
1 3 1 62
1 20 267
1 753
3 51 4
4 352
702
1 0 51 4
20 835
3 61 3
1 1 08
1 849
4 204
1 76
6 239
4 534
21 723
2 694
966
9 655
4 400
5 1 38
22 853
98 544
( 2 01 8)
NOTE 11 – STAFF COSTS
W ages and salaries
R emuneration
Long-term service benefits (see Note 1 2)
Health-care benefits - S AMS
O ther mandatory social charges
P ension costs (see Note 1 2)
O ther costs
31 .03.2009
31 .03.2008
97 424
96 446
978
3 363
1 3 1 47
20 61 5
3 551
95 41 2
94 602
81 0
4 884
1 1 731
7 831
4 992
1 38 1 00
1 24 850
98
Other costs include the amount of euro 90 thousands (31 March 2008: euro 176 thousands) related with
the share based incentive scheme (SIBA) and euro 1 075 thousands related with the variable
remuneration payment plan (PPRV), in accordance with the accounting policy described in Note 2.15. The
details of these plans are presented in Note 12.
As at 31 March 2009 and 2008, the number of employees of the Group is analysed as follows:
BE S employees
Financial sector subsidiaries employees
Financial s ector group entities employees
E mployed by other companies essencially providing services
(a)
to customers outside the Group
Total
31 .03.2009
31 .03.2008
6 838
2 435
6 795
2 1 89
9 273
8 984
-
597
9 273
9 581
a) As at 31 March 2008, this amount refers to E S Contact Center employees. After the second semester of 2008 this company is
consolidated by equity method (see note 1 ).
NOTE 12 – EMPLOYEE BENEFITS
Pension and health-care benefits
In compliance with the collective labor agreement (ACT) for the banking sector established with the
unions, the Bank undertook the commitment to grant its employees, or their families, pension on
retirement and disability, and widows’ pension. Pension payments consist of a rising percentage based
on years of service, applicable to each year’s negotiated salary table for the active work force hired until
31 March 2008. Employees hired after 31 March 2008 are covered by the Portuguese Social Security
scheme.
As at 30 December 1987, the Bank established a pension fund to cover the above mentioned liabilities
with pension payments in relation to the employees in service at that time. In 1998, the Bank and the
Group’s subsidiaries decided to set up an autonomous open-up pension fund – the Fundo de Pensões
Aberto GES – to fund complementary pension benefits of pensioners and employees in service. During
2008, the Bank obtained the necessary authorisations from the Portuguese Insurance Institute to
change the Pension Fund Contract in order to allow the coverage of all pension liabilities and health care
benefits. The pension funds in Portugal are managed by ESAF- Espírito Santo Funds de Pensões, S.A.
In accordance with the accounting policy described in Note 2.15, the Group measures the actuarial present
value of the pensions and health care defined benefits semi-annually. Net assets related with pensions are
presented in caption Other Assets (see Note 28).
99
The net periodic benefit cost can be analysed as follows:
31 .03.2009
Pens ion
plans
Service cost
Interest cost
E xpected return on plan assets
Amortisation of the year
Curtailment losses related to early ret
Net benefit cos t
Health-care
benefits
31 .03.2008
Total
9 944
27 342
( 29 230)
1 2 561
( 2)
569
1 485
( 1 596)
92
-
1 0 51 3
28 827
( 30 826)
1 2 653
( 2)
20 61 5
550
21 1 65
Pens ion
plans
1 0 200
24 574
( 29 059)
2 116
7 831
Health-care
benefits
Total
551
1 380
1 96
-
1 0 751
25 954
( 29 059)
2 31 2
-
2 1 27
9 958
SIBA
During 2000, BES established a ‘‘Stock Based Incentive Scheme’’ (SIBA). This incentive scheme consists
on the sale to BES employees of one or more blocks of BES ordinary shares with deferred settlement for
a period that can vary between two to four years. During this period the employees are required to hold
the shares, after which they are allowed to sell the shares in the market or, alternatively, have the
option to sell them back to BES at acquisition cost.
The main characteristics of each plan are presented as follows:
100
The changes in the number of underlying shares to the outstanding plans during the period ended 31
March 2009 and 31 December 2008 were as follows:
31 .03.2009
Number of
Average price
(euro)
shares
31 .1 2.2008
Number of
Average price
s hares
(euro)
Opening balance
(1 )
Shares sold
2 479 081
( 50 252)
1 2.04
1 1 .24
3 484 262
(1 005 1 81 )
1 1 .89
1 1 .54
Year-end balance
2 428 829
1 2.05
2 479 081
1 2.04
(1 )
Includes shares sold in the market, after the exercise by the employees of the option of sell back to BE S at acquisition cost and those that
were paid by the employees at the maturity of the plans.
The assumptions used in the initial valuation of each plan were the following:
Maturity
1 st block
2nd block
Volatility
R isk free interest rate
1 st block
2nd block
Dividend yield
Fair value at the grant date (thousands of euro)
Plan 2004
Plan 2003
Plan 2002
Plan 2001
Plan 2000
24 months
60 months
1 2%
E xpired
60 months
1 2%
E xpired
E xpired
1 2%
E xpired
E xpired
1 2%
E xpired
E xpired
1 2%
3.04%
3.22%
2.90%
2.63%
3.52%
2.90%
2.70%
3.56%
2.90%
4.38%
5.01 %
2.90%
4.71 %
5.05%
2.90%
2 305
2 1 37
2 830
6 530
3 056
The total costs recognised related to the plan are as follows:
31 .03.2009
Total costs of the plans (see Note 1 1 )
90
31 .1 2.2008
31 .03.2008
703
1 76
The costs with the plans were recognised as staff costs against other reserves, in accordance with the
accounting policy described in Note 2.15.
Variable remuneration payment plan (PPRV)
During the first semester of 2008, following the General Shareholders Meeting held on 31 March 2008,
BES and its subsidiaries established a benefits payment scheme, named Variable remuneration payment
plan (PPRV – 2008/2010).
Under this incentive scheme, BES Group employees have the right to a future cash payment equivalent
to the appreciation of BES shares between the initial reference date and the final reference date. The
PPRV is not a plan where stocks or stock options are granted to employees. Under this plan no rights are
granted to employees equivalent to a shareholding in BES share capital.
101
The plans’ initial fair value was calculated using an option valuation model with the following
assumptions:
Initial reference date
02-J un-2008
Final reference date
02-J un-201 1
R ights granted to employees
5.000.000
Initial stock price
1 1 .00
Interest rate
5.22%
Volatility
33.50%
Initial fair value of the plan (in thousands of euro
1 2.902
In accordance with the accounting policy described in Note 2.15, the initial fair value of the PPRV, in the
amount of euro 12 902 thousands, will be recognised during the three year period comprised between
the initial and the final reference dates. As such, the Group recognised during the first quarter of 2009,
as staff costs, the amount of euro 1 075 thousands. The change in the fair value of the benefit granted to
employees during the life of the program will be recognised as a profit/loss from financial assets at fair
value through profit or loss.
The fair value of the liability recognised is reameasured at the end of each month, being as at 31 March
2009 of euro 201 thousands (31 December 2008: euro 812 thousands).
As referred in Note 2.15, for employees that achieve certain years of service, the Bank pays long service
premiums, calculated based on the effective monthly remuneration earned at the date the premiums
are due. At the date of early retirement or disability, employees have the right to a premium
proportional to that they would earn if they remained in service until the next payment date.
The costs incurred during the first quarter of 2009 with long-term service benefits amounted to euro 978
thousands (31 March 2008: euro 810 thousands).
The actuarial assumptions used in the calculation of the liabilities are those presented for the
calculation of pensions (when applicable).
102
NOTE 13 – GENERAL AND ADMINISTRATIVE EXPENSES
31 .03.2009
R ental costs
Advertising costs
Communication costs
Maintenance and related services
Travelling and representation costs
Transportation
Insurance costs
Specialised services
IT services
Independent work
Temporary work
E lectronic payment systems
Advisory services
Legal costs
Consultants and external auditors
Other specialised services
Water, energy and fuel
Consumables
Other costs
31 .03.2008
1 5 929
8 608
9 786
3 733
6 866
2 837
1 771
1 5 21 4
1 2 299
9 91 8
3 521
6 648
2 923
1 51 8
1 1 644
1 756
1 694
3 1 94
2 278
2 949
2 544
6 390
2 400
1 677
8 985
1 1 01 5
2 250
2 884
3 664
2 783
2 291
4 032
7 934
2 1 99
1 446
6 338
95 041
98 877
The balance other specialised services includes, among others, costs with security, information and
databases. The balance other costs includes costs with training and external suppliers.
NOTE 14 – EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share is calculated by dividing the net profit attributable to equity holders of the Bank
by the weighted average number of ordinary shares outstanding during the period.
31 .03.2009
31 .03.2008
Profit attributable to the equity holders of the B ank
1 01 295
1 45 930
Weighted average number of ordinary shares (thousands)
Weighted average number of treasury stock (thousands)
500 000
2 446
500 000
3 1 55
Weighted average number of ordinary s hares outs tanding (thous ands )
497 554
496 845
0.20
0.29
B as ic earnings per s hare attributable to equity holders of the B ank (in euro)
103
Diluted earnings per share
The diluted earnings per share is calculated considering the profit attributable to the equity holders of
the Bank and the weighted average number of ordinary shares outstanding, adjusted for the effects of
all dilutive potential ordinary shares.
The diluted earnings per share is not different from the basic earning per share as the outstanding plans
of SIBA do not have a dilutive effect.
NOTE 15 – CASH AND DEPOSITS AT CENTRAL BANKS
As at 31 March 2009 and 31 December 2008, this balance is analysed as follows:
31 .03.2009
31 .1 2.2008
Cash
1 87 095
249 979
Deposits at central banks
Bank of Portugal
Other central banks
490 498
259 637
1 1 61 1 86
61 6 1 53
750 1 35
1 777 339
937 230
2 027 31 8
The deposits at Central Banks include mandatory deposits intended to satisfy legal minimum cash
requirements, in the amount of euro 694 259 thousands (31 December 2008: euro 767 966 thousands).
According to the European Central Bank Regulation (CE) no. 2818/98, of 1 December 1998, minimum cash
requirements kept as deposits with the Bank of Portugal earn interest, and correspond to 2% of deposits
and debt certificates maturing in less than 2 years, excluding deposits and debt certificates of institutions
subject to the European System of Central Banks’ minimum reserves requirements.
104
NOTE 16 – DEPOSITS WITH BANKS
Deposits with banks in Portugal
Uncollected cheques
R epayable on demand
Deposits with banks abroad
R epayable on demand
Uncollected cheques
Other
31 .03.2009
31 .1 2.2008
1 64 925
76 348
285 873
37 1 22
241 273
322 995
67 400
1 946
21 9 943
1 24 572
3 263
21 3 580
289 289
341 41 5
530 562
664 41 0
Uncollected cheques in Portugal and abroad were sent for collection during the first working days
following the reference dates.
105
NOTE 17 – FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING
31 .03.2009
31 .1 2.2008
Securities
Shares
1 609 762
85 061
1 553 51 3
97 949
22 593
1 5 1 48
42 090
2 889
1 759 506
1 669 499
2 1 05 326
2 020 663
3 864 832
3 690 1 62
1 81 9 21 4
1 91 4 423
Derivatives
Derivative financial instruments with positive fair value
Derivatives
Derivative financial instruments with negative fair value
In accordance with the accounting policy described in Note 2.6, securities held for trading are those
which are bought to be traded in the short-term, regardless of their maturity.
106
As at 31 March 2009 and 31 December 2008, derivative financial instruments can be analysed as follows:
31 .03.2009
Notional
As sets
31 .1 2.2008
Fair value
Liabilities
Notional
Ass ets
Fair value
Liabilities
Trading derivatives
E xchange rate contracts
Forward
- buy
- sell
Currency Swaps
- buy
- sell
Currency Futures
Currency Interest R ate Swaps
- buy
- sell
Currency Options
Interes t rate contracts
Forward R ate Agreements
Interest R ate Swaps
Swaption - Interest R ate Options
Interest R ate Caps & Floors
Interest R ate Futures
Bonds Options
Future Options
E quity / index contracts
E quity / Index Swaps
E quity / Index Options
E quity / Index Futures
Credit default contracts
Credit Default Swaps
Total
1 044 608
1 028 1 23
1 392 71 5
1 048 759
7 063 399
93 483
73 033
260 757
222 023
1 1 83 408
1 1 86 093
1 21 5 71 5
1 229 832
1 0 571
1 069 029
926 1 60
7 71 0 71 2
1 7 691 797
369 572
31 6 901
1 4 531 520
035
244
259
010
728
556
560
054
098
377
31 272 800
3 344
1 331 869
2 424
86 21 3
-
1 0 851
1 1 30 1 1 4
725
46 901
-
1
54
5
9
1
564
373
548
244
551
20 972 550
1
1 1 79
8
67
21 7
392
662
1 87
-
1 471
974 341
7 745
40 568
-
97 550 445
1 423 850
1 1 88 591
93 284 830
1 256 458
1 024 1 25
1 1 99 91 4
4 362 459
1 03 546
38 323
200 538
-
53 436
1 89 986
-
868 41 7
4 292 082
1 02 944
50 927
1 86 671
-
61 284
284 943
-
5 665 91 9
238 861
243 422
5 263 443
237 598
346 227
3 291 603
73 043
70 300
2 779 578
60 034
65 989
1 24 1 99 764
2 1 05 326
1 81 9 21 4
1 1 5 859 371
2 020 663
1 91 4 423
2 951 1 98
3 004 029
1 58 966
9
43
1
9
3
1 2 61 4
20 586
2 71 8
1 259
-
-
669
969
220
138
314
37 508
71 332
3 81 8
3 629
-
-
1 54 559
21 4 750
270 688
1 88 371
466 573
478 082
NOTE 18 – OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
31 .03.2009
31 .1 2.2008
Shares
Other securities
Book value
1 354 01 4
1 324 543
7 594
7 1 46
71 0 255
830 1 24
2 071 863
2 1 61 81 3
107
In light of IAS 39 and in accordance with the accounting policy described in Note 2.6, the Group
designated these financial assets as at fair value through profit or loss, in accordance with the
documented risk management and investment strategy, considering that these financial assets (i) are
managed and evaluated on a fair value basis and/or (ii) have embedded derivatives.
NOTE 19 – AVAILABLE-FOR-SALE FINANCIAL ASSETS
Cost (1 )
Fair value reserve
Positive
Negative
Impairment
losses
B ook
value
1 674 1 20
3 202 746
1 268
9 058
( 2 1 97)
( 42 251 )
( 28 447)
1 673 1 91
3 1 41 1 06
Shares
1 799 944
72 704
( 265 977)
( 72 01 0)
1 534 661
807 872
1 4 647
( 7 280)
( 1 5 797)
799 442
B alance as at 31 March 2009
7 484 682
97 677
( 31 7 705)
( 1 1 6 254)
7 1 48 400
1 886 264
3 1 33 588
2 706
7 254
( 20)
( 34 1 70)
( 27 046)
1 888 950
3 079 626
Shares
1 680 787
36 655
( 228 01 8)
( 67 346)
1 422 078
709 966
1 2 1 05
( 6 846)
( 1 1 768)
703 457
7 41 0 605
58 720
( 269 054)
( 1 06 1 60)
7 094 1 1 1
B alance as at 31 December 2008
(1 )
Acquisition cost relating to shares and other variable income securities and amortised cost relating to debt securities
In accordance with the accounting policy described in Note 2.6, the Group assesses periodically whether
there is objective evidence of impairment on the available-for-sale financial assets, following the
judgment criteria’s described in Note 3.1.
The securities pledged as collateral by the Group are analysed in Note 39.
108
The changes occurred in impairment losses of available-for-sale financial assets are presented as follows:
31 .03.2009
31 .1 2.2008
Balance at the beginning of the period
Charge for the period
Charge off
Write back for the period
E xchange differences and other
1 06 1 60
7 964
( 1 71 )
( 87)
2 388
64 1 01
57 678
( 1 9 946)
( 32)
4 359
B alance at the end of the period
1 1 6 254
1 06 1 60
The main equity exposures that contribute to the fair value reserve, as at 31 March 2009 and 31
December 2008, can be analysed as follows:
31 .03.2009
Description
Banco Bradesco
Portugal Telecom
E DP
Banque Marocaine du Commerce E xtérieur
Acquisition
cost
Fair value reserve
Positive
Negative
Impairment
41 2 745
453 345
375 944
2 480
6 265
( 5 1 71 )
( 1 05 448)
( 84 850)
-
( 682)
1 244 51 4
6 265
( 1 95 469)
( 682)
B ook
value
407
347
291
8
574
897
094
063
1 054 628
31 .1 2.2008
Description
Banco Bradesco
Portugal Telecom
E DP
Banque Marocaine du Commerce E xtérieur
Acquisition
cost
Fair value reserve
Positive
Negative
Impairment
B ook
value
41 2 745
454 356
375 893
2 480
7 963
( 20 493)
( 91 222)
( 75 81 5)
-
( 682)
392 252
363 1 34
300 078
9 761
1 245 474
7 963
( 1 87 530)
( 682)
1 065 225
As at 31 March 2009 and 31 December 2008, the unrealized losses related with the main equity exposures
under the available-for-sale financial assets category were recognised in the fair value reserve, as they
did not met with the judgment criteria’s applied for impairment recognition, namely (i) the decline in
market value above 30% in relation to the acquisition cost or (ii) market value below the acquisition cost
for a period longer than twelve-months.
During 2008, BES acquired 36.5 million shares of Banco Bradesco, adjusted by the stock split, by an
amount of euro 359.8 million. Also during 2008, BES sold 42.7 million shares of Banco Bradesco by an
109
amount of euro 510.7 million, 38 million of which were sold to BES Vida. During 2008, BES Vida sold all
Bradesco shares (see Note 8 and Note 41).
Following these transactions, the investment funds managed by ESAF – Fundos de Investimento
Mobiliário, S.A. and the Group’s pension fund acquired 25.3 million shares of Banco Bradesco by an
amount of euro 290.5 million and 5 million shares of Banco Bradesco by an amount of euro 67.1 million,
respectively.
NOTE 20 – LOANS AND ADVANCES TO BANKS
(in thous ands of euro)
3 1 .03 .2009
3 1 .1 2 .2 008
L o an s an d ad v an c es to b an k s in P o rtu g al
Inter-bank money market
D epos its
Loans
V ery s hort term deposits
O ther loans and advances
481
80
42 0
1 74
640
440
1 69
31 8
1 1 56 567
1
1 40
112
58
1 73
32 6
508
593
266
02 2
485 71 5
L o an s an d ad v an c es to b an k s ab ro ad
D epos its
V ery s hort term deposits
Loans
O ther loans and advances
Impairment los s es
1 880 670
1 775 61 7
1 809 71 8
2 5 972
1 605
1 91
1 998
2 51
5 491 977
4 047 290
( 2 99)
6 648 2 45
61 9
584
801
286
( 1 022 )
4 531 983
The changes occurred during the period in impairment losses of loans and advances to banks are
( in thous ands of e uro)
3 1 .03 .2 009
3 1 .1 2 .2 008
B alanc e at the be g ining of the pe riod
1 02 2
1 2 04
C harge for the pe riod
W rite bac k for the pe riod
E x chang e diffe re nce s and othe r
2 08
( 9 8 4)
53
41 7
( 65 6)
57
B alan c e at th e e n d o f th e p e rio d
2 99
1 02 2
110
NOTE 21 – LOANS AND ADVANCES TO CUSTOMERS
31 .03.2009
Domestic loans
Corporate
Loans
Commercial lines of credits
Finance leases
Discounted bills
Factoring
Overdrafts
Other loans
R etail
Mortgage loans
Consumer and other loans
Foreign loans
Corporate
Loans
Commercial lines of credits
Finance leases
Discounted bills
Factoring
Overdrafts
Other loans
R etail
Mortgage loans
Consumer and other loans
Overdue loans and interest
Up to 3 months
From 3 months to 1 year
From 1 to 3 years
More than 3 years
Impairment losses
31 .1 2.2008
1 2 249 790
5 503 977
3 063 535
738 043
1 031 943
54 81 2
240 827
1 1 927 971
5 653 679
3 086 997
906 749
1 096 588
37 647
266 223
1 0 364 048
2 340 51 9
1 0 394 044
2 394 856
35 587 494
35 764 754
6 592 1 97
2 1 22 759
282 278
1 44 1 52
50 700
394 803
1 502 91 1
6 436 457
2 076 222
293 250
1 79 742
77 692
276 742
1 585 1 50
546 71 5
308 921
551 043
31 9 548
1 1 945 436
1 1 795 846
1 65
201
249
1 28
520
885
839
331
1 1 2 777
1 74 977
229 075
1 20 1 1 0
745 575
636 939
48 278 505
48 1 97 539
(1 21 5 453)
(1 1 48 065)
47 063 052
47 049 474
111
As at 31 March 2009, the balance loans and advances to customers (net of impairment losses) includes
an amount of euro 4 421.2 million (31 December 2008: euro 4 408.0 million) related to securitised loans
following the consolidation of securitisation vehicles (see Note 42), according to the accounting policy
described in Note 2.2. The liabilities related to these securitisations are booked under debt securities
issued (see Notes 32 and 42).
As at 31 March 2009, loans and advances includes euro 2 711 044 thousands of mortgage loans that
collateralise the issue of covered bonds (31 December 2008: euro 2 722 664 thousands) (see Note 32).
The changes occurred in impairment losses of loans and advances to customers are presented as
follows:
31 .03.2009
31 .1 2.2008
Balance at the beginning of the period
Charge off
Unwind of discount
1 1 48 065
1 08 899
( 22 969)
( 1 2 300)
( 6 545)
303
990 395
31 2 950
( 87 441 )
( 38 51 9)
( 1 6 1 90)
( 1 3 1 30)
1 21 5 453
1 1 48 065
The unwind of discount represents the interest on overdue loans, recognised as interest and similar
income, as impairment losses are calculated using the discounted cash flows method.
As at 31 March 2009 and 31 December 2008, the detail of impairment is as follows:
Loans with impairment
losses calculated on an
individual basis
Gross
Impairment
amount
31 .03.2009
losses calculated on a
portfolio basis
Gross
Impairment
amount
Corporate loans
6 251 898
585 339
Mortgage loans
1 41 6 51 0
205 479
445 021
99 704
8 1 1 3 429
890 522
40 1 65 076
Consumers loans - other
Total
28 288 244
Total
Gross
amount
263 038
34 540 1 42
9 573 458
24 252
1 0 989 968
2 303 374
37 641
2 748 395
324 931
48 278 505
Impairment
Net loans
impairment
848 377 33 691 765
229 731 1 0 760 237
1 37 345
2 61 1 050
1 21 5 453 47 063 052
112
31 .1 2.2008
losses calculated on an
individual basis
Gross
amount
Impairment
losses calculated on a
portfolio basis
Gross
amount
Impairment
Total
Gross
amount
Impairment
Net loans
impairment
Corporate loans
5 343 71 3
536 339
29 031 563
250 721
34 375 276
787 060 33 588 21 6
Mortgage loans
1 042 21 9
205 71 8
9 978 063
25 428
1 1 020 282
231 1 46 1 0 789 1 36
304 240
88 745
2 497 741
41 1 1 4
2 801 981
6 690 1 72
830 802
41 507 367
31 7 263
48 1 97 539
Consumers loans - other
Total
1 29 859
2 672 1 22
1 1 48 065 47 049 474
Loans with impairment losses calculated on an individual basis includes, loans with objective evidence of
impairment, overdue loans for over 90 days and restructured loans.
As at 31 March 2009, loans and advances (excluding loans and interest overdue) includes euro 69 273
thousands of restructured loans (31 December 2008: euro 78 017 thousands). These loans correspond, in
accordance with the definition of the Bank of Portugal, to loans previously overdue, which through a
restructuring process are considered as performing loans.
The interest recognised as interest and similar income in relation to loans with objective evidence of
impairment amounted to euro 103.3 million (31 December 2008: euro 334.5 million), which includes the
effect of the unwind of discount in connection with overdue loans.
NOTE 22 – HELD-TO-MATURITY INVESTMENTS
The held-to-maturity investments, can be analysed as follows:
31 .03.2009
B onds and other fixed income securities
31 .1 2.2008
491 530
1 993 064
504 424
1 655 772
2 484 594
2 1 60 1 96
The Group assessed, with reference to 31 March 2009 and 31 December 2008, the existence of objective
evidence of impairment on its held-to-maturity investments portfolio and no events with impact on the
recoverable amount of the future cash flows associated with those investments were identified.
113
During the year ended 31 December 2008, the Group has reclassified non-derivative financial assets to the
held-to-maturity investments category in the amount of euro 767.2 millions, as follows:
The reclassification of financial assets held-for-trading as held-to-maturity investments was performed
following the amendment to IAS 39 Financial instruments: recognition and measurement and IFRS 7
Financial instruments: disclosures, adopted by the Regulation (EU) n.º 1004/2008 issued in 15 October
2008, as mentioned in the accounting policy described in Note 2.6.
This reclassification was made due to the current market conditions following the international financial
crises that characterized the year 2008, considered to be one of the rare circumstances established by
the amendment to IAS 39.
During the first quarter of 2009, the Group did not carried out any transfer into the held-to-maturity
category.
During the second half of 2008, BES Group acquired to BES Vida securities that were classified upon initial
recognition as held-to-maturity investments, in the amount of euro 689.5 million, from which euro 517.9
million were acquired through brokers.
114
NOTE 23 – DERIVATIVES FOR RISK MANAGEMENT PURPOSES
As at 31 March 2009 and 31 December 2008, the fair value of the derivatives for risk management
purposes can be analysed as follows:
As mentioned in the accounting policy described in Note 2.4, derivatives for risk management purposes
include hedging derivatives and derivatives contracted to manage the risk of certain financial assets and
financial liabilities designated at fair value through profit or loss (and that were not designated as
hedging derivatives).
Changes in the fair value of the financial assets and liabilities mentioned above and of the respective
derivatives for risk management are recognised in the income statement under net gains/ (losses) from
financial assets at fair value through profit or loss.
As at 31 March 2009, the ineffectiveness of the fair value hedge operations amounted to euro 3.6 million
(31 December 2008: euro 6.8 million) and was recognised in the income statement. BES Group evaluates
on an ongoing basis the effectiveness of the hedges.
As at 31 March 2009, the fair value component of the financial liabilities at fair value through profits and
losses, attributable to the Group own credit risk, is euro 114 007 thousands of cumulative profits (31
December 2008: euro 109 725 thousands, of profits) and euro 4 282 thousands of profits for the period
(31 March 2008: euro 41 519 thousands, of profits).
115
NOTE 24 – NON-CURRENT ASSETS AND LIABILITIES HELD FOR SALE
31 .1 2.2008
31 .03.2009
As sets
Liabilities
Ass ets
Liabilities
1 7 042
1 2 827
1 7 042
1 2 827
Property held for sale
E quipment
Other
1 76 927
1 765
1 334
1 80 026
-
1 51 954
1 41 3
1 339
1 54 706
-
Impairment losses
( 25 1 88)
-
( 23 376)
-
1 54 838
-
1 31 330
-
1 71 880
1 2 827
1 48 372
1 2 827
Assets and liabilities of subsidiaries acquired exclusively for resale purposes
The amounts presented refer to (i) investments in companies controlled by the Group, which have been
acquired exclusively with the purpose of being sold in the short term, and (ii) assets acquired in exchange
for loans and discontinued branches available for immediate sale.
The changes occurred in impairment losses are presented as follows:
(thousands of euro)
B alance at the beginning of the period
Charge off
(a)
Transfers
31 .03.2009
31 .1 2.2008
23 376
6 084
1 907
( 1 994)
( 1 3)
1 91 2
1 6 1 31
( 4 848)
( 1 34)
6 1 43
25 1 88
23 376
(a) R epresents the transfer from Other Assets of impairment losses related to property which qualify for recognition as a non current asset held for sale, in
accordance with the accounting policy described in Note 2.1 1 (see Note 28).
116
NOTE 25 – PROPERTY AND EQUIPMENT
31 .03.2009
Property
For own use
Improvements in leasehold property
Other
E quipment
Computer equipment
Fixtures
Furniture
Security equipment
Office equipment
Motor vehicles
Other
Other
Work in progress
Improvements in leasehold property
Property for own use
E quipment
Other
Accumulated depreciation
31 .1 2.2008
404 790
225 450
31 0
407 858
223 583
341
630 550
631 782
260 549
1 20 1 95
1 1 7 823
31 664
33 61 5
5 662
5 367
259 047
1 1 8 922
1 1 6 769
31 021
33 665
5 400
5 340
574 875
570 1 64
91 0
895
1 206 335
1 202 841
1 9 51 5
1 05 344
1 0 91 5
775
1 7 265
86 21 5
9 430
1 026
1 36 549
1 1 3 936
1 342 884
1 31 6 777
( 688 864)
( 678 290)
654 020
638 487
117
The movement in this balance was as follows:
Property
E quipment
Work in
progres s
Other
Total
Acquis ition cos t
Acquisitions
Disposals
Transfers (a)
Other (b)
61 0 625
1 1 41 3
( 2 490)
1 1 363
1 899
( 1 028)
526 1 22
29 728
( 9 677)
27 677
( 497)
( 3 1 89)
557
324
13
1
46 623
1 24 250
( 2)
( 57 864)
550
379
1 1 83 927
1 65 391
( 1 2 1 69)
( 1 8 500)
1 965
( 3 837)
Acquisitions
Disposals
Transfers (c)
Other
631 782
4 308
( 380)
( 2 757)
( 2 41 4)
11
570 1 64
6 206
( 1 785)
1 266
( 977)
1
895
45
( 30)
-
1 1 3 936
33 005
( 3 024)
( 7 367)
( 1)
1 31 6 777
43 564
( 2 1 65)
( 4 51 5)
( 1 0 788)
11
630 550
574 875
91 0
1 36 549
1 342 884
Depreciation
Depreciation of the year
Disposals
Transfers (a)
Other
Depreciation of the period
Disposals
Transfers (c)
Other
229 999
1 7 920
( 2 498)
( 1 873)
1 46
1 60
243 854
4 71 4
( 380)
( 987)
1 06
96
41 5 858
30 81 5
( 9 1 92)
( 1 1 34)
( 1 56)
( 2 055)
434 1 36
8 285
( 1 778)
( 74)
31 2
261
302
201
10
( 21 3)
300
39
8
( 28)
-
646 1 59
48 936
( 1 1 690)
( 3 007)
( 2 1 08)
678 290
1 3 038
( 2 1 58)
( 1 061 )
426
329
247 403
441 1 42
31 9
-
688 864
Net amount as at 31 March 2009
383 1 47
1 33 733
591
1 36 549
654 020
Net amount as at 31 December 2008
387 928
1 36 028
595
1 1 3 936
638 487
(a) Includes the amount of euro 1 8 500 thousands related to the acquisition costs and euro 3 007 thousands of accumulated depreciations
transferred to the balance other assets, referring to discontinued branches.
(b) Includes the amount of euro 4 287 thousands related to the acquisition costs and euro 2 243 thousands of accumulated depreciations,
referring to E S Contact Center which no longer consolidates.
(c) Includes the amount of euro 4 51 5 thousands related to the acquisition costs and euro 1 061 thousands of accumulated depreciations
transferred to the balance other assets, referring to discontinued branches.
118
NOTE 26 – INTANGIBLE ASSETS
31 .03.2009
31 .1 2.2008
Goodwill
1 6 263
1 5 465
Internally developed
Software
21 394
20 847
485 708
1 260
483 475
1 025
486 968
484 500
25 676
21 21 0
550 301
542 022
(426 492)
(1 21 6)
(41 7 806)
-
1 22 593
1 24 21 6
Acquired to third parties
Software
Other
Work in progress
Accumulated amortisation
Impairment losses
The balance internally developed software includes the costs incurred by the Group in the development
and implementation of software applications that will generate economic benefits in the future (see
Note 2.13).
119
The movement in this balance was as follows:
Goodwill
Acquisitions cost
Acquisitions:
Acquired from third parties
Disposals
Transfers
Other (a)
Acquisitions:
Acquired from third parties
Transfers
Other
Software
Work in
progress
Other
Total
7 441
441 609
1 099
31 1 06
481 255
8 1 47
( 1 24)
1
1 5 465
1 42
1 6 1 34
( 390)
48 908
112
(2 1 93)
504 322
74
( 31 )
( 1 08)
23
( 32)
1 025
8 1 73
30 701
(48 800)
29
1
21 21 0
8 31 5
55 056
( 421 )
40
(2 223)
542 022
798
1
( 1)
2 925
25
( 729)
559
63
1 54
18
-
1 529
3 1 22
( 1 79)
( 3)
( 3)
1 529
6 908
( 71 3)
555
1 6 263
507 1 02
1 260
25 676
Amortisation
Amortisation of the year
Disposals
Transfers
Other (a)
Amortisation of the period
Other
-
388 985
28 731
( 347)
( 51 2)
62
( 3)
41 6 91 6
8 543
68
12
1 099
239
( 31 )
51 2
7
( 936)
890
46
17
-
-
390 084
28 970
( 378)
69
( 939)
41 7 806
8 589
85
12
-
425 539
953
-
426 492
Impairment
Impairment losses (b)
Other
600
( 1 06)
722
-
-
-
600
( 1 06)
722
1 21 6
-
-
-
1 21 6
550 301
Net amount as at 31 March 2009
1 5 047
81 563
307
25 676
1 22 593
Net amount as at 31 December 2008
1 5 465
87 406
1 35
21 21 0
1 24 21 6
(a) Includes the amount of euro 1 679 thousands from intangible assets (software and other) and euro 936 thousands from accumulated
amortisation, referring to E S Contact Center wich no longer consolidates.
(b) Impairment from Concordia's goodwill
The changes occurred in 2008 on goodwill are mainly related with the acquisition of 10.64% of BES
Leasing e Factoring - Instituição Financeira de Crédito, S.A., share capital, from which resulted a goodwill
in the amount of euro 7 893 millions.
120
NOTE 27 – INVESTMENTS IN ASSOCIATES
The financial information concerning associates is presented in the following table:
Ass ets
31 .03.2009
Liabilities
31 .1 2.2008
31 .03.2009
E quity
31 .1 2.2008
31 .03.2009
Income
31 .1 2.2008
31 .03.2009
Profit/(Loss ) of the period
31 .03.2008
31 .03.2009
31 .03.2008
Acquisition cost
31 .03.2009
31 .03.2008
BE S VIDA
7 561 696
7 699 81 4
7 500 821
7 600 31 2
60 875
99 502
204 576
1 93 763
( 6 438)
1 3 622
474 997
474 997
E S VÉ NÉ TIE
1 286 51 9
1 335 734
1 1 33 1 81
1 1 85 707
1 53 338
1 50 027
1 7 736
22 707
2 863
2 850
42 293
22 000
LOCARE NT
323 549
320 322
31 7 922
31 4 543
5 627
5 779
24 946
21 780
405
379
2 51 7
BE S S E GUROS
2 51 7
1 1 8 795
1 1 5 51 5
96 340
92 532
22 455
22 983
1 5 923
1 5 596
1 01 7
1 409
3 749
3 749
E S E GUR
44 678
42 41 9
34 1 09
29 788
1 0 569
1 2 631
1 4 747
1 5 841
606
1 050
9 634
9 634
E UR OP AS S ISTANCE
FUNDO E S IBE RIA
37 926
23 683
32 072
23 939
28 568
1 117
23 255
790
9 358
22 566
8 81 7
23 1 49
7 882
2
6 844
-
590
( 1 62)
545
-
1 1 47
1 0 496
1 1 47
1 0 496
SCI GE ORGE S MANDE L
1 2 302
1 2 432
962
35
1 2 397
252
329
1 48
1 24
2 401
2 401
BRB INTE RNACIONAL
1 0 993
1 2 350
1 2 61 3
1 2 203
( 1 620)
1 47
4 074
-
( 4 387)
-
1 0 034
1 0 033
3 722
3 722
1 4 025
1 4 025
( 1 0 303)
( 1 0 303)
-
-
-
-
2 667
2 667
AUTOPISTA PE ROTE -XALAPA
284 861
284 861
1 34 21 7
1 34 21 7
1 50 644
1 50 644
-
-
-
-
35 056
1 6 1 43
LUS OSCUT COS TA DE PRATA
493 475
493 475
421 801
394 851
71 674
71 674
-
-
-
-
9 689
-
LUS OSCUT BE IR A LITORAL E ALTA
976 392
1 020 565
852 1 07
925 025
1 24 285
95 540
-
-
-
-
23 392
-
LUS OSCUT GRANDE PORTO
684 466
684 466
609 548
643 086
74 91 8
30 974
-
-
-
-
27 948
-
SGPICE
AS CE NDI
RODI S INKS & IDE AS
1 1 340
4 302
4 302
1 673
3 023
2 629
2 629
-
-
( 2 371 )
-
46 232
49 81 9
29 478
33 770
1 6 754
1 6 049
27 209
29 998
863
469
2 800
2 000
1 240
1 240
68 1 29
50 091
728 1 89
609 1 1 5
Other
Note: Adjusted data for consolidation effects
B ook value
E conomic interes t
31 .03.2009
BE S VIDA
b)
E S VÉ NÉ TIE
31 .1 2.2008
31 .03.2008
31 .03.2009
31 .1 2.2008
31 .03.2008
31 .03.2009
31 .1 2.2008
31 .03.2008
50,00%
50,00%
50,00%
347 209
367 41 6
437 268
( 4 1 1 3)
( 37 831 )
5 836
42,69%
42,69%
40,00%
65 601
64 1 87
41 229
1 222
4 609
1 1 40
LOCARE NT
45,00%
45,00%
45,00%
2 653
2 722
2 1 69
1 82
724
1 71
BE S SE GUR OS
25,00%
25,00%
25,00%
5 61 2
5 743
6 285
254
1 001
352
E SE GUR
44,00%
44,00%
34,00%
1 1 494
1 2 402
1 1 631
267
2 209
462
E UROP ASS IS TANCE
FUNDO E S IBE RIA
23,00%
38,69%
23,00%
38,69%
23,00%
38,69%
2 1 52
9 060
2 028
9 342
2 295
9 751
1 36
( 99)
364
( 51 9)
1 25
( 1 40)
SCI GE OR GE S MANDE L
22,50%
22,50%
22,50%
2 552
2 789
2 699
33
117
27
BRB INTE RNACIONAL
24,93%
24,93%
24,93%
-
37
71 6
( 37)
( 349)
330
33,33%
33,33%
33,33%
-
-
-
-
-
-
8,1 9%
8,1 9%
1 2,00%
30 1 55
30 1 54
1 6 1 43
-
-
-
9,1 7%
9,1 7%
-
1 7 81 7
1 8 71 4
-
-
554
-
9,1 7%
9,1 7%
-
44 607
43 909
-
-
1 290
-
SGPICE
AUTOPIS TA PE ROTE -XALAPA
a)
LUSOSCUT COSTA DE PRATA
a)
LUSOSCUT BE IRA LITOR AL E ALTA
LUSOSCUT GRANDE PORTO
ASCE NDI
a)
RODI S INKS & IDE AS
Outras
a)
a)
9,1 7%
9,1 7%
-
23 865
23 788
-
-
87
1 6,38%
1 6,38%
24,00%
1 851
1 972
2 000
( 920)
( 28)
-
25,29%
25,29%
1 3,48%
6 023
5 773
5 560
250
21 3
-
65 281
53 530
44 81 5
2 448
7 269
4 557
635 932
644 506
582 561
( 377)
( 20 290)
1 2 860
a) Altough the Group economic interest is less than 20% , these companies were accounted for following the equity method, as the Group exercises a significant influence over
its activities.
b) Include goodwill in the amount of euro 267 440 thousands and value-in-force in the amount of euro 49 331 thousands (31 December 2008: euro 50 225 thousands).
121
The movement occurred in this balance is presented as follows:
31 .03.2009
Disposals
(b)
Acquisitions
Fair value reserve from investments in associates
Dividends received
(b)
(a)
(a)
31 .1 2.2008
644 506
( 667)
1 1 71 7
( 377)
( 1 6 493)
( 270)
( 2 484)
573 700
( 4 460)
1 36 452
( 20 290)
( 29 61 6)
( 28 588)
1 7 308
635 932
644 506
Corresponds mainly to the change in fair value reserves from BE S Vida
(b)
In 2008 corresponds mainly to the consolidation movements of Lusoscut Beira Litoral, Lusoscut Grande Porto e Lusoscut
Costa de Prata and Perote-Xalapa.
122
NOTE 28 – OTHER ASSETS
As at 31 March 2009 and 31 December 2008, the balance other assets is analysed as follows:
31 .03.2009
Debtors
Deposits placed with options contracts
Deposits placed with futures contracts
R ecoverable government subsidies on mortgage loans
Collateral deposits placed
Loans to companies in which the Group has a minority interest
Public sector
Sundry debtors
Impairment losses on debtors
Other assets
Gold, other precious metals, numismatics,
and other liquid assets
Other assets
Accrued income
Prepayments and deferred costs
Other sundry assets
Foreign exchange transactions pending settlement
Stock exchange transactions pending settlement
Other transactions pending settlement
Assets acquired in exchange for loans
Impairment losses on assets acquired in exchange for loans
Assets recognised on pensions
31 .1 2.2008
300 349
74 645
44 987
341 342
1 39 063
56 473
326 767
1 283 626
( 20 1 28)
1 263 498
31 4 41 4
1 48 964
43 046
359 237
1 33 398
51 526
278 952
1 329 537
( 1 8 003)
1 31 1 534
1 3 31 1
99 043
1 1 2 354
1 3 505
85 568
99 073
44 774
54 959
1 76 376
1 39 383
1 87 763
398 91 6
1 56 794
743 473
1 66 021
1 07 51 2
1 60 098
433 631
1 43 063
( 7 474)
1 26 359
( 6 948)
1 35 589
1 1 9 41 1
942 054
962 925
3 41 8 1 1 8
3 1 20 91 6
Loans to companies in which the Group has a minority interest include the amount of euro 118 500
thousands related with loans to Locarent – Companhia Portuguesa de Aluguer de Viaturas, S.A. (31
December 2008: euro 118 500 thousands).
123
As at 31 March 2009, the balance prepayments and deferred costs includes the amount of euro 118 962
thousands (31 December 2008: euro 106 104 thousands) related to the difference between the nominal
amount of loans granted to Group’s employees under the collective labour agreement for the banking
sector (ACT) and their respective fair value at grant date, calculated in accordance with IAS 39. This
amount is charged to the income statement over the lower period between the remaining maturity of
the loan granted, and the estimated remaining service life of the employee.
The stock exchange transactions pending settlement refer to transactions with securities on behalf of
third parties, recorded on trade date and pending settlement, in accordance with the accounting policy
described in Note 2.6.
The movements occurred in impairment losses are presented as follows:
Charge off
(a)
Other
31 .03.2009
31 .1 2.2008
24 951
21 050
4 824
( 64)
( 2 1 09)
11
(
(2
(3
27 602
24 951
01 5
31 9)
829)
966)
(a)
As at 31 March 2009 and 31 December 2008 includes euro 1 91 2 thousands and euro 6 1 43 thousands, respectively, related
to impairment transferred to non-current assets held for sale, as the assets to which the impairment corresponded were also
transferred, in accordance with the accounting policy described in Note 2.1 1 (see Note 24).
124
NOTE 29 – DEPOSITS FROM CENTRAL BANKS
The balance deposits from central banks is analysed as follows:
31 .03.2009
From the E uropean System of Central B anks
Inter-bank money market
Deposits
Other funds
From other Central B anks
Deposits
31 .1 2.2008
24 000
1 82
-
1 00 000
40 505
1 300 000
24 1 82
1 440 505
2 649 1 1 9
3 369 953
2 649 1 1 9
3 369 953
2 673 301
4 81 0 458
As at 31 December 2008 the balance other funds from the European System of Central Banks in the
amount of euro 1 300 million, is covered by securities from the available-for-sale portfolio pledged as
collateral (see Note 39).
NOTE 30 – DEPOSITS FROM BANKS
The balance deposits from banks is analysed as follows:
( in thous ands of e uro)
3 1 .03 .2 009
D o m e s tic
Loans
Inte r-bank mone y mark e t
D e pos its
V e ry s hort te rm funds
R e purc has e ag re e me nts
O the r funds
29
13
7 03
50
004
334
48 0
71 8
1 3 46
7 97 8 8 2
In te rn atio n al
D e pos its
Loans
V e ry s hort te rm funds
R e purc has e ag re e me nts
O the r funds
6 839
1 850
67 6
532
386
5 05
494
323
2 94
979
3 1 .1 2 .2 008
46
1 1 65
73
1
1
21
31 4
8 98
112
664
07 2
1 2 8 8 08 1
3 328
1 645
6 94
43 3
2 92
03 5
7 45
520
2 47
110
1 0 2 8 5 5 95
6 3 93 65 7
1 1 08 3 47 7
7 681 738
125
NOTE 31 – DUE TO CUSTOMERS
The balance due to customers is analysed as follows:
31 .03.2009
R ep ay ab le o n d emand
Demand deposits
Time d ep o s its
Time deposits
O ther
S av ing s ac c o unts
P ensioners
O ther
O ther fund s
R epurchase agreements
O ther
31 .1 2.2008
7 1 24 545
8 874 1 32
1 4 1 55 799
1 3 705
1 3 383 655
1 4 753
1 4 1 69 504
1 3 398 408
75 947
1 601 1 49
83 536
1 61 6 750
1 677 096
1 700 286
1 552 235
804 636
1 820 566
593 362
2 356 871
2 41 3 928
25 328 01 6
26 386 754
NOTE 32 – DEBT SECURITIES ISSUED
The balance debt securities issued is analysed as follows:
31 .03.2009
E uro Medium Term Notes
(b)
Bonds
Covered bonds
Other
(a)
31 .1 2.2008
8 91 9 1 40
6 735 986
5 944 377
2 668 002
1 978 1 54
1 0 1 30 1 09
5 563 026
3 522 854
2 663 350
2 71 7 343
26 245 659
24 596 682
(a)
As at 31 December 2008, the caption E MTN includes the amount of euro 1 79.9 millions of extendible notes.
(b)
As at 31 March 2009, includes euro 1 531 .3 millions from bonds guaranteed by the Portuguese State.
During the first quarter of 2009, BES Group issued bonds in the amount of euro 1 500 million, guaranteed
by the Portuguese State.
126
During the year ended 31 December 2008, BES Group issued covered bonds in the amount of euro
2 500 million, under the covered bonds programme, which has a maximum amount of euro 10 000
million.
The covered bonds are guaranteed by a cover assets pool, comprised of mortgage credit assets and
limited classes of other assets, that the issuer of mortgage covered bonds shall maintain segregated
and over which the holders of the relevant covered bonds have a statutory special creditor privilege.
These conditions are set up in Decree-Law no. 59/2006, Regulations 5/2006, 6/2006, 7/2006 and 8/2006
of the Bank of Portugal and Instruction 13/2006 of the Bank of Portugal.
The main characteristics of these issues are as follows:
Description
BE S Covered Bonds 25/01 /201 1
BE S Covered Bonds 21 /07/201 0
Nominal
value
(in thousands
of euro)
B ook value
(in thousands
of euro)
Issue date
Maturity date
Interest payment
Interest rate
R ating
1 250 000
1 250 000
1 31 5 075
1 352 927
25-01 -2008
21 -07-2008
25-01 -201 1
21 -07-201 0
Anually
Anually
4.375%
5.50%
AAA
AAA
As at 31 March 2009, the mortgage loans that collateralise these covered bonds amounted to
euro 2 711 044 thousands (31 December 2008: euro 2 722 664 thousands) (see Note 21).
The changes occurred in debt securities issued during the first quarter of 2009 are analysed as follows:
31 .1 2.2008
E uro Medium Term Notes
Bonds
Covered bonds
Other
a)
b)
Iss ues
R epayments
Net
repurchase
Other
31 .03.2009
(a)
movements
1 0 1 30 1 09
5 563 026
3 522 854
2 663 350
2 71 7 343
321 041
1 526 323
2 475 676 b)
1 239 807
( 973 81 3)
( 21 7 259)
(2 074 91 1 )
( 377 521 )
( 21 0 548)
( 48 633)
2 062
( 6 41 4)
( 1 80 676)
74 444
( 5 520)
2 590
1 02 329
8 91 9 1 40
6 735 986
5 944 377
2 668 002
1 978 1 54
24 596 682
5 562 847
(3 265 983)
( 641 054)
( 6 833)
26 245 659
Other include accrued interest, fair value hedge and fair value adjustments and foreign translation exchanges adjustments
Certificates of deposit are presented at the net value, considering its short term maturity
In accordance with the accounting policy described in Note 2.8, debt issued repurchased by the Group is
derecognised from the balance sheet and the difference between the carrying amount of the liability and
its acquisition cost is recognised in the income statement.
127
The main characteristics of debt securities issued during the first quarter of 2009 are presented as
follows:
NOTE 33 – PROVISIONS
As at 31 March 2009 and 31 December 2008, the balance of provisions presents the following movements:
R es tructuring
provis ion
Other
provisions
Total
24 201
1 1 9 749
1 43 950
Charge for the year
Charge off
5 688
( 22 049)
-
1 4 1 58
( 1 0 1 82)
( 354)
1 9 846
( 32 231 )
( 354)
7 840
1 23 371
1 31 21 1
Charge off
( 4 440)
-
4 460
( 337)
1 551
4 460
( 4 777)
1 551
3 400
1 29 045
1 32 445
128
In 2008, the Group has set up a restructuring provision in the amount of euro 14.9 million, in order to
face the costs related to the restructuring project “Projecto de Reestruturação 20-10”. This project
comprises several initiatives, namely the merger of BES Leasing & Factoring into BES.
As at 31 March 2009, the remaining provision related to restructuring processes, amounts to euro 3.4
million.
Other provisions in the amount of euro 129 045 thousands (31 December 2008: euro 123 371 thousands)
are intended to cover certain contingencies related to the Group’s activities, as follows:
•
Contingencies in connection with the exchange, during 2000, of Banco Boavista
Interatlântico shares for Bradesco shares. The Group has provisions in the amount of
approximately euro 34.2 million (31 December 2008: euro 33.4 million) to cover these
contingencies;
•
Contingencies in connection with legal processes established following the bankruptcy of
clients which might imply losses for the Group. Provisions in the amount of euro 17.0
million as at 31 March 2009 ( 31 December 2008: euro 17.0 million) were established to
cover these losses;
•
Contingencies for ongoing tax processes. To cover these contingencies, the Group
maintains provisions of approximately euro 55.8 million (31 December 2008: euro 53.3
million);
•
The remaining balance of approximately euro 22.1 million (31 December 2008: euro 19.7
million), is maintained to cover potential losses within the normal activities of the Group,
such as frauds, robbery and on-going judicial cases.
NOTE 34 – INCOME TAXES
The Bank and its subsidiaries domiciled in Portugal are subject to taxation in accordance with the
corporate income tax code (IRC) and to local taxes. BES Group determined its current and deferred
income tax balance for the period ended 31 March 2009 and for the year ended 31 December 2008 on the
basis of a nominal rate of 26.5%, in accordance with the Law No. 107-B/2003 from 31 December and Law
No. 2/2007 of 15 January (approved Local Tax Law).
The Portuguese Tax Authorities are entitled to review the annual tax returns of the Bank and its
Portuguese subsidiaries for a period of four years. Hence, it is possible that some additional taxes may
be assessed, mainly as a result of differences in interpretation of the tax law. However, the Board of
Directors of the Bank, and those of its subsidiaries domiciled in Portugal are confident that there will be
no further material tax assessments within the context of the consolidated financial statements.
129
The deferred tax assets and liabilities recognised in the balance sheet as at 31 March 2009 and 31
December 2008 can be analysed as follows:
Deferred tax assets and liabilities are calculated in accordance with the accounting policy described in
Note 2.16.
The changes in deferred taxes were recognised as follows:
( in thous ands of euro)
3 1 .03 .2 009
3 1 .1 2 .2 008
B alan c e at th e b e g in n in g o f th e p erio d
R e cognis e d in the income s tateme nt
R e cognis e d in fair value re s e rve
R e cognis e d in othe r re s e rves
E xchange diffe re nce s and other
B alan c e at th e e n d o f th e p erio d ( A s s e ts / ( L iab ilitie s ) )
1 04
( 12
(
1
( 3
88
3 05
7 1 4)
97 5)
374
1 37)
853
( 231
67
2 68
2
( 2
1 04
957 )
486
874
506
604)
3 05
130
The deferred tax recognised in the income statement and reserves, during the period ended 31 March
2009 and the year ended 31 December 2008 is analysed as follows:
31 .1 2.2008
R ecognised in
R ecognised in
(profit) /loss
reserves
31 .03.2009
R ecognised in
R ecognised in
(profit) /loss
reserves
Derivative financial instruments
Property and equipment
Intangible assets
Investments in subsidiaries and associates
Provisions
Pensions
Health care - SAMS
Other
Tax credits resulting from double tax treaties
Tax losses brought forward
1 7 544
( 1 1 36)
( 9 1 37)
( 2 21 1 )
9
2 780
( 2 500)
5 282
( 4 074)
( 1 1 3)
1 5 780
2 863
( 1 2 373)
975
( 41 8)
( 956)
-
( 1 027)
( 1 8 937)
( 47 842)
2 008
39
( 4 679)
1 239
7 794
( 5 364)
( 495)
( 268 874)
( 3 341 )
-
4 405
( 4 627)
835
-
Deferred taxes
1 2 71 4
( 399)
( 67 486)
( 271 380)
Current taxes
32 292
442
1 50 984
Total
45 006
43
83 498
3 831
( 267 549)
The current tax recognised in reserves includes euro 418 thousands related to pensions and euro 24
thousands related to the share based payments scheme (31 December 2008: euro 3 341 thousands and
euro 186 thousands, respectively).
The reconciliation of the income tax rate can be analysed as follows:
31 .1 2.2008
31 .03.2009
%
Amount
Profit before taxes and minority interes t
Statutory tax rate
Income tax calculated based on the statutory tax rate
Diferences on the subsidiaries statutory tax rates
Tax-exempt dividends
Tax-exempt profits (off shore)
Tax-exempt gains/ losses
Changes in estimates
Tax losses used for which no deferred tax assets
were recognised
Unrecognised deferred tax assets related to tax
losses generated in the year
Non-taxable share of profit in associates
Non deductible costs
Other
%
Amount
1 55 560
26.5
51 0 643
26.5
(1 5.0)
(1 .7)
(3.5)
2.0
2.8
41 223
( 2 355)
( 2 652)
( 5 521 )
3 075
4 383
(1 .6)
(7.3)
(5.2)
(0.4)
(0.0)
1 35 320
( 8 234)
( 37 392)
( 26 444)
( 2 01 2)
( 23)
0.0
-
0.3
2.1
(0.1 )
1 .7
0.6
3 31 4
( 1 00)
2 679
959
2.3
1 .1
0.7
(0.0)
1 1 860
5 377
3 460
( 1 55)
28.9
45 006
1 6.4
83 498
1 741
131
NOTE 35 – SUBORDINATED DEBT
The balance subordinated debt is analysed as follows:
31 .03.2009
Bonds
Loans
Perpetual bonds
31 .1 2.2008
1 630 653
230 453
689 261
1 649 81 9
228 527
950 637
2 550 367
2 828 983
Changes in subordinated debt are analysed as follows:
31 .1 2.2008
Bonds
Loans
Perpetual bonds
a)
Iss ues
R epayments
Net
R epurchases
Other
31 .03.2009
movements (a)
1 649 81 9
228 527
950 637
-
-
( 24 293)
6 637
( 251 444)
5 1 27
( 4 71 1 )
( 9 932)
1 630 653
230 453
689 261
2 828 983
-
-
( 269 1 00)
( 9 51 6)
2 550 367
Other movements include accrued interest, fair value and foreign exchange translation adjustments
In accordance with the accounting policy described in Note 2.8, debt issued repurchased by the Group is
derecognised from the balance sheet and the difference between the carrying amount of the liability and
its acquisition cost is recognised in the income statement.
During the first quarter of 2009, the Group repurchased subordinated debt in the amount of euro 269
million (31 December 2008: euro 154 million). The book value of the debt acquired amounted to euro 371
million (31 December 2008: euro 182 million).
132
The main features of the subordinated debt are presented as follows:
133
NOTE 36 – OTHER LIABILITIES
As at 31 March 2009 and 31 December 2008, the balance other liabilities is analysed as follows:
Creditors
Public sector
Creditors arising out from future contracts
Deposit accounts
Sundry creditors
Creditors from transactions with securities
Suppliers
Creditors from factoring operations
Other sundry creditors
Accrued expenses
Long-term service benefits (see Note 1 2)
Other accrued expenses
Deferred income
Other sundry liabilities
Stock exchange transactions pending settlement
Foreign exchange transactions pending settlement
Other transactions pending settlement
31 .03.2009
31 .1 2.2008
52 1 55
49 1 09
222 91 5
49 609
49 641
1 85 462
1 96 720
62 350
7 064
205 763
796 076
1 87
73
15
241
803
27 928
1 55 01 4
1 82 942
27 41 2
1 47 384
1 74 796
1 5 576
1 2 078
207 363
1 57 497
1 29 033
493 893
90 450
1 28 799
1 07 069
326 31 8
1 488 487
1 31 6 270
395
562
979
430
078
The stock exchange transactions pending settlement refer to transactions with securities recorded on
trade date and pending settlement, in accordance with the accounting policy described in Note 2.6.
134
NOTE 37 – SHARE CAPITAL, SHARE PREMIUM, TREASURY STOCK AND PREFERENCE
SHARES
Ordinary shares
As at 31 March 2009, the Bank’s share capital was represented by 500 million ordinary shares with a face
value of euro 5 each, which were subscribed and fully paid by the following entities:
% Share capital
31 .03.2009
BE SPAR - Sociedade Gestora de Participações Sociais, S.A.
Crédit Agricole, S.A.
Fundo de Pensões BE S
(1 )
Bradport, SGPS, S.A.
Fundo de Investimento Mobiliário E S Premium
(2)
Previsão - Sociedade Gestora de Fundos de Pensões, S.A.
Credit Suisse Group
Grupo Barclays
Other
(1 )
(2)
31 .1 2.2008
40,00%
1 0,81 %
3,42%
3,05%
2,89%
2,62%
2,1 5%
2,1 5%
32,92%
40,00%
1 0,81 %
2,22%
3,05%
2,62%
2,70%
38,60%
1 00,00%
1 00,00%
Portuguese company fully owned by Banco Bradesco, S.A. (Brazil)
This entity's voting rights are attributable to Portugal Telecom.
Preference shares
The Group issued 450 thousand non-voting preference shares, which were listed in the Luxembourg
stock Exchange in July 2003. In March 2004, 150 thousand preference shares were additionally issued
forming a single series with the existing preference shares, in a total amount of euro 600 million. The
face value of these shares is euro 1 000 and is wholly (but not partially) redeemable by option of the
issuer at its face value, as at 2 July 2014, subject to prior approvals of BES and Bank of Portugal.
These preference shares pay an annual non cumulative preferred dividend, if and when declared by the
Board of Directors of the issuer, of 5.58% p.a. on nominal value. The dividend is paid on 2 July of each
year, beginning 2 July 2004 and ending 2 July 2014.
If the issuer does not redeem these preference shares on 2 July 2014, the dividend applicable rate will be
the 3 months Euribor plus 2.65% p.a., with payments on 2 January, 2 April, 2 July and 2 October of each
year, if declared by the Board of Directors of the issuer.
BES unconditionally guarantees dividends and principal repayment related to the above mentioned
issue, until the limit of the dividends previously declared by the Board of Directors of the issuer.
135
As at 31 December 2008, the Group charged against reserves the amount of euro 33 480 thousands
related to the dividends declared by the Board of Directors of the issuer, as at 20 May, which were paid
as at 2 July 2008.
During the first quarter of 2009, no dividends were declared by the Board of Directors of the issuer, as
these have an annual periodicity.
These shares rank lower than any BES liability, and pari passu relative to any preference shares that
may come to be issued by the Bank.
Share Premiums
As at 31 March 2009, share premiums are represented by euro 668 721 thousands related to the
premium paid by the shareholders following the share capital increases occurred in the first half of 2002
and 2006.
Treasury stock
The Bank’s General Meeting of 20 June 2000 approved the set up of a stock-based incentive scheme (see
Note 2.15), which started in 2000. As at 31 March 2009, 2 429 thousand shares of BES (0.49% of total
share capital), are allocated (31 December 2008: 2 479 thousand of shares, 0.50% of total share capital),
for an overall amount of euro 29.3 million (31 December 2008: euro 29.8 million). These shares are
recognised as treasury stock, as described in Note 2.15
The movement in treasury stocks is analysed as follows:
31 .03.2009
Number of
shares
Opening balance
Shares sold
Period-end balance
2 479 081
( 50 252)
2 428 829
31 .1 2.2008
Amount
(thous ands
of euro)
29 838
( 565)
29 273
Number of
shares
3 484 262
(1 005 1 81 )
2 479 081
Amount
(thous ands
of euro)
41 437
( 1 1 599)
29 838
136
NOTE 38 – FAIR VALUE RESERVE, OTHER RESERVES AND RETAINED EARNINGS AND
MINORITY INTEREST
Legal Reserve
The legal reserve can only be used to absorb accumulated losses or to increase the amount of the share
capital. Portuguese legislation applicable to the banking sector (Article 97 of Decree-Law no. 298/92, 31
December) requires that 10% of the profit for the year be transferred to the legal reserve until it is equal
to the share capital.
Fair value reserve
The fair value reserve represents the amount of the unrealized gains and losses arising from securities
classified as available-for-sale, net of impairment losses recognised in the income statement in the
year/previous years. The amount of this reserve is presented net of deferred taxes and minority interest.
During the three months period ended 31 March 2009 and the year ended 31 December 2008, the
changes in these balances were as follows:
Fair value reserve
Other res erves and retained earnings
Available
for-s ale
financial
as s ets
Deferred
tax res erves
Total fair
value
res erve
Legal res erve
896 691
( 249 990)
646 701
1 66 91 0
Share-based incentive plan (SIBA)
Dividends from preference shares
-
-
-
-
-
51 7
51 7
-
-
-
-
-
( 33 480)
( 33 480)
Changes in fair value
(1 1 95 229)
282 1 94
( 91 3 035)
-
-
-
-
Transfer to reserves
-
-
-
-
( 2 1 70)
-
( 2 1 70)
E xchange
differences
9 696
Other
res erves and
retained
earnings
Total Other
reserves and
retained
earnings
1 1 4 786
291 392
-
-
-
61 753
-
306 460
368 21 3
( 298 538)
32 204
( 266 334)
228 663
7 526
388 283
624 472
Share-based incentive plan (SIBA)
Changes in fair value
-
-
-
-
-
66
66
( 29 903)
4 931
( 24 972)
-
-
-
-
-
-
-
-
( 5 920)
-
( 5 920)
Transfer to reserves
-
-
-
22 000
-
300 628
322 628
( 328 441 )
37 1 35
( 291 306)
250 663
1 606
688 977
941 246
137
Minority Interest
Minority interest by subsidiary are analysed as follows:
31 .03.2009
B alance
Income
sheet
statement
E S CONCE SSÕE S
BE S ANGOLA
E SAF
BE S AÇOR E S
BE ST
BE S Investimento do Brasil
BE S Securities
FIQ VE NTUR E S II
FCR PME /BE S
Other
31 .1 2.2008
B alance
Income
s heet
s tatement
1 9 41 7
55 763
1 6 1 93
1 4 798
7 098
6 51 1
1 2 837
21 458
1 2 032
4 759
490
6 91 2
563
1 84
201
799
1 24
( 244)
59
1 71
1 9 971
38 986
1 6 242
1 4 606
8 265
5 640
1 1 347
21 564
1 1 973
4 91 5
( 1 071 )
1 6 362
3 205
2 401
783
( 1 09)
3 374
( 1 902)
942
876
1 70 866
9 259
1 53 509
24 861
NOTE 39 – OFF-BALANCE SHEET ITEMS
As at 31 March 2009 and 31 December 2008, this balance can be analysed as follows:
31 .03.2009
Contingent liabilities
Guarantees and stand by letters of credit
Assets pleged as collateral
Open documentary credits
Other
Commitments
R evocable commitments
Irrevocable commitments
31 .1 2.2008
6 665 685
775 952
1 852 21 8
1 08 71 1
6 426 61 0
2 279 209
2 1 27 792
1 07 946
9 402 566
1 0 941 557
9 445 1 63
5 623 444
1 0 027 892
4 586 554
1 5 068 607
1 4 61 4 446
Guarantees and standby letters of credit are banking operations that do not imply any out-flow by the
Group.
138
As at 31 March 2009, the balance assets pledged as collateral include:
•
Securities pledged as collateral to the Bank of Portugal for the use of the money transfer
system (Sistema de Pagamento de Grandes Transacções) in the amount of euro 175 710
thousands (31 December 2008: euro 254 610 thousands). As at 31 December 2008, this
balance also included euro 1 400 million in the scope of a liquidity facility collateralized by
securities;
•
Securities pledged as collateral to the Portuguese Securities and Exchange Commission
(CMVM) in the scope of the Investors Indemnity System (Sistema de Indemnização aos
Investidores) in the amount of euro 18 722 thousands (31 December 2008: euro 15 322
thousands);
•
Securities pledged as collateral to the Deposits Guarantee Fund (Fundo de Garantia de
Depósitos) in the amount of euro 62 024 thousands (31 December 2008: euro 62 894
thousands);
•
Securities pledged as collateral to the European Investment Bank in the amount of euro
505 300 thousands (31 December 2008: euro 521 600 thousands).
The above mentioned securities pledged as collateral are booked in the available-for-sale portfolio and
they can be executed in case the Group does not fulfil its obligations under the terms of the contracts.
The documentary credits are irrevocable commitments from the Group on behalf of its clients, to
pay/order to pay a determined amount to the supplier of a given commodity or service, within a
stipulated period, against the presentation of documents referring to the expedition of the commodity or
rendering of the service. The condition of irrevocability consists on the fact of not being viable his
cancellation or alteration without the agreement of all the involved parties
The commitments, revocable and irrevocable, represent contractual agreements for credit concession
with the Group clients which, in general, are contracted by fixed periods or with other expiring requisites
and, normally, apply for the payment of a commission. Substantially, all commitments of credit
concession in force require clients to maintain certain requisites which are verified at the time of the
respective formalisation.
139
Notwithstanding the particular characteristics of these contingent liabilities and commitments, the
analysis of these operations follows the same basic principles of any other commercial operation, namely
the solvency of the underlying client and business, being that the Group requires these operations to be
adequately covered by collaterals when needed. Considering that is expected that the majority of these
contingent liabilities and commitments expire without having being used, the indicated amounts do not
represent necessarily future cash-flow needs.
Additionally, the liabilities accounted for off-balance sheet and related to banking services provided are
as follows:
31 .03.2009
Securities and other items held for safekeeping on behalf of customers
Assets for collection on behalf of clients
Securitised loans under management (servicing)
Other responsabilities related with banking services
31 .1 2.2008
59 484 950
244 840
3 677 587
3 878 745
60 595 075
280 250
3 766 429
4 1 36 767
67 286 1 22
68 778 521
NOTE 40 – ASSETS UNDER MANAGEMENT
In accordance with the legislation in force, the fund management companies and the depositary bank are
jointly liable before the participants of the funds for the non fulfillment of the obligations assumed under
the terms of the Law and the management regulations of the funds.
As at 31 March 2009 and 31 December 2008, the amount of the investment funds managed by the Group
is analysed as follows:
31 .03.2009
Securities investment funds
R eal estate investment funds
Pension funds
Other
31 .1 2.2008
4 806 866
1 098 552
2 491 959
8 525 505
4 748 358
1 1 42 083
2 608 269
9 01 0 1 62
1 6 922 882
1 7 508 872
The amounts recognised in these accounts are measured at fair value determined at the balance sheet
date.
140
NOTE 41 – RELATED PARTIES TRANSACTIONS
The entities considered to be BES Group related parties together with the subsidiaries referred in Note 1,
as defined by IAS 24, are as follows:
141
142
As at 31 March 2009 and 31 December 2008, the balances and transactions with related parties are
As sets
Ass ociated companies
E SUMÉ DICA
E UR OP ASSISTANCE
FIDUPR IVATE
E S VÉ NÉ TIE
BE S SE GUR OS
E SE GUR
BE S VIDA
LOCAR E NT
OTHE R
1 878
9
542 244
45
1 550
71 0 948
1 1 8 500
20 1 02
1 395 276
Liabilities
1
690
8 1 71
5 1 39
261 053
3 704
1 1 2 551
391 309
31 .03.2009
Guarantees
8
1 490
2 452
3 950
Income
63
7
1
579
2 052
15
1 0 1 51
4 881
1 84
1 7 933
E xpenses
4
15
2
28
290
924
274
1 537
Ass ets
1 859
3
388 375
663 1 33
1 1 8 932
4 1 96
1 1 76 498
Liabilities
1 072
76
1 77
1 91
1 04 260
1 890
1 07 666
31 .1 2.2008
Guarantees
3 037
1 651
4 688
Income
69
29
16
8 700
64
270 871
7 1 42
21 3
287 1 04
E xpens es
22
88
16
15
320
1 39
953
8 324
2
9 879
Balances and transactions with the above referred entities relate mainly to loans and advances and
deposits in the scope of the banking activity of the Group.
During 2008, BES sold 38 million shares of Banco Bradesco to BES Vida, adjusted by the stock split, by
the amount of euro 438.4 million. During the same period, BES Vida sold all Bradesco shares. The gain
from this event reached an amount of euro 234.6 million (see Note 8 and Note 19).
In the scope of the distribution and operating management agreement between BES, BES Vida and
Crédit Agricole, BES granted BES Vida a guaranteed return over a group of assets associated to
insurance and investment contracts. BES recognises this guarantee on its balance sheet as a liability at
fair value against the income statement, when the expected return of assets is lower than the minimum
guaranteed return to the policy holders. Based on the valuation performed as at 31 March 2009 and 31
December 2008, no liabilities arising from this guarantee were identified.
As at 31 March 2009 and 31 December 2008, the total amount of assets and liabilities of BES Group with
ESFG (Bank holding) and related companies, is as follows:
143
As at 31 March 2009 and 31 December 2008, loans granted by BES Group to its key management
personnel (being key management personnel, the BES Board of Directors and Audit Committee, the
subsidiary companies Board Members and BES senior management) amounted to euro 30 183 thousands
and 28 725 thousands, respectively.
As at 31 March 2009, loans granted by BES Group to the members of the Board of Directors of ESFG that
are not simultaneously members of the Board of Directors of BES, amounted to euro 5 838 thousands (31
December 2008: euro 6 520 thousands).
All transactions with related parties are made on an arms length basis, under the fair value principle.
Credits granted to members of the Board of Directors correspond to operations under the BES core
business, being excluded from the nr. 2, 3 and 4 of article 397 of the Código das Sociedades Comerciais.
However, credit granted by the Group to members of the Board of Directors of credit institutions are
under the scope of article 85 of the Regime Geral das Instituições de Crédito e Sociedades Financeiras
(RGICSF), which text was amended by Decree-Law nr. 126/2008, of 21 July, being these operations subject
to reporting to the Bank of Portugal, under the terms of Instruction nr. 13/2008. As such, under the above
mentioned legislation, the main conditions for granting loans to members of the Board of Directors of
credit institutions are:
- It cannot be granted credit to executive members of the Board of Directors and to the Fiscal Board
(including first degree relatives), with the exception of operations (i) with a social purpose, (ii) under the
company policies, or (iii) resulting from the use of credit cards in conditions similar to the ones applied to
the general clients with similar risk profile. All these exception are included in nr. 4 of article 85 of RGICSF;
- Credit operations with non-executive members of the Board of Directors are subject to approval by a
majority of at least two thirds of the remaining Board Members and can only be granted with the
approval of the Fiscal Board, in accordance with nr. 8 of article 85 of RGICSF;
- The credit is granted and approved at market prices and the Board Member involved in the operation
cannot intervene in the decision making process.
All credits granted to Board Members fulfill the above mentioned requirements.
144
All credits granted to related parties are included in the impairment model, being subject to provisions in
the same manner that the commercial credits granted by the Group. As at 31 March and 31 December
2008, none of the credits granted to related parties were subject to individual impairment. However,
these credits are subject to an impairment evaluation on a portfolio basis, as referred in Note 2.5 – Loans
and advances to customers.
During the first quarter of 2009 and the year ended 31 December 2008 there were no transactions made
with the Group pensions funds.
NOTE 42 – SECURITIZATION TRANSACTIONS
As at 31 March 2009, the outstanding securitisation transactions performed by the Group were as
follows:
Designation
Initial date
Original amount
Current amount
As set securitised
Lusitano Mortgages No.1 plc
December 2002
1 000 000
51 7 565
Mortgage loans (subsidised regime)
November 2003
1 000 000
523 407
Mortgage loans (subsidised and general regime)
November 2004
1 200 000
732 059
Mortgage loans (general regime)
September 2005
1 200 000
822 81 2
September 2006
1 400 000
1 081 744
October 2006
862 607
81 6 469
Lusitano SME No.1 plc
Loans to small and medium entities
J uly 2007
1 1 00 000
928 088
Lusitano Project Finance No.1 plc
December 2007
1 079 1 00
81 3 735
Project Finance loans
September 2008
1 900 000
1 871 666
As permitted by IFRS 1, the Group has applied the derecognition requirements of IAS 39 for the
transactions entered into after 1 January 2004. Therefore, the assets derecognised until that date, in
accordance with the previous accounting policies, were not restated in the balance sheet.
The assets sold in the securitisation transactions Lusitano Mortgages No.3, Lusitano Mortgages No.4
and Lusitano Mortgages No.5, performed after 1 January 2004, were derecognised considering that the
Group has transferred substantially all the risks and rewards of ownership.
145
In accordance with SIC 12, the Group fully consolidates the Lusitano SME No. 1, plc, the Lusitano
Mortgages No.6 plc, the Lusitano Mortgages No.7 plc and the Lusitano Project Finance No.1 plc as it
retains the majority of the risks and rewards associated with the activity of these SPE’s. Therefore,
assets and liabilities of Lusitano SME No. 1 plc, of Lusitano Mortgages No.6 plc, of Lusitano Mortgages
No.7 plc and of Lusitano Project Finance No.1 plc are included in the consolidated balance sheet of the
Group. The other securitisation vehicles are not included in the consolidated financial statements of the
Group as it has not retained the majority of the risks and rewards of ownership.
NOTE 43 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The fair value of financial assets and liabilities, for the Group, is analysed as follows:
The assets and liabilities fair value was determined in accordance with the methodology described in the
notes to the consolidated financial statements as at 31 December 2008.
The methods and assumptions used in estimating the fair values of financial assets and liabilities
measured at amortised cost in the balance sheet are analysed as follows:
Cash and deposits at central banks, Deposits with banks and Loans and advances to banks
Considering the short term nature of these financial instruments, carrying value is a reasonable
estimate of its fair value.
146
The fair value of loans and advances to customers is estimated based on the discount of the expected
future cash flows of capital and interest, assuming that the installments are paid on the dates that have
been contractually defined. The expected future cash flows of loans with similar credit risk
characteristics are estimated collectively. The discount rates used by the Group are current interest
rates used in loans with similar characteristics.
The fair values of these financial instruments are based on quoted market prices, when available. For
unlisted securities the fair value is estimated by discounting the expected future cash-flows.
Deposits from central banks and Deposits from banks
Considering the short term nature of these financial instruments, carrying value is a reasonable
estimate of its fair value.
Due to customers
The fair value of these financial instruments is estimated based on the discount of the expected future
cash flows of capital and interest, assuming that the installments are paid on the dates that have been
contractually defined. The discount rates used by the Group are the current interest rates used in
instruments with similar characteristics. Considering that the applicable interest rates to these
instruments are floating interest rates and that the period to maturity is substantially less than one
year, the difference between fair value and book value is not significant.
Debt securities issued and Subordinated debt
The fair value of these instruments is based on market prices, when available. When not available, the
Group estimates its fair value by discounting the expected future cash-flows.
147
NOTE 44 – RISK MANAGEMENT
A qualitative outlook of the risk management at the Group is presented bellow:
•
Credit risk;
•
Market risk;
•
Liquidity risk;
•
Operational risk.
Credit risk
Credit risk represents the potential financial loss arising from the failure of a borrower or counterparty
to honour its contractual obligation. Credit risk is essentially present in traditional banking products –
loans, guarantees granted and contingent liabilities – and in trading products – swaps, forwards and
options (counterparty risk).
Regarding credit default swaps, the net exposure between selling and buying positions in relation to each
reference entity, is also considered as credit risk to the Group. The credit default swaps are accounted for
at fair value in accordance with the accounting policy described in Note 2.4.
Credit portfolio management is an ongoing process that requires the interaction between the various
teams responsible for the risk management during the consecutive stages of the credit process. This
approach is complemented by the continuous introduction of improvements in the methodologies, in the
risk assessment and control tools, as well as in procedures and decision processes.
The risk profile of BES Group is analysed on a regular basis by the risk committee, especially in what
concerns the evolution of credit exposures and credit losses. The observance of the approved credit
limits and the correct application of the mechanisms associated to the approval of credit lines under the
current activity of the commercial structure are also subject to periodic analysis.
148
BES Group credit risk exposure is analysed as follows:
31 .03.2009
Deposits with banks
Financial assets at fair value through profit or loss
Other assets
Guarantees granted
Stand by letters of credit
Irrevocable commitments
Credit risk linked to the reference entities of credit derivatives
31 .1 2.2008
7 928 942
3 840 877
1 354 01 4
4 81 4 297
47 063 052
2 484 594
632 489
535 463
6 665 685
1 852 21 8
5 623 444
552 728
6 973 732
3 672 1 25
1 324 543
4 968 576
47 049 474
2 1 60 1 96
936 290
492 352
6 426 61 0
2 1 27 792
4 586 554
581 91 5
83 347 803
81 300 1 59
The analysis of the risk exposure by sector of activity, as at 31 March 2009 and 31 December 2008, can be
analysed as follows:
149
150
As at 31 March 2009 the analysis of loans and advances to customers by internal rating categories, is
151
Market risk
Market risk is the possible loss resulting from an adverse change in the value of a financial instrument
due to fluctuations in interest rates, foreign exchange rates or share prices.
The market risk management is integrated with the balance sheet management through the Asset and
Liability Committee (ALCO). This committee is responsible for defining policies for the structuring and
composition of the balance sheet, and for the control of exposures to interest rate, foreign exchange and
liquidity risk.
The main measure of market risk is the assessment of potential losses under adverse market conditions,
for which the Value at Risk (VaR) valuation criteria is used. BES's VaR model uses the Monte Carlo
simulation, based on a confidence level of 99% and an investment period of 10 days. Volatilities and
correlations are historical, based on an observation period of one year. As a complement to VaR stress
testing have been developed, allowing to evaluate the impact of potential losses higher than the ones
considered by VaR.
(in million of euro)
31 .03.2009
E xchange R isk
Interest rate risk
Shares
Commodity
Diversification effect
Total
31 .1 2.2008
22
21
10
0
-22
25
33
9
0
-20
31
47
Group has a VaR of euro 31 million (31 December 2008: euro 47 million), for its trading positions.
The model used to monitor the sensivity of BES Group banking book to interest rate risk is based on the
duration model and considers a scenario of a 200 basis points parallel shift in the interest rate curve for
all maturities.
The output of this model gives, essentially, the effects over the shareholders equity and the interest
margin of a shift in the interest rate curve. As at 31 March 2009, a shift of 200 basis points in the interest
rate curve would have an impact of euro 62 million in the shareholders equity (31 December 2008: euro 85
million).
152
The following table presents the average balances, interests and interest rates in relation to the Group’s
major assets and liabilities categories, for the first quarter of 2009 and for the year ended 31 December
2008:
31 .03.2009
Average
balance for
the year
31 .1 2.2008
Interest for
the year
Average
interest
rate
Average
balance for
the year
Interest for
the year
Average
interest
rate
Financial Assets
Monetary assets
Securities
Differential deposits
64 91 8 603
6 551 359
47 980 875
1 0 386 369
1 21 8 397
854 682
36 1 83
661 389
1 57 1 1 0
-
5.34%
2.24%
5.59%
6.1 3%
-
61
8
45
7
787 873
379 583
657 828
750 462
-
3 769 440
289 964
2 904 887
574 589
-
6.1 0%
3.46%
6.36%
7.41 %
-
Financial and differential assets
66 1 36 999
854 682
5.24%
61 787 873
3 769 440
6.1 0%
Financial Liabilities
Monetary liabilities
Due to consumers
Other
Differencial resources
66 1 36
1 2 288
25 537
28 31 1
999
433
491
076
-
539 369
87 941
1 73 401
278 027
-
3.31 %
2.90%
2.75%
3.98%
-
61 745 91 1
1 0 309 560
22 71 5 41 0
28 720 941
41 962
2 683 271
497 563
696 720
1 488 988
-
4.35%
4.83%
3.07%
5.1 8%
-
Financial and differential liabilities
66 1 36 999
539 369
3.31 %
61 787 873
2 683 271
4.34%
31 5 31 3
1 .93%
1 086 1 69
1 .76%
Net interest income
Concerning the foreign exchange risk, the distribution of the assets and liabilities by currency as at 31
March 2009 and 31 December 2008, is analysed as it follows:
31 .03.2009
Spot
Forward
31 .1 2.2008
Other
elements
Net exposure
Spot
Other
elements
Forward
Net exposure
USD United States Dollars
( 5 096 1 72)
5 303 005
( 38 538)
1 68 295
( 3 791 01 5)
4 064 237
8 966
282 1 88
GBP Great Britain Pounds
( 896 890)
847 1 27
1 43 697
93 934
( 1 1 50 808)
1 066 053
33 779
( 50 976)
BR L Brazilian real
590 200
( 1 1 1 989)
( 25 752)
452 459
456 1 1 1
( 58 636)
( 67 828)
329 647
DKK Danish krone
87 767
( 54 459)
-
33 308
36 899
( 3 773)
-
33 1 26
( 21 3 029)
277 067
( 20 843)
43 1 95
J PY
J apanese yene
CHF Swiss franc
SE K Swedish krona
( 330 1 1 3)
387 661
( 99 61 1 )
( 42 063)
( 497 023)
502 571
( 90 233)
( 84 685)
66 484
( 56 229)
( 62 401 )
( 52 1 46)
( 40 050)
37 701
6 974
4 625
24 020
( 25 577)
5 227
3 670
NOK Norwegian krone
8 1 90
( 7 088)
50 048
51 1 50
( 8 362)
( 7 542)
22 01 7
6 113
CAD Canadian Dollar
3 353
200
( 30 260)
( 26 707)
383
1 1 93
( 203)
1 373
( 999)
ZAR R and
( 1 408)
393
-
( 1 01 5)
( 1 633)
685
( 51 )
AUD Australian Dollar
1 1 5 039
( 1 08 367)
62 235
68 907
37 270
( 29 892)
14
7 392
AOA Kwanza
( 43 799)
( 49)
-
( 43 848)
1 7 601
-
-
1 7 601
CZK Czech koruna
( 26 736)
27 384
( 1 8 905)
( 1 8 257)
( 26 601 )
27 907
( 1 7 039)
71 709
( 7 381 )
( 51 084)
1 3 244
52 951
1 2 061
( 4 597)
60 41 5
( 6 055 933)
6 81 6 709
( 91 429)
669 347
5 267 554
( 1 02 959)
664 866
Other
( 4 499 729)
( 1 5 733)
153
Liquidity risk
Liquidity risk derives from the potential inability to fund assets while satisfying commitments on due
dates and from potential difficulties in liquidating positions in portfolio without incurring in excessive
losses.
The purpose of liquidity management is to maintain adequate liquidity levels to meet short, medium and
long term funding needs. Further information regarding Group strategy is included in the management
report.
The Group prepares specific reports that allow the identification of negative mismatch and permits their
dynamic coverage. In addition, the Group calculates the liquidity ratios in accordance with the Bank of
Portugal rules.
For the purposes of liquidity management, the following elements are considered:
(in million of euro)
31 .1 2.2008
31 .03.2009
Cash and deposits with banks
Short term deposits from banks
Treasury Gap
(1 )
Securities acceptable as collateral
Securities used as at 31 March 2009/ 31 December 2008
Treasury Gap / Net assets
Liquidity ratio
(1 )
(2)
(2)
7 688
6 71 6
( 1 1 896)
( 1 0 559)
( 4 208)
( 3 843)
8 598
8 71 0
-
( 1 400)
4 390
3 467
82%
87%
Treasury Gap - immediate liquidity and short term interbank loans deducted to interbank debt up to one year.
Considering the financing needs, the treasury gap indicates liquidity levels over what the group needs.
Liquidity ratio calculated in accordance with the Instruction no 1 /2000 of the Bank of Portugal.
As at 31 March 2009, the treasury Gap was negative in the amount of euro 4 208 million (31 December
2008: negative in the amount of euro 3 843 million), being covered by securities acceptable as collateral
by the European Central Bank or in the repos market, in the amount of euro 8 598 million (31 December
2008: euro 8 710 million). From this amount, euro 1 400 million were utilised as at 31 December 2008,
being however available for future use as collateral within one week and three months by the amounts of
euro 900 million and euro 500 million, respectively.
154
Operational risk
Operational risk represents the risk of losses resulting from failures in internal procedures, people
behaviors, information systems and external events.
To manage operational risk, it was developed and implemented a system that standardizes,
systematizes and regulates the frequency of actions with the objective of identification, monitoring,
controlling and mitigation of risk. The system is supported at organizational level by a unit within the
Global Risk Department, exclusively dedicated to this task, and by representatives designated by each of
the relevant departments and subsidiaries.
Capital management and solvability ratio
The main goals from capital management are (i) to allow the adequate growth of activities through the
generation of enough capital to support the increase of assets, (ii) fulfillment of the minimum
requirements defined by the supervision authorities in terms of capital adequacy and (iii) to ensure the
fulfillment of the Groups strategic goals in respect to capital adequacy matters.
The definition of the strategy in terms of capital adequacy is made by the Executive Committee and is
integrated in the global goals of the Group.
The Group is subject to Bank of Portugal supervision that, under the capital adequacy Directive from the
CE, establishes the prudential rules to be attended by the institutions under its supervision. These rules
determine a minimum solvability ratio in relation to the requirements of the assumed risks that
institutions have to fulfill.
In the scope of the implementation of the new capital accord Basel II, and the prudencial regime
established by Decree-Law 103/2007 and Decree-Law 104/2007, the Group was authorized to use, starting
31 March 2009, the approach based in the use of internal models for credit risks (Foundation Internal
Rating Based Approach – IRBF) for credit risk and the Standardized Approach – TSA) for operational risk.
155
The capital elements of BES Group are divided into: Basic Own Funds, Complementary Own Funds and
Deductions, as follows:
• Basic Own Funds (BOF): This category includes the realized capital, the eligible reserves (excluding
the fair value reserves), the retained earnings of the period, minority interests and preference
shares. The unrealised losses recognised under the fair value reserve and associated with equity
securities, book value of goodwill, intangible assets and negative actuarial deviations from
employees’ benefits up to 31 December 2007 are deducted in full. From 2007, 50% of the book value
of investments in banking and insurance associates over 10% also has to be deducted. Since 2009,
following the application of the IRBF method for credit risk, it is also adjusted 50% of the expected
losses of risk positions less any existing provisions.
• Complementary Own Funds (COF): Essentially incorporates the subordinated eligible debt and 45%
of the positive fair value reserve associated with equity securities. The book value of investments in
banking and insurance associates is deducted in 50% of its value and since 2009, is also deducted
50% of the expected losses of the risk positions less any existing provisions, following the application
of the IRBF method for credit risk.
• Deductions (D): Essentially incorporates the prudential amortization of assets received as a recovery
of non-performing loans.
Additionally there are several rules that limit the composition of the capital basis. The prudential rules
determine that the COF cannot exceed the BOF. Also, some components of the COF (Lower Tier II)
cannot exceed 50% of the BOF.
In December 2008, the Bank of Portugal issued the Notice 11/2008, establishing a transitory period of four
years, from December 2009 to December 2012, for the recognition of the actuarial gains/losses
determined in 2008, deducted from the expected return of the fund plan assets for the same year.
As at 31 March 2009 and 31 December 2008, the main movements occurred in BOF are as follows:
156
The capital adequacy of BES Group as at 31 March 2009 and 31 December 2008 is presented as follows:
157
NOTE 45 – SUBSEQUENT EVENTS
The capital increase finalised as at 9 April 2009 occurred in the following three phases:
•
1st phase- share capital reduction from euro 2 500 million to euro 500 million through the
reduction of the nominal value of the 500 million shares that represent the share capital
from 5 euro to 1 euro and the immediate set up of a special reserve in the amount of euro 2
000 million, with the special purpose of allowing the share capital increase through new
entries in cash. This reserve will be reintegrated in the share capital at the end of the
process;
•
2nd phase - share capital increase in the amount of euro 1 200 million through the issue of
666 666 666 new shares with a nominal value of 1 euro each, being available for
subscription by the general public and current shareholders, who have a preference
reserve. In the exercise of the preference rights were subscribed 663 136 969 shares, being
the remaining 3 529 697 available for allotment pro-rata. The demand for the shares
available for allotment pro-rata amounted to 242 742 619 shares. The settlement of the
shares subscribed in the exercise of the preference rights and the shares subscribed in the
allotment pro-rata occurred on 14 and 15 April, respectively.
•
3rd phase - new share capital increase, in the amount of euro 2 333 million, through the
incorporation of reserves (including the euro 2 000 million special reserve set up during the
1st phase, share premiums and reserves), rising the nominal value of all shares.
After the conclusion of the process, the share capital of BES, in the amount of euro 3 500 million, is
represented by 1 166 666 666 shares with a nominal value of 3 euro each, allowing total equity to increase
from euro 4 662 as at 31 March 2009 to euro 5 862 million.
158