activity and results of banco espírito santo group and banco

Transcription

BANCO ESPÍRITO SANTO
BANCO ESPÍRITO SANTO, S.A.
Public Traded Company
Headquarters: Avenida da Liberdade, n.º 195, 1250 – 142 Lisboa - 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 HALF OF 2011
(Audited financial information under IFRS as implemented by the European Union)
(According to article 9 of CMVM regulation nº 5/2008)
This report is a free translation into English of the original Portuguese version. In case of doubt or
misinterpretation the Portuguese version will prevail.
Interim Report
Index
I. MANAGEMENT REPORT
1.
Banco Espírito Santo activity and results in 1H2011
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
The deleveraging process
4.2
Main business areas (Operating Segments)
Financial Strength and Other Indicators
5.1
Credit Quality
5.2
Liquidity, Solvency and Financial Strength
5.3
Productivity and Efficiency
5.4
Bank of Portugal Reference Indicators
6.
Main Risks and Uncertainties in the second half of 2011
7.
Activity and Results of Banco Espírito Santo
8.
9.
7.1
Business Performance and Asset Quality
7.2
Operating Conditions, Productivity and Profitability
Sundry Disclosures
8.1
Securities issued by BES Group and held by members of BES Corporate Bodies
8.2
Qualified Holdings in BES Share Capital
8.3
BES Own Shares
8.4
Recommendations of the Financial Stability Forum (FSF) and the Committee of European Banking
Supervisors (CEBS) concerning the Transparency of Information and the Valuation of Assets
8.5
Other
Declaration of Conformity with the Financial Information Reported
II. INTERIM FINANCIAL STATEMENTS AND NOTES
o
Consolidated Interim Financial Statements and Notes
o
Limited Review Report on Interim Consolidated Financial Information issued by the CMVM Registered
Auditor
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Interim Report
I. MANAGEMENT REPORT
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Interim Report
1. BANCO ESPÍRITO SANTO GROUP ACTIVITY AND RESULTS IN 1H11
•
The worsening of the Euro Zone sovereign debt crisis, particularly Greece, the political crisis in
Portugal, the successive decreases of the ratings of the Republic of Portugal and consequently the
ratings of the financial sector and companies, culminated in the request for financial assistance in
April. This request for help required that the state assume the responsibility for the rebalancing of the
economy and public finances, which will have the inevitable recessionary effect in 2011 and 2012. The
activity in the first half of the year was negatively influenced by these events.
•
The signing of the Memorandum of Economic and Financial Policies (MEFP) between the government
of Portugal, the European Commission, the European Central Bank and the International Monetary
Fund obliges the Portuguese banks to provide a Medium Term Plan between 2011 and 2015 that lays
out explicit strategies for the deleveraging of the balance sheet, the strengthening of capital ratios
and the improvement of liquidity. To this aim the banks must achieve, by December 2014, a
transformation ratio of 120% and a Stable Funding Ratio of 100%, to have a minimum Core Tier 1 of 9%
by December 2011 and 10% by December 2012. The plan is based on reference economic indicators that
point to a decrease in GDP of 2.1% in 2011, 1.6% in 2012 and consequently a substantial worsening of
risk and impairments.
•
In the first 6 months of 2011 total net assets fell by EUR 3.5 billion from EUR 83.7 billion in December
2010 to EUR 80.2 billion in June 2011, as a result of the deleverage plan initiated in the third quarter
2010,. The loans to deposits ratio fell significantly to 155% (Dec 2010: 165%, June 2010 198%), backed by
the programme of planned sales of the international loan portfolio and by a strong growth in deposits,
which increased by 22.6%.
•
The results for the first half of the year reached EUR 156 million. The results were affected by the
considerable strengthening of provisions due to the current and expected deterioration of risk as a
result of the worsening in the economic environment. The international business posted a net income
of EUR 83.5 million (-13.1%), while the domestic net income totalled EUR 72.5million (-61%).
•
During the period there were a number of non-recurrent gross profit/loss items: the sale of shares held
in Banco Bradesco (capital gain of EUR 143.6 million); the extra-ordinary dividend of Portugal Telecom
(EUR 58.5 million); losses from the sale of loans as part of the deleveraging programme (EUR 53.8
million); and the strengthening of loan loss provisions (EUR 126 million). Additionally, provisions for
securities and other provisions (properties held on foreclosures pending court ruling and other
activities) were strengthened in EUR 55.8 million and EUR 86.3 million, respectively. Therefore the non
recurrent gains reported did not impact on results due to the sensible provisioning policy.
•
Commercial banking income increased 1%, supported by the positive performance of the international
commercial banking activity which rose by 13.1% (domestic commercial banking fell by 5.1%). Fees and
Commissions grew by 3.4% (1Q11: -1,1%) in an environment of a sharp down turn in activity.
•
Operating costs growth decelerated significantly backed by the cost reduction programme under way
(from 8.6% YoY in the first quarter to 3%). When recent consolidations and the increase in social
security obligations are excluded operating costs fell by 3.8%.
•
The increase in provisions during the first six months of the year totalled EUR 469.7 million, close to
the double reported in the 1H2010 (EUR 238.8 million). Credit provisions reached EUR 305.4 million
(1H2010: EUR 174.5 million), including an additional amount of EUR 126 million. The associated
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Interim Report
provisions charge was 1.18% (0.69% when excluding the additional charge), raising total provisions for
credit on the balance sheet to close to EUR 2 billion (an increase of 17.9% versus June 2010). The
Provisions for Credit / Gross Loans ratio increased to 3.83% (Mar 2011: 3.47%, Dec 2010: 3.38%). There
was also an increase in provisions for securities of EUR 56.4 million and for other purposes of EUR
107.9 million.
•
Overdue Loans over 90 days was 2.35% (Mar 2011: 2.17%, Dec 2010 1.95%), with the respective coverage
ratio reaching 163% (Mar 2011: 159.4%, Dec 2010: 173%).
•
With the concentration of 86% of the medium and long term debt of the year maturing in the first half
of 2011 (EUR 4.3 billion), ECB facilities used reached EUR 8,3 billion. The pool of eligible securities for the
repo market totalled EUR 16.9 billion, of which EUR 13.2 billion were eligible for use with the ECB.
•
Solvency ratios as of 30 June 2011 were: Core Tier I 8.2%, Tier I 9.2% and Total Solvency 11.5%. BES
Group will undertake, during the second half of the year and in 2012, a broad range of initiatives that
will assure that the Group will meet the capital adequacy requirements established by the Bank of
Portugal and by the EC, ECB and IMF. The completion of the plan and initiatives to be taken is
dependent on the conclusions of the analysis the Troika is undertaking to the Portuguese banking
system.
•
The results of the EU-wide Stress Test, carried out on EU financial institutions, coordinated by the
European Banking Authority (EBA), in cooperation with the ECB and Bank of Portugal, were announced
on the 15 July. Applying the tests criteria to the BES Group resulted in a Core Tier I of 6.2% in 2012
under the adverse scenario not considering any mitigating measures. When considering all mitigating
measures to be concluded until the end of 2011, the Core Tier I of BES in 2012 under the adverse
scenario rises to 7.5%.
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Interim Report
Main indicators
1H10
Change
1H11
ACTIVITY (EUR million)
Total Assets
(1)
Net Assets
Gross Loans
Customer Deposits
Equity
-5.9%
-5.6%
-3.1%
22.6%
1.0%
107 789
84 874
53 355
26 082
6 915
101 434
80 162
51 701
31 972
6 987
11.2%
8.4%
7.9%
11.5%
9.2%
8.2%
0.3 pp
0.8 pp
0.3 pp
6 861
8 807
198%
8 346
13 164
155%
1 485
4 357
-43 pp
1.70%
184.9%
3.15%
0.65%
2.35%
163.0%
3.83%
1.18%
0.65 pp
-21.9 pp
0.68 pp
0.53 pp
SOLVENCY
Bank of Portugal (2)
- Total Solvency Ratio
- TIER I
- CORE TIER I
LIQUIDITY (euro million)
ECB funds (net)
(3)
ECB Eligible Asstes (collaterals)
Loans to Deposits Ratio (%)
(4)
ASSET QUALITY
Overdue loans + 90 days / Gross loans
Coverage of Overdue Loans + 90 days
Provisions for Credit / Gross loans
Cost of risk (5)
RESULTS & PROFITABILITY
282.2
156.0
-44.7%
ROE
(6)
9.6%
4.5%
-5.1 pp
ROA
(6)
0.68%
0.38%
-0.30 pp
240
49.3%
60.2%
256
45.7%
61.3%
6.8%
-3.6 pp
1.1 pp
Retail Network
820
810
-10
- Domestic
725
709
-16
95
101
6
Net income (EUR mn)
PRODUCTIVITY / EFICIENCY
Banking Income(7) per Employee (€,000)
Cost to Income
Cost to Income (ex markets)
BRANCH NETWORK
- International
(1) Net Assets + Asset Management + Other off-balance sheets + Securitised Credit
(2) Data calculated based on IRB Foundation method; preliminary data as of June 2011
(3) Include funds, cash and fin instruments in the ECB System; positive = net borrowing; negative = net lending
(4) According to Bank of Portugal rules
(5) Annualized credit provision charge (P&L provisions / Gross Loans)
(6) Data calculated based on annualized 1H11
(7) Data calculated based on annualized 1H11 Banking Income
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Interim Report
2. ECONOMIC OVERVIEW
The second quarter of 2011 was marked by a deterioration in the economic environment, resulting from a
worsening of the Euro Zone sovereign risk crisis, with new concerns raised over the US budgetary situation and
fears over an unexpected slow down in global economic activity due to an environment of reduced levels of
liquidity.
In the Euro Zone area, questions over the effectiveness of the financial stabilisation efforts in Greece and the
uncertainty over the creation of new mechanisms for external assistance translated into further contagion of
the debt crisis. During the second quarter sovereign debt spreads versus 10 year Germany rose; in Greece
spreads rose by close to 390 basis points (bps) to 1331 bps, in Portugal spreads rose by 273 bps to 787 bps, in
Ireland spreads rose by 270 bps to 867 bps, in Spain spreads rose by 48 bps to 242 bps and in Italy spreads
increased by 43 bps to 186 bps. By July spreads in Spain and Italy reached new highs of over 330 bps. Risk
aversion rose during the period, marked by an increase in the demand for risk free or ‘safe haven’ assets by
investors.
Despite the expectation of an increase in the principal reference rate set by the ECB (having risen by 25 bps in
April and July to 1.5%), the yield of the 10 year Bund fell from 3.354% to 3.025%. The Swiss Franc (CHF) touched
new historical highs against the USD and the EUR. The CHF rose by 8% against the EUR in the quarter to
EURCHF 1.22, going on to reach EURCHF 1.14 in July. Gold rose close 5% to USD 1,500 per ounce (gold went on
to breach the USD 1,600 per ounce at the beginning of the third quarter).
In Europe the CAC40 and IBEX stock indices saw quarterly decreases of 0.17% and 2.05% respectively, whilst
the DAX gained 4.76% clearly reflecting the favourable performance of the German economy. In the US the
NASDAQ and S&P500 indices fell by 0.27% and 0.39% respectively, the Dow Jones however rose by 0.77%. In
China and Brazil, the second quarter saw the removal of monetary stimuli by their respective central banks
following an increase in inflationary pressures. In this context, and in despite of continued strong growth in
economic activity, the Bovespa and Shanghai Composite indices saw significant falls of 9.02% and 5.67%
respectively.
In Portugal funding difficulties arising from the Euro Zone sovereign debt crisis and the restrictive nature of
budgetary constraints continued to weigh on internal demand which led to a further contraction in economic
activity in the second quarter. In contrast, exports continued to show strong growth during the period. The
PSI2O stock index retreated by 5.54% in relation to the first three months of the year.
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Interim Report
3. RESULTS
The Group’s performance in the first half of the year has been constrained by the deepening sovereign debt
crisis that affected the entire Euro Zone, most notably Greece and other peripheral countries, Portugal
included, with clear contagion to Spain and Italy.
The Group’s results during the second quarter, which were particularly affected in Portugal by the conditions
previously described, continued to be positively impacted by the international area. Net income reached EUR
156.0 million, representing a year-on-year decrease of 44.7%.
Income Statement
EUR million
1H10
1H11
Change
absolute
relative
Net Interest Income
546.3
542.8
- 3.5
-0.6%
+
389.6
402.9
13.3
3.4%
=
Commercial Banking Income
935.9
945.7
9.8
1.0%
+
205.7
324.8
119.1
57.9%
=
Banking Income
1 141.6
1 270.5
128.9
11.3%
-
Operating Costs
563.3
580.0
16.7
3.0%
=
Operating Income
578.3
690.5
112.2
19.4%
-
Provisions
238.8
469.7
230.9
96.7%
Credit
174.5
305.4
130.9
75.0%
Securities
32.3
56.4
24.1
74.4%
Other
32.0
107.9
75.9
….
339.5
220.8
- 118.7
-35.0%
41.4
64.0
22.6
54.5%
-
15.2
15.2
-
41.4
79.2
37.8
91.3%
=
Income before Taxes and Minorities
-
Immediate tax burden
Current Tax
Special Tax on Banks
-
Deferred Tax
- 19.9
- 70.4
- 50.5
...
=
Income Before Minorities
318.0
212.0
- 106.0
-33.3%
-
Minority Interests
35.8
56.0
20.2
56.3%
=
Net Income
282.2
156.0
- 126.2
-44.7%
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Interim Report
The principal factors which influenced the results in the reporting period where:
•
Prudent strengthening of provisions, with particular impact on the domestic area, due to the current
situation in Portugal and the worsening scenario caused by the economic recession – according to the
guidelines received with regards to the Plan for 2011 to 2015, GDP should fall 2,1% in 2011 and 1,6% in
2012, with a significant impact on impairments. Consequently, BES Group has immediately increased
its prudent stance vis-à-vis the recognition of impairments, having reinforced provisions totalling EUR
469.7 million in the first half of the year (nearly double the amount of the first half of 2010). Credit
impairments were increased by EUR 305.4million (1H2010: EUR 174.5 million), while provisions for
securities amounted to EUR 56.4 million (1H2010: EUR 32.3 million) and other provisions totalled EUR
107.9 million (1H 2010, EUR 32 million);
•
Growth of Commercial banking by 1% in a recessionary environment, with an increased cost of funds
and a general decline in activity due to the deleverage process;
•
Capital markets and other results (include non-recurrent operations such as the sale of the stake in
Banco Bradesco, losses on the sale of loans and the extraordinary dividend of Portugal Telecom, which
were used entirely to strengthen provisions;
•
Operating cost evolution continues to be determined by the consolidation of new international units,
namely Execution Noble, and domestically by the integration of the employees in to the Social Security
system;
•
The increase in the tax burden leading from the introduction of a Banking levy which has translated
into an additional cost of EUR 15.2 million (half of the full year value of EUR 30.4 million);
•
The international activity continues to minimise the effects of the downturn in the domestic economic
environment, resulting in a decrease in net income to EUR 72.5 million (-61% versus the first half of
2010).
International Activity
The implementation of the deleverage programme, namely the sale of international loans, and the general
reduction in activity has affected the international area’s results, which totalled EUR 83.5 million (1H 2010: EUR
96.1 million).
International commercial banking income rose by 13.1%, backed by the positive evolution of Net Interest
Income (+12.9%) and Fees and Commissions (+13.5%). Operating costs rose by 23.7%, influenced by the
consolidation of new units (excluding this effect international area costs would have increased by 2.5%).
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Interim Report
Income Statement: Domestic vs. International
EUR million
Domestic
1H10
1H11
International
Change
1H10
1H11
Change
Net Interest Income
321.6
289.1
-10.1%
224.7
253.7
12.9%
+
297.1
297.9
0.3%
92.5
105.0
13.5%
=
618.7
587.0
-5.1%
317.2
358.7
13.1%
188.1
313.9
66.9%
17.6
10.9
-37.9%
806.8
900.9
11.7%
334.8
369.6
10.4%
+
=
Banking Income
-
Operating Costs
434.1
420.1
-3.2%
129.2
159.9
23.7%
=
Operating Income
372.7
480.8
29.0%
205.6
209.7
2.0%
-
Provisions
194.2
426.0
119.3%
44.6
43.7
-2.0%
Credit
131.7
267.5
103.1%
42.8
37.9
-11.4%
Securities
32.6
56.5
73.0%
- 0.3
- 0.1
….
Other
29.9
102.0
….
2.1
5.9
….
178.5
54.8
-69.3%
161.0
166.0
3.1%
28.9
49.3
70.3%
12.5
14.7
17.9%
-
15.2
-
-
-
-
28.9
64.5
123.3%
12.5
14.7
17.9%
=
Income before Taxes and Minorities
-
Immediate tax burden
Income Tax
Special Tax on Banks
-
Deferred Tax
- 33.3
- 80.9
….
13.4
10.5
-21.7%
=
Income Before Minorities
182.9
71.2
-61.1%
135.1
140.8
4.2%
-
Minority Interests
=
Net Income
- 3.2
- 1.3
….
39.0
57.3
46.7%
186.1
72.5
-61.0%
96.1
83.5
-13.1%
Among the international business units, BES Angola reached a net income of EUR 115.5 million (+50.4%) which,
when combined to the business units in Spain and Brazil, make up the strategic triangle to contribute with EUR
63.1, million for the consolidated net income (76% of the international activity and a year-on-year growth of
32%). The United Kingdom reported a net income of EUR 7.5 million (1H 2010: EUR 41.4 million), declining as a
result of international credit sales in line with the deleverage process and the inaccessibility to capital markets
resulting from the rating downgrades of the Republic of Portugal and consequent downgrades of the BES
Group.
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Interim Report
(EUR million)
76%
of Total
Strategic
Triangle: 63,1
(47,8)
Strate g ic T riang le
J un. 10
J un.11
Africa*
29.3
42.9
Brazil
10.4
13.6
Spain
8.1
6.6
Total
47.8
63.1
*Ang ola, Libya, Cape Verde and Mozambique
UK: 7,5
(41,4)
France/
Luxembourg: 4,3
(3,2)
Other: 1,5
(-1,8)
USA: 7,1
(5,5)
(x) indicates 1H10 figure for comparison
3.1. Net Interest Income
In the first half of the year net interest income reached EUR 543 million, nearly unchanged from the year
earlier, despite the reduction of interest earning assets (-3.1%). As a consequence, and in spite of the volume
effect being negative at EUR 17 million, this was nearly mitigated by an improvement in the margin effect. Net
interest income in the second quarter increased to EUR 271.5 million, in line with the previous two quarters
(4Q2010: EUR 271.4 million; 1Q2011: EUR 271.3 million).
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Interim Report
Net interest margin
EUR million
1H10
Average
Balance
Interest Earnings Assets
Customer Loans
Other Assets
Other
1H11
Avg Rate
(%)
Average
Balance
NII
Avg Rate
(%)
NII
72 571
3.91
1 406
70 445
4.77
1 668
51 519
21 052
3.73
4.34
953
453
51 657
18 788
4.80
4.71
1 229
439
200
-
-
38
-
-
4.77
1 668
72 771
3.90
1 406
70 483
Interest Bearing Liabilities
72 771
2.39
860
70 483
3.22
1 125
Deposits
Other Liabilities
Other
25 622
47 149
-
1.53
2.85
-
194
666
-
31 433
39 050
-
2.95
3.43
-
460
665
-
Interest Bearing Liabilities and Other
72 771
2.39
860
70 483
3.22
1 125
NII / NIM
1.51
546
1.55
543
Euribor 3 M - average
0.67
Interest Earning Assets & Other
1.25
The EURIBOR 3months reached, in the first half of 2011, an average of 1.25% which compares to 0.67% a year
earlier. The average rate on interest bearing liabilities reached 3.22% (+83 bps), while the average rate on
interest earning assets rose to 4.77% (+87bps) which implies a slight improvement in Net Interest Margin
(+4bps). Average rate of deposits increased from 1.53% to 2.95%, translating into a benefit for the Bank’s
depositor, despite the negative impact on profitability.
The favourable evolution in international Net Interest Income (+12.9%) is in contrast with the contraction of
domestic Net Interest Income (-10.1% YoY), leading to a increased contribution of the international business’
NII to 47% of the consolidated NII (1H2010: 41%).
3.2. Fees and Commissions
Fees and commissions increased 3.4% YoY to EUR 402.9 million, also improving on a quarterly basis (-1.1% YoY
in the first quarter).
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Interim Report
Fees and commissions
EUR million
1H10
1H11
Change
absolute
relative
Collections
12.3
10.9
-1.4
-11.5%
Securities
27.7
52.2
24.5
88.5%
Guarantees
41.7
62.5
20.8
50.0%
40.8
39.0
-1.8
-4.5%
96.3
94.3
-2.0
-2.0%
42.5
31.6
-10.9
-25.5%
50.0
48.7
-1.3
-2.5%
Cards
18.7
19.7
1.0
5.2%
Bancassurance
30.0
21.9
-8.1
-27.0%
Other services
29.6
22.1
-7.5
-25.7%
389.6
402.9
13.3
3.4%
Account management
Commissions on loans and other
(1)
Documentary credit
Asset management
(2)
Total
(1)
Includes commissions on loans, project finance, export financing and factoring
(2)
Includes investment funds and portfolio management
The main drivers of fees and commissions were as follows:
•
Commissions on securities grew year-on-year by 88.5%, impacted positively by the consolidation of
Execution Noble;
•
Commissions on guarantees increased by 50%, driven mainly by the corporate banking area and
commercial paper issues;
•
Commissions on cards were up by 5.2%, reflecting pricing adjustments on discounts/exemptions and
irregular use.
The most significant reductions in Fees and Commissions were:
•
Commissions on documentary credit, despite improvements when compared to the first quarter (58%), continue decrease YoY (-25.5%) due to the seasonal effect of large operations in 1H10;
•
Collections decreased 11.5%, as a consequence of a decline in discounted bills and lower factoring
activity;
•
Commissions on bancassurance and asset management were down by 27.0% and 2.5%, respectively,
reflecting an increased demand for on-balance sheet products;
•
Commissions on loans fell 2% on the back of the the loan portfolio reduction policy.
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Interim Report
3.3. Capital Markets and Other Results
Capital markets and other results remained positive for the period, totalling EUR 324.8 million compared with
EUR 205.7 million reported on the same period in the previous year. Capital markets and other results were
impacted by the following non recurrent transactions:
(i) The sale EUR 1.4 billion of international loans (in line with the deleverage programme), represented a cost of
EUR 53.8 million reflected on Other Results; (ii) the sale of the stake in Banco Bradesco, which occurred in the
second quarter, for the approximate amount of BRL 2 billion, resulting in a capital gain of EUR 143.6 million; (iii)
the extraordinary dividends distributed by Portugal Telecom of EUR 58.5 million.
EUR million
1H10
1H11
Change
Interest rate, Credit and FX
Interest rate
Credit
FX and Other
48.1
17.4
-14.0
44.7
58.1
43.3
22.7
-7.9
10.0
25.9
36.7
-52.6
Equity
Trading
Dividends
146.8
77.9
68.9
286.8
145.9
140.9
140.0
68.0
72.0
Other Results
10.8
-20.1
-30.9
205.7
324.8
119.1
Total
The first half of 2011 was marked by reduced liquidity in the capital markets and by heightened concerns of
investors over the public accounts of the Euro Zone countries which raised the risk aversion. As a
consequence, market uncertainty led to a significant widening of peripheral countries’ public debt credit
spreads.
The negative sentiment of investors towards the Euro Zone resulted in dramatic increases in the volatility of
the EUR against a number of currencies, namely the USD and BRL.
3.4. Operating costs
As was published in the first quarter figures, the evolution of the operating costs in 2011 was influenced by the
consolidation of new international operating units, which explains the rise of 23.7% in international operating
costs. If that effect was excluded (+EUR 27.4 million), the increase in costs would be substantially below, 2.6%
YoY. Additionally, 2011 is the first year of the integration of the Bank’s employees into the Social Security
system, which drove the social contribution costs to increase by EUR 10.4 million.
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Interim Report
Operating costs
EUR million
1H10
Change
1H11
absolute
relative
Staff Costs
298.9
312.3
13.4
4.5%
Administrative Costs
213.9
215.4
1.5
0.7%
50.5
52.3
1.8
3.7%
563.3
580.0
16.7
3.0%
563.3
542.2
-21.1
-3.8%
Domestic
434.1
420.1
-14.0
-3.2%
International
129.2
159.9
30.7
23.7%
Depreciation
Total
Total excluding consolidation of new operating
units and social charges
Consolidated operating costs totalled EUR 580 million, representing an increase of 3% (a sharp deceleration
when compared to the first quarter of the year, +8.6%) as a result of the measures already implemented
viewing a reduction of EUR 60 million in the budget. As a result, and when excluding the aforementioned
factors totalling EUR 37.9 million, consolidated operating costs would have decreased by 3.8%.
Staff costs increased by 4.5% (international: 20.2%, domestic –0.7%), rising on the back of the increase in social
contribution costs. Excluding this effect, domestic staff costs would have fallen by 5.2%.
Staff costs
EIR million
1H10
Remunerations
Domestic
absolute
relative
224.4
227.9
3.5
1.5%
74.5
84.4
9.9
13.3%
298.9
312.3
13.4
4.5%
224.4
222.7
-1.7
-0.7%
224.4
212.7
-11.7
-5.2%
74.5
89.6
15.1
20.2%
Pensions, Long term service benefits & Other
Total
1H11
Change
excluding social charges
International
General administrative expenses rose by 0.7%, which was essentially due to a 29.1% growth in international
costs. The domestic component of general administrative expenses fell significantly by 6.9%.
Investments in IT platforms, in equipment and premises lead to an increase in amortization costs of EUR 1.8
million
(+3.7%).
The
increase
was
mainly
due
to
the
continued
international
expansion
(increase of EUR 2.5 million), while the domestic IT related costs decreased EUR 0.7 million.
15
Interim Report
3.5. Productivity and Efficiency
Cost to Income fell to 45.7% (1H2010: 49.3%), benefiting from the non recurrent operations. Cost to Income
excluding capital markets and other results reached 61.3% which compares to 60.2% a year earlier.
Banking income per employee represented a year-on-year growth of 6.8%.
Productivity and Efficiency
1H10
1H11
Change
Cost to Income
49.3%
45.7%
-3.6 p.p.
Cost to Income (ex markets)
60.2%
61.3%
1.1 p.p.
240
256
Banking Income(1) per Employee (€,000)
(1)
6.8%
Data calculated based on annualized 1H11 Banking Income
3.6. Provisions
The determining factors for impairments on Portuguese banking assets changed radically from the first
quarter to the second quarter 2011. Following the Portuguese government’s request for assistance and the
signing of the Memorandum of Economic and Financial Policies (MEFP) between the Government of Portugal,
the European Commission, the European Central Bank and with the International Monetary Fund, perceived
risks changed radically.
The forecasts provided by the Troika and the Bank of Portugal for the completion of the Funding and Capital
Plan for 2011 to 2015 clearly showed this macroeconomic trend over that period.
Macroeconomic forecasts for Portugal
%
2010
GDP (growth)
Unemployment Rate
2011
2012
2013
2014
2015
1.3
-2.1
-1.6
1.1
2.5
2.4
10.8
12.1
13.3
13.3
12.6
11.8
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Interim Report
Considering this macro scenario, the Board of Directors proactively decided to further strengthen provisions,
with special focus on the coverage of credit risk in line with its conservative prudent stance,. Total provisions
in the second quarter reached EUR 366.6 million, 3.6 times more than the first quarter (EUR 103.1 million).
Provisions for securities totalled EUR 55.8 million (1Q2011: EUR 0.6 million), while provisions for foreclosures
and other assets reached EUR 86.3 million (1Q2011: EUR 21.6 million).
Provision Charge
EUR million
2011
1Q
Credit Provisions
Securities Provisions
Other Provisions
Total
2010
2Q
1H
1H
80.9
224.5
305.4
174.5
0.6
55.8
56.4
32.3
21.6
86.3
107.9
32.0
103.1
366.6
469.7
238.8
Provisions of the first half of 2011 totalled EUR 469.7 million, approximately twice the provisions of the same
period a year earlier, and correspond to 68% of the Net Operating income for the period (full year 2010: 43%).
Credit provisions on loans were EUR 305.4 million, 75% higher than the same period a year earlier. The
provisioning charge for the first six months of the year reached 1.18% (0.69% when excluding the additional
charge of EUR 126 million that compares to 0.65% in the same period in 2010). The ratio of Credit Provisions
/Gross Loans rose from 3.15% in June 2010 to 3.83%, with the amount of provision on the balance sheet rising
to close to EUR 2 billion (+17.9%).
Credit provisions
EUR million
Jun,10
Gross Loans
Jun,11
Variação
absoluta
relativa
53 355
51 701
-1 654
-3.1%
174.5
305.4
130.9
75.0%
1 681.5
1 982.6
301.1
17.9%
Provision Charge
0.65%
1.18%
0.53 pp
Provisions for credit / Gross Loans
3.15%
3.83%
0.68 pp
Credit Provisioning Charge
Provisions for credit
Excluding additional contributions, the provision charge reached 0.76% in the second quarter, compared to
0.63% in the previous quarter.
17
Interim Report
Evolution of Provision charge and Credit Provisions / Gross Loans (%)
2.91
2.81
3.12
3.07
3.15
3.27
3.38
3.83
3.47
2.52
1.14
(1)
0.85
0.80
0.76
(2)
0.62
1Q09
2 Q09
3Q09
4 Q09
Provision charge (%)
1Q10
0.71
2Q10
0.63
3Q10
0.71
4 Q10
0.76
(3)
0.63
1Q11
2Q11
Provisions for Credit / Gross Loans
(a) For comparable purposes the “Provision charge” does not include extra-provisioning efforts
(1)
1.47%, including additional LLC
(2)
1.28%, including additional LLC
(3)
1.74% including additional LLC
The recessionary environment, the general reduction in market prices and the worsening of the credit quality
of some issuers has led to a prudent recognition of impairments for securities and a resulting increase in
provisions of EUR 56.4 million (1H2010: EUR 32.3 million). For the same reasons, and as a function of credit
recovery efforts, other provisions reached EUR 107.9 million, of which 60% relates to provisions for properties
held on foreclosures.
3.7. Profitability
The annualised Net Income in the first half of the year corresponds to an average Return on Equity (ROE) of
4.5% and a Return on Assets (ROA) of 0.38%.
Profitability
1H10
(1)
1H11
(1)
Return on Equity
9.6%
4.5%
Return on Assets
0.68%
0.38%
(1) Annualised 1H return
The share price of BES as of 30 June 2011 (EUR 2.57) equates to a market capitalisation of EUR 2,998 million,
which represents a 10.8% decrease Ytd (market capitalisation of EUR 3.360 billion at year end 2010).
18
Interim Report
4. ACTIVITY
4.1. The Deleveraging Process
At the beginning of the second half of 2010, clearly well before the request for financial assistance was made
by the Portuguese government and in anticipation of the inevitable re-adjustments the Portuguese banking
system would be facing, the Board of Directors took the decision to implement a set of initiatives with the
objective of reducing the Loans to Deposits Ratio and reinforce the solvency of the Group.
This resulted in the launch of the deleverage programme which led to a reduction of net assets by EUR 1.2
billion, with a further reduction of EUR 3.5 billion in the first half of 2011. in less than one year there has been a
total reduction of EUR 4.7 billion of net assets. The principal contributors to the deleveraging programme in
the first half of 2011 were (i) a reduction of close to EUR 2 billion of securities of the Fair Value, Available for
Sale and Held to Maturity portfolios (the securities portfolio fell from EUR 18.2 billion in December 2010 to EUR
16.2 billion in June 2011); (ii) the disposal of international loans (project finance, leveraged finance and
structured trade finance) amounting to EUR 2.5 billion by the end of June 2011.
In this context, in which a general deleverage should be promoted, BES has focused on the sale of international
loans as a way to keep financing Portuguese companies. BES Group maintains its traditional support to
Portuguese corporate sector, especially SME, maintaining a continued support through such a difficult period
for the country.
19
Interim Report
Activity Indicators
EUR million
Jun. 10
Total Asstes (1)
Dec. 10
Jun. 11
YoY Change
107 789
105 540
101 434
-5.9%
Net Assets
84 874
83 655
80 162
-5.6%
Customer Loans
53 355
52 606
51 701
-3.1%
Loans to Individuals
14 533
14 523
14 292
-1.7%
- Mortgage
11 739
11 701
11 646
-0.8%
- Other Loans to Individuals
2 794
2 822
2 646
-5.3%
Corporate Lending
38 822
38 083
37 409
-3.6%
Total Customer Funds
55 847
55 988
56 132
0.5%
On-Balance Sheet Customer Funds
- Deposits
- Debt Securities placed with Clients
(2)
Off-Balance Sheet Customer Funds
37 841
38 894
39 610
4.7%
26 082
30 819
31 972
22.6%
11 759
8 075
7 638
-35.0%
18 006
17 094
16 522
-8.2%
198%
137%
165%
131%
155%
125%
-43
-12
Transformation Ratio (%)
(3)
(4)
Customer loans / Deposits
(3)
Customer loans / Customer funds
(1)
p.p.
p.p.
Net Assets + Asset Management + Off-Balance sheet funds + Non consolidated Secuiritised credit
(2)
Includes funds associated with consolidated securitisations and commercial paper
(3)
Net Customer Loans
(4)
According to Bank of Portugal rules
Customer loans show a 3.1% reduction and is evident in all market segments, especially in Other Loans to
individuals which fell by 5.3% and also corporate lending which fell by 3.6% as a consequence of the sale of
international loans(without this effect, corporate lending in fact stabilized during the period). There was also a
contraction, though to a lesser degree, in mortgage loans (-0.8%).
The financial assets available for sale reduced EUR 0.9 billion. Further to the effects on the Group’s liquidity,
the priority was given to exposures with a bigger impact on the Core Tier I ratio, both through RWA reduction
and capital base impact.
In line with the Group’s focus on the improvement of the Loans to Deposits Ratio (LDR), customers’ deposits
increased 22.6% YoY (+EUR 5.9 billion). The substantial increase in deposits and the reduction in loans led to an
improvement in the LDR ratio from 198% in June 2010 to 155%.
20
Interim Report
Wholesale debt securities were considerably reduced compared to June 2010 (-EUR 4.1 billion), namely
certificates of deposits, as a result of the successive rating downgrades of the Portuguese Republic and, as a
consequence, of BES Group’s rating.
In spite of the reduction of off-balance sheet funds by EUR 1.5 billion, total customer funds had a slight
increase of 0.5%.
The programme of the sale of loans has inevitably impacted the activity of the international units, namely in
London and in New York, with clear reduction in the size of their respective portfolios. As a consequence of the
deterioration in Portuguese sovereign risk, there was a reduction of total customer loans driven by the
decrease of the certificates of deposits (CD’s) programme.
Domestic and International Activity
EUR million
Domestic
Jun. 10
(1)
Jun. 11
International
Change
Jun. 10
Jun. 11
Change
77 593
74 664
-3.8%
30 196
26 770
-11.3%
Loans to Customers
41 682
41 241
-1.1%
11 673
10 460
-10.4%
40 375
42 351
4.9%
15 472
13 781
-10.9%
201%
159%
188%
142%
Total Assets
Transformation Ratio
(2) (3)
(1)
Net Assets + Asset Management + Off-Balance sheet funds + Non consolidated secuiritised credit
(2)
Net Customer Loans/ On-Balance Sheet Customer Funds
(3)
According to Bank of Portugal rules
-42
p.p.
-46
p.p.
4.2. Main business areas (Operating Segments)
BES Group Overview
The BES Group develops its activity supported by value propositions aimed at meeting the needs of its
individual costumers, companies and institutions, with its decision making centre and main market of
operation based in Portugal.
The historic links with Africa and South America, particularly with Angola and Brazil, the internationalisation
of national companies, the growing interdependence of economies and the significance of the Portuguese
communities established across various continents have provided the basis for the BES Group international
expansion.
21
Interim Report
In monitoring the performance by business area, the following Operating Segments are considered:
•
Domestic Commercial Banking (includes the Retail, Corporate, Institutional and Private Banking sub
segments)
•
International Commercial Banking
•
Investment Banking
•
Asset Management
•
Markets and Strategic Investments
•
Corporate Centre
Each segment is supported by dedicated structures as well as Group units whose activity is closely related to
each of these segments. The individual monitoring of each operational segment (considered from the
viewpoint of an investment centre) is accompanied by the Executive Committee who defines strategies and
commercial plans for each Operational Segment.
Additionally, the Group uses a second segmentation of its activity and results according to geographical
criteria, considering individually the performance of the units located in Portugal (domestic area) from that
achieved by the units located abroad (International area).
4.2.1. Retail Banking
This segment includes activities with individual costumers, most notably mortgages and consumer loans,
financing of small businesses, deposits, pension plans and other insurance products for private clients, account
management and means of payment, allocation of investment fund units, the buying and selling of securities
and custodian services.
Retail Banking
EUR million
Jun,10
Jun,11
Chg%
BALANCE SHEET
Gross Customer Loans
18 069
17 451
-3.4%
9 032
11 665
29.1%
289.3
276.3
-4.5%
INCOME STATEMENT
14.2
17.9
26.1%
Banking Income
303.5
294.2
-3.1%
Operating Costs
Capital Mkts & Other Results
215.9
212.7
-1.5%
Provisions
19.7
49.9
153.3%
Income Before Tax
67.9
31.6
-53.5%
71.1%
72.3%
1.2
Cost to Income
pp
22
Interim Report
This business area is supported by a branch network that reached a total of 709 branches by the end of June
2011 (a reduction of 22 branches since the beginning of the year). The network includes 46 on-site branches
resulting from partnerships with insurance agents under the Assurfinance programme. The number of on-site
branches has been increasing significantly (+18% compared to the same half a year earlier) due to its major
contribution for the Retail Banking expansion.
In the first half of 2011 the retail banking activity has been characterised by a reinforced capacity of increasing
client funds, producing a positive outcome of 51 bp of the transformation ratio compared to the same period in
June 2010. This occurred in an environment characterised by low interest rates and a high level of competition
in the market in order to attract and retain client deposits. In an effort to reduce the impact of this
environment in terms of banking income, several cross-selling reinforcement measures were put in place as
well as risk-mitigating measures. These initiatives slowed the decrease in banking income to 3.1% when
compared with the same period in 2010.
Since the beginning of the year a total of 63 thousand new clients were acquired, as a result of good
coordination between the branch network and the main costumer acquisition channels (particularly the CrossSegment and Assurfinance programmes). Considering the international units, BES Group acquired 74
thousand clients in the quarter.
The retail segment is supported by the following main growth drivers:
•
Strong focus on attracting costumer funds due to an increase in demand for on-balance sheet funds
which registered a year-on-year growth of 29.1%. In order to support commercial productivity, a broad
offer of solutions were launched such as several structured products as well as a wide range of
programmed saving solutions, with a significant contribution to the reinforcement of long term
savings by the clients (as an example, the programmed savings solutions launched at the beginning of
the second quarter of the year 2011 had in June more than 13 thousand affluent clients. This value has
duplicated by the end of July);
•
A selective credit allocation policy, translating into a contraction in the credit portfolio of 3.4%. This
was in line with a reduction of the credit demand not only in mortgages but also in consumer credit.
Credit origination has improved its risk profile: this can be clearly observed in new mortgages, where
the mass market weight was limited to 43% of new mortgages and the loan-to-value (the ratio
between the loan value and the property value) of new contracts was reduced to 71% (-6% year-onyear);
•
Sustained increases in cross-selling, supported by a continuous flow of innovative products, services
and tools. Within this context it is important to mention the launch of an innovative CRM platform
shared by all retail banking segments which integrates all interaction channels, enhancing the
commercial effectiveness in the entire network. As an example, the individual accidents insurance
(‘BES day-to-day’), an innovative product in both insurance coverage and indemnity system, increased
by 56% the number of insurance policies compared with the same period in the previous year.
23
Interim Report
The Assurfinance programme maintained a central contribution to the commercial performance of Retail
Banking, being responsible for the acquisition of 8.8 thousand new clients.
During the first half of the year the use of Direct Channels continued to increase. The internet banking service
for individual clients – BESnet – reached 1,211,000 subscribers in June 2011, which shows a 14.7% increase
compared with the same period in the previous year. Simultaneously there was an increase in the number of
users, with the number of frequent users rising by
7.2% and logins by 20.3%.
Aiming for continuous
improvement and innovation, at the end of the June BES launched the new BESnet website, a more up to date,
flexible and efficient version than the previous version but still maintaining the simplicity and easier content
navigation: (i) easy and fast content navigation through side, top and frequent operations menu; (ii) service or
operation advanced search; (iii) functional interface with customised menus for font size and page layout
views; (iv) advanced security with new version warnings, personal data protection and safer transactions. The
development of this new platform will also allow, in the near future, the launching of new customised menus
with significant added value.
When considering costumers’ continued change in behaviour and increased mobile connection demand, BES
launched a new service BESmobile for individual and corporate clients with new applications for Android and
Apple, which has been very successful, reaching 75,000 monthly logins which represents four times the
number used by previous versions.
The use of Direct Channels continues to reinforce the number of commercial opportunities through a multichannel vision (e.g. costumers are now able to subscribe to regular saving plans through Direct Channels as
well as to the existing BESnet offer).
BES has also launched the innovative, telephone based, Customer Relationship Management (CRM) platform.
Its integration with Internet Banking will be the next step in the implementation process. This device will
generate better commercial performance from the sales force, a better way to organise the branch network,
(including the generation of potential client leads and their follow-up). and ultimately a reinforcement of the
commercial features of remote channels thus establishing a truly multichannel customer approach.
BEST – Banco Electronico de Servico Total has launched a new ‘mobile’ website – that allows a geo-location of
Bank branches as well as vast array of banking operations. Additionally this mobile site provides a module
called Mobile Trader which provides access to the most important global markets and which allows the
trading of more than 1,200 securities with real time investment portfolio updates. This year BEST also
launched eBudget, an application for iPhone, iPod Touch and iPad, and Android SmartPhones that allows its
users to save, organise and manage their daily expenses ‘on-the-go’ in a practical and innovative way. This
new application is available to clients and non clients alike and has seen downloads not only in Europe but also
in Brazil, China, USA, Canada, Japan, India, Australia, South Africa, showing a clear and growing geographical
distribution. Compared with the previous year, customer loans increased by 8.7%, in line with expected results,
customer deposits increased by 3.2%, despite strong competition within the Portuguese banking system. The
volume of Assets under Custody reached EUR 1.6 billion and net income for the period totalled EUR 4 million.
24
Interim Report
Banco Espirito Santo dos Açores continued to pursue its strategy aimed at increasing its market share and
attracting new clients, having signed a number of protocols with companies and institutions. The opening of a
new branch in Santa Maria Island is in line with this strategy, the youth card ‘Cartão Interjovem’ has futher
reinforced the commercial partnership between the Bank and the Azores Regional Government. The 1st
semester net income reached EUR 558.9 million which represents a year-on-year rise of 4.8%. Compared with
the same period in 2010, customer deposits grew by 8.2% and customer loans by 1.6%. The Mortgage credit has
been decreasing, falling by +2.3%. Net income totalled EUR 409 thousand, a 48.2% reduction affected by a
reduction in financial results and the significant increase in credit provisions.
4.2.2. Corporate and institutional Clients
This business area includes activities with large and medium-sized companies, as well as business with
institutional and municipal clients. BES Group holds a significant position in the Corporate and Institutional
Customers segment, as a result of its traditional role in supporting the development of the national business
community, where it targets companies with a good risk profile and innovative characteristics and companies
with an international focus.
Corporate and institutional Clients
EUR million
Jun,10
Jun,11
Chg%
BALANCE SHEET
21 078
21 676
2.8%
8 756
10 712
22.3%
238.8
189.9
-20.5%
8.3
8.6
3.6%
Banking Income
247.1
198.5
-19.7%
Operating Costs
31.5
33.0
4.8%
Provisions
56.7
79.7
40.6%
158.9
85.8
-46.0%
12.7%
16.6%
3.9
INCOME STATEMENT
Income Before Tax
Cost to Income
pp
Results in this area were directly influenced by the increased cost of accessing the markets, with negative
repercussions on the cost of credit as well as the rise in credit delinquencies which led to a need to strengthen
provisions. To counteract the impact of this effect, the Group has not only intensified its risk control measures
(namely by the increase of collateralisation on loans, not only on new loans but on outstanding loans) but also
by updating the Bank’s pricing policy both in terms of credit spreads but also the reduction of discounts and
fees exemptions.
25
Interim Report
There has been a general improvement in the contribution by this area to the Bank’s balance sheet and an
improvement in the Loans to Deposits Ratio of 44%, with a reinforced link between customer loans and
customer funds.
•
On balance sheet customer funds saw a significant year-on-year rise of 22.3%
•
Customer loans continue to decelerate, with a stock growth of only 1.5% since the beginning of the
year.
The “BES Express Bill” service has clearly proven to be a valuable tool to manage companies’ payments, also
providing them with an important source of liquidity, and generating confidence in dealings between
companies due to BES’s guarantee of payment. So far, more than 6,000 companies subscribed to the “BES
Express Bill”, with more than EUR 1.5 billion in facilities approved and guaranteeing payments in excess of EUR
7.2 billion per year.
International expansion and exports are becoming increasingly more important as a motor for growth for the
Portuguese economy and the Portuguese companies. BES has increased its support to these areas, promoting
several initiatives since the beginning of the year:
•
In partnership with Jornal de Negócios, BES has launched the “BES/Jornal de Négocios Exports and
Internationalisation” prize, which is awarded to companies with the best performance in expanding
their presence abroad and increasing exports. Cotesi Companhia de Têxteis Sintéticos won the award
for the large enterprise category whilst Frezite won the award under the SME category. Also Derovo
and Metalusa won ex-aequo under the category of ‘Revelação’. Special mention was also made to
Grupo Auto-Sueco Coimbra and Efacec Engenharia e Sistemas for the large enterprise category and
Grupo Pecol and Frulact for the SME category.
•
Within the protocol “Export Invest” established with the Portuguese Government, bank discounts are
offered for firm orders given by foreign clients to national producers of equipment and products with
long manufacturing cycles.
Also, continued focus is given to the support of innovation and entrepreneurism, during the first half of the
year the following initiatives were noted:
•
Espírito Santo Ventures launched two new funds for Portuguese companies: a EUR 5 million fund (in
partnership with the Instituto Superior Técnico) to support start-ups, and a EUR 10 million fund to
support companies’ international expansion processes;
•
The launch of an Advanced Management and Innovation Programme for Entrepreneurs jointly
organised with the Portuguese Catholic University. The aim of the programme is to give entrepreneurs
the tools which will make it easier for them to move successfully from innovation to company
formation, to market and finally to internationalisation;
•
The publication of the third annual issue of the “PME Leader” magazine, a joint initiative of Banco
Espírito Santo and the Diário Económico newspaper, which aims to promote companies awarded SME
leader status by the IAPMEI.
26
Interim Report
The team of international bankers from the International Premium Unit continued to contribute to the
successful international expansion of Portuguese and foreign companies based in Portugal. The unit has made
clear contributions in terms of new business lead generation, permitting an effective communication between
the domestic and the several international operations of the Group. At an Iberian level, client acquisition and
business development are supported by close cooperation between domestic and Spanish commercial
networks: of the Iberian companies with a quality risk profile, ca. 50% are BES Group clients.
BES has also continued to pursue a wide set of initiatives aiming at diversifying the profile of revenues. In this
context, Trade Finance clearly plays an important role: the commissions generated by the area of Corporate
and Institutional Clientes increased by 37% year-on-year.
The Internet Banking service for corporate clients - BESnetwork – saw strong growth, with the number of
users reaching 97,000 (+12.8% year-on-year). The number of frequent users and logins to the service grew by
7.3% and 18.1%, respectively. The new service – BESmobile – was also made available to corporate and
institutional clients.
4.2.3. Private Banking
This area is dedicated to business with private high net worth individuals, covering all products associated
with these clients, such as deposits, discretionary management, custodian services, buying and selling of
securities and insurance products.
Private Banking
EUR million
Jun,10
Jun,11
Chg%
BALANCE SHEET
1 031
1 056
2.3%
962
2 146
123.1%
19.5
46.0
135.9%
2.8
3.5
25.0%
Banking Income
22.3
49.5
122.0%
Operating Costs
10.7
9.6
-10.3%
-33.3%
INCOME STATEMENT
Provisions
Income Before Tax
Cost to Income
1.2
0.8
10.4
39.1
….
48.0%
19.4%
-28.6
pp
At the end of the first half of 2011, total Assets under Management and custody reached EUR 7.8 billion (+1.6%
YoY), which represents a very positive evolution within the current market environment. This evolution is
supported by a strong growth of On-Balance Sheet Customer Funds (+123.1% compared with June 2010).
Consequently, this business unit provides an important contribution to the Group’s balance sheet due to its
surplus of customer deposits versus credit loans (Loans-to-Deposits ratio improved year-on-year by 62%).
Despite a strong pressure on deposit rates, Banking Income showed a strong positive progression due to
27
Interim Report
several initiatives such as the ongoing improvement in the credit pricing and the reinforcement of crossselling.
4.2.4 International Commercial Banking
This segment includes the business units located abroad. They continue to show a positive performance
achieving a 19.4% increase in commercial banking income, while the pre-tax profit rose by 24.4%, to EUR 148.7
million.
Customer funds dropped by 24.4% reflecting the reduction in Certificates of Deposit placed in the international
markets following the rating downgrades of sovereign debt and the banking systems.
EUR million
Jun,10
Jun,11
Chg%
BALANCE SHEET
11 229
9 844
-12.3%
10 941
8 274
-24.4%
229.1
273.5
19.4%
INCOME STATEMENT
14.9
1.3
-91.3%
Banking Income
244.0
274.8
12.6%
Operating Costs
89.5
95.0
6.1%
Provisions
35.0
31.1
-11.1%
119.5
148.7
24.4%
36.7%
34.6%
-2.1
Income Before Tax
Cost to Income
pp
During the first half of the year 2011, BES Spain Branch maintained a positive performance, despite the difficult
economic situation. Main highlights of the period include: (i) customer deposits increased by 50.7% YoY , while
credit loans decreased by 11.4%; (ii) a 47.1% YoY increase in client acquisition, exceeding the June 2010 results
by 5 thousand customers, mostly in terms of individual and private banking clients (+55.6%); and (iii) the
reinforcement of prudent credit risk management. Net interest income showed a significant increase,
compensating for the high pressure on the costs of deposits coming from the high competitive Spanish
banking system. The branch posted a net profit of EUR 5.7 million, slightly higher than the previous year.
Last year’s purchase of Banco Pastor’s investment fund and pension funds operations has impacted positively
on the Spanish Branch’s results namely in the asset management business volume.
BES London Branch focuses its activity on wholesale banking in the European market. During the first half of
2011, there has been a reduction in business volume reflecting the adverse conditions in the financial markets
and successive rating downgrades. The deleverage process has also affected the London Branch business
28
Interim Report
performance. Under the difficult current environment, London Branch has adjusted its balance sheet with a
44% reduction in assets year-on-year and by 29% in the loan portfolio with a consequent contraction of the
banking income and net income.
At Banque Espírito Santo et de la Vénétie (France) results reached EUR 10.4 million, representing a year-onyear increase of 3%. This result, supported by a banking income of EUR 22.4 million (+11% YoY), is due to a
strong performance in traditional commercial activity and to positive results from new activities. General
administrative costs grew by 19% as a consequence of the increase of permanent employees as the expansion
policy continues. Net income reached EUR 6.2 million (102% above the same period in 2010).
During this period Espírito Santo Bank (USA) performance continued to be constrained by the difficult scenario
that has been affecting South Florida, principally the property market which continuous to struggle. Deposits
reached USD 477 million (+3% compared with December 2010) 39% of which is current account deposits.
Customer loans reached USD 412 million, a rise of USD 37 million compared with last year’s results. Liquidity
levels remain high with the Credit/Deposit ratio reaching 83%. The broker/dealer ES Financial Services grew by
7.2% as a result of a diverse and consistent range of asset management products aiming to satisfy the clients’
financial needs. Assets under management reached USD 1.3 billion at the end of June 2011. Net income of 1H
2011 totalled USD 2.6 million.
BES New York Branch (USA) focuses its activity on wholesale banking, mainly in the US and Brazil. In the first
half of the year, following consecutive rating downgrades of the Republic of Portugal the consequent
difficulties in accessing capital markets had a negative impact on the distribution of the certificates of deposit
and commercial paper programmes. Adverse market conditions required increased caution and focus on risk
monitoring, in accordance with the Group’s international strategy. The Branch achieved a result of EUR 6.7
million, despite the credit loan portfolio reduction (-63% YoY) and the consequent balance sheet reduction (50%), in line with the established deleverage plan.
In the first half of 2011, Banco Espirito Santo Angola (Angola) maintained its position as the second largest
private owned commercial bank operating in Angola. The dynamic growth however continued to be strongly
affected by the macroeconomic environment and also by the changes to the financial and prudential reporting
rules (bringing in line with best practices). BES Angola consolidated its credit cards business line (BESA
Collection) in line with an expanded range of products and services offered to its individual and corporate
clients, namely new saving plans directed to target segments. During this period, BES Angola continued to be
in the international spotlight, receiving the following distinctions: (i) ‘Best Trade Finance in Angola 2011’ (Global
Finance); (ii); Best Foreign Exchange Provider 2011’ (Global Finance); (iii) ‘Best Emerging Market Bank 2011’
(Global Finance); and (iv) ‘Best Commercial Bank in Angola’ (World Finance). At the end of June 2011, net income
reached EUR 5,966 million, a 8% year-on-year increase; customer funds rose 6 % to EUR 2,209 million and
customer loans increased by 32% to EUR 3,221 million. Commercial banking income grew by 40% to EUR 159
million underpinned by a 65% increase in net interest income. The operational costs increased by 6% although
maintaining high efficiency levels. The net income reached EUR 115.5 million representing an increase of 50%.
29
Interim Report
BES Cape Verde Branch focuses on local corporate banking activities with particular focus on public
companies and Portuguese companies with business links to the Cape Verde Islands and also on the local
affluent market. In June 2011 another branch opened in Santa Maria (Sal Island). During the second quarter of
the year, customer funds rose by 15% and customer loans by 100% impacting positively on Commercial
Banking Income and Net Income rising from the previous quarter. Cape Verde Branch continues to operate,
with an activity focused in loans to non resident entities.
Banco Espirito Santo do Oriente (Macao) showed in the first half of this year a significant decrease compared
with the same period a year earlier, mainly on customer loans explained by the deleveraging plan and its
increased selectivity in terms of new customer loans. These new measures yielded a decrease of 42% YoY (in
EUR million) in customer loans. The Bank’s principal focus was on trade finance operations, taking advantage
of the Group’s presence in Africa, Latin America and Europe and using Macao as a business platform between
China and Portuguese speaking countries. Deposits growth has a strong importance in the current context and
this business unit has been developing several initiatives with institutional clients and local funds in order to
sustain a high level of customer deposits.
During the first half of 2011 the Group has continued to roll-out its international expansion plan. One of the
main highlights of the semester was the acquisition of 25.1% of Moza Bank (Mozambique), with BES being a
part of the management team. This business unit has an ambitious expansion plan and is located in a market
that, though still small in size, has significant growth opportunities.
4.2.5 Investment Banking
Investment banking services include, as well traditional banking services such as loan granting and deposit
taking, advisory services in project finance, mergers and acquisitions, restructuring and consolidation of
liabilities, preparation and public or private placement of shares, bonds and other fixed-income and equity
instruments, stock broking and other investment banking services.
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Interim Report
Investment Banking
EUR million
Jun,10
Jun,11
Chg%
BALANCE SHEET
2 387
2 269
-4.9%
1 438
1 279
-11.1%
113.2
116.4
2.8%
14.7
2.4
-83.7%
Banking Income
127.9
118.8
-7.1%
Operating Costs
63.2
85.1
34.7%
Provisions
21.6
24.3
12.5%
43.1
9.4
-78.2%
49.4%
71.6%
22.2
INCOME STATEMENT
Income Before Tax
Cost to Income
pp
Despite measures taken to mitigate the effects of the current adverse market environment banking income
reached EUR 118.8 million, a decrease of 7.1%, when compared to the same period a year earlier. Results were
penalised by trading performance. Commercial banking income however rose by 2.8% compared the H1 2010
resulting from the focus on commission business. Pre-tax profits reached EUR 9.4 million, decrease year-onyear by 78.2% reflecting, above all, the need for the prudent strengthening of provisions against loans
impairments in Portugal and Spain. The consolidation of Execution Noble also contributed to the decrease in
results through the respective increases in costs associated with the consolidation.
Mergers and Acquisitions – The main operations were: in Portugal (i) the acquisition of a 55% stake in Saludães
Produtos Alimentares; (ii) the sale of 34.98% of the holding company controlled by Grupo SPAL; and (iii) the
acquisition by Secil of Lafarge Betões; in Spain (iv) the Logica group’s acquisition of the control of Informática
Gesfor; (v) TDR Capital and Capricorn Associate’s divestment of Pizza Marzano; and (vi) Grupo ContourGlobal
in the acquisition of a 800MW combined cycle plant from Grupo Gas Natural (the operation is still dependent
on regulatory approval). In Brazil the following operations took place: (vii) Monteiro Aranha in the sale of its
stake of 20.6% in Owens-Illinois do Brasil Indústria e Comércio, Owens-Illinois do Brail e Companhia Industrial
São Paulo e Rio – Cispor for the total amount of USD 140 million; (viii) divestment of 50% by Atech Negócio in
Technolgias Group Mbraer Defesa e Seguros, and (ix) the sale by SAG of a 47% stake in Unidas to Vinci Capital
Partners investment fund, Gávea Investmentos and Kinea Investimentos through a BRIL 300 million capital
increase.
At the end of the first half of the year BESI was ranked in the M&A market: #1 in Portugal by the number of
announced transactions (Mergermarket/Bloomberg), #2 in the Iberian market by number of announced
transactions (Bloomberg) and #2 in the Brazilian market by the number of completed transactions
(Mergermarket).
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Interim Report
Project Finance – the principal operations were; (i) financial advice to the government of South Africa through
the governmental agency of the South African National Roads Agency limited on the motorway concession N1N2 Winelands Toll Highway. (ii) Gestamp Wind – Leader in the restructuring of bridging loans to wind farm
projects in the state of Pernambuco in BRL 116 million; (iii) Rio Maderia – Guarantor for BNDES for the
guarantee of bridging loans for the amount of BRL 450 million for the construction of 2,400 km of power
cables linked to the hydroelectric project at Santo António e Jirau; (iv) Renova – Guarantor for BNDES for the
guarantee of bridging loans for the amount of BRL 410 million for 4 wind farms regarding energy auctions by
the Federal Government of Brazil; (v) Hidrotérmica - Guarantor for BNDES for short term financing of BRL 158
million for the construction of two small hydro power plants in Brazil – Boafé and Autódromo; (vi) the
structuring for the financing of CRT through the issuance of a project bond for the amount of BRL 484 million;
(vii) PV Loiral, Produção de Energia, Lda – Mandated Lead Manager in the structuring and financing in EUR 14
million for the construction of a photovoltaic solar park on the island of Madeira in 7.2MW.
Acquisition Finance and Other Finance Operations - The main operations were: (i) in Portugal as Mandated
Lead Arranger and Agent in the financing transaction in EUR 10 million for Águas do Ribatejo for its activity
expansion plans; (ii) in Brazil as Lead Co-ordinator in the structuring and syndication of the financing of Ouro
Verde Transporte e Locação Ltda in BRL 65 million through the issuance of debentures.
Equity Capital Markets – The principal operations were: (i) in Spain, Sole Bookrunner, the IPO of Cátenon no
Mercado Alternativo Bursátil (MAB), the only share placement in the market during the first six months of 2011;
(ii) in Poland, acted as Joint Bookrunner in the privatisation of 12.1% of Banco BGZ in PLZ 312 million; (iii) in
Brazil as Co-Lead Manager in the Block Trade sale of shares in Banco Bradesco in the sum of BRL 3.2 billion.
Debt Capital Markets – In Brazil the investment bank acted as (i) Bookrunner in the issuance of debentures for
Ouro Verde to the amount of EUR 165 million; (ii) Join Bookrunner in the issuance of debentures by TCI for the
value of BRL 66 million; (iii) Co-Manager for the issuance of promissory notes by FIDC do Banco Pine for the
sum of BRL 207 million; (iv) coordinator in the issuance of promissory notes by CRT in BRL 484 million; (v)
Coordinator in the issuance of promissory notes by Ongoing Participações for the sum of BRL 60.5 million; (vi)
Leading coordinator in the issuance of promissory notes by Ejesa for the amount of BRL 87 million; (vii)
Coordinator of deal between FIDC and OMNI in the amount of BRL 87 million; and (viii) coordinator for the
issuance of debentures by Rodoanel for the sum of BRL 75 million. In Portugal, BESI acted as the sole Lead
Manager for the EUR15 million senior debt issue of Ascendi Financing B.V.
Brokerage – BESI maintained its market leadership in Portugal where it claimed an 11.8% market equity share,
BESI was ranked 4th on the Madrid Stock Exchange with a market share of 6.8%. In Brazil BESI continues to
improve its market share and was ranked 23rd at the end of the reporting period with a market share of 1.6%.
In Poland the Bank rose to 12th place in the stock market ranking with a market share of 2.5%.
Private Equity – The main operations were (i) the investment, via Fundo SES Ibéria in conjunction with other
partners, in the Owners Buyout of a 25% stake in GLT, a Spanish company that provides services to the public
transport network; (ii) the full capital acquisition of PV Loiral, Lda by Globalwatt SGPS in 50:50 participation by
32
Interim Report
Espirito Santo Infrastructure Fund – I (managed by Espírito Santo Capital) and by Grupo Salvador Caetano. PL
Loiral is the licence holder in the prject for the development of the 7.2 MW photovoltaic solar park on the
island of Madeira.
At the beginning of July BESI received the prize for the ‘Best M&A House in Portugal’ and ‘Best Equity House’ in
2011 by Euromoney. BESI’s research team (Espírito Santo Investment Bank Research) was also awarded by
receiving the ‘Best Financial Analyst in Portugal’ by Deloitte at the IRG Awards 2011 and ‘Insurance Analyst of
the Year’ award during the Insurance Day Market Awards 2011. These distinctions continue to demonstrate the
Bank’s commitment to excellence.
4.2.6 Asset management
This segment includes all the asset management activities of the Group, essentially carried out by Espírito
Santo Activos Financeiros (ESAF), within Portugal and abroad (Spain, Luxembourg, United Kingdom, Angola,
and Brazil). ESAF’s product range covers mutual funds, real estate funds and pension funds, besides providing
discretionary and portfolio management services.
Asset Management
EUR million
Jun,10
Jun,11
Chg%
19 673
18 284
-7.1%
Banking Income
28.6
29.5
3.1%
Operating Costs
12.2
11.1
-9.0%
0.0
0.8
….
16.4
17.6
7.3%
42.7%
37.6%
-5.1
ASSETS UNDER MANAGEMENT
INCOME STATEMENT
Provisions
Income Before Tax
Cost to Income
pp
In the first half of 2011 Assets under Management reached EUR 18.3 billion, a year on year decreased of 7.1%.
Due to the recession in the financial markets it has to be considered that, in Portugal, a strong reduction in the
volume of investment funds management (-17%), asset management (-14.7%) and fixed asset funds (-7.7%),
countered only by the acquisition in Spain of Gespastor SGIIC, Spain (formally owned by Banco Pastor), where
Assets under Management rose 77%. The international activities saw, at the end of the period, more than EUR
3.9 billion of Assets under Management, reflecting an increase of 46%.
To adapt to market needs and after the success achieved in previous years with the issue of ES Income funds,
another 5 funds with similar characteristics were issued which, however, were not sufficient to reverse the
trend of a decrease in Assets under Management.
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Interim Report
4.2.7 Markets and Strategic Holdings
This segment oversees the global financial management activity of the Group, which includes the raising and
placing of funds in the financial markets, as well as investment in and risk management of credit, interest rate,
FX and equities, both strategic and relating to the current activities in the financial markets. It also includes
the activities with non-resident institutional investors and the subsequent effects incurred from strategic
decisions impacting indirectly with the Group as a whole.
Markets and Strategic Holdings
EUR million
Jun,10
Jun,11
Chg%
INCOME STATEMENT
Banking Income
168.2
305.2
81.5%
Operating Costs
23.4
25.2
7.7%
104.6
283.2
170.7%
40.2
-3.2
-108.0%
Provisions
Income Before Tax
The performance of this segment is affected by non recurrent operations during the period. Subsequently, the
banking income is also influenced by the gains obtained from these transactions, whose result (+EUR
137million) was fully absorbed by the additional provisions (+EUR 178.6 million) allocated to this particular
business area, leading to a loss of EUR 3.2million.
34
Interim Report
5. FINANCIAL STRENGTH AND OTHER INDICATORS
5.1. Asset Quality
The table below summarises credit, overdue and doubtful loans, credit provisions , as well as overdue loans
and coverage ratios relating to December 2010, March 2011 and June 2011.
Asset Quality
Dec. 10
Mar. 11
Jun. 11
Change
10 / Jun. 11
absolute
Dec.
relative
EUR million
Gross loans
Overdue Loans
Overdue Loans +90d
Overdue and Doubtful Loans (BoP)
Provisions for Credit
(a)
52 606
1107
1027
1439
1777
51 652
1232
1123
1542
1790
51 701
1337
1216
1674
1983
- 905
230
189
235
206
2.10
1.95
2.74
160.6
173.0
123.5
3.38
2.38
2.17
2.99
145.4
159.4
116.1
3.47
2.59
2.35
3.24
148.3
163.0
118.4
3.83
0.49 p.p.
0.40 p.p.
0.50 p.p.
-12.3 p.p.
-10.0 p.p.
-5.1 p.p.
0.45 p.p.
0.67
0.63
0.63
0.58
1.18
1.12
0.51 p.p.
0.49 p.p.
-1.7%
20.8%
18.4%
16.3%
11.6%
Indicators (%)
Overdue Loans / Gross Loans
Overdue Loans +90d / Gross Loans
Overdue and Doubtful Loans / Gross Loans
Coverage of Overdue Loans
Coverage of Overdue Loans + 90d
Coverage of Overdue and Doubtful Loans
Provisions for Credit / Gross Loans
(a)
Provision Charge
Provision Charge net of Recoveries
(a)
According to Circular Letter 99/2003/DSB of BoP
As a consequence of the recessionary environment, the extremely restrictive financial and fiscal policies and
the implementation of the deleverage plan, Overdue Loans ratio over 90 days rose to 2.35% in the first half of
the year (March 2011: 2.17%, December 2010: 1.95%%), with the respective coverage reaching 163.0% (March
2011: 159.4%, December 2010: 173.0%)
Total credit provisions (Provisions for credit/Gross Loans) continued to improve, namely through the additional
charge led by the worsening of the Portuguese economic forecasts, reaching 3.83% of the Gross Loans (March
2011: 3.46%, December 3.38%).
The provisions charge in the period rose to 1.18% (0.69% excluding the additional charge), which compares to
0.63% in the first quarter of the year and 0.67% in the full year 2010.
Overdue loans are deteriorating across the board, with mortgage overdue loans continuing to increase at a
slower rate, reaching 0.82% but still below 1%.
35
Interim Report
Asset Quality Detail
Dec. 10
Mar. 11
Jun. 11
change
Dec. 10 / June 11
(p.p.)
Overdue Loans
Individuals
- Mortgage
- Other Purposes
Corporate
2.10%
1.44%
0.80%
4.08%
2.36%
2.38%
1.52%
0.84%
4.46%
2.72%
2.59%
1.51%
0.82%
4.55%
3.00%
0.49
0.07
0.02
0.47
0.64
According to the latest statistics published by the Bank of Portugal (May 2011), the Group’s overdue loans
ratios compare favourably with those of the Portuguese banking sector, which show an average overdue loans
ratio of 4.1% for corporate clients (BES Group 3%), 1.6% for mortgages (BES Group 0.8%) and 8.5% for other
loans to individuals (BES Group 4.6%).
5.2. Liquidity, Solvency and Financial Strength
5.2.1. Liquidity
After a two year period of maintaining the reference rate at historical lows, ECB raised the refi rate from 1.0%
to 1.25%. This rise was justified by the need to adjust the expansionary monetary policy adopted in the recent
past, and the ECB reaffirmed its objective to maintain price stability and control inflationary pressures.
The approval of the assistance package to Portugal did not allay market fears around the peripheral
economies, spreading to other peripheral EU economies, namely Spain and Italy. This feeling of uncertainty
continued throughout the second quarter and culminated in July with an increase in the support for Greece
and the lengthening of maturities on loans provided to Greece, Ireland and Portugal.
Sovereign debt yields of Greece, Portugal and Ireland reached historical maximums at the end of the second
quarter, peaking at the beginning of July. The situation was worsened by cuts in ratings in April, with Fitch
reducing Portugal sovereign rating by 3 notches to BBB- and Moody’s to Baa1. In July Moody’s cut further the
sovereign rating of the Republic of Portugal to Ba2 (outlook negative).
The banks were also affected by these downgrades; Moody’s reduced its rating on BES to Baa2 in April and Ba1
in July (one notch above that of the Republic of Portugal). In April, the Canadian rating agency DBRS initiated
coverage of BES with a rating of A (low), downgrading to BBB (high) in May as a result of the soverign rating
downgrade to the same level.
During this period, access to the REPO facilities at the ECB continued to be fundamental to offset the
inaccessibility to the financial markets in the short and medium term. At the end of the quarter the amount
outstanding with the ECB increased EUR 2.5 billion versus the previous quarter to EUR 8.3 billion, explained by
the EUR 1.1 billion redemption of medium and long term debt maturing during the quarter (on the first half of
36
Interim Report
the year, 86% of the medium and long term debt maturing in 2011 was redeemed, totalling EUR 4.3 billion) and
the non renewal of short term lines. These effects were not fully compensated by the deleverage programme
currently under way, nor by the EUR 1.4 billion increase in deposits in the second quarter that have increased
their weight in the Group’s funding structure to 56%.
The portfolio of securities eligible for repo operations with Central Banks or in general repo market was
strengthened during the 2nd quarter in about EUR 2.6 billion. In total, the Group’s portfolio of repoable
securities reached EUR 16.9 billion at the end of June 2011, of which EUR 13.2 billion are eligible for repo with the
ECB.
This amount includes total exposure to Portuguese sovereign debt of EUR 3.3 billion (of which EUR 3 billion
with a maturity less than one year). As to exposures to other peripheral countries, BES had an exposure to
Spain of EUR 10 million and no exposure to the Irish, Greek or Italian public debt.
5.2.2. Solvency
The solvency ratios of BES Group are calculated in accordance with Basel II regulations. BES has been
authorised by the Bank of Portugal to use the Internal Ratings Based (IRB) approach for credit risk and the
Standardised Approach – TSA method for operational risk and TSA method for operational risk from the first
quarter of 2009 onwards. The IRB approach implies the use 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 allows for the use of internal estimates for default probabilities
(IRB Foundation).
5.2.3. Basel III recommendations
As of the end of the third quarter 2010, the Basel Committee on Banking Supervision made a number decisions
regarding the general functioning of the global financial system, that have resulted in a set of
recommendations, entitled Basel III.
Banks will have a transition period (from 1 January 2013 to 1 January 2019) to comply with the rules, aimed at
strengthening solvency of financial institutions and preventing financial crises in the future.
Basel III rules have established the following regulatory framework to be gradually implemented until 1 January
2019:
•
minimum level for Core Tier 1 at 7%, (4.5% minimum common equity and 2.5% capital conservation
buffer);
•
minimum level for Tier 1 at 8.5%, (6.0% minimum and 2.5% capital conservation buffer);
•
total capital ratio at 10.5%;
•
introduction of a countercyclical buffer, ranging from 0% to 2.5% of common equity, under conditions
to be defined by the national regulatory authorities;
37
Interim Report
•
transition period defined for the absorption of deductions to capital not eligible under BIS III and for
the new deductions to capital; and
•
definition of the leverage and liquidity ratios (short and long term) in certain conditions, to be defined.
The BES Group continues to closely follow the development process for the future regulatory framework, as
well as all the efforts carried out to define the final rules for new capital ratios. Therefore, based on the
available information, BES is already developing internal studies regarding the impacts of the new regulations
and the strategy to comply with the new requirements defined in the document released by the Basel
Committee on 16 December 2010. This regulation is subject to approval by the European Commission and
transcription into Portuguese law.
During the second quarter, as required by the signing of the Memorandum of Economic and Financial Policies
(MEFP) between the Government of Portugal, the European Commission, the European Central Bank and the
International Monetary Fund, the Bank of Portugal published its Notice 3/2011 where new minimum levels for
Core Tier I were set: 9% by December 2011 and 10% by December 2012.
5.2.4.
Financial Strength: Capital Ratios
The table below provides the relevant information on risk weighted assets, regulatory capital and capital
ratios under the BIS IRB II, as of 30 June 2011 and 31 December 2010.
Risk Weighted Assets and Regulatory Capital
EUR million
Dec. 10
Jun. 11(1)
Risk Weighted Assets (A)
68 802
66 431
Banking Book
Trading Book
Operational Risk
60 610
4 219
3 973
59 482
2 976
3 973
Regulatory Capital (B)
7 798
7 644
Tier I Capital ( C)
6 040
5 416
624
6 127
5 445
682
(10%)
(13%)
1 758
1 517
Core Tier I (D/A)
7.9%
8.2%
Tier I (C/A)
8.8%
9.2%
Total (B/A)
11.3%
11.5%
- Core Tier I (D)
- Other
(Pref Shares / Tier I)
Tier II and Deductions
(1) preliminary figures
Risk weighted assets decreased EUR 2.4 billion in the 1H2011, of which EUR 1.1 billion in the Banking Book and
EUR 1.2 billion in the Trading Book.
38
Interim Report
Core Tier I increased when compare to 2010. The reduction in total regulatory capital due to the lower
contribution from subordinated debt. Core Tier I rose (+30bp) in the semestre to 8.2%, the Tier I ratio rose (+40
bp) to 9.2% and the total solvency ratio remained unchanged at 11.5%.
During the first six months of the year the international rating agencies made a number of adjustments to the
Group’s rating as a consequence of the downgrade of the sovereign rating of the Republic of Portugal. As of 30
June 2011 the BES Group’s rating stood at:
•
Standard and Poor's - long term rating of BBB-, having removed the negative credit watch; short term
rating of A3; negative outlook was maintained.
•
DBRS – long term rating of BBB (high) with negative outlook, short term rating at R-2 (high) also with
negative outlook; intrinsic assessment of A;
•
Moody's (revised 15 July 2011) - long term rating of Ba1; short term NP; credit watch negative.
Stress Test
On the 15 July the Bank of Portugal announced the results of the EU wide stress test for 2011 lead by the
European Banking Authority (EBA) and the ECB. The results published refer to Espírito Santo Financial Group
(ESFG) but which were based on the results of the BES Group. ESFG fully consolidates BES which makes up
97% of its consolidated assets.
The results calculated for the BES Group, based on the assumptions and methodology defined by the EBA and
ECB, confirm a Core Tier I of 6.2% in 2012 under the adverse scenario, without any mitigating measures, which
compares with a level of 7.4% at the end of 2010 and against a benchmark of 5%. Including the mitigating
measures that were completed by the 30th April, the BES Group’s Core Tier I reached 7.0% in 2012 under the
adverse scenario. When all mitigating measures completed until 15 July are taken into account the Core Tier I
in 2012 under the adverse scenario rises to 7.2%, a figure that compares favourably to the more conservative
benchmark of 6.0%. Considering all mitigating measures that will be completed by the end of the year BES
Group Core Tier 1 reaches 7.5% under the adverse scenario in 2012.
Stress Tests Results
Core Tier I as of December 2012 - adverse scenario
Excluding all mitigating measures
6.2%
Including mitigating measures up to 30 April 2011
7.0%
Including mitigating measures up to 31 July 2011
7.2%
Including mitigating measures up to December 2011
7.5%
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Interim Report
Main Equity Stakes in the Available for Sale Portfolio
The principal equity exposures held in the Available for Sale (AFS) portfolio indicate a potential loss of EUR 162
million.
Main Equity Stakes in the Available for Sale Portfolio
EUR million
Gross Potential Gains and Losses
Dec. 10
Jun. 11
Banco Bradesco
170.2
-
EDP - Energias de Portugal
-49.9
-20.1
-7.3
-146.8
7.3
5.2
120.3
-161.7
Portugal Telecom
B. Marocaine Com. Exterieur
In accordance with the current regulatory framework, potential losses are deducted from Core Tier I, adjusted
by deferred tax assets, while only 45% of gross potential gains on securities are eligible as Tier II capital.
40
Interim Report
5.3. Bank of Portugal Reference Indicators
The table below lists the reference indicators under Bank of Portugal instruction 16/2004 for the first half of
2011 and compares with the same period in 2010.
Bank of Portugal Reference Indicators
%
1H10
Solvency
1H11
(f)
Regulatory Capital / RWA (a)
Tier I Capital / RWA
(a)
11.2
11.5
8.4
9.2
2.4
3.2
-0.8
-0.6
10.2
5.8
2.7
3.1
0.8
0.5
49.3
45.7
26.2
24.6
Asset Quality
Overdue and Doubtful Loans
(b)
/ Gross Loans
(c)
Overdue and Doubtful Loans, net / Net loans
(c)
Profitability
Income before Tax and Minorities / Average Equity
Banking Income
(e)
(d)
/Average Net Assets
Income Before Tax and Minorities / Average Net Assets
Efficiency
General Admin Costs
(e)
+ Depreciation / Banking Income
Staff Costs / Banking Income
(a)
(e)
Calculated under IRB Foundation
(b)
According to BoP Circular Letter 99/2003/DSB
(c)
Credit net of Provisions for Overdue Credit and for Doubtful Credit
(d)
Includes average Minority Interests
(e)
According to BoP Instruction n.16/2004
(f)
(e)
1H11 infromation is preliminary
The indicators confirm the following: (i) solvency ratios are in line with the Bank of Portugal’s recommended
minimum levels; (ii) credit quality indicators deteriorated though provisions exceed the overdue and doubtful
loans; (iii) profitability indicators are lower year-on-year due to lower banking income, caused by the increase
in provisioning, and (iv) efficiency levels increased due to operating costs increasing at a slower rate than the
increase in banking income.
41
Interim Report
6. Main Risks and Uncertainties in the second half of 2011
The attached Notes to the Financial Statements contain a description of the management approach to the
main activity risks (credit, market, liquidity and operational risk) to which BES Group and BES are exposed
through the regular development of their activities. We would first highlight the prospects for the second half
of the year which the second quarter’s performance permits to anticipate. As referred in the Economic
Overview chapter, the second quarter of 2011 was marked by the deterioration of sovereign risk in Europe.
This deterioration, combined with new concerns raised over the US budgetary situation and fears over a
deeper than expected slowdown of global economic activity due to an environment of reduced levels of
liquidity, further worsened economic sentiment.
Adding to this context, the execution of the plan agreed with the EC, the ECB and the IMF as a result of the
Portuguese government’s request for financial assistance - whose restrictive effects on families and
companies should start to be felt with increasing acuteness in the last four months of the year - poses new
constraints and challenges to the development of banking activity.
Main risks and uncertainties that may affect the activity and results of BES Group during the second half of
2011:
•
the solutions which the European policy makers come forward with for the Euro Zone countries as a
whole, and the markets’ perception as to whether these solutions are the most adequate to tackle the
current sovereign financial crisis;
•
the Portuguese Government’s level of success in achieving the goals and commitments agreed with
the EC/ECB/IMF under the Economic and Financial Policy Memorandum, and consequent restoration of
Portugal’s credibility within the international community;
•
the increase in the Portuguese banking sector’s difficulties of access to the money and financial
markets if the measures referred to in the two preceding paragraphs fail to produce the desired
effects;
•
the likelihood that Portugal will face a recession in 2011 and 2012;
•
compliance with the new Core Tier I ratio requirements – 9% in December 2011 and 10% in December
2012;
•
the general evolution of the financial markets and how this impacts the Group’s assets.
42
Interim Report
Faced with these prospects, BES Group’s activity in the second half of the year should thus be developed
according to the following guidelines:
•
continued balance sheet deleveraging to achieve new improvements in the Credit / Deposits ratio;
•
broadening and intensification of the commercial strategy of attracting customer funds with an
emphasis on deposits;
•
prudent financial management, maintaining adequate liquidity levels and adapting asset and liability
management to the current context;
•
continued implementation of measures to reinforce the capital ratios, as considered necessary;
•
maintaining a selective credit policy and reinforcing the risk mitigation and control mechanisms;
•
reinforcement and development of initiatives to improve efficiency and productivity.
43
Interim Report
7.
Activity and Results of Banco Espírito Santo
7.1. Business Performance and Asset Quality
BES’s activity in the first half of 2011 was also conditioned by the implementation of the deleveraging
programme which led to a EUR 1.4 billion reduction in assets, underpinned by: reductions in assets held for
trading (-EUR 805 million), assets at fair value (- EUR 664 million), and assets held to maturity, and a reduction
in customer loans (-EUR 360 million). Customer loans decreased across all segments, but particularly in Other
loans to individuals (-6.3%, YoY) and corporate loans (-3.2%), due to the deleveraging programme.
Concerning on-balance sheet customer funds, deposits grew by an expressive 30.0% year-on-year (+EUR 6.7
billion), while debt securities (mainly certificates of deposit) placed with institutional clients fell sharply (-EUR
4.7 billion) as a result of the successive downgrades of the rating of the Portuguese Republic. Off-balance sheet
customer funds decreased by 11.4% due to reductions in portfolio management and bancassurance.
Activity Indicators
eur million
Jun.10
Dec.10
Jun.11
chg %
Net Assets
77 919
75 964
74 579
-4.3%
Customer Loans
43 114
42 237
41 876
-2.9%
Loans to individuals
- Mortgage
- Other Loans to Individuals
11 299
8 621
2 678
11 302
8 615
2 687
11 078
8 568
2 510
-2.0%
-0.6%
-6.3%
Corporate Lending
31 815
30 935
30 798
-3.2%
48 030
47 437
48 078
0.1%
31 184
31 232
33 156
6.3%
22 402
26 604
29 119
30.0%
Debt Securities placed with Clients
8 782
4 628
4 037
-54.0%
-Off-Balance Sheet Customer Funds
16 846
16 205
14 922
-11.4%
- On-Balance Sheet Customer Funds
Deposits
As a reflex of the economic recession, the extremely restrictive financial and fiscal policies and the
implementation of the deleveraging plan, the overdue loans ratio (>90 days) increased to 2.69% (Dec. 10:
2.30%), while the corresponding provision coverage dropped to 156.5% (Dec.10: 163.5%).
There has been a consistent favourable evolution in the ratio of total balance sheet provisions to total loans,
which reached 4.20% on 30 June 2011 (Dec. 10: 3.76%).
44
Interim Report
Asset Quality
Jun,10
Dec,10
Jun,11
Change
Absolute
%
(EUR million)
Customer Loans (gross)
Overdue Loans
Overdue Loans > 90 days
(a)
Overdue and Doubtful Loans (BoP)
Provisions for Credit
43 114
944.4
861.4
1229.4
1501.6
42 237
1036.9
972.7
1379.5
1590.0
41 876
1228.0
1124.9
1577.3
1760.6
- 361
191.1
152.2
197.8
170.6
2.19
2.00
2.85
2.45
2.30
3.26
2.93
2.69
3.77
0.48
0.39
0.51
159.0
174.4
122.2
3.48
153.4
163.5
115.3
3.76
143.4
156.5
111.5
4.20
-10.0
-7.0
-3.8
0.44
0.61
0.65
1.17
0.52
-0.9%
18.4%
15.6%
14.3%
10.7%
(%)
Overdue Loans/Customer Loans (gross)
Overdue Loans> 90 days/ Customer Loans (gross)
Overdue & Doubtful Loans / Customer Loans (gross) (a)
Coverage of Overdue Loans
Coverage of Overdue Loans > 90 days
Coverage of Ovedrue Loans & Doubtful Loans
Provisions for Credit (Balance) / Customer Loans
P&L Credit Provision / Gross Loans
p.p.
p.p.
p.p.
p.p.
p.p.
p.p.
p.p.
p.p.
(a)
According to BoP circular letter nº 99/03/2003
7.2. Operating Conditions, Efficiency and Profitability
BES posted a net loss of EUR 38.8 million in the first half of 2011. This result translates the prudent provisioning
policy implemented, with the provision charge in the period being EUR 185.9 million higher than in the first half
of 2010.
45
Interim Report
Activity Results
EUR million
Jun,10
Jun,11
304.9
Change
Abs.
%
Net Interest Income
353.2
+
-48.3
-13.7%
242.5
234.6
-7.9
-3.3%
=
595.7
539.5
-56.2
-9.4%
+
149.7
205.0
55.3
37.0%
=
Banking Income
745.4
744.5
-0.9
-0.1%
-
Operating Costs
423.2
414.1
-9.1
-2.1%
=
Operating Income
322.2
330.5
8.2
2.5%
-
Net Provisions
199.9
385.8
185.9
93.0%
Credit
132.1
244.0
111.8
74.7%
Securities
34.4
52.2
17.8
51.7%
Other
33.4
89.7
56.3
168.8%
122.3
-55.3
-177.7
-145.2%
-16.1
-30.9
-14.8
….
138.4
14.4
14.4
-
-38.8
-177.2
-128.0%
=
Income before Taxes
-
Taxes
-
Special tax on Banks
=
Net Income
The commercial banking income dropped by 9.4% year-on-year, mainly on a 13.7% reduction of net interest
income that translates the negative impact of a lower net interest margin.
Capital markets and other results benefitted from the receipt of extraordinary dividends, growing by 37.0%
and allowing total banking income to remain flat compared to June 2010.
Operating costs dropped by 2.1%, backed by a 6.4% reduction in other administrative costs, namely travel
expenses (-19.1%), retainer and legal costs (-17.3%), advertising (-15.4%) and studies and advisory services (13.3%).
Provisions were reinforced by a total of EUR 385.8 million, of which 63% were provisions for loan impairments;
the provision charge for impairments in securities was EUR 52.2 million, while other provision charges, almost
entirely allocated to cover real estate received during the loan recovery process, reached EUR 89.7 million.
In addition, the new tax on the banking sector introduced by Ministerial Order no. 121/2011 of 30 March
increased the tax burden in the first half of 2011 by EUR 14.4 million.
In terms of efficiency, the Cost to Income (with markets) improved due to the performance of total banking
income, while the Cost to Income (without markets) mainly reflects the reduction in net interest income.
Productivity and Efficiency Indicators
Jun,10
Jun,11
Chg
Cost to Income
56.8%
55.6%
-1.2
p.p.
Cost to Income (ex-markets)
71.0%
76.7%
5.7
p.p.
46
Interim Report
8. SUNDRY DISCLOSURES
8.1.
Securities issued by BES and held by BES senior officers
In compliance with Article 9 (1-a)) of CMVM regulation no. 5/2008, the table below lists the members of BES
Corporate Bodies who on 30 June 2011 held shares or related financial instruments issued by BES Group.
Shareholder
Securities
Ricardo Espirito Santo Salgado
Securities held
as of 31/12/2010
BES Shares
Disposals
Unit Price (EUR)
Securities held
as of 30/06/2011
1 384 333
20
20
BES Shares
357 008
Fiduprivate Shares
António José Baptista do Souto
Acquisitions
1 384 333
Fiduprivate Shares
José Manuel Espírito Santo Silva
Transactions in the 1H2011
Date
BES Shares
12-04-2011
10 000
2,93
367 008
20
20
38 575
38 575
Jorge Alberto Carvalho Martins
BES Shares
132 385
132 385
Aníbal da Costa Reis de Oliveira
BES Shares
810 000
810 000
Manuel Fernando Espírito Santo Silva
BES Shares
2 484
2 484
José Maria Espirito Santo Ricciardi
BES Shares
21 789
21 789
Jean-Luc Louis Marie Guinoiseau
BES Shares
110 363
25-02-2011
33 455
3,20
76 908
15-05-2011
76 908
2,50
0
Rui Manuel Duarte Sousa da Silveira
BES Shares
2 315
2 315
Joaquim Aníbal B. Freixial de Goes
BES Shares
88 805
88 805
Pedro Fernandes Homem
BES Shares
0
0
Ricardo Abecassis Espirito Santo Silva
BES Shares
50 000
50 000
Amílcar Carlos Ferreira de Morais Pires
BES Shares
40 251
40 251
João Eduardo Moura Silva Freixa
BES Shares
30 000
30 000
In compliance with Article 14 (6 and 7) of CMVM Regulation no. 5/2008, there follows a list of the transactions
of Banco Espírito Santo S.A. shares or related financial instruments carried out during the first half of 2011 by
members of its corporate bodies:
Name
Transaction Nº of Shares Unit Price
Jean-Luc Guinoiseau
Disposal
José Manuel Espírito Santo
Acquisition
386
700
616
933
1 084
2 259
2 340
2 673
3 300
4 164
5 000
5 000
5 000
1
559
584
1 916
1 941
2 500
2 499
3,196
3,196
3,196
3,196
3,196
3,196
3,196
3,196
3,196
3,196
3,196
3,196
3,196
2,9370
2,9330
2,9370
2,9370
2,9330
2,9330
2,9370
Market
Date
Exch
25-02-2011
Exch
12-04-2011
47
Interim Report
Also for compliance with Article 14 (6 and 7) of CMVM Regulation no. 5/2008, the table below lists the
transactions of BES shares or related financial instruments carried out during the first half of 2011 by other
senior executives of BES or of companies having control over BES, or by persons having a close connection to
the former.
Shareholder
António Manuel Marques
Securities
Securities held
as of
31/12/2010
Movimentos em 2010
Date
Acquisitions
Disposals
2 069
Unit Price
(EUR)
2,87
Securities
held as of
30/06/2011
BES shares
2 240 05-01-2011
4 309
António Miguel Natário Rio-Tinto
BES shares
4 892
Bernardo Leite Faria Espirito Santo
BES shares
0
0
Carlos Manuel Garcia Calvário
BES shares
26 277
26 277
Eduardo Nuno Sousa F. Moradas
BES shares
0
0
Eugénio Fernando Quintais Lopes
BES shares
8 763
8 763
4 892
Isabel Almeida Bernardino
BES shares
13 931
13 931
João Filipe Martins Pereira
BES shares
16 446
16 446
João Maria Mello Franco
BES shares
25 272
25 272
Jorge Daniel Lopes da Silva
BES shares
13 245
13 245
José Alexandre Pinto Ribeiro
BES shares
17 000
17 000
Lourenço Vieira Campos
BES shares
0
0
Luis Filipe Magalhães Palma Rodeia
BES shares
2 678
2 678
Manuel José Dias de Freitas
BES shares
13 370
13 370
Miguel Almeida Carvalho
BES shares
0
0
Paulo António Padrão
BES shares
4 554
4 554
Pedro Roberto Menéres Cudell
BES shares
0
0
Rui José Costa Raposo
BES shares
Rui Manuel Fernandes Pires Guerra
BES shares
705 07-04-2011
21 255
705
3.03
0
21 255
8.2. Qualified Holdings in BES Share Capital
The table below lists the qualified holdings in BES share capital as at 30 June 2011, calculated under the terms
of Article 20 of the Securities Code, for compliance with the provisions of Article 9 (1-c)) of CMVM Regulation
no. 05/2008.
48
Interim Report
June 2011
QUALIFIED STAKES
N Shares
ESPIRITO SANTO FINANCIAL GROUP, S.A (Luxembourg)
- directly
- through BESPAR, SGPS, S.A (controlled by Espirito Santo Financial (Portugal), SGPS, S.A.,
fully owned by Espirito Santo Financial Group S.A)
- through members of its Board of Directors and Supervisory Bodies
- through companies controlled directly and indirectly and/or members of its Board of Directors
and Supervisory Bodies
Total attributable
CRÉDIT AGRICOLE, S.A (France)
- directly
Total attributable
BRADPORT, SGPS, S.A*
- directly
Total attributable
SLICHESTER INTERNATIONAL INVESTORS LIMITED (UK)
- directly
Total attributable
PORTUGAL TELECOM, SGPS, S.A
- directly
- through members of its Board of Directors and Supervisory Bodies
Total attributable
ESPIRITO SANTO ACTIVOS FINANCEIROS, SGPS, S.A.
-through ES Premium Fund
Total attributable
% Voting
Rights
29 107 443
2.49%
466 666 666
3 213 134
40.00%
0.28%
8 166 666
507 153 909
0.70%
43.47%
126 076 650
126 076 650
10.81%
10.81%
70 583 333
70 583 333
6.05%
6.05%
69 151 582
69 151 582
5.93%
5.93%
30 585 108
129 056
30 714 164
2.62%
0.01%
2.63%
28 726 150
28 726 150
2.46%
2.46%
* Portuguese company fully owned by Banco Bradesco (Brasil)
8.3. BES Treasury Stock
Transactions involving the Bank’s own shares in the first half of 2011 related to the execution of the Variable
Remuneration Plan based on Financial Instruments (“PRVIF”), which is an integral part of the remuneration
policy of the members of BES’s Executive Committee approved by the General Meeting held on 6 April 2010.
nº of
Shares
Balance
Price (EUR)
Total
(euro thousand)
-
-
-
Shares purchased by BES
342 475
2.909
996
Balance as at June, 30 2011
342 475
2.909
996
Detailed information about this plan is provided in the Notes to the Financial Statements.
49
Interim Report
8.4. Recommendations of the Financial Stability Forum (FSF) and the Committee of European Banking
Supervisors (CEBS) concerning the Transparency of Information and the Valuation of Assets
In its Circular Letter no. 58/2009/DSB of 5 August 2009, the Bank of Portugal reiterated “the need for
institutions to maintain adequate compliance with the recommendations of the Financial Stability Forum
(FSF), as well as those issued by the Committee of European Banking Supervisors (CEBS), concerning the
transparency of information and the valuation of assets, taking into account the proportionality principle”, as
set out in Circular Letters no. 46/08/DSBDR of 15 July 2008 and no. 97/08/DSB of 3 December 2008.
The Bank of Portugal recommends the inclusion in the reporting documents of a specific chapter or annex
exclusively dedicated to the issues dealt with in the CEBS and FSF recommendations.
This chapter aims to comply with the Bank of Portugal’s recommendation, including references to where the
information provided may be found within the body of the Management Report or in the Notes to the Financial
Statements, or, in the present case of an Interim Report, in other documents previously disclosed by BES
Group, namely the 2009 and 2010 Management Reports and the Notes to the 2009 and 2010 Financial
Statements.
I.
BUSINESS MODEL
1.
Description of the Business Model
A detailed description of the Group’s business model is provided in Item 3 of the 2010 Management Report,
with no changes since the publication of the report. The performance of the Group’s main business areas
(operating segments) may be found in Item 4.2 of the first half of 2011 Management Report and in Note 41.
2.
Strategy and Objectives
A detailed description of the Group’s strategy is provided in Item 3 of the 2010 Management Report, with no
relevant changes in strategic guidelines since the publication of the report.
The securitisation transactions are detailed in Note 43.
3., 4. and 5. Activities developed and contribution to the business
Item 4.2 of the first half of 2011 Management Report and Note no. 4 contain detailed information about the
activity developed and its contribution to the business.
II.
RISK AND RISK MANAGEMENT
6. and 7. Description and Nature of the Risks Incurred
Item 5 of the 2010 Management Report describes how the Risk Management function is organised within BES
Group; this information is still up to date. Note 45 contains diverse information that in total allows the market
1
The numbering refers to the Notes to the Interim Consolidated Financial Statements.
50
Interim Report
to form a perception about the risks incurred by BES Group and the management mechanisms in place to
monitor and control such risks.
III.
IMPACT OF THE PERIOD OF FINANCIAL TURMOIL ON THE RESULTS
8.,9.,10. and 11. Qualitative and quantitative description of the results and comparison of impacts between
periods
In 2010 there was an increase in sovereign risk that led to a substantial rise in risk premia, with impacts on the
following areas: determination of EUR 117 million losses on credit instruments (item 6.4 d) of the 2010
Management Report); recognition of EUR 79 million negative fair value reserves for debt instruments (Note no.
19); increase in the cost of funding – a 16 bp differential between the interest rate on customer funds and the
interest rate on customer loans had a negative impact of ca. EUR 110 million on net interest income.
Activity during the first half of 2011 was conducted in a climate of deterioration of Portugal’s economic
situation and prospects of a recession in 2011 and 2012, with a negative impact on risk. Consequently the
Group decided to make an additional credit provision charge of EUR 126 million. The situation of the financial
markets and sovereign risk context also impacted the fair value reserve and the performance of pension fund
assets, whose value decreased in the period by EUR 373 million and EUR 60 million, respectively.
12. Decomposition of realised and non realised write-downs
The profit and loss of assets and liabilities held for trading and of assets at fair value and assets available for
sale are detailed by financial instrument in Notes 7 and 8 to the financial statements of the first half of 2011. In
addition, non realised gains and losses on assets available for sale are detailed in Notes 20 and 39, while the
most significant positions are decomposed in Note 20.
13. Financial turmoil and the price of the BES share
Item 1.7 of the 2010 Management Report and item III.8 of the Corporate Governance Report present the BES
share price performance. Item 2.7 of the first half of 2011 Management Report indicates the price of the BES
shares on 30 June 2011, which decreased in line with the PSI20 index and with the shares of the other
Portuguese banks.
14. Maximum loss risk
Note 45 contains the relevant information about potential losses in market stress situations.
15. Debt issued by the Group and results
Note 44 describes the impact of debt revaluation and the methods used to calculate its impact on the Results.
51
Interim Report
IV.
LEVEL AND TYPE OF EXPOSURES AFFECTED BY THE PERIOD OF TURMOIL
16. Nominal and fair value of exposures
17. Credit risk mitigators
18. Information about the Group’s exposures
The turmoil occurred in the first half of 2011 and in 2010 resulted from the deterioration of sovereign risk in the
peripheral Eurozone countries. As at 30 June 2011 BES Group’s total exposure to these countries’ public debt
was EUR 3,320 million (Dec.10: EUR 2,286 million), of which EUR 3,310 million to Portugal (Dec.10: EUR 1,955
million), EUR 10 million to Spain (Dec.10: EUR 21 million), and EUR 0 to Greece (Dec.10: EUR 309 million, repaid
on 14 January 2011). The Group had no exposure to Italian and Irish public debt during these periods.
19. Movement in exposures between periods
The explanatory Notes (specifically Note 44 in 2010 and Note 45 in the first half of 2011) contain information
comparing the exposures and results. Such information is considered sufficient taking into account the detail
and quantification provided.
20. Non consolidated exposures
All the structures related to securitisation operations originated by the Group are presented in Note 43. None
of the SPEs was consolidated due to the market turbulence.
21.Exposure to monoline insurers and quality of the assets insured
The Group does not have exposures to monoline insurers.
V.
ACCOUNTING POLICIES AND VALUATION METHODS
22. Structured Products
These situations are described in Note 2 – Main accounting policies.
23. Special Purpose Entities (SPEs) and consolidation
Disclosure available in Notes 2 and 43.
24. and 25. Fair value of financial instruments
See the comments to item 16 of this Annex. Notes 2 and 44 contain the conditions for utilisation of the fair
value option as well as the methodology used to value the financial instruments.
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Interim Report
VI.
OTHER RELEVANT ASPECTS OF DISCLOSURE
26. Description of the disclosure policies and principles
The BES Group, within the context of accounting and financial information disclosure, aims to satisfy all the
regulatory requirements, defined by the accounting standards or by the supervisory and regulatory entities.
At the same time, the Group aims to meet the best market practices in information disclosure, balancing the
cost of preparing the relevant information with the benefit that it may provide to the users.
From the information made available to the Group’s shareholders, clients, employees, supervisory entities and
the public in general, we highlight the Annual, Interim and Quarterly Management Reports, the Financial
Statements and the respective Notes, the Corporate Governance Report and the Sustainability Report.
The financial statements, released on a quarterly basis, are prepared under IFRS that comply with the highest
degree of disclosure and transparency and facilitate comparison to other domestic and international banks.
The Corporate Governance Report and the Social Responsibility Report also provide a detailed view about the
governing structure of the Group and the social responsibility assumed in light of the numerous challenges
that the modern world faces, whether of an environmental or social nature, or pertaining to innovation and
entrepreneurship.
A detailed description of all the means used by the Group to communicate with the financial community is
provided in item III.16 of the 2010 Corporate Governance Report.
8.5. Other
• On 9 June 2011 BES held an Extraordinary Meeting of Shareholders that approved a partial amendment of the
Company’s bylaws. BES had requested the Bank of Portugal permission to issue non-subordinated bonds with
a Portuguese Republic guarantee of up to EUR 1.25 billion, with a three years maturity. The Bank of Portugal
in turn requested that BES should change its by-laws in order to allow the Board of Directors to decide on
increasing the share capital if that guarantee were to be executed.
• Within the scope of the Economic and Financial Policy Memorandum signed by the Portuguese Government,
the Portuguese banks are required to prepare a Financial Plan for the period of 2011 to 2015 setting out the
strategy they propose to implement to strengthen capital ratios, deleverage the balance sheet and reinforce
liquidity. This plan must include the following elements:
53
Interim Report
Loan to Deposits Ratio
Stable Funding Ratio
Core Tier I Ratio
%
Date
< 120%
Dec,14
100%
Dec,14
≥ 9%
Dec,11
≥ 10%
Dec,12
BES Group Plan was included in the Espírito Santo Financial Group Plan (ESFG), which is the entity under
supervision on a consolidated basis, having been submitted to the Bank of Portugal on the 30 June. The Plan
will be analysed and discussed with the Bank of Portugal and the representatives from EC, ECB and IMF.
Furthermore, a Special Supervisory Programme has been established by these entities to validate the banks
assets values and capital adequacy, which will incur, during the last four months of the 2011.
54
Interim Report
9. Declaration of Conformity with the Financial Information Reported
In accordance with Article 246 (1-c)) of the Securities Code, the Board of Directors of Banco Espírito Santo, S.A.,
whose members are named hereunder, hereby declares that:
I. the individual financial statements of Banco Espírito Santo, S.A. (BES) for the six-month periods ended 30
June 2010 and 2011 were prepared in accordance with the Adjusted Accounting Standards (AAS), as
determined by Bank of Portugal Notice no. 1/2005, of 21 February 2005;
II. the consolidated financial statements of Grupo Banco Espírito Santo, S.A. (BES Group) for the six-month
periods ended 30 June 2010 and 2011 were prepared in accordance with the International Financial
Reporting Standards (IFRS) adopted in the European Union and transposed into Portuguese legislation
through Decree-Law no. 35 /2005, of 17 February;
III. to the extent of their knowledge the financial statements referred in (i) and (ii) provide a true and
appropriate image of the assets, liabilities, equity and earnings of respectively BES and BES Group, in
accordance with the referred Standards, and were approved by the Board of Directors during the meeting
on 29 July 2011;
IV. the interim report relative to the six-month period ended 30 June 2011 refers the important events
occurred during this period and their impact on the period’s financial statements, describing the main risks
and uncertainties foreseen for the following six months.
Lisbon, 29 July 2011
The Board of Directors
Ricardo Espírito Santo Silva Salgado,
Vice-Chairman of the Board of Directors and
Chairman of the Executive Committee
Amílcar Carlos Ferreira de Morais Pires,
Member of the Board of Directors and
of the Executive Committee
55
Interim Report
BANCO ESPÍRITO SANTO, S.A..A.
CONSOLIDATED BALANCE SHEET AS OF JUNE 30 2011
Jun,10
Dec,10
Jun,11
(eur '000)
(eur '000)
(eur '000)
ASSETS
Cash and deposits at Central Banks
Deposits with banks
Financial assets held for trading
Financial assets at fair value through profit or loss
Available-for-sale financial assets
Loans and advances to banks
(of which of the European system of Central 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 propreties
Proprety and equipment
Intangible assets
Investments in associates
Current income tax assets
Deferred income tax assets
Other assets
TOTAL ASSETS
1 943 001
500 858
5 966 222
1 611 266
10 114 794
3 569 738
( 425)
51 673 579
(1 681 539)
2 757 451
532 552
486 369
746 402
152 763
851 866
24 688
237 180
3 704 856
930 505
557 972
3 942 061
1 424 331
11 774 881
4 245 436
(1 200 424)
50 829 123
(1 776 988)
2 458 800
447 304
574 550
809 037
233 537
961 908
99 396
283 367
4 083 219
1 084
537
3 007
1 063
10 924
3 438
584
579
360
434
881
948
49 717 892
(1 982 632)
2 252 043
329 048
637 413
798 252
221 019
960 815
107 709
376 864
4 704 202
84 873 585
83 655 427
80 162 043
8 995 743
(6 861 735)
2 169 271
7 112 438
26 082 073
29 451 274
241 304
35 217
179 572
96 655
92 082
2 305 591
1 197 386
7 964 820
(5 218 306)
2 088 007
6 380 592
30 819 220
24 109 939
228 944
5 411
214 706
25 324
115 660
2 291 833
1 934 723
9 672 667
(8 346 495)
1 894 927
5 961 051
31 972 098
19 907 433
230 041
5 411
206 667
24 872
79 420
1 577 559
1 642 442
77 958 606
76 179 179
73 174 588
3 500 000
1 085 396
( 24 971)
600 000
59 703
1 023 085
282 178
389 588
3 500 000
1 085 398
269 953
600 000
( 9 580)
978 547
510 520
541 410
3 500 000
1 085 399
269 196
( 997)
456 094
( 382 951)
1 322 053
156 010
582 651
6 914 979
7 476 248
6 987 455
84 873 585
83 655 427
80 162 043
LIABILITIES
Deposits from central banks
(of which of the European System of Central Banks)
Financial liabilities helding for trading
Other financial liabilities at fair value through profit or loss
Deposits from banks
Due to customers
Debt securities issued
Financial liabilities to transferred assets
Hedging derivatives
Non core liabilities held for sale
Provisions
Current income tax liabilities
Deleted income tax liabilities
Capital instruments
Subordinated debt
Other liabilities
TOTAL LIABILITIES
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
56
Interim Report
CONSOLIDATED INCOME STATEMENT AS OF JUNE 30 2011
Jun,10
Jun,11
(eur '000)
(eur '000)
Interest and similar income
1 861 406
1 949 666
Interest expense and similar charges
1 315 065
1 406 853
546 341
542 813
68 903
140 931
426 651
452 848
55 940
68 186
Net Interest Income
Dividend income
Fee and Commission income
Fee and Commission expense
Net gains from financial assets at fair value through profit or loss
( 49 845)
( 142 047)
165 703
168 470
Net gains from foreign exchange differences
17 404
30 147
Net gains/ (losses) from sale of other assets
( 3 242)
Net gains from available-for-sale financial assets
( 45 831)
4 857
163 250
1 120 832
1 242 395
Staff costs
298 959
312 342
General and administrative expenses
213 893
215 360
50 476
52 331
Other operating income and expense
Operating income
Depreciation and amortisation
12 805
8 074
174 526
305 426
Impairment on other financial assets net of reversals
32 104
56 484
Impairment on other assets net of reversals
19 338
99 672
-
-
20 759
12 877
339 490
205 583
41 415
63 989
Provisions impairment net of reversals
Loans impairment net of reversals
Negative consolidation differences
Equity accounted earnings
Net income before income tax and minorities
Income tax
Current tax
Deferred Tax
Net income
ow: profit after taxes of discontinued operations
Minority interests
Consolidated net income for the period
( 19 899)
( 70 372)
317 974
211 966
( 4 290)
( 2 170)
35 796
55 956
282 178
156 010
57
Interim Report
INDIVIDUAL BALANCE SHEET AT JUNE, 30 2011
euro thousand
Jun,11
amount befor
provisions,
provisions,
impairment and
impairment and
depreciations
depreciations
ASSETS
Cash and deposits at Central Banks
Deposits with banks
Customer loans
Repurchase agreements
Deposits with bankserivatives for risk management purposes
Non-current assets held for sale
Invesment properties
Proprety and equipment
Intangible assets
Investments in associates
Current income tax assets
Deferred income tax assets
Other assets
TOTAL ASSETS
516
180
1 272
1 116
12 553
8 429
41 876
1 486
389
322
255
057
587
530
140
076
119 980
153
1 310 219
31 626
295 957
731 895
140 820
711
738
034
720
491
899
715 553
478 612
115 557
77 519 801
8 997 436
1 505 771
12 823 688
29 118 786
11 419 082
1 888 569
190 015
617 546
5 857
137 152
1 487 102
602 658
1 078
592
1 896
76
454
4 962
Net amiunt
1
1
12
8
40
1
516
180
272
116
433
429
565
454
389
322
255
057
607
377
921
450
Jun,10
1 324
224
4 651
1 513
8 293
10 375
42 122
1 922
220
107
391
151
635
586
030
696
295 957
591 075
673 780
391 075
158
126
477
720
491
388
387 576
104 958
1 765 412
2 297
371 372
3 795 749
2 941 031
74 578 770
77 919 035
-
8 997 436
1 505 771
12 823 688
29 118 786
11 419 082
1 888 569
190 015
617 546
5 857
137 152
1 487 102
602 658
8 543 982
1 911 440
14 804 303
22 402 488
19 513 133
367 383
361 147
664 556
71 245
176 476
3 131 974
604 613
68 793 662
72 552 740
28 511
363
114
1 780
76
454
4 934
LIABILITIES
Deposits from Central Banks
Financial liabilities held for trading
Other financial liabilities at fair value through profit or loss
deposits from banks
Due to customers
Financial liabilities to transferred assets
derivatives for risk management purposes
Non core liabilities held for sale
Provisions
Current income tax liabilities
Deleted income tax liabilities
Equity instruments
Subordinated debt
Other liabilities
TOTAL LIABILITIES
68 793 662
EQUITY
Share capital
Share premium
Other equity instruments
Treasury stock
Fair value reserve
Other reserves and retained earnings
Profit for the year
Dividends paid
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
3 500 000
1 080 258
727 650
( 997)
( 141 894)
674 791
( 38 762)
( 15 938)
-
3 500 000
1 080 258
727 650
( 997)
( 141 894)
674 791
( 38 762)
( 15 938)
3 500 000
1 080 255
( 24 971)
99 086
573 490
138 435
-
5 785 108
-
5 785 108
5 366 295
74 578 770
-
74 578 770
77 919 035
58
Interim Report
INDIVIDUAL INCOME STATEMENT AT JUNE, 30 2011
euro thousand
Jun,11
Interest and similar income
Jun,10
1 349 066
1 404 116
995 889
1 099 257
353 177
304 859
Dividend income
115 088
137 291
Fee and comission income
304 217
301 422
Fee and comission expense
71 511
74 989
Interest expense and similar charges
Net Interest Income
Net gains from financial assets at fair value through profit or loss
( 96 839)
( 192 484)
Net gains from available-for-sale financial assets
139 104
32 669
Net gains from foreign exchange differences
( 1 538)
2 344
Net gains from sale of other assets
( 3 146)
Other operating income and expense
( 34 933)
6 875
254 011
745 427
730 190
Staff costs
208 478
209 987
General and administrative expenses
172 638
161 572
Depreciation and amortisation
42 043
42 510
Provisions impairment net of reversals
46 442
4 036
100 552
242 704
Impairment on other financial assets net of reversals
34 389
44 133
Impairment on other assets net of reversals
18 509
94 915
122 376
( 69 667)
( 16 059)
( 30 905)
Operating Income
Loans impairment net of reversals
Net Income Before Tax
Income tax
Current tax
Deferred tax
Net Income
ow: net income after discontinued operations
13 690
6 150
( 29 749)
( 37 055)
138 435
( 38 762)
( 6 070)
( 3 011)
59
Interim Report
II. INTERIM CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES
60
Interim Report
61
Interim Report
62
Interim Report
63
Interim Report
Interim Report
-BANCO ESPÍRITO SANTO
Grupo Banco Espírito Santo
Notes to the interim consolidated financial statements as at 30 June 2011
(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 the core of a financial group – BES Group – formed
by the Bank and a number of financial entities located in Portugal and abroad.
BES is listed on the Euronext Lisbon. As at 30 June 2011, the Bank’s subsidiary BES Finance, Ltd had 600
thousand preference shares listed on the Luxembourg Stock Exchange (no. of preferred shares
outstanding at 30 June 2011: 456 thousand shares).
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 810 branches throughout Portugal (31 December 2010: 828), international
branches in London, Spain, New York, Nassau, Cayman Islands, Cape Verde and Venezuela, a branch in
the Madeira Free Zone and eleven overseas representative offices.
Group companies where the Bank has a direct or indirect holding greater or equal to 20%, over which the
Bank exercises control or has significant influence, and that were included in the consolidated financial
statements, are as follows:
Interim Report
a) Subsidiaries consolidated directly into the Bank:
67
Interim Report
b) Sub-Groups:
68
Interim Report
a)
These companies were fully consolidated, as the Group exercises control over their activities.
b)
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.
69
Interim Report
Additionally, in accordance with SIC 12, the Group consolidates special purpose entities, as follows:
During the first semester of 2011, the special purpose entity “Lusitano Project Finance No.1” was
liquidated. Following this transaction, the Group started to consolidate “Lusitano Project Finance No.1
FTC”.
As at 30 June 2011, the consolidation of these entities had the following impact on the Group’s accounts:
( in thousands of euro)
30.06.2011
D eposits at Central B anks
Finacial assets held for trading
D ue to costumers (net of impairment)
D ebt securities issued
N et Profit for the period
489
336
4 868
1 058
36
241
91 7
044
659
81 2
31 .12.2010
468 085
406 734
5 71 5 334
1 208 319
1 4 346
The main changes in the Group structury that occurred during the six months period ended 30 June 2011
are highlighted as follows:
- Associates (see Note 28)
•
In January 2011, BES ÁFRICA acquired 25.1% of Moza Banco, SA, a mozambican bank;
•
In February 2011, following the capital increase of Watson Brown HSM, Ltd, FCR Ventures III Fund
became to hold 27.57% of its share capital, and started to consolidate this entity under the equity
method;
•
In April 2011, BES sold the participation in Esumédica to Companhia de Seguros Tranquilidade, SA,
originating a consolidated capital gain of euro 380 thousands;
•
In May 2011, occurred the merger of Gespastor, SA in Espirito Santo Gestión, SA.
The movements referring to acquisitions and disposals of investments in subsidiaries and associates
occurred during the six months period ended 30 June 2011 and 2010 are presented as follows:
70
Interim Report
(in thousands of euro)
30.06.2011
Ac quis itio ns
Other
Acqu is ition
price
As soc iates
Moza Banco
Watson Brown
Esumédica
Ascendi Group
Global Active
inv es tmen ts (a)
Dis posals
Total
Other
Sale price
reimbu rs ements (a)
Gain s/ (loss es )
from sales/
dispos als
Total
8 018
68
8 086
1 782
2 938
4 969
87
9 776
9 800
3 006
4 969
87
1 7 862
-
-
-
380
380
8 086
9 776
1 7 862
-
-
-
380
( a) C apital incre ase and loans to companies.
30.06.2010
Ac quisitions
Acquis itio n
price
S ubs idiaries
AMAN B ank
As soc iates
Nanium
Unicre
MRN
AE NOR Douro Interior
Ascendi P inhal Interior
Auvisa
Global Active
Sousacamp
Ydreams
Nutrigreen
AMAL
Polish Hotel Company
Palexpo
O ther
investments (a)
Dis posals
T otal
Other
reimbu rs ements (a)
S ale pric e
Gains/ (los ses)
from sales /
dis posals
T otal
24 275
24 275
15 994
15 994
40 269
40 269
-
-
-
-
1 481
1 0 929
11
10
10
43 458
55 899
6 1 59
568
67
700
1 020
500
1 71
9 1 85
7 640
11 497
11
10
10
43 458
67
700
1 020
500
171
65 084
-
( 652)
( 247)
( 899)
( 652)
( 247)
( 899)
-
80 174
25 1 79
1 05 353
-
( 899)
( 899)
-
(a) C apital incre se and loans to companie s.
71
Interim Report
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUTING 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.
These interim consolidated financial statements for the six months period ended 30 June 2011 were
prepared in accordance with the IFRS effective and adopted by the EU until 30 June 2011. 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 2011.
The accounting policies applied by the Group in the preparation of its interim consolidated financial
statements as at and for the six month period ended 30 June 2011 are consistent with the ones used in
the preparation of the annual consolidated financial statements as at
and for the year ended 31
December 2010.
These consolidated financial statements are expressed in thousands of euro, rounded to the nearest
thousand, 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, recognised 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 judgement
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.
72
Interim Report
These interim consolidated financial statements were approved in the Board of Directors meeting held
on 29 July 2011.
2.2. Basis of consolidation
These consolidated financial statements comprise the interim financial statements of BES 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 interim 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 are attributed proportionally to the owners of the parent and to the
non-controlling interest even if this results in non-controlling interest having a deficit balance.
In a business combination achieved in stages (step acquisition) where control is obtained, the Group
remeasures its previously held non-controlling interest in the acquire at its acquisition date fair value
and recognises the resulting gain or loss in the income statement when determining the respective
goodwill. At the time of a partial sale, from which arises a loss of control of a subsidiary, any remaining
non-controlling interest retained is remeasured to fair value at the date the control is lost and the
resulting gain or loss is recognised against the income statement.
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 associated entity 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. The book
value of the investments in associates includes the value of the respective goodwill determined on
acquisitions and is presented net of impairment losses.
73
Interim Report
In a step acquisition that results in the Group obtaining significant influence over an entity, any previously
held stake in that entity is remeasured to fair value through the income statement when the equity
method is first applied.
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.
Gains or losses on sales of shares in associate companies are recognised in the income statement even if
that sale does not result in the loss of significant influence.
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 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.
Investment funds managed by the Group
As part of the asset management activity, the Group manages investment funds on behalf of the holders
of the participation units. The financial statements of these funds are not consolidated by the Group
except in the cases where control is exercised over its activity based on the criteria estabilished by SIC –
12. Control is presumed to exist when the Group owns more than 50% of the participation units of the
fund.
74
Interim Report
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.
Goodwill resulting from business combinations that occurred from 1 January 2004 until 31 December
2009, was accounted under the purchase method. The cost of acquisition was 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 represented the difference between the cost of acquisition and the fair value of the Group’s
share of identifiable net assets, liabilities and contingent liabilities acquired.
For acquisitions on or after 1 January 2010, in accordance with IFRS 3 – Business combinations, the Group
measures goodwill as the fair value of the consideration transferred including the fair value of any
previously held non-controlling interest in the acquire, less the net recognised amount (generally fair
value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date.
Transaction costs are expensed as incurred.
At the acquisition date, the non-controlling interest are measured at their proportionate interest in the
fair value of the net identifiable assets acquired and of the liabilities assumed, without the respective
portion of goodwill. As a result, the goodwill recognised in these consolidated financial statements
corresponds only to the portion attributable to the equity holders of the Bank.
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.
Transactions with non-controlling interest
Acquisitions of non-controlling interest are accounted for as transactions with equity holders in their
capacity as equity holders and therefore no goodwill is recognised as a result of such a transaction. Any
difference between the consideration paid and the amount of non-controlling interest acquired is
accounted for as a movement in equity. Similarly, sales of non-controlling interest and dilutions from
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which does not result a loss of control, are accounted for as transactions with equity holders in their
capacity as equity holders and therefore no gain or loss is recognised in the income statement.
Any difference between the sale proceeds and the recognised amount of non-controlling interest in the
consolidated financial statements is accounted for as a movement in equity.
Gains or Losses on a dilution or on a sale of a portion of an interest in a subsidiary, from which results a
loss of control, are accounted for by the group in the income statement.
Foreign currency translation
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 period
using the exchange rates at the beginning of the period and at the 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 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 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.
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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.
2.4. Derivative financial instruments and hedge accounting
Classification
Derivatives for risk management purposes includes (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
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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;
(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.
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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.
2.5. Loans and advances to customers
Loans and advances to customers includes 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.
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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 into consideration the following factors:
•
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
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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.
2.6. Other financial assets
Classification
The Group classifies its other financial assets at initial recognition in the following categories:
•
This category includes: (i) financial assets held for trading, which are those acquired principally for the
purpose of selling in the short term or that are owned as part of a portfolio of identified financial
instruments that are managed together and for which there is evidence of a recent actual pattern of
short-term profit taking 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 24 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 the above mentioned conditions, and, in accordance, are classified
under the fair value through profit or loss category.
•
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
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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.
Initial recognition, initial 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.
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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.
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.
During the six month period ended 30 June 2011 and the year 2010, there were no reclassifications
between categories.
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.
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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.
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.
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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 the above mentioned conditions and, in accordance,
are classified under the fair value through profit or loss category.
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.
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2.11. Non-current assets held-for-sale
Non-current assets or disposal groups (groups 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 is highly probable.
Immediately before classification as held for sale, the measurement of the non-current assets or all
assets and liabilities in a disposal group, is brought up to date in accordance with the applicable IFRS.
Subsquently, these assets or disposal group are measured at the lower of their carrying amount or fair
value less costs to sell.
In the scope of its activity, the Group incurs in the risk from failure of the borrower to repay all the
amounts due. In case of loans and advances with mortgage collateral, the Group acquires the asset held
as collateral in exchange from loans. In accordance with the requirements of Regime Geral das
Instituições de Crédito e Sociedades Financeiras (RGICSF), banks are prevented from acquiring property
that is not essential to their daily operations (No. 1 of article of RGICSF) being able to acquire, however,
property in exchange for loans. This property must be sold within 2 years, period that may be extended by
written authorization from the Bank of Portugal and in conditions to be determined by this authority (No.
114 of article of RGICSF).
It is Group’s objective to immediately dispose all property acquired in exchange for loans. This property is
classified as non-current assets held-for-sale and initially recognised at the lower of its fair value less
costs to sell and the carrying amount of the loans. Subsequently, this property is measured at the lower
of its carrying amount and the corresponding fair value less costs to sell and is not depreciated. Any
subsequent write-down of the acquired property to fair value is recorded in the income statement.
Property valuations are performed in accordance with one of the following methodologies, which are
applied in accordance with the specific situation of the asset:
a) Market Method
The Market Comparison Criteria takes as reference transaction values of similar and comparable
property to the property under valuation, obtained through market searching carried out in the zone.
b) Income Method
Under this method, the property is valued based on the capitalization of its net income, discounted
for the present moment, through the discounted cash-flows method.
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c) Cost Method
This method separates the value of property on its basic components: Urbane Ground Value and
Urbanity Value; Construction value; and Indirect Costs Value.
The valuations are performed by independent specialized entities. The valuation reports are analysed
internally with the gauging of processes adequacy, by comparing the sales values with the reevaluated
values.
2.12. Property and equipment
Property and equipment are measured at 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:
Number of years
Buildings
Improvements in leasehold property
35 to 50
10
Computer equipment
4 to 5
Furniture
4 to 1 0
Fixtures
5 to 1 2
S ecurity equipment
4 to 1 0
Office equipment
4 to 1 0
Motor vehicles
4
Other equipment
5
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.
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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
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
(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.
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•
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 to cover retirement benefits
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.
From 1 January 2011, the Bank employees hired until 31 March 2008 were also integrated into the General
Social Security Regime, which ensure the protection of employees in contingencies of maternity,
paternity, adoption and oldness, remaining under the responsibility of banks to protect sickness, disability,
survival and death (Decree-Law No. 1-A/2011, from 3 January).
The contribution rate is 26.6%, 23.6% paid by the employee entity and 3% paid by the employers, instead
of Caixa de Abono de Família dos Empregados Bancários (CAFEB), abolished by the same law. In
consequence of this change, the pension rights of active employers is to be covered under the terms
defined by the General Social Security Regime, taking into account the length of service from 1 January
2011 until retirement. The differential required to support the guaranteed pension in terms of the ACT is
paid by the Banks.
The pension liabilities and health 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.
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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
independent actuaries.
The discount rate used in this calculation is determined based on market rates of emissions associated
with high quality corporate bonds, denominated in the currency in which benefits will be paid and with a
similar maturity to the date of termination of the plan.
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 not to 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 over 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%.
Semiannually, the Group assesses 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.
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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. Since 2008, these
benefits are covered by the Pension Fund which at present covers all responsibilities with pensions and
health care benefits.
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 longterm 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
was determined based on the same methodology described for pensions.
In each period the increase in the liability for long-term service premiums, including actuarial gains and
losses and past service costs is charged to the income statement.
Share based incentive scheme (SIBA)
BES and its subsidiaries established a share based payment scheme (SIBA), which ended in December
2010 that allowed its employees to acquire BES shares with deferred settlement financed by it. The
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employees had 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 had, after the referred period, the option to
sell the shares back to BES at acquisition cost.
The shares held by the employees under SIBA were accounted for as treasury stock of BES, being this
scheme classified as an equity settlement share based payment in accordance with IFRS 2 – Share based
payments.
Each option under the scheme was fair valued on grant date and was recognised as an expense, with a
corresponding increase in equity, over the vesting period. Annually the amount recognised as an expense
was adjusted to reflect the actual number of options that vest. The equity instruments granted were 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 – 2008/2011).
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 statement as staff costs over a period of three
years. The recognised liability under the plan is re-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.
Variable remuneration payment plan on financial instruments (PRVIF)
Following the recommendations of the Supervising and Regulatory authorities, on the shareholders
General Meeting, held in 6 April 2010 it was approved a new remuneration policy for the Executive
Committee members. This policy consists in giving to the Executive Committee members a fixed
remuneration, which should represent approximately 45% of the total remuneration, and a variable
component representing around 55% of the total remuneration. The variable remuneration shall have
two components: one associated with short-term performance and another with medium-term
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performance. Half of the short-term component must be paid in cash and the remaining 50% should be
paid over a three years period, with half of these payments to be made in cash and the remaining through
the attribution of shares. The medium-term component has associated a share options program with the
exercise of the options set at 3 years from the date of its attribution.
The execution of PRVIF regarding the total remunerations in cash, number of shares and options
attributable to each Executive Committee member will be determined by the Remuneration Committee.
Regarding the first scheme, the attribution of PRVIF shares to the beneficiaries is performed on a
deferred basis over a period of three years ( 1st year: 33%; 2nd year: 33% and 3rd year: 34%) and is subject
to the achievement of a Return on Equity (ROE) greater than or equal to 5%.
Regarding the attribution of options to the beneficiaries is also performed by the Remuneration
Committee, and the exercise price is equal to the single average of the closing prices of BES shares on
NYSE Euronext Lisbon during the 20 days preceding the day of attribution of the options, plus 10%. The
option can only be exercised at maturity and the beneficiary may choose between the physical settlement
or the financial settlement of the options.
PRVIF provides for the granting of options on BES shares to the Bank Top Management. The options are
granted by the Board of Directors to the beneficiaries in identical terms to those explained above for the
attribution of options to the members of the Executive Committee.
PRVIF is accounted for under IFRS rules (IFRS 2 and IAS 19).
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 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.
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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
consolidated balance sheet 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
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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.
For derivative financial instruments, except for 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.
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2.20. Dividend income
Dividend income is recognised when the right to receive payment is established.
2.21. Segmental reporting
The Group adopted IFRS 8 – Segmental reporting, for the disclosure 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.
The results of the operating segments are periodically reviewed by the Management for decisions taking
purposes. The Group prepares on a regular basis, financial information regarding the operating segments,
which is reported to the Management.
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.
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. 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, deposits with banks and deposits
at Central Banks.
Cash and cash equivalents exclude restricted balances with central banks.
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NOTE 3 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES
IFRS set forth a range of accounting treatments and require management to apply judgement 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
applied 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 are appropriate and that the financial statements present the Group’s financial
position and results fairly in all material aspects.
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 of the markets, 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 or market value
below the acquisition cost for a period longer than twelve-months;
(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.
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
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for the underlying instruments, time value, yield curve and volatility factors. These pricing models may
require assumptions or judgements in estimating fair values.
Consequently, the use of a different model or different assumptions or judgements 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 judgements. 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. Securitisations and special purpose entities (SPE)
The Group sponsors the formation of special purpose entities (SPEs) primarily for asset securitisation
transactions.
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
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.
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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.
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.
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NOTE 4 – SEGMENT REPORTING
BES Group activities are focused on the financial sector and are directed to companies, institutionals and
private customers. 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 customers, 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 663 branches in Portugal and with branches in
London, New York, Spain (25 branches), Nassau, Cayman Islands, Cape Verde, Venezuela and Madeira
Free Zone and 11 representation offices – with BES Investmento (investment banking); BES Angola (39
branches); BES Açores (18 branches); Banco BEST (11 branches); Espírito Santo Bank; BES Oriente; Aman
Bank; 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, Institutional and Private
Banking; (2) International Commercial Banking; (3) Investment Banking; (4) Asset Management; (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 other units of the Group whose activities are
most related to one of these segments. In addition to the individual evaluation of each operating unit of
the Group (considered as an investment centre), the Executive Committee 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).
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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 customers
developed in Portugal, based in the branch offices network, corporate centres and other channels and
includes the following:
a) Retail: corresponds to all activity developed by BES in Portugal with private customers and small
businesses, 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 customers, commissions
over account management and electronic payments, the investment funds cross-selling and
brokerage and custodian services.
b) Corporate and Institutional: includes BES activities in Portugal with small, medium and large
companies, through its commercial structure dedicated to this segment, which includes 24 corporate
centres. Also includes activities with institutional and municipal customers. 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.
c)
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.
This operating segment includes the units located abroad, which banking activities are focused on
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, New York, Cape Verde and
Venezuela 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.
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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 Project Finance 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 types 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 non-controlling 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, which
allow the Group to take advantage of the price changes in those markets where these instruments are
exchanged.
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, Planning, 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.
The accounting policies applied in the preparation of the financial information related with the operating
segments are consistent with the ones used in the preparation of these consolidated financial
statements, which are described in Note 2, being also adopted the following principles:
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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 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
Cost Based Approach (CBA) model; (vi) the allocation of credit risk determined in accordance with the
impairment model; (vii) the allocation of the Bank total equity to the capital markets and strategic
investments segment.
The transactions between the 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 transactions are allocated to the segments in accordance with CBA 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
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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 and Intangible Assets. 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 taxes
Income tax is a part of the Group net income but does not affect the evaluation of most of the Operating
Segments. Deferred tax assets and liabilities are included in the 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 the operating
segments, which activities relate to customers.
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 África, Aman Bank, BES Oriente, Espírito Santo
Bank, BES Cape Verde; Espírito Santo Vénétie, Banco Delle Tre Venezie, 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.
The primary segments reporting are presented as follows:
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Six month period ended
30.06.2011
Corporates a nd
Institutionals
Retail Banking
Private banking
International retail
banking
Investment
banking
Asset management
Ca pital markets
and strategic
investments
Corporate center
Total
Net intere st income
176 31 3
63 773
37 564
224 754
37 644
588
2 1 77
-
542 81 3
Other operating income
11 7 81 4
1 34 729
1 1 916
49 902
78 134
28 900
277 807
-
699 202
Total operating income
294 1 27
1 98 502
49 480
274 656
1 15 778
29 488
279 984
-
1 242 01 5
Ope rating expenses
262 583
1 12 61 4
1 0 378
126 087
1 09 452
11 851
308 302
108 422
1 049 689
31 081
469 654
Of which:
Provisions/Impairment
49 852
79 694
783
24 270
819
283 1 55
-
Gains on disposal of investments in subsidiaries and asso
-
-
-
-
-
-
380
-
380
Share of profit of associates
-
-
-
1 00
2 393
-
1 0 384
-
12 877
31 544
85 888
39 1 02
148 669
8 71 9
17 637
( 17 554)
( 1 08 422)
205 583
452
16 844
8
( 51 487)
( 2 714)
( 9 581 )
78 766
-
32 288
Profit before income tax
Inter-segments operating income
30.06.2010
Corporates a nd
Institutionals
Retail Banking
Private banking
International retail
banking
Investment
banking
Asset management
Ca pital markets
and strategic
investments
Corporate center
Total
Net intere st income
180 543
1 34 856
7 386
192 057
41 604
243
( 10 348)
-
546 341
Other operating income
122 969
1 12 259
1 4 932
51 895
81 364
28 380
162 692
-
574 491
Total operating income
303 51 2
247 11 5
22 318
243 952
1 22 968
28 623
152 344
-
1 1 20 832
Ope rating expenses
235 554
88 21 4
1 2 006
124 465
84 858
12 135
128 023
11 6 846
802 101
238 773
O f which:
Provisions/Impairment
19 669
56 720
1 217
34 969
21 61 0
( 48)
104 636
-
Gains on disposal of investments in subsidiaries and asso
-
-
-
-
-
-
-
-
-
Share of profit of associates
-
-
-
-
4 886
-
1 5 873
-
20 759
67 958
1 58 901
1 0 312
11 9 487
42 996
16 488
40 1 94
( 1 16 846)
339 490
1 1 85
18 399
94
( 11 198)
3 756
( 1 1 330)
34 023
-
34 929
Profit before income tax
Inter-segments operating income
The secondary segment information is prepared in accordance with the geographical distribution of the
Group’s business units, as follows:
30.06.2011
P ortugal
N et profit for the period
N et assets
C apital expenditure (P roperty and equipment)
C apital expenditure (Intangible assets)
72
59 048
7
14
546
963
792
532
F rance /
Luxembourg
S pain
6 647
4 791 973
920
1 438
United
Kingdom
4 290
77 361
-
United States
of America
7 522
5 051 1 15
1 67
2 320
7 148
1 496 41 2
3 796
409
Brazil
1 3 630
2 71 1 740
332
8
Angola
Cape Verde
41 681
5 992 837
33 280
739
Macao
543
106 694
506
16
O ther
667
225 122
207
2
Total
1 336
659 826
79
232
1 56
80 1 62
47
19
01 0
043
079
696
(in thousands of euro
30.06.201 0
Portugal
Net profit for the period
Net assets *
Capital expenditure (P roperty and equipment) *
Capital expenditure (Intangible assets) *
186 077
61 472 957
40 656
105 002
S pain
8
5 498
1
22
077
374
325
632
France /
Luxembourg
3 240
72 470
-
U nited
Kingdom
41
5 601
3
6
388
399
11 8
733
U nited S tates
of America
5 480
1 562 993
14
-
B razil
10 371
2 672 1 91
-
Angola
28 794
5 923 889
1 48 435
695
Cape Verde
1 165
1 11 437
1 281
85
Macao
886
252 857
36
-
O ther
( 3 300)
486 860
11 6
Total
282 1 78
83 655 427
1 94 865
1 35 263
* Information as at 3 1 De cembe r 201 0
105
Interim Report
NOTE 5 – NET INTEREST INCOME
This balance is analysed as follows:
30.06.201 1
In teres t and s imilar inc ome
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
Interest from held-to-maturity financ ial assets
Other interest and similar income
In teres t ex pense and s imilar c harges
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 and similar income
1 228
98
45
1 91
326
50
8
30.06.2010
854
393
874
366
292
730
157
953 146
1 54 752
35 888
1 56 435
501 077
52 988
7 120
1 949 666
1 861 406
417
459
200
276
47
5
237
774
824
459
11 0
449
467 879
1 93 060
1 38 537
454 707
59 451
1 431
1 406 853
1 31 5 065
542 81 3
546 341
Interest from loans and advances includes an amount of euro 20 585 thousand (30 June 2010: euro 10 815
thousand) related to the unwind of discount regarding the impairment losses of loans and advances to
customers that are overdue (see Note 22).
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.
106
Interim Report
NOTE 6 – NET FEE AND COMMISSION INCOME
S ix month period ended
30.06.201 1
Fee and c ommiss io n inc ome
F rom banking s ervices
F rom guarantees granted
F rom transac tions with securities
F rom commitments as sumed to third parties
Other fee and commission income
Fee and c ommiss io n ex pens es
F rom banking s ervices rendered by third parties
F rom transac tions with securities
F rom guarantees rec eived
Other fee and commission expens es
248
97
41
23
43
30.06.201 0
254
023
033
141
397
249 1 91
85 837
21 353
21 375
48 895
452 848
426 651
41
13
2
10
084
566
841
695
34 663
1 0 381
1 659
9 237
68 186
55 940
384 662
370 71 1
107
Interim Report
NOTE 7 – NET GAINS / (LOSSES) FROM FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT FAIR VALUE
THROUGH PROFIT OR LOSS
Six mon th period ended
Gains
30.06.2011
Los ses
Total
30.06.2010
Los ses
Gains
Total
T rading as s ets an d liabilities
B onds and other fixed income securities
Issued by government and public entities
Issued by other entities
1 5 378
1 1 485
39 954
3 834
( 24 576)
7 651
1 06 587
1 8 743
17 292
16 154
89 295
2 589
S hares
47 571
21 369
26 202
44 976
70 747
( 25 771 )
31 5
493
( 178)
763
5 31 9
( 4 556)
74 749
65 650
9 099
1 71 069
1 09 51 2
61 557
Other variable income securities
D erivativ e financial ins truments
E xchange rate contracts
Interest rate contracts
E quity/Index contracts
C redit default contracts
Other
1 01 8 51 4
2 905 353
1 230 41 0
256 467
1 88 222
1 1 33
2 925
1 231
255
1 81
068
493
580
976
666
( 1 14 554)
( 20 140)
( 1 170)
491
6 556
1 260 095
3 063 449
736 975
201 530
225 435
1 369
3 1 04
740
211
227
961
064
166
567
837
( 1 09 866)
( 40 615)
( 3 1 91 )
( 1 0 037)
( 2 402)
5 598 966
5 727 783
( 1 28 81 7)
5 487 484
5 653 595
( 1 66 1 11 )
5 673 71 5
5 793 433
( 1 19 71 8)
5 658 553
5 763 107
( 1 04 554)
74 694
68 346
6 348
1 52 630
81 337
71 293
693
-
693
79
1 793
( 1 714)
84 656
1 77 11 5
( 92 459)
73 000
89 854
( 1 6 854)
1 60 043
245 461
( 85 41 8)
225 709
1 72 984
52 725
1 63 552
1 46 842
1 6 71 0
87 379
96 220
( 8 841 )
256 544
210 165
46 379
1 47 482
1 36 657
10 825
580 139
602 468
( 22 329)
460 570
405 861
54 709
6 253 854
6 395 901
( 1 42 047)
6 1 1 9 1 23
6 1 68 968
( 49 845)
F inanc ial as sets and liabilities at fair value
through profit o r los s
S ecurities
S hares
Other financ ial assets
Financial liabilities
( 1)
( 1)
(1 )
includes the fair value change on hedged ass ets/liabilities or at fair value option
As at 30 June 2011, this balance includes a negative effect of euro 19.0 million 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 (30 June 2010: positive effect of euro 60.5 million).
108
Interim Report
NOTE 8 – NET GAINS FROM AVAILABLE-FOR-SALE FINANCIAL ASSETS
Six mon th period ended
30.06.201 1
Gains
Bonds and other fixed income securities
Shares
Other variable income s ecurities
Los ses
30.06.2010
Total
Gains
L oss es
Total
5 134
12 483
1 188
18 987
3 946
( 6 504)
1 6 209
30 234
1 8 600
8 630
( 2 391)
21 604
219 146
57 321
161 825
184 1 31
39 523
1 44 608
9 537
334
9 203
2 1 65
283
1 882
246 300
77 830
168 470
232 739
67 036
1 65 703
During the six month period ended 30 June 2011, the Group sold at market prices through the overall stock
exchange 81.6 million ordinary shares of Bradesco (its entire shareholding position in Banco Bradesco) and
transacted on the stock exchange 165.4 million ordinary shares of EDP. The realised net gain obtained
with these transactions amounted to euro 176.7 million.
During the six month period ended 30 June 2010, the Group sold at market prices through the overall
stock exchange 22.5 million ordinary shares of Bradesco; 24 million ordinary shares of Bank of America
and 129.3 million ordinary shares of Citigroup. The realised net gain following these transactions was euro
159.6 million.
Related party transactions are described in Note 42.
109
Interim Report
NOTE 9 – NET GAINS FROM FOREIGN EXCHANGE DIFFERENCES
Foreign exchange translation
Gains
30.06.201 1
L oss es
1 085 379
1 055 232
30 1 47
654 274
636 870
17 404
1 085 379
1 055 232
30 1 47
654 274
636 870
17 404
Total
Gains
30.06.2010
Los ses
Total
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.
NOTE 10 – NET GAINS / LOSSES FROM THE SALE OF OTHER ASSETS
(in thousand of euro)
30.06.201 1
Loans and advances to cos tumers (deleverage )
N on current assets held for trade
Other
30.06.2010
( 53 780)
( 3 056)
1 0 625
( 6 042)
2 800
( 46 21 1 )
( 3 242)
Under the strategy of reducing assets (deleverage), the Group sold euro 1.4 billion of loans during the six
month period ended 30 June 2011, having recorded in the income statement a loss of euro 53.8 million.
110
Interim Report
NOTE 11 – OTHER OPERATING INCOME AND EXPENSES
30.06.201 1
Other operating inc ome / (expens es )
IT related business
Gains on repurchase of Group debt securities (see Notes 33 and 36)
N on recurring gains on credit operations
N on recurring gains on advisory services
D irect and indirect taxes
C ontributions to the deposits guarantee fund
Membership and donations
Other
30.06.2010
3 402
3 379
147 694
1 5 431
2 1 51
( 24 254)
( 3 020)
4 251
9 81 7
3 359
( 5 167)
( 2 741 )
( 3 780)
25 626
( 3 991 )
( 4 050)
163 250
4 857
Direct and indirect taxes include an amount of euro 15.2 million relating to the cost related with the
introduction of a Banking levy, created by Law No. 55-A/2010 of 31 December (see Note 35).
111
Interim Report
NOTE 12 – STAFF COSTS
30.06.201 1
Wages and salaries
Remuneration
Long-term service benefits (see N ote 1 3)
Mandatory social charges
Pension costs (see Note 1 3)
Other costs
220
218
1
49
33
9
30.06.2010
340
424
91 6
082
437
483
21 8 889
21 6 456
2 433
31 982
40 096
7 992
312 342
298 959
Included in other costs is the amount of euro 1 792 thousand (30 June 2010: euro 2 150 thousand) 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 13.
Also included in other costs is the amount of euro 1 577 thousand related with variable remuneration
granted under PRVIF (see Note 13).
As at 30 June 2011 and 2010, the number of employees of the Group is analysed as follows:
30.06.2011
30.06.201 0
BE S employees
Employed by the Group subsidiaries
6 780
3 155
6 709
2 823
Total employees of the Group
9 935
9 532
112
Interim Report
NOTE 13 – 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 estabilished a pension fund to cover the above mentioned liabilities
with pension payments. Later, after obtaining the authorisation from the Portuguese Insurance Institute,
the Bank has changed the pension fund contract in order to allow the coverage of all pension liabilities,
health care benefits and, in 2009, the death allowance. The pensions funds in Portugal are managed by
ESAF – Espírito Santo Fundo de Pensões, S.A.
From 1 January 2011, the Bank employees hired until 31 March 2008 were also integrated into the General
Social Security Regime, which ensure the protection of employees in contingencies of maternity,
paternity, adoption and oldness, remaining under the responsibility of banks to protect sickness, disability,
survival and death (Decree-Law No. 1-A/2011, from 3 January).
Retirement pensions of banking employees integrated into the General Social Security Regime continue
to be calculated according to the provisions of ACT and other conventions. Banking employees, however,
are entitled to receive a pension under the general regime, which amount takes into account the number
of years of discounts for that scheme. Banks are responsible for the difference between the pension
determined in accordance with the provisions of ACT and that the one that the banking employees are
entitled to receive from the General Social Security Regime.
Notwithstanding, the integration leads to an effective decrease in the present value of total benefits
reported to the normal retirement age (VABT) to be borne by the pension fund. Since there was no
reduction in benefits from the perspective of the beneficiary on the date of integration, the past service
liability remained unchanged as at 31 December 2010.
Taking into account that the basis for calculating benefits under the ACT and RGSS plans are based on
different formulas, there is the possibility of obtaining a gain, when the value of the liabilities to be
covered by the pension fund at retirement is lower than responsibilities on 31 December 2010, being this
gain deferred on a linear basis over the average working life until the employees reach the normal
retirement age.
The key actuarial assumptions used to calculate pension liabilities are as follows:
113
Interim Report
Ass umptions
30.06.201 1
31.1 2.201 0
3.25%
1.75%
5.50%
5.50%
3.25%
1.75%
5.50%
5.50%
F inanc ial as sumptions
S alaries increase rate
P ensions increase rate
E xpected return of plan assets
D iscount rate
D emographic ass umptions and v aluation methods
Mortality table
Men
Women
Actuarial method
TV 73/77 (adjusted)
TV 88/90
Project Unit Credit Method
The number of employees covered by the plan is a follows:
30.06.2011
E mployees
P ensioners
TO TAL
31.1 2.201 0
6 264
5 692
6 292
5 684
1 1 956
1 1 976
In accordance with IAS 19, the Group’s liabilities, charges and contributions to the pension funds and
respective coverage levels reported as at 30 June 2011 and 31 December 2010 are analysed as follows:
30.06.2011
31.1 2.201 0
As sets / (liab ilities) recognis ed in the balance sheet
D efined benefit obligation
P ensioners
E mployees
Health-c are benefit obligation
P ensioners
E mployees
T otal obligations
Cov erage
Fair value of plan assets
E xcess of coverage/ ( amounts payable to the fund)
( 1 283 260)
( 749 368)
( 2 032 628)
(1 292 087)
( 799 508)
(2 091 595)
( 70 518)
( 40 864)
( 1 11 382)
( 70 371 )
( 43 400)
( 11 3 771 )
( 2 1 44 010)
(2 205 366)
2 092 073
2 206 313
( 51 937)
947
U nrecognised net actuarial losses
903 452
884 528
As set/(liab ilities ) rec ognis ed in the balance s heet
851 51 5
885 475
In accordance with the accounting policy described in Note 2.15 – Employee benefits, the Group calculates
responsibilities with pensions semiannually. The change in the fair value of the benefit granted to
114
Interim Report
employees during the life of the program will be recognised as a profit/loss from financial assets at fair
value through profit or loss (see Note 29).
In accordance with the accounting policy described in Note 2.15 and following the requirements of IAS 19 –
Employees benefits, the Group assesses at each balance sheet date and for each plan separately, the
recoverability of the recognised assets in relation to the defined benefit pension plans based on the
expectation of reductions in future contributions to the funds.
The changes in the defined benefit obligation can be analysed as follows:
30.06.2011
Pension
plan s
D efined ben efit o bligation at the b eginning of the period
S ervice cost
Interest c ost
P lan participants' contribution
Actuarial (gains) / losses:
- experience adjustments
P ensões pagas pelo fundo
E xchange differences and other
D efined ben efit o bligation at the end of the period
Health-care
benefits
31 .12.2010
Total
P ension
plans
Health-c are
benefits
T otal
2 091 595
11 3 771
2 205 366
2 01 6 799
1 08 403
2 1 25 202
8 399
54 1 75
1 541
804
3 055
-
9 203
57 230
1 541
36 483
109 425
3 243
2 180
5 904
1
38 663
1 15 329
3 244
( 71 485)
( 52 41 5)
818
( 3 261 )
( 2 984)
( 3)
( 74 746)
( 55 399)
81 5
21 955
( 105 293)
8 983
3 246
( 5 945)
( 18)
25 201
( 11 1 238)
8 965
2 032 628
11 1 382
2 1 44 01 0
2 091 595
1 13 771
2 205 366
As at 30 June 2011, the increase of 1% in the contributions to SAMS, would imply an increase in liabilities
of euro 17.1 million (31 December 2010: euro 17.5 million) and an increase in costs (service cost and
interest cost) of euro 1.1 million (31 December 2010: euro 1.3 million).
The change in fair value of the plan assets for the six month period ended 30 June 2011 and for the year
ended 31 December 2010 is analysed as follows:
(in thousand of euro)
Six mo nth period
en ded
30.06.2011
F air value of plan as sets at th e begin nin g o f the period
Actual return on plan assets
Group contributions
P lan participants ' contributions
P ensions paid by the fund
F air value of plan as sets at th e en d o f the period
Y ear en ded
31.1 2.201 0
2 206 31 3
2 198 280
( 59 751)
1 541
( 55 399)
( 631)
45 296
58 027
3 244
( 1 11 238)
1 2 704
2 092 073
2 206 313
115
Interim Report
The fair value of plan assets can be analysed as follows:
31 .12.2010
30.06.201 1
Shares
Fixed income securities
Real estate
Other
Total
590 700
520 996
677 837
302 540
759 778
441 1 78
477 677
527 680
2 092 073
2 206 31 3
The real estate assets rented to BES Group and securities issued by Group companies which are part of
the plan assets are analysed as follows:
30.06.2011
31.12.2010
Shares
Fixed income securities
Real estate
26 422
3 404
1 80 457
37 895
1 1 32
169 1 25
Total
210 283
208 1 52
As at 30 June 2011, the shares held by the pension fund correspond to 10.3 million shares of BES (31
December 2010: 13.2 million shares of BES).
During the six months period ended 30 June 2011 the Group sold 18 520 thousand and 4 830 thousand
units of the Fungepi Fund and Fungere Fund to the Group pensions funds, by a global amount of euro 80.0
million, not originating any material gain or loss.
The changes in the unrecognised net actuarial losses are analysed as follows:
S ix month
period ended
Y ear ended
30.06.201 1
31 .12.2010
U nrec ognised net ac tuarial los ses at the b eginning of the perio d
884 528
839 063
Actuarial (gains) / losses
- experience adjustments
Amortisation of the period
Other
40 61 8
( 22 61 7)
923
92 096
( 46 450)
( 1 81 )
U nrec ognised net ac tuarial los ses at the end of the period
903 452
884 528
Of which:
Within the corridor
Outside the corridor
212 235
691 21 7
21 8 528
666 000
The changes in the (un)/overfunded liabilities are analysed as follows:
116
Interim Report
Six month
period ended
Year ended
30.06.2011
31 .12.2010
( Un) /ov erfunded liabilities at the beginning of the period
Actuarial ( gains ) / losses on defined benefit obligation
Actuarial ( gains ) / losses of plan assets
C harges for the period:
- S ervice cost
- Interest cost
- E xpected return on plan assets
- Other
C ontributions of the year and pensions paid by the Group
947
73 078
74 746
( 1 15 364)
( 25 201)
( 66 895)
( 9 203)
( 57 230)
55 613
( 1 446)
-
( 38 663)
( 1 15 329)
11 2 1 91
3 739
58 027
( 51 937)
947
( Un) /ov er fu nded liabilities at the end of the period
The net periodic benefit cost can be analysed as follows:
Six mo nth period
ended
30.06.2011
S ervice cost
Interest cost
E xpected return on plan assets
Amortisation of the period
N et benefit c ost
9 203
57 230
( 55 613)
22 61 7
Y ear en ded
31.1 2.201 0
S ix month period
ended
30.06.201 0
38 663
1 15 329
( 11 2 1 91 )
46 450
33 437
1 9 701
56 393
( 57 247)
21 249
88 251
40 096
The changes in the assets/ (liabilities) recognised in the balance sheet for the six months period ended 30
June 2011 and for the year ended 31 December 2010 is analysed as follows:
S ix month
period ended
Year ended
30.06.201 1
31 .12.2010
A t the beginning of the period
885 475
91 2 1 41
N et benefit cost
C ontributions of the period and pensions paid by the Group
Other
( 33 437)
( 523)
( 88 251 )
58 027
3 558
A t the end of the period
851 51 5
885 475
The evolution of the defined benefit obligations, fair value of plan assets and of the experience
adjustments gains/ (losses) in the past 5 years, is presented as follows:
117
Interim Report
30.06.2011
Defined benefit obligation
Pension plans
Health-care benefits
31.12.2010
31.12.2009
31.12.2008
31.12.2007
(2 032 628)
( 111 382)
(2 091 595)
( 113 771)
(2 016 799)
( 108 403)
(1 958 118)
( 106 756)
(1 970 365)
( 110 675)
(2 144 010)
(2 205 366)
(2 125 202)
(2 064 874)
(2 081 040)
Fair value of plan asssets
2 092 073
2 206 313
2 198 280
2 056 627
2 233 823
(Un)/over funded liabilities
( 51 937)
947
73 078
( 8 247)
(Gains)/losses from experience adjustments arising on defined benefit obligation
Pension plans
Health-care benefits
( 71 485)
( 3 261)
21 955
3 246
50 034
1 549
23 491
19
42 590
( 1 881)
(Gains)/losses from experience adjustments arising on plan assets
115 364
66 895
( 90 994)
727 214
( 157 635)
152 783
SIBA
During 2000, BES Group established a ‘‘Share Based Incentive Scheme’’ (SIBA). This incentive scheme
ended in 31 December 2010, so there is no movement of the underlying shares of the plans since that
reference date.
The total costs recognised related to the plans for the six month period ended 30 June 2010 and the year
ended 31 December 2010 are as follows:
S ix mo nth period
ended
30.06.2011
Total costs of the plans ( see N ote 1 2)
Y ear end ed
31 .12.201 0
-
S ix month period
ended
30.06.201 0
515
181
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)
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 – 2008/2011).
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 position in BES.
118
Interim Report
The plans’ initial fair value was calculated using an option valuation model with the following
assumptions:
Inicial reference date
F inal reference date
R ights granted to employees
Assumptions at the
beginning of PP RV
02-J un-2008
After the capital
increase in 2009 (a)
02-J un-201 1
5 000 000
8 285 626
R eference price (in euro)
1 1 .00
6.64
Interest rate
Volatility
5.22%
33.5%
Inicial fair value of the plan (in thousands of euro)
12 902
( a)
Includes the adjustment of the dilutive effe ct arising from the capital increase
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 thousand, has been recognised as staff costs during the three year period
comprised between the initial and the final reference dates (3 years). As such, the Group recognised
during the first semester of 2011, as staff costs, the amount of euro 1 792 thousand (30 June 2010: euro 2
150 thousand). The change in the fair value of the benefit granted to employees during the life of the
program was recognised as a profit/loss from financial assets at fair value through profit or loss. As at
30 June 2011, the plan was extinguished.
Variable remuneration payment plan on financial instruments (PRVIF)
Following the recommendations of the Supervising and Regulatory authorities, on the shareholders
General Meeting, held in 6 April 2010 it was approved a new remuneration policy for the Executive
Committee members. This policy consists in giving to the Executive Committee members a fixed
remuneration, which should represent approximately 45% of the total remuneration, and a variable
component representing around 55% of the total remuneration. The variable remuneration shall have
two components: one associated with short-term performance and another with medium-term
performance. Half of the short-term component must be paid in cash and the remaining 50% should be
paid over a three years period, with half of these payments to be made in cash and the remaining through
the attribution of shares. The medium-term component has associated a share options program with the
exercise of the options set at 3 years from the date of its attribution.
Regarding the details of PRVIF shares attribution, they are delivered to the beneficiaries over a deferred
period of 3 years (1st year: 33%; 2nd year: 33%; 3rd year: 34%) and it is conditioned to the verification of a
Return on Equity equal to or greater than 5%.
Regarding the attribution of options to the beneficiaries is also performed by the Remuneration
Committee, and the exercise price is equal to the single average of the closing prices of BES shares on
NYSE Euronext Lisbon during the 20 days preceding the day of attribution of the options, plus 10%. The
119
Interim Report
option can only be exercised at maturity and the beneficiary may choose between the physical settlement
or the financial settlement of the options.
The plans’ initial fair value was calculated using an option valuation model with the following
assumptions:
Inicial reference date
F inal reference date
R ights granted to employees
R eference price (in euro)
Assumptions at the
beginning of PRVIF
1 4-Apr-201 1
31 -03-201 4
2 250 000
3.47
Interest rate
2.31%
Volatility
40.0%
Inicial fair value of the plan (in thousands of euro)
1 130
PRVIF is accounted for under IFRS rules (IFRS 2 and IAS 19). During the six month period ended 30 June
2011, the Group registered a cost of euro 1 577 thousand related to variable remuneration (of which the
amount of euro 126 thousands relating to amortization of initial strike of options granted).
As referred in Note 2.15, for employees that achieve certain years of service, the Bank pays long term
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.
As at 30 June 2011 and 31 December 2010, the Groups’ liabilities regarding this benefits amount to euro
29 784 thousand and euro 29 655 thousand, respectively (see Note 37). The costs incurred in the six
months period ended 30 June 2011 with long-term service benefits amounted to euro 1 916 thousand (30
June 2010: euro 2 433 thousand).
The actuarial assumptions used in the calculation of the liabilities are those presented for the calculation
of pensions (when applicable).
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Interim Report
NOTE 14 – GENERAL AND ADMINISTRATIVE EXPENSES
Six mo nth period ended
30.06.2011
R ental costs
Advertising costs
C ommunication costs
Maintenance and related services
T ravelling and representation costs
T ransportation
Insurance costs
IT services
Independent work
T emporary work
E lectronic payment systems
Advisory services
Legal costs
C onsultants and external auditors
Water, energy and fuel
C onsumables
O ther costs
30.06.201 0
35 253
1 6 841
23 681
1 0 848
1 6 71 1
4 255
4 299
31 691
3 965
3 1 74
6 446
6 308
8 755
4 374
5 079
2 799
30 881
34 512
1 9 205
1 9 983
8 531
1 7 927
4 765
3 584
30 644
4 466
3 762
6 684
7 259
1 1 062
3 874
5 054
2 886
29 695
21 5 360
21 3 893
The balance other costs includes, among others, specialised services with security, information,
databases, costs with training and external suppliers.
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Interim Report
NOTE 15 – EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share are 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.
Profit attributable to the equity holders of the B ank
( 1)
Six mo nth
period en ded
Year ended
30.06.201 1
31 .12.2010
S ix month
period ended
30.06.201 0
135 009
477 040
265 438
Weighted average number of ordinary shares (thous ands)
Weighted average number of treasury stock (thousands)
1 166 667
( 171)
1 1 66 667
( 1 243)
1 166 667
( 1 253)
Weighted av erage number of ordinary shares outs tanding (th ousands )
1 166 496
1 1 65 424
1 165 414
0.1 2
0.41
0.23
B asic earnings per s hare attributable to equity ho lders of the B ank (in euro)
(1 )
Net profit for the period adjusted by the dividend from preference shares, which is accounted as an equity movement.
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 are not different from the basic earning per share as the outstanding
plans of SIBA do not have a dilutive effect.
122
Interim Report
NOTE 16 – CASH AND DEPOSITS AT CENTRAL BANKS
As at 30 June 2011 and 31 December 2010, this balance is analysed as follows:
(in thous ands of euro)
30.06.2011
31 .12.2010
Cash
1 90 173
306 203
Deposits at central banks
B ank of P ortugal
Other central banks
83 306
81 1 105
1 20 045
504 257
894 41 1
624 302
1 084 584
930 505
The deposits at Central Banks includes mandatory deposits with the Bank of Portugal intended to satisfy
legal minimum cash requirements, for an amount of euro 80 306 thousand (31 December 2010: euro 116
208 thousand). 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. As at 30 June 2011, the interest earnings average rate of these deposits was 1.11% (31
December 2010: 1.00%).
The fulfilment of the minimum mandatory requirements for a given period of observation is implemented
taking into account the value of bank deposits with the Bank of Portugal during the referred period. The
balance of the bank account with the Bank of Portugal as at 30 June 2011, was included in the
maintenance period of 15 June 2011 to 12 July 2011, which corresponded to an average mandatory reserve
of euro 578 million.
123
Interim Report
NOTE 17 – DEPOSITS WITH BANKS
Deposits with banks in P ortugal
U ncollected cheques
R epayable on demand
Deposits with banks abroad
Repayable on demand
Uncollected cheques
Other
30.06.201 1
31 .12.2010
11 8 91 2
63 698
1 81 680
64 388
182 61 0
246 068
188 964
3 457
162 548
1 48 121
1 260
1 62 523
354 969
311 904
537 579
557 972
Uncollected cheques in Portugal and abroad were sent for collection during the first working days
following the reference dates.
124
Interim Report
NOTE 18 – FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING
30.06.2011
31 .12.2010
Financ ial as s ets held for trading
S ec urities
S hares
939 523
495 956
1 524 069
307 352
52 1 65
181 238
O ther variable income securities
753
538
1 488 397
2 01 3 1 97
1 51 8 963
1 928 864
3 007 360
3 942 061
1 894 336
591
1 894 927
1 957 969
130 038
2 088 007
Derivatives
Derivative financial ins truments with positive fair value
Financ ial liabilities held for trading
Derivative financial ins truments with negative fair value
S hort sales
Short selling represents securities sold by the Group, which had been acquired under a purchase
transaction with a resale agreement. In accordance with the accounting policy described in Note 2.7,
securities purchased under agreements to resell are not recognized in the balance sheet. If those
securities are sold, the Group recognizes a financial liability equivalent to the fair value of assets that
must be returned under the resale agreement.
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.
Securities pledged as collateral by the Group are analysed in Note 40.
As at 30 June 2011, the exposure to debt of peripheral countries in the euro area is analysed as follows:
Notion al Amount
Portugal
Spain
Fair Value Amount
Ac c rued Interes t
B ook Valu e
1 89 808
1 63 390
1 984
165 914
1 783
1 775
4
1 786
1 91 591
1 65 165
1 988
167 700
125
Interim Report
As at 30 June 2011, BES Group had no exposure to the Italian, Irish and Greek public debt.
As at 30 June 2011 and 31 December 2010, derivative financial instruments can be analysed as
follows:
30.06.201 1
No tional
As sets
31 .1 2.2010
Fair v alue
Liabilities
Notional
As sets
Fair Value
Liabilities
T rading deriv ativ es
E xc hange rate c ontrac ts
Forward
- buy
- sell
Currency S waps
- buy
- sell
Currency F utures
Currency Interest Rate Swaps
- buy
- sell
Currency O ptions
Interes t rate c ontrac ts
Forward Rate Agreements
Interest Rate S waps
S waption - Interest Rate Options
Interest Rate Caps & Floors
Interest Rate Futures
Interest Rate O ptions
Future Options
B ond O ptions
E quity / index con trac ts
E quity / Index S waps
E quity / Index O ptions
E quity / Index Futures
Future Options
Credit default contrac ts
Credit D efault S waps
Total
1 528 574
1 529 61 1
3 080 590
3 075 341
226 355
1 8 325
73 141
8 463
8 201
-
-
1 509 550
1 495 411
39 212
70 486
9 689
10 188
-
-
31 8 313
1 54 61 4
130 067
1 54 837
497 281
390 125
124 000
600 058
747 426
523 046
207 167
310 536
458 165
-
408
1 166 981
4 893
63 400
1 94
-
197
1 1 89 653
3 502
52 830
28 261
-
3 626 838
3 632 969
31 9 608
200 485
205 100
4 901 520
39 846
33 81 7
92 064
1 07 230
3 664 746
3 646 1 80
5 921 549
1 4 747 576
1 58 698
222 389
23 81 6 851
600
41 229
6 953
8 111
3 436
7 249
000
279
216
519
512
876
285 000
1 1 46 590
8 463
47 1 59
6 413
1 1 58
1 091 861
8 388
42 604
5 306
1 360
67 865 402
1 209 783
1 1 49 51 9
1 32 970 398
1 235 876
1 274 443
1 340 471
1 977 241
1 64 423
457 406
44 006
31 582
-
350 51 0
1 12 021
-
678 278
3 405 551
361 985
5 242 778
20 069
11 5 744
-
31 099
212 068
-
3 939 541
75 588
462 531
9 688 592
135 813
243 167
3 521 737
74 894
59 897
3 544 556
59 894
50 234
90 074 254
1 51 8 963
1 894 336
1 70 020 397
1 928 864
1 957 969
1
41
2
8
17
32
29
NOTE 19 – OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
30.06.2011
31 .12.2010
S hares
Other securities
221 546
259 002
1 5 741
1 5 1 45
826 1 47
1 150 1 84
1 063 434
1 424 331
In light of IAS 39 and in accordance with the accounting policy described in Note 2.6, the Group
designated these financial assets 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.
126
Interim Report
NOTE 20 – AVAILABLE-FOR-SALE FINANCIAL ASSETS
C ost (1)
Fair v alue reserve
Pos itive
N egativ e
Impairment
loss es
Book
valu e
5 212 31 2
4 375 767
133
1 2 01 4
( 1 09 176)
( 96 388)
( 1)
( 9 469)
5 1 03 268
4 281 924
S hares
1 398 209
38 341
( 1 87 664)
( 1 25 098)
1 1 23 788
437 090
4 475
( 2 392)
( 23 272)
415 901
1 1 423 378
54 963
( 395 620)
( 1 57 840)
1 0 924 881
3 745 390
5 1 12 239
368
1 6 032
( 26 974)
( 69 703)
( 1)
( 30 496)
3 718 783
5 028 072
S hares
2 270 027
21 9 852
( 81 690)
( 92 694)
2 315 495
731 936
22 428
( 5 792)
( 36 041 )
712 531
1 1 859 592
258 680
( 1 84 159)
( 1 59 232)
1 1 774 881
B alance as at 30 J une 201 1
B alance as at 31 Dec ember 2010
(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
judgement criteria’s described in Note 3.1.
As at 30 June 2011, the exposure to debt of peripheral countries in the euro area is analysed as follows:
No tional
A mo unt
Fair Value
Amou nt
Acc rued
Interest
B ook
Value
Fair Value
Res erve
Impairmen t
Portugal
U p to 1 year
More than 1 year
3 302 946
3 007 449
295 497
3 134 968
2 91 5 547
21 9 421
9 184
2 11 5
7 069
3 144 1 52
2 91 7 659
226 493
-
( 1 08 804)
( 41 487)
( 67 31 7)
Spain
U p to 1 year
More than 1 year
7 803
6 223
1 580
7 841
6 210
1 631
41
17
24
7 883
6 227
1 656
-
13
14
( 1)
3 310 749
3 142 809
9 225
3 152 035
-
( 1 08 791)
As at 30 June 2011, BES Group had no exposure to the Italian, Irish and Greek public debt.
The securities pledged as collateral by the Group are analysed in Note 40. As at 30 June 2011, the available
for sale securities portfolio includes the amount of euro 366.9 million related with securitization
operations (see Note 1)
The changes occurred in impairment losses of available-for-sale financial assets are presented as follows:
127
Interim Report
S ix month perio d ended
30.06.201 1
31 .12.2010
30.06.201 0
B alance at the beginning of the period
Charge for the period
Charge off
Write back for the period
1 59 232
47 044
( 45 999)
( 1 21 )
( 2 316)
1 39 588
32 91 1
( 8 420)
( 2 722)
( 2 1 25)
137 890
3 202
( 6 095)
( 3 589)
8 1 80
B alance at the end of the period
1 57 840
1 59 232
139 588
The main equity exposures that contribute to the fair value reserve, as at 30 June 2011 and 31 December
2010, can be analysed as follows:
30.06.2011
Desc ription
Portugal Telecom
ED P- E nergias de Portugal
Banque Marocaine du Commerce E xtérieu
Ac quis ition
c ost
Fair value reserve
P os itive
Negative
Impairment
Book
value
760 468
1 97 505
2 21 5
5 157
( 1 46 782)
( 20 146)
-
( 341)
61 3 686
1 77 359
7 031
960 188
5 157
( 1 66 928)
( 341)
798 076
Desc ription
Banco Bradesco
Portugal Telecom
ED P- E nergias de Portugal
Banque Marocaine du Commerce E xtérieu
31 .12.2010
Fair value reserve
Ac quis ition
c ost
P os itive
Negative
759
754
284
2
Impairment
Book
value
002
062
953
290
1 70 21 7
7 293
( 7 280)
( 49 897)
-
( 344)
929 21 9
746 782
235 056
9 239
1 800 307
1 77 51 0
( 57 177)
( 344)
1 920 296
During the six month period ended 30 June 2011, the Group sold at market prices 81.6 million ordinary
shares of Bradesco (its entire shareholding position in Banco Bradesco) and transacted on the stock
exchange 165.4 million ordinary shares of EDP. The realised net gain following these transactions was
euro 176.7 million (see Note 8).
During the six month period ended 30 June 2011, the Group received as dividends an amount of euro 116.8
million from PT shares, an amount of euro 11.8 million from EDP shares and an amount of euro 5.3 million
from Banco Bradesco shares (30 June 2010: euro 39.9 million, euro 17.2 million and euro 5.8 million,
respectively).
128
Interim Report
NOTE 21 – LOANS AND ADVANCES TO BANKS
30.06.201 1
31 .12.2010
Loans and adv anc es to bank s in Portugal
Deposits
Loans
Very s hort term deposits
Other loans and advances
571 396
58 625
11 6 1 50
124 651
1 295
42
27
64
549
241
105
483
870 822
1 429 378
Loans and adv anc es to bank s ab ro ad
Deposits
Very s hort term deposits
Loans
Other loans and advances
Impairment losses
1 224 471
44 583
928 668
370 755
1 370
55
1 000
390
001
269
033
999
2 568 477
2 816 302
( 351)
( 244)
3 438 948
4 245 436
The main loans and advances to banks in Portugal, as at 30 June 2011, bear interest at an average annual
interest rate of 1.97% (31 December 2010: 1.53%). Loans and advances to banks abroad bear interest at
international market rates where the Group operates.
As at 31 December 2010, the balance loans and advances to banks in Portugal includes deposits in the
European Central Banks System (Bank of Portugal) in the amount of euro 1 200 thousand.
The changes occurred during the year in impairment losses of loans and advances to banks are
presented as follows:
S ix month period en ded
30.06.201 1
31 .12.2010
30.06.2010
244
246
41 6
246
( 11 7)
( 22)
130
( 1 11 )
( 21 )
34
( 267)
63
244
246
351
129
Interim Report
NOTE 22 – LOANS AND ADVANCES TO CUSTOMERS
30.06.2011
Domestic loans
Corporate
Loans
Commercial lines of credits
Finance leases
Discounted bills
Factoring
Overdrafts
Other loans
Retail
Mortgage loans
Consumer and other loans
Foreign loans
Corporate
Loans
Commercial lines of credits
Finance leases
Discounted bills
Factoring
Overdrafts
Other loans
Retail
Mortgage loans
C onsumer and other loans
Overdue loans and interes t
Up to 3 months
From 3 months to 1 year
From 1 to 3 years
More than 3 years
Impairment losses
1 4 392
5 220
3 086
537
1 546
57
301
31.1 2.201 0
560
405
272
543
570
850
31 2
14 107 206
4 800 692
3 200 046
554 527
1 566 1 42
25 048
226 522
1 0 662 121
2 087 274
10 71 6 984
2 254 461
37 891 907
37 451 628
7 885
1 873
1 45
63
42
407
726
685
584
91 9
289
61 3
400
502
8 553 1 56
2 147 981
182 281
174 543
50 802
372 415
1 229 237
888 328
438 190
884 958
452 445
1 2 471 51 0
14 047 818
1 21
313
601
300
971
398
580
158
79 520
258 045
536 733
232 367
1 337 107
1 106 665
51 700 524
52 606 1 11
(1 982 632)
( 1 776 988)
49 717 892
50 829 1 23
As at 30 June 2011, the balance loans and advances to customers (net of impairment losses) includes an
amount of euro 4 868.0 million (31 December 2010: euro 5 715.3 million) related to securitised loans
following the consolidation of securitisation vehicles (see Note 43), according to the accounting policy
described in Note 2.2. The liabilities related to these securitisations are booked under debt securities
issued (see Notes 33 and 43).
130
Interim Report
As at 30 June 2011, loans and advances includes euro 5 314 650 thousand of mortgage loans that
collateralise the issue of covered bonds (31 December 2010: euro 4 963 051 thousand) (see Note 33).
The changes occurred in impairment losses of loans and advances to customers are presented as
follows:
30.06.201 1
Charge off
31 .12.2010
30.06.201 0
1 776 988
456 507
( 73 078)
1 681 539
277 951
( 60 1 27)
1 552 307
281 470
( 47 81 2)
Unwind of discount
( 1 51 081)
( 20 585)
( 6 11 9)
( 100 668)
( 1 3 548)
( 8 1 59)
( 1 06 944)
( 10 81 5)
1 3 333
1 982 632
1 776 988
1 681 539
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 30 June 2011 and 31 December 2010, the detail of impairment is as follows:
Loans with impairment
losses calculated on an
individual basis
Gross amount Impairment
Corporate loans
Mortgage loans
Consumers loans - other
Total
30.06.201 1
losses calculated on a
portfolio basis
Gross
Impairment
amount
Total
Net Loans
Impairment
1 2 726 21 1
1 406 610
24 682 1 51
264 897
37 408 362
1 671 507
35 736 855
2 1 35 526
1 39 927
9 510 728
23 793
1 1 646 254
163 720
11 482 534
517 782
1 28 790
2 1 28 1 26
1 8 615
2 645 908
147 405
2 498 503
1 5 379 51 9
1 675 327
36 321 005
307 305
51 700 524
1 982 632
49 71 7 892
losses calculated on an
individual basis
Corporate loans
8 31 3 225
Mortgage loans
Consumers loans - other
Total
31 .12.2010
losses calculated on a
portfolio basis
Gross
amount
1 063 999
29 769 724
1 206 383
1 93 056
456 680
1 34 482
9 976 288
1 391 537
Impairment
Total
Net Loans
Impairment
322 320
38 082 949
1 386 31 9
36 696 630
10 494 630
26 285
1 1 701 01 3
21 9 341
11 481 672
2 365 469
36 846
2 822 149
171 328
2 650 821
42 629 823
385 451
52 606 11 1
1 776 988
50 829 1 23
Loans with impairment losses calculated on an individual basis includes, loans with objective evidence of
impairment, overdue loans for over 30 days and restructured loans.
131
Interim Report
As at 30 June 2011, loans and advances includes euro 174 252 thousand of restructured loans (31
December 2010: euro 144 585 thousand). 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 during the first semester of 2011 in relation to
these loans amounted to euro 282.3 million (31 December 2010: euro 382.4 million), which includes the
effect of the unwind of discount in connection with overdue loans.
132
Interim Report
NOTE 23 – HELD-TO-MATURITY INVESTMENTS
The held-to-maturity investments can be analysed as follows:
30.06.201 1
Impairment losses
31 .12.2010
830 899
1 453 1 26
2 284 025
827 260
1 681 634
2 508 894
( 31 982)
( 50 094)
2 252 043
2 458 800
As at 30 June 2011 and 31 December 2010 the changes occurred in impairment losses of held-to-maturity
investments are presented as follows:
30.06.201 1
Balance at the beginning of the period
C harge for the period
C harge off
Balanc e at the end of the perio d
31.1 2.201 0
30.06.201 0
50 094
21 091
( 27 544)
( 1 1 659)
-
61 648
( 9 855)
( 25 893)
23 875
31 9
34 565
56 599
( 4 809)
( 23 875)
( 832)
31 982
50 094
61 648
The securities pledged as collateral by the Group are analysed in Note 40.
133
Interim Report
NOTE 24 – DERIVATIVES FOR RISK MANAGEMENT PURPOSES
As at 30 June 2011 and 31 December 2010, the fair value of the derivatives for risk management purposes
can be analysed as follows:
30.06.201 1
Hedging
31 .1 2.201 0
R is k
management
Total
Hedging
Ris k
management
Total
D erivativ es for ris k managemen t purpos es
Derivatives for risk management purposes - assets
Derivatives for risk management purposes - liabilities
1 62 001
( 99 699)
62 302
1 67 047
( 130 342)
36 705
329 048
( 230 041 )
99 007
255 908
( 88 057)
1 67 851
1 91 396
( 1 40 887)
50 509
447 304
( 228 944)
21 8 360
F air value compo nent of as s ets an d liab ilities
being hedged
Finan cial ass ets
Finan cial liabilities
Deposits from banks
Due to customers
Subordinated debt
18 506
-
18 506
21 1 40
-
21 1 40
18 506
-
18 506
21 1 40
-
21 1 40
( 20 390)
( 721 )
( 1 8 808)
2 068
( 37 851 )
15 755
1 38 801
1 54 556
( 20 390)
15 034
1 19 993
2 068
1 16 705
( 29 639)
( 3 323)
( 42 004)
( 863)
( 75 829)
( 538)
( 1 4 760)
1 19 308
1 04 01 0
( 30 177)
( 18 083)
77 304
( 863)
28 1 81
( 1 9 345)
1 54 556
1 35 21 1
( 54 689)
1 04 01 0
49 321
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 hedged items mentioned above and of the respective hedging derivatives
are recognised in the income statement under net gains/ (losses) from financial assets at fair value
through profit or loss (See Note 7).
As at 30 June 2011, the ineffectiveness of the fair value hedge operations amounted to a gain of euro 6.0
million (30 June 2010: loss of euro 0.2 million) and was recognised in the income statement. BES Group
evaluates on an ongoing basis the effectiveness of the hedges.
As at 30 June 2011, the fair value component of the financial liabilities at fair value through profits and
losses, attributable to the Group’s own credit risk, amounts to euro 132 400 thousand of cumulative
profits (31 December 2010: euro 151 411 thousand of profits).
134
Interim Report
NOTE 25 – NON-CURRENT ASSETS AND LIABILITIES HELD FOR SALE
30.06.201 1
As sets
Assets and liabilities of subsidiaries acquired exclusively
for resale purposes
Property held for s ale
Equipment
Impairment losses
31.1 2.201 0
Liabilities
As sets
L iabilities
21 423
5 41 1
21 423
5 411
751 871
5 323
757 194
( 141 204)
-
641 11 2
1 840
642 952
( 89 825)
-
61 5 990
-
553 127
-
637 41 3
5 41 1
574 550
5 411
The amounts presented refer to investments in companies controlled by the Group, which have been
acquired exclusively with the purpose of being sold in the short term, and assets acquired in exchange for
loans and discontinued branches available for immediate sale.
As at 30 June 2011, the amount of property held for sale includes euro 15 085 thousand (31 December 2010:
euro 12 848 thousand) related to discontinued branches, in relation to which the Group recognised an
impairment loss amounting to euro 6 999 thousand (31 December 2010: euro 3 924 thousand).
The changes occurred in impairment losses are presented as follows:
(thousands of euro)
30.06.201 1
31 .12.201 0
30.06.2010
89 825
63 062
52 666
C harge off
64 447
( 12 869)
( 152)
( 47)
39 752
( 1 2 1 64)
( 759)
( 66)
18 737
( 8 127)
( 206)
( 8)
Balance at the end of the period
141 204
89 825
63 062
The changes occurred during in non-current assets held for sale are presented as follows:
135
Interim Report
30.06.201 1
Balanc e at the b eginning of the perio d
Additions
S ales
O ther
31 .1 2.201 0
664 375
460 251
21 4 251
( 1 01 961)
1 952
464 923
( 260 003)
( 796)
778 617
664 375
Following the sale occurred during the six month period ended 30 June 2011, the Group registered a loss of
euro 3 056 thousand (31 December 2010: euro 12 727 thousand).
NOTE 26 – PROPERTY AND EQUIPMENT
(in thous ands of euro)
30.06.201 1
P roperty
For own use
O ther
E quipment
Computer equipment
Fixtures
Furniture
S ecurity equipment
O ffice equipment
Motor vehicles
O ther
Other
Work in progress
P roperty for own use
E quipment
O ther
A cc umulated deprec iatio n
31.1 2.201 0
440 653
238 757
4 455
445 224
238 604
1 237
683 865
685 065
283 341
1 36 334
1 25 145
36 061
35 733
9 101
5 232
288 067
1 34 134
1 24 373
35 655
35 696
8 955
5 227
630 947
632 107
727
765
1 31 5 539
1 31 7 937
1 676
260 020
7 883
67
1 577
250 609
9 597
151
269 646
261 934
1 585 185
1 579 871
( 786 933)
( 770 834)
798 252
809 037
136
Interim Report
The movement in this balance was as follows:
P roperty
E quipment
Work in
p rog res s
Other
Total
Ac quisition c ost
B alan ce as at 31 Dec ember 2009
Acquisitions
Disposals
Transfers ( a)
E xchange differences and other (b)
656 472
3 061
( 3 505)
1 484
12 725
597 325
9 631
( 4 216)
2 961
14 541
825
6
53
1 23 924
70 298
( 6 143)
15 064
1 378 546
82 990
( 7 721 )
( 1 692)
42 383
B alan ce as at 30 J une 2010
Acquisitions
Disposals
Transfers ( a)
670 237
19 170
( 2 393)
1 01 1
( 2 960)
620 242
13 134
( 2 742)
3 393
( 1 920)
884
( 11 9)
203 1 43
79 571
( 31)
( 8 590)
( 1 2 159)
1 494 506
1 11 875
( 5 166)
( 4 186)
( 1 7 158)
Acquisitions
Disposals
Transfers ( a)
685 065
4 91 3
( 1 299)
167
( 4 981 )
632 107
6 801
( 8 950)
3 888
( 2 899)
765
( 21)
( 1 7)
261 934
35 365
( 6 989)
( 20 664)
1 579 871
47 079
( 1 0 249)
( 2 955)
( 28 561 )
683 865
630 947
727
269 646
1 585 185
D epreciation
Depreciation for the period
Disposals
Transfers ( a)
E xchange differences and other (b)
258 191
11 797
( 3 505)
( 504)
1 433
461 303
19 81 8
( 3 716)
( 17)
2 985
279
15
25
-
719 773
31 630
( 7 221 )
( 521 )
4 443
Disposals
Transfers ( a)
267 41 2
10 31 2
( 1 81 1 )
( 998)
( 506)
480 373
20 004
( 3 1 81 )
( 60)
( 963)
319
31
( 98)
-
748 104
30 347
( 4 992)
( 1 058)
( 1 567)
Disposals
Transfers ( a)
274 409
10 085
( 1 199)
( 729)
( 827)
496 173
19 401
( 8 874)
( 1 718)
252
5
( 45)
-
770 834
29 491
( 1 0 073)
( 729)
( 2 590)
281 739
504 982
212
-
786 933
N et amount as at 30 J une 2011
402 126
1 25 965
515
269 646
798 252
N et amount as at 31 Dec ember 201 0
410 656
1 35 934
513
261 934
809 037
402 825
1 39 869
565
203 1 43
746 402
( a) R elates to discountinued branches, transfered to the balance Non-current assets held for sale.
( b) Includes euro 1 9 726 thousand from property and equipment and euro 4 487 thousand of accumulated depreciation related to the inclusion of
Aman B ank in the consolidation scope.
137
Interim Report
NOTE 27 – INTANGIBLE ASSETS
30.06.201 1
31.1 2.201 0
Go odwill
95 401
95 616
In tern ally dev elop ed
S oftware
39 741
38 360
578 938
1 282
561 677
1 312
580 220
562 989
35 099
35 732
750 461
732 697
(519 626)
(9 81 6)
(497 360)
(1 800)
221 01 9
233 537
Ac quired to th ird parties
S oftware
Other
Work in progress
Ac cumulated amortis ation
Impairment los ses
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).
Goodwill is registered in accordance with the accounting policy described in Note 2.2. and is presented as
follows:
30.06.2011
31.1 2.201 0
Subsidiaries
ES Investment Holding ( a)
Gespastor
Aman B ank
Concordia
Other
Other cash-generating units
Asset Management
Leasing and Factoring
Impairment losses
( a)
43
19
16
1
3
91 4
683
046
793
61 3
46 046
1 9 000
1 5 533
1 800
2 885
2 459
7 893
2 459
7 893
95 401
95 61 6
( 9 816)
(1 800)
85 585
93 81 6
C ompany that holds E xecution Noble
138
Interim Report
The movement in this balance was as follows:
Goodwill
Ac quisition c ost
Acquisitions:
Internally developed
Ac quired from third parties (a)
Disposals
Transfers
S oftware
Work in
p rog res s
Other
17 287
545 817
13 475
231
1 341
( 79)
5 974
8 061
Acquisitions:
Ac quired from third parties (a)
Disposals
Transfers
30 993
1 301
T otal
27 549
591 954
69
( 36)
62
4 673
1 1 939
(5 974)
( 21 )
4 673
26 824
( 11 5)
8 333
561 1 14
1 396
38 166
631 669
67 1 04
( 2 481)
9 998
( 395)
30 559
(1 239)
( 51 )
( 33)
4 226
23 957
( 43)
(30 559)
( 15)
4 226
101 008
( 438)
(3 768)
Acquisitions:
Ac quired from third parties
Disposals
Transfers
95 61 6
600 037
1 312
35 732
732 697
( 21 5)
4 074
( 336)
1 6 381
(1 477)
( 30)
3 984
1 1 638
(1 6 381 )
126
3 984
1 5 712
( 336)
(1 596)
95 401
61 8 679
1 282
35 099
Amortis atio ns
Amortisations of the period
Disposals
-
451 298
1 8 780
5 984
1 028
66
( 35)
60
-
452 326
1 8 846
( 35)
6 044
Disposals
-
476 062
1 9 204
( 402)
1 347
1 1 19
65
( 35)
-
477 1 81
1 9 269
( 402)
1 312
Disposals
-
496 211
22 774
( 9)
( 532)
1 1 49
66
( 33)
-
497 360
22 840
( 9)
( 565)
-
51 8 444
1 1 82
-
51 9 626
Impairment
1 743
( 1 8)
-
-
-
1 743
( 1 8)
1 725
75
-
-
-
1 725
75
Impairment losses ( b)
1 800
8 023
( 7)
-
-
-
1 800
8 023
( 7)
9 81 6
-
-
-
9 816
85 585
100 235
1 00
35 099
221 019
N et amount as at 31 Dec ember 2010
93 81 6
103 826
1 63
35 732
233 537
29 268
85 052
277
38 166
152 763
750 461
( b) In the scope of Aman B ank, Execution Noble and Gespastor acquisitions, it was recognis ed goodwill in the amount of euro 1 5 533 thousand, euro
46 046 thousand and euro 1 9 000 thousand, respectively.
( c) Impairment of Aman Bank goodwill.
139
Interim Report
NOTE 28 – INVESTMENTS IN ASSOCIATES
The financial information concerning associates is presented in the following table:
( in thousands of e uro)
Assets
30.06.201 1
Li abili ties
31.1 2.201 0
30.06.201 1
Equity
31.1 2.201 0
30.06.201 1
Inc ome
31.1 2.201 0
30.06.201 1
P rofi t/(Loss ) for the pe riod
30.06.201 0
30.06.201 1
30.06.201 0
BE S V IDA
6 846 438
8 013 503
6 751 2 29
7 860 505
95 2 09
1 52 998
1 98 481
7 80 643
8 403
1 7 1 91
ES VÉ NÉ TIE
1 683 5 54
1 631 953
1 51 8 7 54
1 473 33 9
164 800
1 58 61 4
3 6 664
29 447
6 1 51
3 038
35 2 939
1 47 1 19
3 44 1 48
1 20 02 8
344 982
12 7 7 59
3 39 17 7
95 73 8
7 957
1 9 3 60
4 97 1
24 290
47 5 24
3 2 956
37 565
32 606
1 5 00
928
675
1 41 2
ES EGUR
44 919
48 794
3 4 425
38 55 4
1 0 494
10 240
2 9 8 04
19 383
600
1 000
EUR OP ASS ISTANC E
42 5 91
39 883
3 3 908
31 098
8 683
8 78 5
2 4 1 41
16 781
1 2 00
1 2 00
F UNDO ES IBER IA
1 7 2 64
18 82 4
15
1 5 51 5
18 809
30
( 1 3 0)
( 31 1)
SC I GEOR GE S MANDEL
1 1 004
11 1 98
33
12
1 0 971
11 1 8 6
479
391
3 00
2 47
1 2 2 47
42 1 952
11 788
417 53 2
1 0 028
27 5 2 47
1 0 240
2 74 13 7
2 219
146 7 05
1 548
1 43 395
5 016
-
2 52 6
-
1 61
( 1 7 2)
2 42
-
LOCAR ENT
BE S S EGUR OS
BR B INTER NAC IONAL
AUTOP ISTA PER OTE-XALAP A
LUS OSC UT C OSTA DE PR ATA
-
1 7 49
-
53 71 4
LUS OSC UT BEI RA LI TORAL E ALTA
-
958 22 6
-
800 794
-
1 57 43 2
-
27 864
-
4 071
LUS OSC UT GR ANDE PO RTO
-
7 38 043
-
652 65 5
-
85 38 8
-
16 53 0
-
1 2 66
4 057 3 63
3 640 996
3 47 7 666
3 3 89 48 7
57 9 697
2 51 509
64 8 06
-
1 6 8 99
-
AS C ENDI
-
45 394
-
46 91 5
-
( 1 5 21 )
-
-
-
-
EMPAR K
77 8 926
7 30 904
63 5 1 61
594 65 7
AS C ENDI GR OUP
5 04 386
-
450 67 2
1 82
143 7 65
-
1 36 247
14 91 8
-
2 967
84 082
-
1 026
-
AUV ISA - AUTO VIA DE LOS V IÑEDOS
23 8 957
2 42 01 3
196 928
2 1 2 200
42 029
29 81 3
5 5 91
6 883
5 54
656
UNIC RE
31 3 1 02
3 10 1 55
200 945
1 95 88 0
11 2 1 57
1 1 4 27 5
1 1 2 658
-
5 1 39
-
MOZA B ANC O
67 403
-
43 2 49
-
2 4 1 54
-
6 472
-
1 1 81
-
R ODI S INKS & IDEAS
45 2 11
45 21 1
2 4 1 96
24 196
2 1 01 5
21 01 5
1 6 7 19
16 71 9
902
902
802 1 70
8 02 1 7 0
72 9 8 31
7 29 83 1
7 2 3 39
72 33 9
96 1 98
-
1 0 907
-
SC UTVIAS
Note : Information adjusted for consolidation purpose s
Partici pati on Cos t
30.06.201 1
31.1 2.201 0
BE S V IDA a)
474 997
ES VÉ NÉ TIE
Ec onomi c Inter est
30.06.201 0
30.06.201 1
31.1 2.201 0
B ook Value
30.06.201 0
30.06.201 1
31.1 2.201 0
Share of profits of as soc iates
30.06.201 0
30.06.201 1
31 .1 2.201 0
30.06.201 0
474 997
474 997
5 0.00%
50.00%
50.00%
3 56 998
387 3 94
408 011
2 699
15 469
6 998
42 293
42 2 93
42 293
42.69%
42 .69%
42 .69%
70 493
67 8 53
66 3 65
2 626
3 62 2
1 297
LOCAR ENT
BE S S EGUR OS
2 967
3 749
2 967
3 7 49
2 967
3 749
5 0.00%
2 5.00%
50.00%
25 .00%
50.00%
25 .00%
4 289
4 83 8
2 796
6 070
603
5 623
750
232
78 5
1 004
33 8
353
ES EGUR
9 63 4
9 634
9 63 4
44.00%
44.00%
44.00%
11 461
1 1 3 50
1 1 8 77
264
440
440
EUR OP ASS ISTANC E
1 147
1 1 47
1 147
2 3.00%
23 .00%
23 .00%
1 997
2 021
2 1 78
276
33 9
276
( 3 46)
FUNDO ES IBER IA
8 708
8 7 08
10 496
3 8.69%
38 .69%
38 .69%
6 368
7 2 87
8 453
391
31 0
SC I GEOR GE S MANDEL
2 401
2 401
2 401
2 2.5 0%
22 .50%
22 .50%
2 468
2 518
2 7 09
68
11 6
56
BR B INTER NAC IONAL
10 65 9
1 0 659
10 03 4
2 4.93%
24.93 %
24.93 %
31 4
2 43
3 45
70
86
188
AUTOP ISTA PER OTE-XALAP A b)
35 05 6
3 5 056
35 056
8.1 9%
8 .19%
8 .19%
30 660
( 1 03 )
2 8 679
3 2 466
227
LUS OSC UT C OSTA DE PR ATA
-
-
10 442
-
-
9.17 %
-
-
2 2 5 92
-
1 27 1
476
LUS OSC UT BEI RA LI TORAL E ALTA
-
-
23 093
-
-
9.17 %
-
-
43 651
-
2 267
543
LUS OSC UT GR ANDE PO RTO
AS C ENDI GR OUP b)
AS C ENDI
-
-
-
25 165
-
-
9.17 %
-
-
1 9 3 74
-
95 8
( 21 )
1 68 31 0
163 3 41
-
1 6.3 8%
16.38 %
-
1 78 271
170 2 59
-
3 044
6 91 8
-
-
-
2 400
-
-
16.38 %
-
-
1 1 77
-
( 525 )
-
EMPAR K b)
55 01 3
55 013
61 41 3
9.1 7%
9.17 %
11 .77 %
54 02 7
54 003
5 9 677
-
77 2
-
AUV ISA - AUTO VIA DE LOS V IÑEDOS
41 05 6
41 056
43 458
2 0.48%
20.48 %
-
41 147
3 7 081
43 5 56
59
31
-
UNIC RE b)
11 497
1 1 497
11 497
1 7.5 0%
17 .50%
-
19 62 7
1 9 998
1 9 7 54
899
8 47 9
8 260
10 256
MOZA B ANC O
R ODI S INKS & IDEAS
SC UTVIAS b)
Other
-
-
2 5.1 0%
-
-
-
-
296
-
-
1 240
1 2 40
1 240
2 4.8 1%
24.81 %
25 .29%
7 52 8
7 528
6 096
-
1 43 2
-
50 669
9 800
50 669
-
9.1 1%
9.11 %
-
50 669
50 669
-
-
-
-
1 13 73 9
11 0 5 41
99 01 3
-
-
-
1 09 404
106 1 59
97 3 47
976
( 6 496)
1 901
1 042 93 5
1 02 4 968
870 495
960 81 5
961 908
85 1 8 66
12 877
37 17 5
20 759
a) I ncludes goodwill in the amount of euro 2 67 440 thousand and value-in-force in the amount of e uro 41 952 thousand (31 December 2010: euro 43 454 thousand).
b) Although the Group's economic inte re st is less than 20% , this entities were consolidated unde r the equity method, as the G roup exe rcises a significant influence over their ac tivitie s.
140
Interim Report
The movement occurred in this balance is presented as follows:
30.06.2011
31 .1 2.201 0
D isposals
Acquisitions ( see Note 1 )
S hare of profit of associates
F air value reserve from investments in associates (a)
D ividends received
961 908
1 7 862
1 2 877
( 32 51 1)
( 2 91 8)
3 597
793 81 5
( 99 682)
292 61 9
37 175
( 48 485)
( 1 5 927)
2 393
Balance at the end of the period
960 815
961 908
(a) C hange in fair value re serve s mainly from BE S Vida.
NOTE 29 – OTHER ASSETS
As at 30 June 2011 and 31 December 2010, the balance other assets is analysed as follows:
30.06.201 1
Deb tors
Depos its plac ed with futures contracts
Depos it accounts
Recoverable government subsidies on mortgage loans
Debtors for unrealised capital of subsidiaries
Loans to companies in which the Group has a non-controlling interest
Public s ector
Sundry debtors
Impairment losses on debtors
O ther ass ets
Gold, other precious metals, numismatics,
and other liquid assets
O ther assets
Acc ru ed inco me
Prepay ments an d d eferred c osts
O ther s undry ass ets
Foreign exchange transactions pending settlement
Stock exchange transactions pending settlement
O ther transactions pending settlement
Ass ets rec ognised on pen sions
31 .12.2010
109 1 27
983 666
47 463
7 000
208 041
134 824
546 401
2 036 522
( 39 492)
1 997 030
48 958
960 404
42 264
3 500
1 27 520
1 24 978
424 321
1 731 945
( 1 5 047)
1 716 898
1 1 074
74 514
85 588
11 979
87 371
99 350
51 375
81 81 4
11 2 664
1 05 654
30 849
1 281 861
293 320
1 606 030
1 49 578
666 499
377 951
1 1 94 028
851 515
885 475
4 704 202
4 083 21 9
As at 30 June 2011, Loans to companies in which the Group has a non-controlling interest include the
amount of euro 100 million related with loans to Locarent – Companhia Portuguesa de Aluguer de
Viaturas, S.A. (31 December 2010: euro 110 million).
141
Interim Report
As at 30 June 2011, the balance prepayments and deferred costs includes the amount of
euro 65 097 thousand (31 December 2010: euro 62 719 thousand) 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
The movements occurred in impairment losses are presented as follows:
30.06.201 1
Balanc e at the b eginning of the perio d
C harge off
O ther
31 .12.2010
30.06.201 0
15 047
22 050
18 733
29 304
( 2 912)
( 1 950)
3
4 796
( 5 938)
( 6 992)
1 1 31
1 371
( 564)
2 51 0
39 492
1 5 047
22 050
142
Interim Report
NOTE 30 – DEPOSITS FROM CENTRAL BANKS
The balance deposits from central banks is analysed as follows:
30.06.201 1
From the E uropean S ys tem o f Central B ank s
Inter-bank money market
Deposits
Other funds
From o ther C entral B an ks
Deposits
Repurc hase agreements
Loans
31 .12.2010
1 3 495
8 333 000
264 500
1 53 806
4 800 000
8 346 495
5 218 306
1 9 027
786 435
76 807
443 903
2 438 247
308 267
-
1 326 172
2 746 51 4
9 672 667
7 964 820
As at 30 June 2011 and 31 December 2010, Other funds from the European System of Central Banks in the
amount of euro 8 333 million and euro 5 065 million, respectively, are covered by Group’s financial
assets (see Note 40).
As at 30 June 2011, the balance Deposits From other Central Banks includes euro 657 million of deposits
made by the Central Bank of Angola (31 December 2010: euro 1 356 million).
143
Interim Report
NOTE 31 – DEPOSITS FROM BANKS
The balance deposits from banks is analysed as follows:
30.06.201 1
Domestic
Loans
Deposits
Very s hort term funds
Other funds
31 .12.2010
1 6 858
22 368
702 884
123 1 80
193 458
32
18
339
44
5
1 058 748
In tern ational
Deposits
Loans
Very s hort term funds
Repurc hase agreements
Other funds
495
650
774
148
276
440 343
467 1 84
1 839 553
471 443
1 848 957
275 1 66
1 434
2 1 23
201
1 874
306
200
528
357
668
496
4 902 303
5 940 249
5 961 051
6 380 592
NOTE 32 – DUE TO CUSTOMERS
The balance due to customers is analysed as follows:
30.06.201 1
Repayable on demand
D emand deposits
Time depos its
Time deposits
O ther
S av in gs acc ounts
P ensioners
O ther
Other funds
R epurchase agreements
O ther
31 .1 2.201 0
8 466 309
8 676 475
20 862 644
1 03 365
19 426 1 16
133 543
20 966 009
19 559 659
20 370
1 678 963
29 751
1 758 470
1 699 333
1 788 221
523 054
317 393
436 619
358 246
840 447
794 865
31 972 098
30 81 9 220
144
Interim Report
NOTE 33 – DEBT SECURITIES ISSUED
The balance debt securities issued is analysed as follows:
30.06.201 1
E uro Medium Term Notes (EMTN)
Certificates of deposit
B onds a)
Covered bonds
Other
31 .12.201 0
10 038 270
1 649 418
3 601 329
959 1 69
3 659 247
1 1 575 244
1 748 683
4 049 569
2 333 906
4 402 537
19 907 433
24 109 939
a) As at 30 J une 2 01 1, includes the amount of euro 1 539 million of debt s ecuritie s issue d with a guarante e from the Portugues e
R epublic (3 1 De cember 2010: e uro 1 584 million)
BES Group issued covered bonds in the amount of euro 4 290 million, under the Covered Bonds
Programme, which has a maximum amount of euro 10 000 million. The main characteristics of these
issues at 30 June 2011 are as follows:
Des c ription
BE S
BE S
BE S
BE S
BE S
C overed B onds 3.375%
C overed B onds D UE J U L 1 7
C overed B onds 21 /07/201 7
C overed B onds D UE 4.6%
C overed B onds H IP O T. 201 8
Nominal
value
( in thousand
of euro)
1 000 000
750 000
1 250 000
40 000
1 250 000
B ook value
(in thousand
of euro)
Is su e date
Maturity date
Interest payment
Interes t rate
Rating
920 31 8
38 851
-
1 7-1 1 -2009
07-07-201 0
21 -07-201 0
1 5-1 2-201 0
25-01 -201 1
1 7-02-2015
09-07-2017
21 -07-2017
26-01 -2017
25-01 -2018
Annually
Annually
Annually
Annually
Annually
3.375%
6 month E uribor + 0.60%
4.600%
A3
A3
A3
A3
A3
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
and Instruction 13/2006 of the Bank of Portugal.
As at 30 June 2011, the mortgage loans that collateralise these covered bonds amount to euro 5 314 650
thousand (31 December 2010: euro 4 963 051 thousand) (see Note 22).
The changes occurred in debt securities issued during the six month period ended 30 June 2011 are
analysed as follows:
145
Interim Report
E uro Medium Term Notes (E MTN)
C ertificates of deposit
B onds
C overed bonds
Other
31.1 2.201 0
Iss ues
Repaymen ts
1 1 575 244
1 748 683
4 049 569
2 333 906
4 402 537
81 7 557
30 000
3 11 6 904
(1
(
(
(1
(3
24 109 939
3 964 461
(6 851 859)
N et
repurc has e
555 536)
( 708 603)
100 620) b)
326 1 35)
( 240 776)
250 000)
( 52 669)
61 9 568)
1 41 3
(1 000 635)
Other
30.06.201 1
mov ements a)
( 90 392)
1 355
88 671
( 72 068)
( 242 039)
1 0 038 270
1 649 41 8
3 601 329
959 169
3 659 247
( 314 473)
1 9 907 433
a)
Othe r movements include accrue d interest, corrections by he dging ope rations, fair value adjustments and foreign exchanges differences.
b)
C ertificates of deposit are presented at the net value, conside ring their short te rm 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. Following acquisitions, as at 30 June 2011 and
31 December 2010, the Group recongnised a profit of euro 61.7 million and a loss of euro 5.2 million
respectively (see Note 11 and 36).
146
Interim Report
The main characteristics of debt securities issued during the six month period ended 30 June 2011, are
147
Interim Report
NOTE 34 – PROVISIONS
As at 30 June 2011 and 31 December 2010, the balance of provisions presents the following movements:
R es truc turing
provis ion
Oth er
prov isions
Total
1 529
178 322
1 79 851
( 1 36)
1 2 805
( 10 794)
12 805
( 1 0 930)
-
( 2 154)
( 2 1 54)
1 393
178 1 79
1 79 572
( 1 5)
36 538
( 6 952)
36 538
( 6 967)
-
5 563
5 563
1 378
21 3 328
214 706
Charge off
-
8 074
( 14 51 7)
( 1 596)
8 074
( 1 4 517)
( 1 596)
1 378
205 289
206 667
Charge off
Charge off
Other provisions in the amount of euro 205 289 thousand (31 December 2010: euro 213 328 thousand) are
intended to cover certain contingencies related to the Group’s activities, the more relevant being as
follows:
•
Contingencies in connection with the exchange, during 2000, of Banco Boavista Interatlântico
shares for Bradesco shares. The Group has provisions for an amount of approximately euro 65.7
million (31 December 2010: euro 62.0 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 25.2 million as at 30
June 2011 (31 December 2010: euro 26.5 million) were established to cover these losses;
•
Contingencies for ongoing tax processes. To cover these contingencies, the Group maintains
provisions of approximately euro 40.2 million (31 December 2010: euro 39.8 million);
•
Contingencies for ongoing processes regarding commercial operations performed abroad in the
amount of euro 24.1 million (31 December 2010: euro 37.4 million);
•
The remaining balance of approximately euro 50.1 million (31 December 2010: euro 47.6 million), is
maintained to cover potential losses within the normal activities of the Group, such as frauds,
robbery and on-going judicial cases.
148
Interim Report
NOTE 35 – 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 six month period ended 30 June 2011 and for the year ended 31 December 2010
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 current and deferred tax for the six
month period ended 30 June 2011 was determined based on a tax rate of 26.5% plus an additional tax of
2.5% added following Decree-law No. 12-A of 30 June, in the scope of the additional measures of
“Programa de Estabilidade e Crescimento” (PEC).
The Portuguese Tax Authorities are entitled to review the annual tax return of the Group subsidiaries
domiciled in Portugal 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 Group subsidiaries domiciled in Portugal are confident that there will be no material
differences arising from tax assessments within the context of the financial statements.
The deferred tax assets and liabilities recognised in the balance sheet as at 30 June 2011 and 31 December
2010 can be analysed as follows:
As sets
30.06.201 1
31.1 2.201 0
Liab ilities
30.06.201 1
31 .1 2.201 0
Net
30.06.2011
31.12.201 0
D erivative financial instruments
Loans and advances to cus tomers
P roperty and equipment
Intangible assets
Investments in subsidiaries and associates
P rovisions
P ensions
H ealth care - SAMS
O ther
T ax losses brought forward
98 503
297 898
102
1 3 758
38 790
25 1 1 9
21 1
8 122
8 051
2 090
26 581
61 328
252 580
1 02
3 821
33 646
26 985
202
8 1 52
5 748
47 598
( 81 812)
( 9 1 55)
( 83 733)
( 41 789)
( 2 1 15)
( 3 1 77)
-
( 11 1 202)
( 9 239)
( 73 204)
( 43 81 9)
( 27 81 4)
( 7 1 77)
-
1 6 691
297 898
( 9 1 55)
102
( 69 975)
38 790
( 1 6 670)
21 1
8 122
5 936
( 1 087)
26 581
( 49 874)
252 580
( 9 239)
102
( 69 383)
33 646
( 1 6 834)
202
8 152
( 27 81 4)
( 1 429)
47 598
D eferred tax as set / (liability)
51 9 225
440 1 62
( 221 781 )
( 272 455)
297 444
1 67 707
( 142 361 )
( 1 56 795)
1 42 361
1 56 795
-
-
376 864
283 367
( 79 420)
( 11 5 660)
297 444
1 67 707
Assets / liabilities compensation for deferred taxes
D eferred tax as set / (liability) , net
149
Interim Report
The changes in deferred taxes were recognised as follows:
Six mo nth period
en ded
30.06.2011
B alan ce at th e beg in nin g o f the p eriod
Recognised in the income statement
Recognised in fair value reserve (1 )
Recognised in other reserves
B alan ce at th e end o f the p eriod (Ass ets/ (Liabilities) )
Year en ded
31 .12.201 0
167 707
70 372
108 655
1 5 899
66 253
( 5 521 )
( 1 367)
297 444
47 885
( 2 723)
( 2 009)
167 707
(1 )
The amount recognise d in the consolidated statement of comprehensive income include s, additionally, the de ferred tax re cognised on the
fair value re serves of associate s in the amount of e uro 11 143 thousands - gains (31 Dece mbe r 201 0: euro 1 6 902 thousands - gains ).
The current and deferred taxes recognised in the income statement and reserves, during the six month
period ended 30 June 2011 and the year ended 31 December 2010 is analysed as follows:
30.06.2011
R ec ognised in
Rec ognis ed in
(profit) /los s
reserves
31 .12.2010
R ec ognised in
Recognis ed in
(profit) /los s
reserves
D erivative financial instruments
P roperty and equipment
Intangible assets
Investments in subsidiaries and assoc iates
P rovisions
P ensions
Health care - S AMS
Other
T ax losses brought forward
( 31 2)
( 45 31 8)
( 84)
7 458
( 5 144)
750
( 9)
30
( 33 750)
( 2 675)
8 682
( 66 253)
( 6 866)
( 914)
966
1 2 335
( 25 732)
( 39 863)
( 2 259)
9
66 362
( 3 875)
( 1 852)
30 080
( 885)
3 588
809
( 42 281 )
( 47 885)
3 017
( 1 829)
1 535
-
D eferred taxes
( 70 372)
( 60 732)
( 1 5 899)
( 45 1 62)
63 989
1 920
59 673
46
( 6 383)
( 58 812)
43 774
( 45 1 16)
C urrent taxes
T otal
The current tax recognised in reserves includes a profit of euro 1 972 related to the acquisition of
preference shares issued by the Group and recognised as other reserves; includes a deferred tax income
of euro 966 thousand related to the costs incurred with the capital increase (31 December 2010: euro 1
933 thousand) and deferred tax expenses of euro 914 thousand related with pensions (31 December 2010:
euro 1 829 thousand) and as at 31 December 2010 includes euro 150 thousand related to the share based
payments scheme.
150
Interim Report
The reconciliation of the income tax rate can be analysed as follows:
31 .1 2.201 0
30.06.2011
%
P rofit befo re taxes
S tatutory tax rate
Income tax calculated based on the statutory tax rate
T ax-exempt dividends
T ax-exempt profits (off shore)
T ax-exempt gains
N on-taxable share of profit in associates
N on deductible costs
E ffect of the additional tax of added (D ecrew law nr 12-A)
N on-recoverable taxes paid abroad
E ffect of deferred tax asset calculated on los ses brought forward considering a 25% ra
O ther
Amou nt
%
Amoun t
205 583
700 765
29.0
29.0
(17.6)
(20.4)
(7.0)
(1 .8)
1 4.7
0.0
0.0
0.0
0.1
59 619
( 36 262)
( 42 009)
( 14 406)
( 3 734)
30 1 91
218
(6.1)
(8.2)
( 11 .5)
(1 .5)
4.8
(2.4)
1.2
1.0
0.0
203 222
( 42 951 )
( 57 503)
( 80 543)
( 1 0 781 )
33 563
( 1 7 000)
8 739
6 759
269
(3.1)
( 6 383)
6.2
43 774
Following the Law No. 55-A/2010 of 31 December, was established a contribution fo the banking sector.
During the six month period ended 30 June 2011, the Group recongnised a cost of euro 15.2 million,
included in balance Other operating income and expenses – Direct and indirect taxes (see Note 11).
NOTE 36 – SUBORDINATED DEBT
The balance subordinated debt is analysed as follows:
30.06.2011
B onds
Loans
P erpetual Bonds
31.1 2.201 0
823 702
255 967
497 890
1 246 324
276 936
768 573
1 577 559
2 291 833
151
Interim Report
The main features of the subordinated debt are presented as follows:
30.06.2 01 1
Currency
Is sue r
Issue Date
Designation
Amount
Issued
Carrying
amount
Interest R ate
Maturity
BE S ( Cayman branch)
S ubordinated loans
J PY
2005
21 3 068
255 967
3.95%
2015
BE S Finance
S ubordinated perpetual bonds
EU R
2002
500 000
256 954
6.63%
2012
a)
BE S Finance
EU R
2004
500 000
225 922
4.50%
2015
a)
BE S Finance
S ubordinated bonds
EU R
2008
20 000
20 046
3 Months Euribor + 1 %
2018
BE SI
S ubordinated bonds
BR L
2008
1 683
2 286
1 .30%
2013
BE SI
S ubordinated bonds
BR L
2007
21 1 34
24 360
1 .30%
2014
BE SI
S ubordinated bonds
BR L
2008
1 0 099
1 3 778
1 .30%
2015
BE SI
S ubordinated bonds
EU R
2005
60 000
43 1 91
5.33%
2015
BE SI
S ubordinated bonds
EU R
2003
1 0 000
1 0 1 56
5.50%
2033
BE S
S ubordinated bonds
EU R
2004
25 000
25 1 33
6 Months Euribor + 1 .25%
2014
BE S
EU R
2005
1 5 000
1 5 014
3 Months Euribor + 2.25%
2015
BE S
S ubordinated bonds
EU R
2008
41 550
1 4 318
2018
BE S
S ubordinated bonds
EU R
2008
638 450
620 337
2019
BE S
S ubordinated bonds
EU R
2008
50 000
50 097
3 Months Euribor + 1 .05%
2018
2 105 984
1 577 559
a)
a) Call option date
The changes occurred in subordinated debt during the six month period ended 30 June 2011 are analysed
as follows:
31 .1 2.201 0
Bonds
Loans
Perpetual B onds
(b)
Iss ues
Repaymen ts
Net
Repurc has es
O ther
30.06.201 1
mov ements (a)
1 246 324
276 936
768 573
-
( 400 219)
-
( 20 646)
( 236 624)
( 1 757)
( 20 969)
( 34 059)
823 702
255 967
497 890
2 291 833
-
( 400 219)
( 257 270)
( 56 785)
1 577 559
a)
Other move me nts include accrued inte re st, corre ctions by hedging operations, fair value adjustments and foreign e xchange differences.
b)
In the issue s were cons idered the amounts corresponding to de bt re place ments previously repurchased by the Group.
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. Following the repurchases performed during
the six months period ended 30 June 2011 and 31 December 2010, the Group has recognised a gain in the
amount of euro 86.0 million and euro 3.2 million, respectively (see Note 11 and 33).
152
Interim Report
NOTE 37 – OTHER LIABILITIES
As at 30 June 2011 and 31 December 2010, the balance other liabilities is analysed as follows:
Cred itors
Public sector
Creditors arising out from future contracts
Deposit accounts
Sundry creditors
Creditors from transactions with securities
S uppliers
Creditors from factoring operations
Other sundry creditors
Ac crued ex pen ses
Long-term service benefits (see Note 13)
Other accrued expenses
Deferred in come
Other s undry liabilities
Stock exchange transactions pending settlement
Foreign exchange transactions pending settlement
Other transactions pending settlement
30.06.2011
31.1 2.201 0
1 54 399
37 654
52 1 43
1 27 583
25 500
1 07 625
1 27 61 7
36 1 34
6 51 4
292 080
706 541
1 07 486
68 241
4 304
265 496
706 235
29 784
1 53 01 6
1 82 800
29 655
1 71 463
201 1 18
15 653
23 033
567 51 6
15 352
1 54 580
737 448
71 4 013
2 095
288 229
1 004 337
1 642 442
1 934 723
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
153
Interim Report
NOTE 38 – SHARE CAPITAL, SHARE PREMIUM, TREASURY STOCK AND PREFERENCE SHARES
Ordinary shares
As at 30 June 2011, the Bank’s share capital in the amount of euro 3 500 million, was represented by 1 166
666 666 ordinary shares with a face value of euro 3 each, which were subscribed and fully paid by the
following entities:
% S hare capital
30.06.2011
31.1 2.201 0
BE S PAR - S ociedade Gestora de Participações Sociais, S.A.
Credit Agricole, S .A.
Bradport, SGP S, S .A. ( 1)
Silchester International Investors Limited
Portugal Telecom, SGP S , S A
Espírito S anto Financial Group, S.A.
Outros
(1 )
40.00%
10.81 %
6.05%
5.93%
2.62%
2.49%
32.10%
40.00%
1 0.81 %
6.05%
5.41 %
2.62%
2.47%
32.64%
1 00.00%
1 00.00%
P ortuguese company fully owned by B anco Bradesco, S .A. (B razil), which has the voting rights.
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. During
the six month period ended 30 June 2011, the Group acquired 144 thousand preference shares, with a net
profit of euro 35 124 thousand recognised in Other reserves.
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.
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.
154
Interim Report
Share Premiums
As at 30 June 2011, share premiums are represented by euro 1 085 399 thousand related to the premium
paid by the shareholders following the share capital increases.
Other equity instruments
The Group issued during 2010, perpetual subordinated bonds with interest conditioned in the total
amount of euro 320 million. These bonds have an interest conditioned non-cumulative, payable only if and
when declared by the Board of Directors.
The main characteristics of these equity instruments are presented as follows:
Is suer
BE S
BE S
BE S I (1 )
Is sue date
C urrenc y
D ecember 2010
D ecember 2010
E UR
US D
October 201 0
E UR
Emis sion
v alue
B ook Valu e
264 952
5 080
264 499
4 697
270 032
269 1 96
50 000
50 000
320 032
31 9 1 96
Interest rate
Coupo n d ate
Reimbursemen t
pos sibility (2)
8.50%
8.00%
1 5th Mar and 14th S ep From S eptember 201 5
1 5th Mar and 14th S ep From S eptember 201 5
8.50%
20th April anf 20th Oct From October 2015
(1)
BE SI issue is included in the balance non-controlling interest (see Note 39)
The reimbursement of these securities may be performed in full, but not partially, at the option of the issuer, subject to prior approval of the Bank of
Portugal.
(2)
During the six month period ended 30 June 2011, the Group pays interest in the amount of euro
8 210 thousand, registered as a deduction in reserves.
These bonds are subordinated in respect of any liability of BES and BESI and pari passu in respect of any
subordinated bonds with identical characteristics that may be issued by the Bank. Given their
characteristics, these obligations are considered as equity instruments in accordance with the accounting
policy described in Note 2.9.
Treasury stock
BES and its subsidiaries established a share based payment scheme (SIBA) which terminated in December
2010.
During the six month period ended 30 June 2011, the Group acquired treasury stock under PRVIF
programme (see Note 12).
155
Interim Report
The movement in treasury stocks is analysed as follows:
For the period ended
For the year en ded
30.06.201 1
Number of
shares
Opening balance
Shares acquired (1)
Shares sold ( 2)
Net amount of transactions with SIB A shares
(3)
Year-end balance
(1 )
31 .1 2.201 0
Amo un t
(th ou s and o f eu ro )
Nu mb er of
s hares
Amo un t
(tho u san d o f eu ro )
342 475
-
997
-
1 276 261
(1 276 261 )
-
25 083
( 2 952)
( 22 131 )
342 475
997
-
-
Shares acquired under PR VIF , at a price of 2. 909 euro per share.
(2)
Includes the shares sold by the Bank in the market after the exercise by the employees of the option to sell the shares back to BE S at acquisition cost, and
the shares liquidated by the employees at the maturity of the plans.
(3)
Amount transfered to Other reserves in December 201 0.
NOTE 39 – FAIR VALUE RESERVE, OTHER RESERVES AND RETAINED EARNINGS AND NON-CONTROLLING
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 shown net of deferred taxes and non-controlling
interest.
During the six months period ended 30 June 2011 and the year ended 31 December 2010, the changes in
these balances were as follows:
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Interim Report
F air value res erv e
Av ailable
for-s ale
financ ial
as sets
Deferred
tax
res erv es
O ther reserves and retained earnings
Total fair
v alue
reserve
Legal res erv e
Ex ch ange
differences
O ther
reserves and
retained
earnings
Total Oth er
reserves and
retained
earnings
672 063
365 323
( 64 490)
300 833
22 000
( 5 634)
655 697
S hare-based incentive plan (S IBA)
-
-
-
-
-
1 29
1 29
D ividends from preference shares
-
-
-
-
-
( 33 480)
( 33 480)
C hanges in fair value
( 270 233)
29 103
( 241 1 30)
-
-
-
-
E xchange differences
T ransfer to reserves
-
-
-
37 000
25 437
-
321 936
25 437
358 936
95 090
( 35 387)
59 703
59 000
1 9 803
944 282
1 023 085
-
-
-
-
-
237
( 22 131)
237
( 22 131 )
( 106 381 )
37 098
( 69 283)
-
-
-
-
-
-
-
-
-
( 3 321)
( 3 321 )
S hare-based incentive plan (S IBA)
S ettlement of S hare-based incentive plan ( SIB A)
O ther
-
-
-
-
( 19 323)
-
( 19 323)
( 1 1 291 )
1 71 1
( 9 580)
59 000
480
91 9 067
978 547
Acquis ition of preference shares
Interest of other equity instruments
D ividends from preference shares
-
-
-
-
-
35 1 24
( 8 21 0)
35 1 24
( 8 21 0)
( 25 657)
Variable remuneration plan in financial instruments
T ransfer to reserves
-
-
-
-
-
( 25 657)
( 451 008)
77 637
( 373 371 )
-
-
-
-
-
-
-
-
( 20 141)
-
( 1 130)
( 20 141 )
( 1 130)
-
-
-
26 000
-
337 520
363 520
( 462 299)
79 348
( 382 951 )
85 000
( 19 661)
1 256 714
1 322 053
The movement in the fair value reserve, net of deferred taxes, impairment losses and non-controlling
interest is analysed as follows:
30.06.2011
D isposals during the period
31 .12.2010
( 9 580)
300 833
( 329 461 )
( 168 470)
( 41 980)
( 364 436)
Impairment recognised during the period
46 923
29 802
D eferred taxes recognised in reserves during the period
77 637
66 201
( 382 951 )
( 9 580)
157
Interim Report
Non-controlling Interest
Non-controlling interest by subsidiary are analysed as follows:
30.06.2011
B alan ce
Inc ome
s heet
s tatement
B E S ANGO LA
B E SI a)
AMAN BAN K
E S C O NCE SS Õ E S
F CR VE NT URE S II
B E S S ecurities
B E S Investimento do Brasil
E S AF
B E S AÇO RE S
F CR PME/B E S
E spirito Santo Investment Holding b)
B E ST
F CR VE NT URE S III
O UT RO S
290 570
50 000
36 290
42 437
23 094
20 1 76
1 9 794
1 9 725
1 6 025
1 5 052
9 590
1 3 1 45
1 0 588
1 6 1 65
55 508
51 6
2 296
( 5 1 08)
71 3
1 580
1 677
172
( 65)
( 2 091 )
1 446
( 1 636)
948
582 651
55 956
31.12.201 0
B alance
In come
sheet
statemen t
256
50
36
35
23
22
19
18
15
15
12
11
8
15
969
000
620
094
903
681
41 4
109
930
105
085
689
533
278
541 41 0
a)
Corresponds to the value of the issue of other equity instruments (see Note 38).
b)
H olding company of BE S I Group that holds a 50.1 % participation in E xecution Holdings, Limited
120 599
( 835)
1 7 827
( 1 022)
3 096
355
3 414
1 1 28
1 64
11
2 1 89
( 1 063)
608
146 471
The movements in non-controlling interest in the six months period ended 30 June 2011 and the year
ended 31 December 2010 are analysed as follows:
30.06.2011
N on-c ontrolling interes t at the beginning of th e period
C hanges in the scope of cons olidation
C apital increase (s ubsidiaries )
O ther equity instruments issue
D ividends distributed
31 .12.201 0
541 41 0
283 557
686
45 285
3 287
-
1 7 325
50 000
( 3 601 )
( 6 461)
5 966
( 4 969)
P rofit for the period
( 21 053)
55 956
1 0 202
1 46 471
N on-c ontrolling interes t at the end of th e period
582 651
541 410
C hanges in fair value reserve
158
Interim Report
NOTE 40 – OFF-BALANCE SHEET ITEMS
As at 30 June 2011 and 31 December 2010, this balance can be analysed as follows:
30.06.2011
Contingen t liabilities
Guarantees and stand by letters of credit
Assets pleged as collateral
Open documentary credits
Other
Commitments
R evocable commitments
Irrevocable commitments
31.12.201 0
8 689 358
11 777 718
3 026 364
598 673
8 1 98
8 320
3 239
581
285
999
192
957
24 092 1 13
20 340 433
5 974 371
4 651 987
6 883 602
5 349 361
10 626 358
1 2 232 963
Guarantees and standby letters of credits are banking operations that do not imply any out-flow by the
Group.
As at 30 June 2011, the balance assets pledged as collateral include:
•
Securities pledged as collateral to the Bank of Portugal (i) for the use of the money transfer
system (Sistema de Pagamento de Grandes Transacções) in the amount of euro 156.1 million (31
December 2010: euro 155.3 million) and (ii) in the scope of a liquidity facility collateralised by
securities in the amount of euro 10 084 million (as at 30 June 2011, securities eligible for
rediscount at the Bank of Portugal amounted to euro 13 164 million);
•
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 19 576 thousand (31 December 2010: euro 24 241 thousand);
•
Securities pledged as collateral to the Deposits Guarantee Fund (Fundo de Garantia de Depósitos)
in the amount of euro 64 873 thousand (31 December 2010: euro 63 173 thousand);
•
Securities pledged as collateral to the European Investment Bank in the amount of euro 1 065 500
thousand (31 December 2010: euro 594 500 thousand).
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.
159
Interim Report
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.
Revocable and irrevocable commitments represent contractual agreements for credit concession with
the Group clients (eg. unused credit lines) 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.
Notwithstanding the particular characteristics of these contingent liabilities and commitments, the
analysis of these operations follows the same basic principles of any one another 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:
30.06.2011
S ecurities and other items held for safekeeping on behalf of customers
Assets for collection on behalf of clients
S ecuritised loans under management (s ervicing)
Other responsabilities related with banking services
31.12.201 0
62 569 413
281 814
2 987 956
10 185 856
69 1 77
274
3 1 07
9 757
21 5
553
186
863
76 025 039
82 316 81 7
160
Interim Report
NOTE 41 – 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 fulfilment of the obligations assumed under
the terms of the Law and the management regulations of the funds.
As at 30 June 2011 and 31 December 2010, the amount of the investment funds managed by the Group is
30.06.2011
S ecurities investment funds
Real estate investment funds
P ension funds
B ancass urance
P ortfolio management
Other
5
1
2
4
1
1
038 065
328 988
686 977
31 4 915
399 1 79
754 005
16 522 1 29
31.1 2.201 0
4 459
1 374
2 655
5 373
1 785
1 445
631
539
602
789
790
009
1 7 094 360
The amounts recognised in these accounts are measured at fair value determined at the balance sheet
date.
NOTE 42 – 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:
161
Interim Report
162
Interim Report
As at 30 June 2011 and 31 December 2010, the balances and transactions with related parties are
As sets
As so ciated c ompanies
B E S VID A
628 443
B E S VÉN ÉTIE
1 028 825
AS CE NDI GR OU P S GPS
185 684
LOCAREN T
149 1 27
AE NOR DOURO
190 953
N ANIUM
44 569
E MP ARK
41 306
S OUS AC AMP
64
AS CE NDI PINHAL IN TER IOR
1 9 380
S CUT VIAS
8 645
P ALE XP O
6 800
B E S S EGUR OS
35
E S EGUR
3 501
E S UMÉ DICA
E S C ON TAC T CE NTE R
1 344
E UROP AS S IS TANCE
1 086
FIDU PR IVATE
1 41
U NICRE
2
OTHE R
27 437
2 337 342
Liabilities
30.06.201 1
Guarantees
163 611
120 475
5 038
1 23
1 722
1 588
3 826
12
1 6 943
235
1 417
7
7 441
30 1 86
352 624
4 81 5
33 269
1 2 000
1 9 784
3 01 3
1 5 374
6 868
2 1 97
4
92
7
4 946
102 369
Inc ome
18
1
8
2
4
1
2
2
43
325
390
925
338
353
460
271
61
434
538
21 6
11 1
471
2
28
20
267
21 0
Ex penses
721
52
30
4 378
1
71
23
465
18
167
5 926
As s ets
924 51 1
889 175
1 88 684
1 39 970
1 22 304
45 403
41 537
1 5 064
9 320
9 140
6 800
3 840
2 657
2 569
1 61 4
1 064
139
12
1 6 139
2 41 9 942
Liabilities
429 055
1 20 264
5 348
712
592
704
7
1 7 769
1 89
1 3 773
1 38
1 670
7
1 6 695
1 1 810
61 8 733
31 .12.2010
Guarantees
832
3 013
2 261
4
92
7
6 209
Inc ome
48 770
8 967
9 882
3 303
5 01 3
610
3 286
835
256
227
353
1 41 3
842
83
60
43
813
84 756
Ex penses
1 094
345
2 542
1 0 1 77
19
1
4
1 26
55
91 5
12
1
1 456
1 6 747
Balances and transactions with the above referred entities relate mainly to loans and advances and
deposits in the scope of the activity of the Group.
163
Interim Report
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. As at 30 June 2011 and as at 31 December 2010, the liability
recognised in the balance sheet amounts to euro 6.8 million.
As at 30 June 2011 and 31 December 2010, the total amount of assets and liabilities of BES Group with
ESFG (Bank holding) and related companies, is as follows:
30.06.2011
Ass ets
E S F INANC IAL GRO UP
E S F PORTU GAL
B E SP AR
GRU PO CRÉ DIT AGRICO LE
P ARTRAN
E S PÍRITO SANTO FINANCIÉ RE, S A
C OMPANHIA S E GURO S TR ANQ UILID AD E
E S IRMÃO S
B ANQ UE P RIVÉ E E S PÍRITO SANTO
E S BANK P AN AMA
E S S AUDE
O P WAY
T - VIDA
C ONSTR UCCIO NE S S AR RION
E S PÍRITO SANTO RE SOU RCE S
O TH ER
T OT AL
Loan s and
adv an ces to
banks
1 022
1 7 591
354 803
22 237
395 653
Loans
S ecurities
O ther
T otal
Guarantees
Liabilities
Income
E xp ens es
1
1
91 9
479
309
977
598
593
367
1
378
233
93 810
3
1 2 544
165 527
2 602
1 81
306
19
49
90
26
1 117
41 4
93 81 1
1 023
1 51 91 9
1 09 788
84 309
17 61 0
354 803
1 27 570
52 598
228 21 0
26 367
27
1 18 334
207
21 1 42
1 0 499
24 884
32 575
2 252
1 8 675
50 743
246
904
495
39
271
1 50 499
29 675
2 988
9 802
4
82 342
1 151
27 745
277
532
10
695
1 975
250
4 079
1 990
953
1 53
32
3 995
1
1
2
81 3
176
1
23
11 6
102
478
694 623
274 719
1 788
1 366 783
11 0 234
356 904
1 4 941
1 71 3
1 51
1 09
84
1 14
52
62
26
92
31 .1 2.2010
A ss ets
Loans and
advanc es to
bank s
E S F IN AN CIAL GR OU P
E S F PO RTU GAL
BE SP AR
GRU PO CRÉ DIT AGR ICO LE
P ARTRAN
E S PÍRITO S ANT O FINANCIÉ RE , S A
C OMPANH IA SE GURO S TRANQ UILIDADE
E S IR MÃOS
E S CO M
BANQ UE P RIVÉE E SP ÍRITO S ANTO
E S B ANK P ANAMA
E S S AUDE
OP WAY
T - VIDA
C ON ST RUCC IO NE S S ARRIO N
E S PÍRITO S ANT O RE S OU RCE S
OTH ER
TOTA L
23
311
23
359
973
989
074
766
802
Loans
1
135 000
2 667
87 948
11 8 944
31 606
20
26 934
77 724
480 844
S ec urities
1 36
93 810
3
1 2 544
190 281
2 592
299 366
O ther
2
6 866
424
13
32
205
31
846
8 419
T otal
1 38
93 81 1
7 839
1 35 000
3 094
87 948
24 002
31 1 074
1 31 520
31 606
1 90 506
26 934
31
1 04 928
1 1 48 431
Guarantees
21
10
24
35
12
1 05
207
563
623
885
665
370
31 3
Liabilities
91 342
1 54
479
549
40
74
68 267
1
27 629
2 930
5 308
8 998
97 471
1 86
28 016
331 444
Inc ome
241
945
1 1 46
2 469
6 645
270
8 093
232
713
1 73
91
6 582
27 600
E x pens es
1 344
1 01
44
1
1 08
1
898
2 497
164
Interim Report
As at 30 June 2011, 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 28 385 thousand (31 December 2010: euro 27 386
thousand).
As at 30 June 2011, 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 4 878 thousand (31
December 2010: euro 5 924 thousand).
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(1).
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 fulfil the above mentioned requirements.
(1)
This Instruction will remain in-force until 21 August 2011, date on which the Instruction No. 17/2011 of the Bank of Portugal
becomes effective, imposing new rules that the banks must observe regarding this matter.
165
Interim Report
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 30 June 2011 and 31 Decebmber
2010, 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 six months period ended 30 June 2011 the Group sold 18 520 and 4 830 units of the Fungepi
Fund and Fungere Fund to the Group pensions funds, by a global amount of euro 80.0 million, not
incurring in any material loss or gain.
166
Interim Report
NOTE 43 – SECURITISATION TRANSACTIONS
As at 30 June 2011, the outstanding securitisation transactions performed by the Group were as follows:
Des ignation
Initial date
Original amount
C urrent amount
A ss et s ecuritis ed
Mortgage loans (s ubsidised regime)
Lusitano Mortgages N o.1 plc
December 2002
1 000 000
41 3 1 32
November 2003
1 000 000
41 1 700
Mortgage loans (s ubsidised and general regime)
November 2004
1 200 000
584 434
Mortgage loans (general regime)
S eptember 2005
1 200 000
664 553
S eptember 2006
1 400 000
91 4 1 37
Loans to s mall and medium entities
Lusitano S ME No.1 plc
Lusitano P rojec t Finance No.1 , FTC
Lusitano Leverage finance No. 1 BV
Lusitano S ME N.º 2
October 2006
862 607
477 843
J uly 2007
1 1 00 000
81 9 069
December 2007
1 079 100
152 1 21
S eptember 2008
1 900 000
February 201 0
516 534
( 2)
31 8 459
1 951 908
( 3)
1 657 558
December 201 0
(1 )
1 895 795
P roject Finance loans
C ompanies loans
Loans to s mall and medium entities
(1 )
During the first s emes ter of 201 1 , credit portfolio ass ociated to this securitization was partially sold, with the remaining (domes tic credit) been transferred to "Lusitano Project
Finance No.1 FTC".
(2)
This securitisation includes the amount of euro 382 062 thousand of mortgage loans from BE S and an amount of euro 1 34 472 thousand of mortgage loans from BE SI and E S
Vénétie.
(3)
This securitisation includes an amount of euro 1 348 825 thousand of companies loans and an amount of euro 603 083 thous and of commercial paper from BE S.
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.
In accordance with SIC 12, the Group fully consolidates Lusitano SME No. 1, plc, Lusitano Mortgages No.6
plc, Lusitano Project Finance No. 1 FTC and Lusitano Mortgages No.7 plc as it retains the majority of the
risks and rewards associated with the activity of these SPE’s. Therefore, the respective assets and
liabilities 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.
During 2010 it was set-up two securitization operations of company loans (Lusitano Leverage Finance
Nº1) which includes loans from BES London Branch, BESI and ES Vénétie and other of company loans and
commercial paper (Lusitano SME Nº2). These loans were not derecognised considering that the group has
not transferred substantially all the risks and rewards of ownership.
167
Interim Report
NOTE 44 – FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The fair value of financial assets and liabilities, for the Group, is analysed as follows:
31.1 2.201 0
30.06.2011
Book Value
Fair Value
B ook Value
Fair Valu e
Cash and deposits at central banks
Deposits with banks
Financial assets as at fair value through profit or loss
Financial assets available-for-sale
Held to maturity investments
Hedging derivatives ( assets)
1 084 584
537 579
3 007 360
1 063 434
1 0 924 881
3 438 948
49 71 7 892
2 252 043
329 048
1 084 584
537 579
3 007 360
1 063 434
1 0 924 881
3 438 948
47 518 733
2 1 59 822
329 048
930
557
3 942
1 424
1 1 774
4 245
50 829
2 458
447
505
972
061
331
881
436
123
800
304
Financ ial as s ets
72 355 769
70 064 389
76 610 41 3
74 647 243
Deposits from central banks
Financial liabilities held for trading
Deposits from banks
Due to customers
Hedging derivatives ( liabilities)
Subordinated debt
9 672 667
1 894 927
5 961 051
31 972 098
1 9 907 433
230 041
1 577 559
9 672 667
1 894 927
5 539 242
31 972 098
1 7 666 457
230 041
1 1 18 925
7 964
2 088
6 380
30 819
24 1 09
228
2 291
7
2
5
30
21
Financ ial liabilities
71 21 5 776
68 094 357
73 883 355
820
007
592
220
939
944
833
3
1
11
4
48
2
930 505
557 972
942 061
424 331
774 881
245 436
932 520
392 233
447 304
964 820
088 007
842 853
81 9 220
584 479
228 944
1 491 096
70 01 9 419
The Financial Assets and liabilities of BES Group at fair value were measured in accordance with the
methodology described in the Financial Statements Report for the year ended 31 December 2010.
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.
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.
168
Interim Report
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.
169
Interim Report
NOTE 45 – 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.
BES Group credit risk exposure is analysed as follows:
30.06.201 1
D eposits with banks
F inanc ial assets held for trading
O ther financial assets at fair value through profit or loss
Loans and advances to cus tomers
H eld-to-maturity investments
D erivatives for risk management purposes
O ther assets
Guarantees granted
S tand by letters of credit
Irrevocable commitments
C redit risk associated to the credit derivatives reference entities
31.1 2.201 0
4 870 938
2 954 442
221 546
9 386 625
49 71 7 892
2 252 043
329 048
81 3 788
8 689 358
3 026 364
4 651 987
489 899
5 427 710
3 760 285
259 002
8 746 855
50 829 1 23
2 458 800
447 304
660 872
8 1 98 285
3 239 1 92
5 349 361
404 756
87 403 930
89 781 545
170
Interim Report
The analysis of the risk exposure by sector of activity, as at 30 June 2011 and 31 December 2010, can be
30.06.201 1
Other
Derivatives Available-for-sale financial
financial
Financial
assets
for risk
assets at fair
assets held
value through management
for trading
profit and
purposes
Gross
Impairment
loss
amount
Loans and advances to
customers
Gross
amount
Impairment
(
(
(
(
Held-to-maturity
investments
Gross
amount
Guarantees
granted
Impairment
Agriculture
Mining
Food, beverage and tobacco
Textiles
Shoes
Wood and cork
Printing and publishing
R efining and oil
Chemicals and rubber
Non-metallic minerals
Metallic products
Production of machinery, equipment and electric device
Production of transport material
Other transforming industries
E lectricity, gas and water
Construction
Wholesale and retail
Tourism
Transports and communications
Financial activities
R eal estate activities
Services provided to companies
Public services
Non-profit organisations
Mortgage loans
Consumer loans
Other
495 625
405 1 58
937 071
335 469
81 1 82
1 60 506
353 947
22 479
61 0 975
356 1 51
885 277
284 1 78
548 1 08
378 200
1 485 31 7
4 630 624
3 489 31 3
1 661 1 81
1 797 426
1 802 042
5 921 1 68
4 892 388
1 089 41 1
4 462 835
1 1 646 254
2 645 908
322 331
27 291 )
1 0 1 02)
23 228)
31 960)
( 3 892)
( 22 858)
( 6 433)
( 1 25)
( 1 4 738)
( 1 7 871 )
( 38 937)
( 1 2 237)
( 1 2 055)
( 24 698)
( 1 2 936)
( 231 591 )
( 222 336)
( 54 474)
( 92 372)
( 1 74 71 8)
( 261 91 7)
( 1 76 262)
( 1 7 879)
( 1 76 086)
( 1 64 965)
( 1 47 71 6)
( 2 955)
5 657
3 61 3
8 908
4 436
382
603
47 469
3 877
1 1 462
474
2 040
1 545
455
424
58 423
1 62 771
22 1 1 5
1 6 058
234 91 0
1 067 353
47 627
1 56 200
964 444
1 82 674
3 440
53 480
902 990
20 998
85 966
-
5 01 8
324 030
-
25 21 5
2 644
30 606
20 1 70
1 679
1 46 836
4 439
40 925
30 862
500
46 451
1 788
5 371
244 399
1 53 884
372 782
3 245
305 233
1 445 01 9
201 759
2 1 01 230
5 1 03 271
782 801
1 1 61 2
( 3 087)
( 52)
( 2 238)
( 499)
( 2 232)
( 5 808)
( 1 08)
( 2 21 3)
( 1 729)
( 1 687)
( 3 386)
( 379)
( 1 1 1 72)
( 64 650)
( 4)
( 25 688)
( 1)
( 30 283)
( 2 624)
9 602
1 5 566
1 7 580
7 279
21 5 434
949 201
830 899
232 570
5 894
( 1 8 694)
( 1 3 288)
-
46 550
22 504
1 36 658
1 7 786
2 096
7 983
85 600
6 383
90 405
43 327
1 1 2 337
1 62 430
83 761
61 024
596 335
2 320 1 02
493 564
1 01 631
1 082 61 9
293 1 32
420 936
1 698 01 8
248 036
456 781
39
97 274
2 047
TOTAL
51 700 524
(1 982 632)
3 007 360
1 063 434
329 048
1 1 082 721
( 1 57 840)
2 284 025
( 31 982)
8 689 358
31 .1 2.201 0
Loans and advances to
customers
Gross
amount
Agriculture
560 703
Mining
507 759
Food, beverage and tobacco
897 598
Textiles
367 563
Shoes
1 35 256
Wood and cork
1 78 826
Printing and publishing
333 563
R efining and oil
1 7 670
Chemicals and rubber
524 851
Non-metallic minerals
439 876
Metallic products
650 669
442 265
Production of machinery, equipment and electric devices
Production of transport material
1 07 391
Other transforming industries
467 774
E lectricity, gas and water
1 620 543
Construction
5 1 96 272
Wholesale and retail
3 633 806
Tourism
1 550 582
Transports and communications
2 565 859
Financial activities
2 1 91 977
R eal estate activities
6 1 07 235
Services provided to companies
4 651 301
Public services
1 1 23 298
Non-profit organisations
3 459 987
Mortgage loans
1 1 701 009
Consumer loans
2 822 1 49
Other
350 329
TOTAL
52 606 1 1 1
Impairment
Other
Derivatives Available-for-sale financial
financial
Financial
assets
for risk
assets at fair
assets held
value through management
for trading
profit and
purposes
Gross
Impairment
loss
amount
( 25 844)
( 7 243)
( 1 9 706)
( 63 1 74)
( 4 725)
( 24 093)
( 6 1 21 )
( 1 1 2)
( 1 5 602)
( 1 5 368)
( 28 708)
( 1 4 094)
( 1 0 255)
( 24 251 )
( 1 6 604)
( 221 660)
( 1 89 568)
( 41 937)
( 80 334)
( 1 06 862)
( 1 87 461 )
( 1 28 042)
( 1 7 297)
( 1 31 1 93)
( 220 277)
( 1 72 209)
( 4 248)
7 111
4 833
1 4 893
1 925
629
823
38 828
692
1 3 633
800
1 529
3 463
4 1 54
780
64 660
1 66 241
1 6 482
1 1 31 0
232 331
1 381 629
27 289
1 70 246
1 552 392
221 000
4 388
4 675
56 1 40
1 233 259
5
1 30 252
-
51 0
441 820
4 974
-
(1 776 988)
3 942 061
1 424 331
447 304
Held-to-maturity
investments
Gross
amount
Guarantees
granted
Impairment
20 31 4
3 222
24 501
23 451
1 434
5 389
1 45 083
4 523
29 009
3 905
3 836
34 273
2 407
36 61 8
300 1 95
423 484
1 88 71 2
4 357
366 1 62
334 31 3
227 738
863 227
71 8 784
1 52 872
1 6 304
( 3 087)
( 52)
( 2 238)
( 499)
( 1 500)
( 1 0 630)
( 596)
( 31 )
( 1 5 508)
( 6 625)
( 1 331 )
( 376)
( 8 91 8)
( 53 768)
( 1 724)
( 38 968)
( 1)
( 1 3 374)
( 6)
4 308
1 3 1 63
1 4 41 2
1 7 531
7 099
21 4 665
1 081 31 7
827 260
307 884
21 255
( 32 853)
( 1 7 241 )
-
42 1 91
22 068
99 1 1 8
21 323
2 269
4 203
87 321
55 457
83 872
64 396
1 1 4 290
1 73 632
81 655
52 1 71
645 853
2 21 5 1 95
521 1 39
73 870
981 406
1 28 764
440 446
1 632 840
250 71 7
293 488
39
1 08 298
2 264
1 1 934 1 1 3
( 1 59 232)
2 508 894
( 50 094)
8 1 98 285
3
1
3
1
171
Interim Report
As at 30 June 2011 and 31 December 2010, the analysis of the loan portfolio by rating is as follows:
( in million of euro)
30.06.201 1
R atin g/S c orin g mod els
In tern al sc ale
[aaa;a-]
Large companies
Medium enterprises
S mall enterprises
69
C redit
amoun t
(% )
(% )
0.13%
549
1.04%
[bbb+;-bbb-]
2 696
5.21 %
3 019
5.74%
[bb+;bb-]
5 241
1 0.14%
5 766
1 0.97%
[b+;b-]
8 668
1 6.77%
9 077
1 7.26%
ccc+
1 560
3.02%
1 472
2.80%
8-9
555
1.07%
361
0.69%
1 0-11
689
1.33%
491
0.93%
1 2-13
784
1.52%
745
1.42%
1 4-15
656
1.27%
710
1.35%
1 6-17
71 2
1.38%
944
1.79%
1 8-19
550
1.06%
527
1.00%
20-21
539
1.04%
706
1.34%
22-23
442
0.85%
378
0.72%
24-25
771
1.49%
1 036
1.97%
A
95
0.18%
91
0.1 7%
B
446
0.86%
446
0.85%
C
905
1.75%
1 021
1.94%
D
472
0.91 %
578
1.1 0%
E
271
0.52%
326
0.62%
F
Mortgage loans
Credit amount
31 .1 2.201 0
465
0.90%
475
0.89%
01
4 979
9.63%
1 250
2.38%
02
-
-
3 1 26
5.95%
03
1 636
3.16%
2 324
4.42%
04
972
1.88%
1 253
2.38%
05
734
1.42%
691
1.31%
06
558
1.08%
553
1.05%
07
1 905
3.68%
1 318
2.51%
08
-
-
1 32
0.24%
01
96
0.19%
1 28
0.24%
02
11 0
0.21 %
90
0.1 7%
03
199
0.38%
1 81
0.34%
04
361
0.70%
341
0.65%
05
226
0.44%
275
0.52%
06
225
0.44%
211
0.40%
07
177
0.34%
207
0.39%
08
129
0.25%
1 35
0.26%
09
202
0.39%
231
0.44%
10
4
0.01 %
5
0.01%
N o internal rating/s coring loans
1 2 602
24.40%
1 1 437
21.75%
T OTA L
51 701
100.00%
52 606
100.00%
P rivate individuals
Market risk
172
Interim Report
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 has been developed, allowing to evaluate the impact of potential losses higher than the ones
considered by VaR.
30.06.2011
E xchange Risk
Interest rate risk
S hares and c ommodities
D iversification effect
T otal
31.1 2.201 0
1 0 310
1 0 019
1 8 972
( 17 122)
1 4 1 75
1 6 246
1 9 069
( 27 077)
22 1 79
22 41 3
BES Group has a VaR of euro 22 179 thousand (31 December 2010: euro 22 413 thousand), 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 measures of interest rate risk mainly quantify the impact on equity and on the financial result arising
from changes in interest rates. The interest rate risk, considering the effect on the Group’s equity,
amounted to euro 474 million, as at 30 June 2011, which compares to euro 596 million as at the year
ended 2010.
The following table presents the average balances, interests and interest rates in relation to the Group’s
major assets and liabilities categories, for the six month period ended 30 June 2011 and year ended 31
December 2010:
173
Interim Report
30.06.201 1
Averag e
balance for
the period
31 .1 2.201 0
Intere st for
the peri od
Averag e
interest
rate
Average
balance for
the year
Average
interest
rate
Interest for
the year
Monetary assets
Loans and advance s to customers
Securities
Differential applications
5 604
51 656
1 3 1 84
37
446
51 1
445
51 6
96 3 84
1 228 8 54
342 5 20
-
3.47 %
4.80%
5.24%
-
6 495 350
52 042 341
1 3 28 2 1 99
343 086
21 5 3 70
2 037 7 94
669 2 26
-
3.32%
3.92%
5.04%
-
Financial Asse ts
70 482 91 8
1 667 7 58
4.77%
72 1 62 976
2 922 3 90
4.05%
Monetary liabilitie s
Due to consumers
Other
Differential resources
1 6 234 260
31 432 872
22 81 5 786
-
200 8 24
459 7 74
464 3 47
-
3.1 6%
2.95 %
4.1 0%
-
1 3 52 2 742
27 1 45 694
31 494 540
-
1 93 7 22
507 8 25
1 056 8 85
-
1 .43%
1 .87%
3.36%
-
Financial Liabilities
70 482 91 8
1 1 24 9 45
3 .22%
72 1 62 976
1 758 432
2.44%
542 8 1 3
1 .55%
1 1 63 9 58
1 .61 %
Ne t interest income
Concerning the foreign exchange risk, the distribution of the assets and liabilities by currency as at 30
June 2011 and 31 December 2010, is analysed as it follows:
30.06.201 1
S pot
31 .12.2010
O ther
elements
Forward
Net ex pos ure
Spo t
O th er
elements
F orward
N et exp osure
U SD United States Dollar
( 1 970 1 39)
2 346 012
4 565
380 438
( 3 426 729)
3 855 544
( 1 98 660)
GBP Great Britain Pound
393 036
( 310 597)
( 5 378)
77 061
243 793
( 180 981 )
1 4 272
77 084
B RL Brazilian real
228 858
( 6 761)
31 255
253 352
1 1 43 453
( 3 731 )
( 2 375)
1 1 37 347
D KK Danis h Krone
J PY
J apanese yene
49 728
( 294)
-
49 434
( 21 0 002)
250 265
( 42 880)
( 2 61 7)
52 071
( 330 71 8)
230 155
( 3 873)
-
48 198
373 190
( 1 11 436)
( 68 964)
C HF S wiss franc
8 768
( 8 71 0)
( 7 001 )
( 6 943)
88 969
( 84 849)
5 838
9 958
S E K S wedish krona
5 036
( 5 400)
3 629
3 265
15 232
( 1 7 061 )
-
( 1 829)
N OK Norwegian krone
C AD Canadian D ollar
Z AR Rand
AUD Australian Dollar
AOA Kwanza
C ZK Czech koruna
O ther
3 278
( 1 968)
-
1 310
1 910
( 2 995)
7 689
6 604
1 5 807
( 14 71 7)
3 020
4 1 10
31 403
( 20 886)
2 880
13 397
( 42 536)
2 000
( 4 373)
( 3 782)
( 6 155)
2 897
( 6 844)
( 38 589)
160 180
( 1 51 578)
( 6 275)
2 327
1 65 596
( 158 495)
1 0 848
17 949
( 529 982)
-
-
( 529 982)
( 414 047)
-
-
( 41 4 047)
( 12)
656
( 20 71 2)
20 842
-
130
( 60 397)
7
( 16 621)
661
83 592
6 574
( 19 480)
( 39 1 94)
451 980
393 306
( 1 903 822)
2 075 919
60 733
232 830
( 2 466 362)
3 730 667
142 447
1 406 752
N ote: asset / ( liability)
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.
174
Interim Report
Additionally, it is also performed an on-going monitoring of the liquidity position, calculated in accordance
with the Bank of Portugal rules (Instrution nr.13/2009):
30.06.201 1
Accumulated mismatch
Net assets buffer (2)
( 1)
L iqu idity pos itio n
( 5 262)
6 825
( 5 463)
5 502
1 563
39
345
1 491
1 908
1 530
Other assets acceptable as collateral
Global liquidity
(in million of euro)
31.12.201 0
(1 )
Accumulate d mismatch corresponds to the diference betwe en asse ts and liabilitie s with maturity date less than one year.
( 2)
The net asse ts buffer refle cts the asse ts with maturity over one year that c an be give n as collate ral to obtain liquidity, namelly asse ts that can
be given as collate ral on loan ope rations with C entral Banks (less haircuts), excluding those assets which are being used as collate ral for loan
operations with maturity of over one year.
As at 30 June 2011, the treasury Gap was positive in the amount of euro 1 908 million (31 December 2010:
euro 1 530 million).
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.
175
Interim Report
In the scope of the implementation of the new capital accord Basel II, and using the permission granted
by the new prudential 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.
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, non-controlling interest 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 a
consequence, the annual amount to be incorporated is euro 137 million.
176
Interim Report
As at 30 June 2011 and 31 December 2010, the main movements occurred in BOF are as follows:
(in million of euro)
For th e six
mon th period
end ed
30.06.201 1
For the year
en ded
31 .12.2010
B alance at the beggining of the period
Hybrid instuments
R etain profit for the year
N on-controlling interest, excluding hybrids
C hanges on actuarial Losses
R ecognition of the impact of adopting IFR S
D eduction in connection with investments held in banking and insurance entities
F air value reserves with an impact in BOF
Other effects
6 040
1 32
( 145)
42
( 25)
( 6)
203
( 157)
43
5 405
320
330
207
( 196)
( 1 2)
1 31
( 1 3)
( 132)
6 1 27
6 040
The capital adequacy of BES Group as at 30 June 2011 and 31 December 2010 is presented as follows:
( in million of euro)
30.06.201 1
31.1 2.201 0
A - Capital Requirements
S hare Capital, Issue P remium and T reasury stock
E legible res erves and retained earnings (excluding fair value reserves)
4 584
1 474
Minority Interest
533
4 585
1 31 0
491
Intangible assets
Changes on actuarial Losses
( 135)
( 384)
( 140)
( 359)
Goodwill
( 472)
( 479)
Fair value reserves with an impact on B OF
( 187)
( 30)
32
5 445
38
5 41 6
456
600
31 9
( 93)
320
( 296)
6 1 27
6 040
27
1 551
84
1 925
Recognition of the impact of adopting IFRS
B as ic own fu nds exc luding preference shares (Core Tier I)
( A1 )
P reference shares
Hybrid instuments, elegible for Tier I
Deductions in connection with investments held in banking and insurance entities
B as ic own fu nds (T ier I)
( A2 )
P ositive fair value reserves (45% )
E ligible subordinated debt
Deductions in connection with investments held in banking and insurance entities
C omplementary own fund s (Tier II)
D educ tions
E ligib le own fund s
( A3 )
( 1 4)
( 207)
1 564
( 47)
1 802
( 44)
7 644
7 798
B - Risk Weighted Ass ets
Calculated according Notice 5/2007 ( Credit Risk)
59 367
60 61 0
Calculated according Notice 8/2007 ( Market Ris k)
2 976
4 21 9
Calculated according Notice 9/2007 ( Operational Risk)
3 973
3 973
66 31 6
68 802
Ris k Weighted As sets Total
(B )
C - Prud ential Ratio s
Core T ier 1
( A1 / B )
8.2%
7.9%
Tier 1
S olv en cy R atio
( A2 / B )
( A3 / B )
9.2%
1 1 .5%
8.8%
1 1 .3%
177
Interim Report
NOTE 46 – SUBSEQUENT EVENTS
•
As at 9 June, BES Shareholders’ General Meeting took place, where was delibered on the partial
amendment of the articles of association. This amendment approves the suppression of
shareholders’ pre-emption rights, in case the Board of Directors resolves on a capital increase, with
the objective of converting credits arising from the guarantee provided by the Portuguese State to
the
issuance
of
non
subordinated
bonds
till
the
limit
of
euro
1 250 000 000 and three year maturity, if that guarantee were to be executed.
178
Interim Report
LIMITED REVIEW REPORT
ON INTERIM CONSOLIDATED FINANCIAL INFORMATION
ISSUED BY THE CMVM REGISTERED AUDITOR
Introduction
1.
In accordance with the Stock Exchange Code (‘Código dos Valores Mobiliários’ or ‘CVM’), the
Portuguese Stock Exchange Code, we present our Limited Review Report on the interim
consolidated financial information for the six-months period ended 30 June 2011 of Banco
Espírito Santo, S.A., (‘the Bank’) which includes: the Report of the Board of Directors, the
consolidated balance sheet (with a total assets of 81,162,043 thousands of euro and total equity
attributable to the equity holders of the Bank of 6,987,455 thousands of euro, including a net
profit attributable to the equity holders of the Bank of 156,010 thousands of euro), the
consolidated statements of income, of comprehensive income, of cash flows and of changes in
equity for the six-months period then ended and the corresponding Notes to the accounts.
2.
The amounts included in the interim financial statements and in the additional financial
information were derived from the accounting records.
Responsibilities
3.
The Board of Directors is responsible for:
a) the preparation of the consolidated financial statements that present fairly, in all material
respects, the consolidated financial position of the Bank and its subsidiaries, the consolidated
results of its operations, its consolidated comprehensive income and its consolidated cash
flows;
b) maintaining historical financial information, prepared in accordance with
IAS 34 - Interim Financial Reporting which is complete, true, current, clear, objective and
lawful as required by the CVM;
c) the adoption of adequate accounting policies and criteria;
d) maintaining an appropriate system of internal control; and
e) the communication of any relevant fact that may have influenced their activity, financial
position or results.
4.
Our responsibility is to verify the consolidated financial information included in the above
referred documents, namely as to whether it is complete, true, current, clear, objective and
lawful as required by the CVM, in order to issue a professional and independent report based on
our review.
179
Interim Report
Scope
5.
The work that we have performed was conducted with the objective of obtaining a moderate
level of assurance that the financial information mentioned above is free of material
misstatements. Our work was performed based on the technical standards and review/audit
guidelines issued by the ‘Ordem dos Revisores Oficiais de Contas’ (the Portuguese Institute of
Chartered Accountants), and planned in accordance with that objective and included the
following procedures:
a) mainly, inquiries and analytical procedures performed to review:
•
the reliability of the assertions included in the interim consolidated financial
information;
•
the adequacy of the accounting policies adopted, considering the circumstances and the
consistency of their application;
•
the application of the going concern principle;
•
the presentation of the interim consolidated financial information;
•
if the interim consolidated financial information is complete, true, current, clear,
objective and lawful; and
b) substantive tests on material non current transactions.
6.
Our review also included the verification that the interim consolidated financial information
contained in interim the Report of the Board of Directors is consistent with the remaining
documents mentioned above.
7.
We believe that our work provides a reasonable basis to issue our report on the interim
consolidated financial information.
Conclusion
8.
Based on our review, which was performed with the objective of obtaining moderate assurance,
nothing has come to our attention that causes us to believe that the interim consolidated financial
information for the six-months period ended 30 June 2011, is not free of material misstatements
that affects its compliance with the IAS 34 - Interim Financial Reporting and that is not
complete, true, current, clear, objective and lawful.
Lisbon, 12 August 2011
KPMG & Associados
Sociedade de Revisores Oficiais de Contas, S.A. (nº 189)
Represented by
Sílvia Cristina de Sá Velho Corrêa da Silva Gomes(ROC N.º 1131)
180
Interim Report

activity and results of banco espírito santo group and banco

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