Espirito Santo Dynasty Loosens Grip on 94-Year-Old Bank

Portugal’s Espirito Santo family, which has controlled its namesake bank for most of the lender’s 94-year history, is loosening its grip on management after the second rights offering in two years.

A family-led investment company and allies now own a combined 46 percent of Banco Espirito Santo SA, down from 54 percent after Portugal’s biggest lender not owned by the state raised 1.04 billion euros ($1.4 billion) this month.

Espirito Santo Financial Group SA, the bank’s biggest shareholder, proposed Chief Financial Officer Amilcar Morais Pires to replace Ricardo Salgado as chief executive officer at the lender. The proposal will be decided by shareholders at a meeting on July 31, according to a statement today. The mandate of Salgado, the 69-year-old great-grandson of the bank’s founder, is scheduled to end in 2015.

Morais Pires, 53, has been CFO since 2004, and previously was an adviser to the board, according to the bank’s website.

Banco Espirito Santo dropped 3.2 percent to 88.4 cents by 3:15 p.m. in Lisbon trading, while Espirito Santo Financial shares declined 3.8 percent. Shares in both were suspended until this afternoon pending the announcement.

Choosing a CEO from outside the family is a milestone for one of Portugal’s best known business groups. The Espirito Santo family lost control of their bank only when it was seized by a revolutionary government in 1975, regaining it 16 years later. The company has since become the country’s biggest bank by market value and the largest in terms of assets apart from state-owned Caixa Geral de Depositos SA.

Consulting Council

The family will still wield influence. Espirito Santo Financial proposed creating a strategic council at the bank with a consulting role. It will be led by Salgado, and will include Jose Manuel Pinheiro Espirito Santo Silva, Jose Maria Espirito Santo Silva Ricciardi, Ricardo Abecassis Espirito Santo Silva and Pedro Mosqueira do Amaral, who will all leave the bank’s board after the shareholder meeting.

Chairman Alberto de Oliveira Pinto is to be replaced by Paulo Mota Pinto.

The Espirito Santo Financial stake in the bank is worth about 1.23 billion euros, though the family’s economic interest isn’t publicly disclosed. As of Jan. 23, ESF was 49 percent-owned by Espirito Santo Irmaos, which in turn is owned by Rioforte, which is fully owned by closely held Espirito Santo International.

“There was market and regulatory pressure to solve once and for all the shareholder structure,” said Diogo Teixeira, CEO of Lisbon-based Optimize Investment Partners, which manages 90 million euros in assets and doesn’t own Banco Espirito Santo shares.

Crisis Impact

Portugal accepted a bailout by the European Union and International Monetary Fund in 2011 as it lost access to market funding, and the country’s financial institutions faced a similar squeeze, though Banco Espirito Santo returned to the bond market in November 2012.

Banco Espirito Santo was the only one of the three biggest publicly traded Portuguese banks, unlike its peers Banco BPI SA and Banco Comercial Portugues SA, to not request state aid after the country was bailed out.

The financial crisis took a toll on the lender as well as its competitors. It posted losses in 2011 and 2013, with a 517.6 million-euro loss last year. Shareholders haven’t received dividends in three years.

The bank sold 1.01 billion euros of new shares in 2012, and Espirito Santo Financial raised capital of its own in order to maintain its stake -- which it didn’t do with the bank’s latest share sale.

Reduced Stakes

In this month’s capital increase, Espirito Santo Financial reduced its stake to 25 percent from 27.4 percent, and Credit Agricole SA, France’s third-largest lender, cut its holding to 14.6 percent from 20.1 percent. Until May, those shares were held by their joint holding company, Bespar.

Dissolving Bespar “meant there was no longer shareholder control of the bank by a group of core investors,” Salgado said in a telephone interview last week. That group also included Brazil’s Banco Bradesco SA, whose stake fell to 3.9 percent from

4.8 percent, and Portugal Telecom SGPS SA, which kept its 2.1 percent holding.

“It clearly looks like Credit Agricole is leaving the bank, although this will happen gradually,” said Pedro Pintassilgo, who helps manage 53 million euros in assets at F&C Asset Management Plc in Lisbon. An executive board with no family members will be well received by the institutional investors that are filling the gap, he said.

Anne-Sophie Gentil, a spokeswoman for Credit Agricole, declined to comment on the bank’s Espirito Santo stake.

Stronger Ratios

Espirito Santo’s share sale helped the bank strengthen capital ratios before the European Central Bank’s stress tests later this year. The common equity Tier 1 ratio, fully applied under Basel III rules, rose to 9.6 percent after the capital increase from 8 percent in March, and may reach 10.5 percent with changes to a rule on deferred tax assets, Salgado said. That brings it closer to Spanish peers, whose capital ratios in some cases exceed 10 percent, analyst Carlos Peixoto at Oporto-based Banco BPI SA, with a “neutral” rating on BES, said by phone.

The offering came as accounting irregularities emerged at the Espirito Santo International holding company. The bank’s rights-offering prospectus said there’s a “serious financial situation” at ESI and that the bank’s exposure to the holding could be damaging.

‘Selling Pressure’

“The biggest market concern is if the Espirito Santo family is forced to reduce its stake further because of these issues, and if Credit Agricole does continue to reduce its stake, then there will be selling pressure,” said Benjie Creelan-Sandford, an analyst at Macquarie Bank in London. He doesn’t see Banco Espirito Santo becoming a takeover target.

The family’s role in Portuguese finance started when Jose Maria Espirito Santo opened a “Caza de Cambio” in Lisbon in 1869, where he bought and sold credit securities and lottery tickets, according to Carlos Alberto Damas, director of the Center for the History of Banco Espirito Santo. That business was the basis for the bank, which later diversified into insurance.

The bank became Portugal’s biggest non-state lender in 1936 and Ricardo Espirito Santo, who ran the company from 1932 to 1955, became one of dictator Antonio de Oliveira Salazar’s main financial advisers, according to Damas’s research.

After private-sector Portuguese banks and insurers were nationalized in 1975, the Espirito Santos developed businesses outside of Portugal, investing in Brazil, France, Switzerland and the U.S.

Botin Example

Their international banking contacts came in useful, as David Rockefeller set up a credit line for them, according to Damas. Credit Agricole helped the Espirito Santos regain control of their old bank and insurer after the government in 1989 started selling the companies it seized in the 1970s.

Even as its stake is diluted, the Espirito Santo family will still be the biggest shareholder, and “maintaining control is still possible,” Peixoto at BPI said, citing the grip Banco Santander SA Chairman Emilio Botin’s family has kept on the Spanish lender even with a stake of only about 2 percent. “In any case, the family’s influence will be reduced.”