BES Urged by Central Bank to Bring Forward New CEO Appointment

Portugal’s central bank told Banco Espirito Santo SA, the country’s second biggest lender by market value, to hold a board meeting yesterday to appoint the new chief executive officer and chief financial officer earlier than previously planned.

The Bank of Portugal said in a statement yesterday that it ordered an “urgent extraordinary meeting” of the Banco Espirito Santo board to decide on the proposed appointments of Vitor Bento as CEO, Joao Moreira Rato as CFO and Jose Honorio as vice president of the executive committee.

Espirito Santo Financial Group SA, or ESFG, which is controlled by Banco Espirito Santo’s founding family and is the biggest shareholder in the bank, with a 25 percent stake, said on July 5 it would propose Bento and Moreira Rato at a July 28 board meeting. Credit Agricole SA, which owns 14.6 percent of Banco Espirito Santo, backed the proposal. Shareholders are due to ratify the new board members on July 31.

Banco Espirito Santo roiled markets on July 10 after a parent company called Espirito Santo International SA missed some payments on commercial paper. The bank’s stock dropped 36 percent last week and its credit rating was lowered by both Standard & Poor’s and Moody’s Investors Service on July 11.

German Chancellor Angela Merkel on July 12 said that turmoil in global markets caused by a Portuguese bank underscores the euro region’s fragility. “The example of a Portuguese bank showed us in the last few days how quickly the so-called markets are roiled, how quickly uncertainty returns and how fragile the whole euro construction still is,” Merkel said. She didn’t mention Espirito Santo by name.

Debt Auctions

Moody’s Investors Service said on July 11 that “the problems detected at the parent company of Banco Espirito Santo and their likely impact on the wider banking system should not have a significant impact on the sovereign’s credit metrics and the macroeconomic fundamentals of the country.”

Portugal’s government debt agency on July 11 said it plans to auction as much as 1.25 billion euros ($1.7 billion) of treasury bills on July 16. It also said it plans to hold one or two bond auctions during the third quarter.

“It would be important that Grupo Espirito Santo organizes as soon as possible the negotiations with creditors that are necessary, so that, in an orderly way, any possible failures in the group don’t have a relevant impact in macroeconomic terms,” Portuguese Prime Minister Pedro Passos Coelho said on July 11. Banco Espirito Santo has “solid” capital levels and a “comfortable margin to face up to any contingencies,” he said.

Restructuring Plan

“The ones who have problems, not because we are going through difficult times but because they decided badly, gave credit to who they shouldn’t have, worked with who wasn’t competent, they have to solve their problems,” Coelho said on July 12 in comments broadcast by television station RTP.

Grupo Espirito Santo includes companies linked to the founding family of lender Banco Espirito Santo. Espirito Santo Financial is 49-percent owned by Espirito Santo Irmaos SGPS SA, which in turn is fully owned by Rioforte Investments SA. Espirito Santo International fully owns Rioforte.

Banco Espirito Santo on July 10 said it has exposure of 1.18 billion euros to companies of Grupo Espirito Santo through loans, securities and other items, and is waiting for the release of that group’s restructuring plan to assess any potential losses. The lender also said it has a capital buffer of 2.1 billion euros above the regulatory minimum following a June capital increase.

Oi Merger

Portugal Telecom SGPS SA also has exposure to Grupo Espirito Santo. The country’s biggest telecommunications company said on June 30 it holds 897 million euros in commercial paper issued by Rioforte. Those securities will mature on July 15 and 17. Grupo Espirito Santo owns 10.1 percent of Portugal Telecom, and Portugal Telecom holds 2.1 percent of Banco Espirito Santo.

Brazil’s state development bank, known as BNDES, on July 8 said that this debt purchase by Portugal Telecom “lacks good corporate governance.” Shares of Portugal Telecom, which is in process of merging with Brazilian telephone company Oi SA, dropped 20 percent last week.

Portuguese securities regulator CMVM on July 11 said it was extending a ban on short selling of Banco Espirito Santo shares until the end of the day on July 15.

Client Confidence

Bento, 60, is currently the chairman of payment-processing company SIBS SA. He’s replacing Ricardo Salgado, the 70-year-old great-grandson of the bank’s founder, who was due to end his term in 2015. Moreira Rato, 42, heads Portugal’s government debt agency.

Jose Maria Ricciardi, who heads the lender’s investment-banking unit and belongs to the bank’s founding family, said on July 12 that Banco Espirito Santo’s executive committee should be replaced as soon as possible to “reinforce the confidence of clients, employees and the general public.” Ricciardi said his earlier request to resign as an executive board member at Banco Espirito Santo takes immediate effect to “facilitate” the management’s replacement.

Choosing a CEO from outside the family is a milestone in the 94-year history of Banco Espirito Santo. 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.

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