Espirito Santo Exit Cuts Banks’ Share of Portugal Index

Banco Espirito Santo SA’s fall from grace is having one unintended consequence in Portugal’s equity market: it’s reducing the disproportionate influence of banks on the benchmark index.

The PSI 20 Index was compiled today without Banco Espirito Santo for the first time since its creation more than two decades ago. The action, along with the stock’s 89 percent plunge and losses in its peers since mid-June, has cut the proportion of lenders in the the gauge to about 10 percent, compared with 22 percent six weeks ago, data compiled by Bloomberg show.

The reduction in the weighting of bank shares mirrors the role of financial institutions in Portugal’s economy, which accounted for less than 14 percent of gross domestic product in the first quarter of 2014, according to data from the country’s statistics office. Alfredo Mendes, a trader at Banco Best in Lisbon, says the cut will redefine the benchmark index.

“This can be a positive change as banks in Portugal had an excessive weighting,” Mendes said by phone from Lisbon on Aug. 6. “With energy companies, utilities and retail making up more than half of the index now, it’s more of an accurate representation of the future of the Portuguese economy.”

The index balance is perhaps the last thing on the minds of investors who have watched the Portuguese gauge lose 27 percent since June 10 in a selloff that spread well beyond banks. The PSI 20 dropped 0.2 percent at 12:12 p.m. in Lisbon, falling for a fifth day. Banco Espirito Santo’s downfall harmed confidence in the market and it will take a long time to recover, according to Jose Rocha, a broker at X-Trade Brokers DM SA.

‘Really Damaged’

Shares of the company that once was Portugal’s largest lender by market value slumped 67 percent in July as regulators uncovered potential losses on loans to other firms linked to the Espirito Santo family. Three companies tied to to the lender requested protection from creditors.

“It’s clear that this really damaged the PSI 20,” Rocha said in a phone interview on Aug. 8. “Many institutional investors got burned and shareholders lost a lot of money. Even companies from a completely different sector have been affected. Confidence about Portuguese equities is very low and will take a while to return.”

Credit Agricole SA booked 708 million euros in costs related to its 14.6 percent stake in Banco Espirito Santo. Goldman Sachs Group Inc. lowered its holding in the lender to 1.9 percent last month from 2.3 percent, while BlackRock Inc. reduced it to 4.7 percent.

Euronext NV removed Espirito Santo Financial Group SA, the bank’s parent company, from the national gauge on July 22.

Financials Output

The financial industry’s output dropped for a third consecutive quarter in the three months through March, data from Portugal’s statistics office show. Every other group has increased production this year, except construction.

Retail, which includes restaurants and hotels, accounted for 17 percent of GDP. Output from utilities has risen every quarter since 2012, and the the industry registered its largest production growth in four years in the first quarter of 2014.

Utility companies made up almost 25 percent of the PSI 20 as of Aug. 8, while food and retail stocks accounted for 20 percent of the index, data compiled by Bloomberg show.

Banco Espirito Santo’s plunge helped push the PSI 20 down 30 percent from an almost three-year high in April, sending it for the worst performance this quarter among 24 developed-market gauges tracked by Bloomberg.

Taking Control

Portugal’s central bank took control of Banco Espirito Santo this month in a 4.9 billion-euro ($6.6 billion) bailout after the lender reported a first-half loss of 3.6 billion euros and failed to raise capital through private investors. Banco Espirito Santo was the only big publicly traded lender that didn’t request state aid after the nation’s bailout in May 2011. Its shares haven’t traded since Aug. 1.

Banco Comercial Portugues SA, the country’s biggest listed bank, also suffered from Banco Espirito Santo’s misfortunes. The stock has plunged 40 percent since a three-year high last month and is down 13 percent this year. Banif SGPS SA has lost 34 percent in 2014.

“There are still some doubts about the financial system in Portugal,” Francois Savary, chief investment officer at Reyl & Cie., said by phone from Geneva on Aug. 8. “It’s better for the index that the weight of financials is so much lower.”

Peripheral Markets

Investors have cooled on so-called peripheral markets as speculation grew that shares rose too much too fast, while concerns over the economic recovery remained. The PSI 20 rallied 75 percent from its 16-year low in June 2012 through its high in April, compared with a 39 percent gain for the Stoxx Europe 600 Index. The Portuguese gauge fell to a one-year low last week.

“The weighting of financials on the PSI 20 was a little counter-intuitive,” said Diogo Teixeira of Optimize Investment Partners in Lisbon. His firm manages 90 million euros and sold almost all of its Portuguese equities in the first two weeks of July, he said. “There was a huge disparity between the PSI 20 and the actual behavior of the Portuguese economy. It’s important that the financial sector doesn’t represent too much of the index.”

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