News Column

1st Quarter Results

May 26, 2014

LUXEMBOURG/PORTUGAL--(BUSINESS WIRE)--



ESPÍRITO SANTO FINANCIAL GROUP S.A. ANNOUNCES ITS UNAUDITED CONSOLIDATED RESULTS FOR THE FIRST QUARTER OF 2014

Luxembourg/Portugal27 May 2014 - EspÍrito Santo Financial Group S.A. (“ESFG” or the “Company”) (NYSE Euronext Lisbon: ESF; Bloomberg: ESF PL; Reuters: ESF LS) today announces its unaudited consolidated results for the first quarter of 2014. The report is compiled under IFRS as implemented by the EU.

HIGHLIGHTS FOR THE REPORTING PERIOD

ESFG’s banking and insurance operations were constrained by economic weakness in the Eurozone. Despite these challenges, and noting signs of improvement in the economic landscape, ESFG’s principal banking subsidiary, BES, was able to greatly increase its banking income and net operating income during the quarter. Banking results were underpinned by strong results in capital markets operations as well as a positive recovery in net interest income. Provisioning however weighed on consolidated results. ESFG’s insurance operations continue to make a positive contribution to consolidated results but decline during the period.

  • Consolidated Q114 Net Income fell to -EUR 37.0 million (-EUR 13.1 million in Q113);
  • Consolidated Banking Income rose by 9.6% to EUR 607.7 million (EUR 554.3 million in Q113);
  • Consolidated Net Interest Income rose 19.3% to EUR 281.6 million (EUR 236.0 million in Q113);
  • Consolidated Net Fees and Commissions fell by 9.6% to EUR 160.0 million (EUR 177.0 million in Q113);
  • Consolidated Market Results1 and Other Operating Income rose by 34.0% to EUR 189.4 million (EUR 141.3 million in Q113);
  • Consolidated Insurance Earned Premiums Net of Reinsurance rose by 41.9% to EUR 137.6 million (EUR 97.0 million in Q113) and includes the full consolidation of the BES life insurance business BES Vida;
  • Consolidated Claims Incurred (Net of Reinsurance) fell by 9.1% to EUR 118.6 million (EUR 130.4 million in Q113);
  • Consolidated Operating Expenses rose by 25.7% to EUR 906.1 million (EUR 721.1 million in Q113). Consolidated expenses include a 53.7% increase in depreciation, provisions and loan impairments, net of reversals;
  • Staff Costs and General Administrative Expenses rose by 0.8% to EUR 299.4 million (EUR 296.9 million in Q113) with staff costs up by only 2.2% year-on-year;
  • On 15 May 2014 ESFG announced the dissolution of BESPAR. As of the date of this report ESFG’s direct and indirect economic stake in BES remains at 27.36%.

    1 In its Q114 results BES reported that it maintained a positive fair value reserve of EUR 290.0 million on its balance sheet which relates to gains in public debt securities. (Aggregate of Net Gains/Losses from Financial Assets at Fair Value through Profit and Loss; Net Gains on Available for Sale Financial Assets, Net Gains from Foreign Exchange Differences and Net Gains/Losses from the Sale of Other Assets).

    INDEX

    1. Income Statement Summary [3]

    2. Economic Environment [4]

    3. Overview of Operations [5]

    4. Operating Structure [10]

    5. Operating Income

    5.1 Banking [11]

    5.2 Insurance [12]

    5.3 Other Income [13]

    6. Operating Expenses

    6.1 Staff Costs & General Admin. Expenses [14]

    6.2 Depreciation, Provisioning & Impairments [14]

    6.3 Extraordinary Provisioning [14]

    7. Solvency and Financial Strength [15]

    8. Developments in Q114 and Subsequent Events [18]

    9. Consolidated Financial Statements [20]

    CONFERENCE CALL

    A conference call for investors and analysts will be held on 27 May 2014 at 3:00 PM (UK & Portugal) / 4:00PM (CET) / 10:00AM (Eastern). An instant replay of the call will be available for two weeks. For details, please contact Miles Chapman at Taylor Rafferty on telephone number +44 (0) 207 614 2916.

    1.INCOME STATEMENT SUMMARY

    (EUR Thousands)   Q113   Q114   % ?
    + Net Interest Income   236 013   281 631   19.3%
    + Net Fees and Commissions   176 999   159 999   (9.6%)
    = Commercial Banking Income   413 012   441 630   6.9%
    + Capital Markets Results & Other Operating Income   141 311   189 416   17.5%
    + Insurance Earned Premiums*   96 993   137 602   41.9%
    + Dividend Income   1 872   4 206   -
    = Operating Income   653 188   772 854   18.3%
    - Staff costs and General Expenses   296 883   299 354   0.8%
    - Depreciation, Provisioning and Impairments   264 933   407 271   53.7%
    - Claims* , Technical Reserves* & Commissions   87 177   142 195   63.1%
    - Other Expenses   72 111   57 302   (20.5%)
    - Operating Expenses   721 104   906 122   25.7%
    = Profit before Tax (inc. Gains from Financial

    Investments & Share of profit of Associates)

      (65 145)   (130 783)   -
    - Direct Taxes   47 126   36 689   (22.1%)
    - Deferred Taxes   (49 525)   (35 881)   (27.5%)
    - Minority Interests   (49 616)   (94 607)   90.7%
    = Net Income   (13 130)   (36 984)   -


    * Net of Reinsurance

    2. ECONOMIC ENVIRONMENT

    After starting on a positive note, the first quarter of 2014 saw an increase in volatility in the financial markets. This was driven by lacklustre economic indicators in the US, new signs of deceleration in China and an escalation of geopolitical risk mainly due to mounting tensions between the Ukraine and Russia. The consequent increase in risk aversion led to increased demand for safe haven assets, pushing Treasuries and Bund yields down by 31 bps and 36bps, to 2.72% and 1.57%, respectively, and so breaking the upward yield trend seen in the previous quarters.

    The main stock market indices oscillated between moderate declines and moderate gains: in the US, the Dow Jones retreated 0.72% in the first three months of the year, while the Nasdaq and S&P 500 rose by 0.54% and 1.3% respectively. In Europe, the DAX and CAC 40 edged up by 0.04% and 2.2%, while the FTSE 100 fell by 2.2%. Mirroring the existing concerns with the emerging markets, in Brazil, the Bovespa retreated by 2.1% while in China the Shanghai Composite lost 3.9%.

    Despite these factors, the principal advanced economies continued to show signs of an economic upturn. In the US, the first quarter’s uninspired performance was mainly due to poor weather conditions, as the available indicators for the start of the second quarter again suggest a strengthening of activity. The Fed therefore continued to taper quantitative easing. In the Eurozone, quarterly growth is estimated to have risen from 0.3% to close to 0.4%, as activity picked up and financial conditions in the periphery stabilised. The improvement in sentiment towards the periphery economics led to a 206 bps drop, to 4.073%, in the yield on the 10-year Portuguese Treasury bonds, with yields continuing to fall during the second quarter of 2014, reaching close to 3.7%. This movement, which was shared with the other peripheral economies, was also supported by expectations of new monetary stimuli from the ECB, taking into account the drop in the Eurozone year-on-year inflation to 0.5%.

    Bolstered by the reduction of the government deficit (4.9% of GDP in 2013) and the improvement in the external accounts (a surplus of 2.0% of GDP in 2013), the Portuguese Treasury successfully placed two long-term debt issues (with maturities of 5 and 10 years), for an overall amount of EUR 6.25 billion. After rising by 1.7% in the fourth quarter of 2013 (the first positive change in 12 quarters) Portugal’s GDP is believed to have grown by 2.0% year-on-year in the first quarter of 2014, underpinned by the still favourable performance of exports and a moderate recovery of domestic demand. The PSI-20 advanced by close to 16.0% in the period.

    3. OVERVIEW OF OPERATIONS

    ESFG’s unaudited consolidated net results for the first quarter of 2014, attributable to equity holders of the Company fell to -EUR 37.0million:

    Results of ESFG’s core operations continued to be constrained by the challenges of economic weakness in the Eurozone and the impact of the Financial Adjustments’ Programme adopted by Portugal. ESFG notes however that on 17 May 2014 the Republic of Portugal made a Clean Exit from the assistance programme. The performance of ESFG’s principal banking investment, BES, was affected by insolvencies in Portugal, impacting on impairment levels and the need to provide adequate provisioning. Quarterly banking income results both in late 2013 and into 2014, however, show clear improvements. Consolidated contributions from ESFG’s other banking operations remain positive, though reduced when compared to the first quarter of 2013. ESFG’s consolidated life and non-life insurance results, through BES and Tranquilidade, continue to contribute positively in the reporting period.

    Total consolidated assets at ESFG declined by 2.6% year-on-year to EUR 86.42 billion by the end of March 2014 from EUR 88.75 billion at the March 2013 (EUR 84.85 billion at the end of December 2013).

    ESFG continues the simplification of its investment structure through the sale of no core assets, as well as the dissolution of BESPAR (see note 7.2). In the first quarter of 2014 ESFG underwent divestments, namely the sale of its stake in BES VÉnÉtie to BES and the IPO of a material stake in its healthcare investment; EspÍrito Santo SaÚde. In early April 2014 ESFG sold its remaining stake in Banco BEST to BES which now hold 75.0% of the company.

    On 15 May 2014 ESFG announced that it had ended its partnership with the CrÉdit Agricole Group (‘CASA’) by the dissolution of BESPAR, and the division of the holding company’s assets; specifically the 35.3% stake in the shares in Banco EspÍrito Santo (‘BES’). Following the dissolution ESFG holds, directly and indirectly, a BES shareholding of 27.36% and therefore no longer consolidates the voting rights of CrÉdit Agricole shareholding in BES through BESPAR.

    On the same date ESFG’s fully owned insurance subsidiary Tranquilidade acquired a 10.0% in ESAF and a further 50.0% stake in BES Seguros from CASA, Tranquilidade now hold 75.0% of the non-life insurance operator. The acquisition of the stake on BES Seguros remains subject to regulatory approval (see note 3.3).

    Also on 15 May 2014 BES announced its intention to raise new capital through a EUR 1.045 billion rights issue. ESFG intends to subscribe, in whole or part, to the Rights Issue. On 22 May 2014 the BES went ex-Rights and the capital raise process is expected to be complete by the middle of June.

    3.1 Banco EspÍrito Santo

    BES remains the single most important asset held by ESFG, the Bank’s contribution to consolidated results is a key driver to the Company’s financial results. On 15 May 2014 BES reported a strong improvement in its quarterly banking income and net operating profit, at EUR 576.5 million (a year-on-year increase of 27.1%) and EUR 290.1 million (a year-on-year increase of 67.5%) respectively. Net results however fell to -EUR 89.2 million as BES continues to strengthen its provisions for impairments on the Bank’s activities with a special focus on the coverage of risks relating to the loans’ book. Impairments in the first quarter 2014 totalled EUR 136.6 million, versus a quarterly average in 2013 of EUR 129.4 million.

    Capital markets and other results reached EUR 154.7 million, a significant increase over previous quarters. Results were driven by interest rate business, with substantial gains achieved from the fall in the Republic of Portugal’s yield curve. The Bank also reported that it maintained a positive fair value reserve of EUR 290.0 million on its balance sheet which relates to gains in public debt securities.

    The Bank’s credit impairment cost increased by 47.6% to EUR 276.3 million (with an annualised charge of 2.17% versus FY13: 2.02%); provisions for securities were reinforced by EUR 46.1 million from EUR 18.5 million in Q113 due to impairment losses in credit restructuring funds, while provisions for real estate totalled EUR 47.7 million from EUR 25.2 million in Q113. As a result the total impairment cost in the period was EUR 380.6 million, up by 7.0% on the 2013 quarterly average.

    Deleveraging continues as BES where assets decreased by EUR 2.1 billion, a decline of 2.5% year-on-year. Net customer loans fell by EUR 1.1 billion or -2.3% year-on-year, securities fell by EUR 1.7 billion or -8.8% year-on-year. Deposits and insurance products increased by EUR 0.5 billion whilst debt securities decreased by EUR 1.8 billion. The loan to deposits’ ratio rose to 129%, having touched 121% at yearend 2013, following the full consolidation of BES VÉnÉtie and the recognition of its EUR 1.3 billion loans book and EUR 400.0 million deposit base.

    The Provisions for Credit / Gross Loans ratio increased to 7.16% from 6.81% at yearend 2013. The Coverage of Credit at Risk ratio remained stable at 64.2% from 64.5% at yearend 2013. The ratio of overdue loans over 90 days/gross loans rose to 6.0% from 5.7% as of 31 December 2013 and on-balance sheet provisions for credit impairments increased to EUR 3.6 billion versus EUR 3.4 billion at year end 2013 and EUR 2.8 billion in the same quarter of 2013.

    Contributions from the Bank’s international operations in the quarter however rose sharply, year-on-year to EUR 13.9 million from EUR 4.4 million in Q113. International banking income grew by 60.7%, underpinned by a 32.3% increase in net interest income and positive capital markets and other results of EUR 31.4 million against -EUR 15.6 million in Q113. The 4.6% year-on-year increase in operating costs and the EUR 89.7 million provisioning cost prevented the international units from making a more significant contribution to the consolidated results at the Bank.

    Investment banking activities at ESFG, through the investment banking subsidiaries EspÍrito Santo Investment Bank (‘BESI’), include advisory services in project finance, mergers and acquisitions, placements of shares and bonds, stock-broking and other investment banking services. Banking Income at BESI rose by 43.3 % year-on-year to EUR 91.1 million with the non-Portuguese business accounting for 44.0% of total business. Pre-tax profits for the period rose to EUR 19.5 million as the investment bank reported a two fold increase in capital markets and other results. Provisioning however rose to EUR 30.6 million, operating costs declined by 4.6% to EUR 41.0 million from EUR 43.0 million in the same period in 2013.

    3.2 Other Banking, Wealth and Asset Management Operations

    ESFG’s Swiss private banking operations, Banque PrivÉe EspÍrito Santo (‘BPES’), reported a net profit in the first quarter of 2014 of CHF 0.5 million under Swiss GAAP, down from CHF 0.8 million in the same period of the previous year. Gross income, however grew year-on-year by 10.6 % to CHF 2.5 million. Increased provisioning weighed on net results.

    The strength of the Bank’s commercial activity is reflected in Assets under Management (‘AuM’) which now exceed CHF 5.60 billion, an increase of 13.8% year-on-year. Net new money amounted to CHF 68.7 million since the beginning of the year. AuM at BPES’ Branch in Portugal reached EUR 275.0 million increasing by 24.0% on a year-on-year basis. BPES Portuguese branch increased its contribution to BPES consolidated Net profit to EUR 320 thousand up by 7.0% when compared to the same period last year.

    At EspÍrito Santo Wealth Management (Europe) S.A. (‘ES Wealth’), a wholly owned subsidiary of BPES, AuM has reached EUR 287.4 million. Operations in Spain, with the first branch opened in Madrid, began in the first quarter 2014. In February 2014, ESW asked the Luxembourg Financial Regulator (‘CSSF’) for an authorization to begin operations in Italy.

    BPES also received the final approval from the Brazilian Central Bank (‘BACEN’) to acquire up to a 20.0% share capital of E.S. ServiÇos Financeiros S.A. a licensed Asset Manager with offices located in SÃo Paulo and Rio de Janeiro.

    Net Income at ES Bankers (Dubai) Limited (‘ESBD’), wealth management operations, rose to USD 2.0 million from USD 1.3 million a year earlier, a rise of 66.0% year-on-year. Banking income grew to USD 5.5 million. The quarterly results reflect the Bank’s new strategy and repositioning for the future, whilst the personnel levels at the Bank have almost doubled from one year ago (Cost to Income of 62.0%).Fees and Commissions rose by over 35.0% when compared to Q1 of 2013, from USD 2.7 million in Q113 to USD 3.6 million by Q114. The Bank’s lending to customers reflects the conservative approach, with LtD ratio stable around 28.0%. Q114 ended with USD 2.2 billion of Assets under Management with USD 323.0 million of Net New Money with 230 new accounts opened.

    Banking activity at ES Bank (Panama) S.A. (‘ESBP’) remains positive. Individual net income in Q114 rose to USD 5.0 million from USD 4.2 million in Q113, an increase of 20.3%. NII rose by 9.5% to USD 5.8 million during the period from USD 4.7 million a year earlier. Fees and Commissions increased to USD 0.4 million in Q114 from USD 0.2 million in Q113. Banking Income rose to USD 6.2 million. Staff costs and general administrative expenses rose to USD 1.1 million as ESBP develops new business channels focusing on wealth management.

    At Banque EspÍrito Santo et de la VÉnÉtie (‘BESV’) (France) pre-tax profits rose to EUR 5.3 million from EUR 2.8 in Q113 a year-on-year improvement of 86.0%. Banking income rose by 29.0% to EUR 13.2 million in Q114. Operating costs at the bank fell by 7.0% to EUR 6.2 million. On 14 February 2014 ESFG announced that it has sold its full 44.81% stake in BESV to BES. BES now fully consolidates the French banking operations.

    Banco BEST, principally owned through BES but in which ESFG owned a 9.0% direct stake during the reporting period, reported a net individual quarterly net income of EUR 4.8 million, a rise of 19.0% year-on-year. The internet banking operation focuses on the provision of online trading and investment services. The Bank reported EUR 2.5 billion of Assets under Custody. On 2 April 2014 announced that ESFG’s remaining 9.0% stake in BEST was sold to BES. As of that date BES holds a direct stake of 75.0%.

    At ESAF- EspÍrito Santo Activos Financeiros, SGPS, S.A. (‘ESAF’), which operates within Portugal, Spain, Brazil, Angola, Luxembourg and the United Kingdom, announced that at the end of Q114 the global volume of assets under management reached EUR 16.9 billion, a year-on-year increase of 9.1%. ESAF holds a market share in Portugal of 15.5%, a rise of 0.8% from yearend 2013. Net results reached EUR 5.0 million, 6.3% above budget. The 15.4% year-on-year decline was due to non-recurrent results in Q113 which included results from ESAF’s operations in Spain.

    In Portugal, the year-on-year increase in pension funds, asset management and real estate investment funds contributed significantly to the increase, while in the international business, there was an increase in volume under management in Luxembourg.

    3.3 Insurance

    ESFG's insurance operations contributed positively to the overall net profit of the Group in the first quarter of 2014 despite a difficult operating environment in Portugal. Income generated from the Group's insurance operations are consolidated from both ESFG's fully owned Companhia de Seguros Tranquilidade, S.A. (‘Tranquilidade’) operations and through BES' consolidation of its life business; BES Vida, Companhia de Seguros (‘BES Vida’). By the end of the reporting period, ESFG's consolidated life and non-life operations remained the largest fully privately owned insurance group in Portugal with a combined market share of 22.5%.

    In the first quarter of 2014 Tranquilidade's net individual income reached EUR 8.1 million, a year-on-year decline of 14.7%. Tranquilidade’s insurance earned premiums (net of reinsurance) increased by 1.5% year-on-year to EUR 68.4 million from EUR 67.4 million a year earlier. Claims at Tranquilidade and changes on technical reserves and commissions reached EUR 76.5 million, compared to EUR 69.7 million in the first quarter of 2013, an increase of 9.7%. The expense ratio stood at 24.0%. Tranquilidade, which acts as a holding company for ESFG's interests in T-Vida, LOGO, BES Seguros and others, reported continued geographical growth as operations expand in Mozambique and Angola in 2014.

    T-Vida reported an individual net income of EUR 1.3 million, a year-on-year increase of 9.9%. Premiums increased by 4.9%. Risk products continue to be the main focus for ESFG's insurance operations in its Life business though the largest growth was in PPR's products (retirement savings plans). The technical margin increased by 4.5% from EUR 1.5 million in Q113 to EUR 1.6 million in Q114, mainly due to an increase in premiums. Operating costs decreased by 2.9% year-on-year to EUR 1.5 million.

    On 15 May 2014 CrÉdit Agricole sold to Tranquilidade 10.0% of the share capital of ESAF-EspÍrito Santo Activos Financeiros, SGPS, S.A. (‘ESAF’), and 50.0% of BES Companhia de Seguros, S.A. (‘BES Seguros’). As of that date Tranquilidade holds a 75.0% stake in BES Seguros. The completion of the sale of the shareholdings at ESAF and BES Seguros is subject to market conditions and in respect to BES Seguros, the approval of the competent supervisory or regulatory authorities. Once regulatory approval has been received Tranquilidade will have management control of the non-life insurer and will fully consolidate its operations.

    The assurfinance programme of cross-selling banking products through its agents accounted for 19.7% of new clients at BES and represents 9.5% of the total increase in retail assets under management. Tranquilidade's distribution network is made up of approximately 1,700 points of sale, of which 34 are own branches and 169 tied agent stores. BES's partnership with ESFG's insurance agents Tranquilidade under the assurfinance programme helps support the Groups cross-selling activities.

    At BES Vida, a wholly owned subsidiary of BES, net income decline year-on year from EUR 70.3 million in Q113 to EUR 37.7 million in Q114. Life product production reached EUR 648.1 million in the period, a rise in premiums of 39.6% year-on-.year. Customer funds at BES Vida rose by 35.4% to EUR 6.54 billion from EUR 4.83 billion a year earlier.

    4. OPERATING STRUCTURE - 27 May 2014

    [ Objects omitted ]

    PRINCIPAL ITEM ANALYSIS

    5.Operating Income:

    ESFG is a financial holding company, with its shares quoted on the Luxembourg, London and NYSE Euronext Lisbon exchanges. It consolidates the financial results from its broad range of banking and insurance investments.

    5.1 Banking Income:

    Consolidated Net Interest Income (‘NII’) rose by 19.3% year-on-year to EUR 281.6 million from EUR 236.0 million in Q113. NII, which is principally driven by the BES consolidation, derived from the Bank’s international performance namely through the rise in Net Interest Margin (NIM) at BES Angola as well as a positive improvement in the domestic market of Portugal.

    The net interest margin (’NIM’) improved to 1.59% in Q114 from 1.28% in Q113 due to the reduction in the average rate of liabilities, to 3.03% down by 30 bps year-on-year. The average rate on assets remained flat at 4.62%. The decline in the cost of liabilities resulted from reductions in the average rate paid for both deposits, down by 59 bps, and debt securities and other interest bearing liabilities which fell 35 bps. The results reflect the general improvement in the financial system liquidity as a result of the deleveraging effort and the gradual opening of the debt markets to the Eurozone peripheral countries which includes Portugal.

    Consolidated Fees and Commissions (Net of Expenses) decreased by 9.6% year-on-year to EUR 160.0 million (EUR 177.0 million in Q113). The decline was due to a reduction in domestic commissions in Portugal as a result of the on-going deleveraging process at BES. Commission income contracted across all banking services provided to the clients, except for commissions on securities, which were up by 21.2%, notably commissions on the sale of treasury bonds and public offers for sale in the equity market.

    Furthermore at BES there was a reduction in commissions on collections, down by 24.1% year-on-year. Commission income on loans and other was down by 19.6%, reflecting not only the overall contraction of the loans book but also reduced demand for corporate and project finance solutions. Commissions on documentary credit fell by 12.7% as origination of new trade finance transactions with emerging countries slowed. Commissions on guarantees declined by 11.4% commercial paper operations slowed. Commissions on asset management declined by 9.2% with funds under discretionary management down year-on-year.

    Consolidated Capital Markets totalled EUR 164.4 million in Q114 from EUR 111.3 million reported in Q113, a year-on-year rise of 47.6%. Capital market results reflect the consolidated trading activity of BES. It reported that its capital market results were greatly improved by its interest rate related business. BES’ exposure in March 2014 to Portuguese, Spanish and Italian sovereign debt reached EUR 6.59 billion. 50.0% of sovereign exposure was in T-bills and debt maturing in less than 5 years and a further 50.0% in debt of over 5 years, reflecting the well-considered duration profile of investments. Equity trading also showed positive results, but to a lesser degree.

    5.2 Insurance Income:

    Consolidated Insurance Earned Premiums Net of Reinsurance increased by 41.9% to EUR 137.6 million in the first quarter of 2014 from EUR 97.0 million a year earlier. ConsolidatedClaims Incurred (Net of Reinsurance) fell by 9.1% year-on-year to EUR 118.6 million (EUR 130.4 million in Q113). Whilst insurance commissions remained stable, the change in the technical reserves, net of reinsurance, rose to EUR 17.9 million from -EUR 49.9 million. Results include the full consolidation of both ESFG’s direct investments in Tranquilidade and the BES life and non-life insurance operations.

    Tranquilidade's net individual income reached EUR 8.1 million, a year-on-year decreased of 14.7%. Technical results net of reinsurance decrease during the period by 39.5% to EUR 6.3 million. The comparable period's results in 2013 were affected by the storms that affected Portugal in the first quarter 2013. Financial results reached EUR 18.3 million in Q114. Operating costs stood at EUR15.6 million. Tranquilidade's individual market share stood at 8.4%. During the first quarter of 2014 Tranquilidade's market share in workers' compensation, fire and other damages and motor stood at 11.5%, 8.7% and 8.4% respectively compared to 10.2%, 8.3% and 8.4% in the first quarter of 2013.

    T-Vida reported an individual net income of EUR 1.3 million, a year-on-year increase of 9.9%. Premiums increased by 4.9%. Risk products continue to be the main focus for ESFG's insurance operations in its Life business though the largest growth was in PPR's products (retirement savings plans). The technical margin increased by 4.5%, (from EUR 1.5 million in Q113 to EUR 1.6 million in Q114), mainly due to an increase in premiums. Operating costs decreased by 2.9% year-on-year to EUR 1.5 million.

    ESFG's Angolan and Mozambican life and non-life insurance operations, through Tranquilidade, which began in 2012, report individual results of EUR 0.1 million and EUR -0.1 million respectively but are expected to continue to contribute positively to full year results in 2014. Tranquilidade's direct insurance business, LOGO, reported that its customer base had reached 116.210 clients and that gross written premiums of amounted to EUR 4.9 million in the first quarter. LOGO is currently the third largest direct insurer in Portugal. The motor claims ratio at LOGO decreased by 5.8 p.p. from 66.4% in Q113 to 60.6% in Q114.

    AdvanceCare, ESFG's managed care platform for healthcare insurers provides the link between the Company's insurance operations and healthcare providers. The care manager continues to provide strong results, in the period ending March 2014 its net individual income stabilized at EUR 0.5 million from EUR 0.7 million a year earlier. AdvanceCare is a joint venture between Tranquilidade and United Health Group. In 2013 the managed care company is estimated to have handled one third of healthcare claims made through all insurance companies in Portugal. Tranquilidade maintains management control.

    Tranquilidade's assistance service provider, Europ-Assistance (Portugal), jointly held with Europ Assistance Holding (France) reported a 11.0% decrease in individual results to EUR 1.0 million by the end of March 2014 from EUR 1.1 million a year earlier. Tranquilidade has a 47.0% economic stake in the operations.

    5.3 Other Income:

    Consolidated Net Other Operating Income declined to EUR 25.1 million from EUR 30.0 million.

    Dividend Income rose to EUR 4.2 million (EUR 1.9 million in Q113) payments remain constrained but have improved year-on-year. Consolidated dividend income reflects income from certain equity investments at BES.

    6. Operating Expenses:

    6.1 Consolidated Staff Costs and General Administrative Expenses rose by 0.8% to EUR 299.4 million from EUR 296.9 million in Q113. A 0.8% rise in staff costs resulted from ESFG Group strict control over variable salaries both in Portugal and throughout the 27 countries ESFG operates in. ESFG’s strategy of further internal expansion saw increased staff costs in developing markets such as BES Angola.

    6.2 Consolidated Costs due to Depreciation, Provisioning and Impairments rose by 53.7% year-on-year to EUR 407.3 million from EUR 264.9 million in Q113 which was the principle factor in the 25.7% year-on-year rise in Operating Expenses from EUR 721.1 million in Q113 to EUR 906.1 million in Q114.

    As the economic picture in ESFG’s principal market, Portugal, continues to show weakness the balance of provisions for credit BES has increased to EUR 380.6 million in the period, a year-on-year rise of 58.5%. At BES, as at the end of Q114, provisions for credit registered in the Balance Sheet totalled EUR 3.65 billion a rise of 29.3% year-on-year. The credit provisions/gross customer loans ratio rose to 7.2% from 6.8% as of 31 December 2013.

    6.3 Extraordinary Provisioning and Guarantee. As reported in ESFG’s full year 2013 results on 28 April 2014 ESFG’s full year’s accounts included a EUR 700.0 million extraordinary provision which relates to the potential risks that could arise from the fact that some of ESFG Group’s clients are exposed, through debt issuance, to EspÍrito Santo International (‘ESI’).

    Despite not being responsible for ESI’s financial position ESFG recognised that in 2013 ESI was subject to a special purpose limited review, regarding its pro-forma consolidated financial statements for 9M13 and FY13, carried out by an external auditor, at the request of the Bank of Portugal, which revealed material irregularities in ESI’s financial statements.

    Also, as part of ESFG’s measures, a guarantee has been put into place to ensure the timely reimbursement of the commercial paper issued by ESI and placed with BES retail clients. The outstanding amount of commercial paper held by BES retail clients has fallen to less than EUR 300.0 million as of 27 May 2014. The reduction has been achieved through the ongoing deleverage and re-organisation plan at ESI. Final reimbursements to BES retail investors are expected to be concluded in early December 2014. ESFG remains committed in its support of its subsidiaries through the provision of the guarantee.

    Other than the provision, as disclosed in Note 41 to the Consolidated Financial Statements of ESFG as at 31 December 2013, and the contingency associated with the guarantee mechanism approved by the Board of Directors of ESFG in favour of retail clients from 1 April 2014, ESFG is not liable for the debts owed by ESI.

    6.4 Other Expenses fell year-on-year by 53.3% to EUR 33.7 million from EUR 72.1 million in Q113.

    7. Solvency, Regulation and Financial Strength:

    7.1 Solvency and Regulation

    On June 26th, 2013 the European Parliament and the Council approved Directive 2013/36/EU and Regulation (EU) no. 575/2013, which, as from 1 January 2014, regulate in the European Union, respectively the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, and the prudential requirements for these institutions.

    Bank of Portugal’s Notice 6/2013, of 30 December 2013 established transitional arrangements for own funds, under said Regulation, and laid down measures to preserve those funds, determining a Common Equity Tier 1 Ratio of no less than 7%.

    As the table shows, on 31 March 2014 ESFG Group’s capital ratios were above the minimum established levels (considering phasing in application of the new regulation):

    EUR million
        31 March 2014(1)
      Fully
    Phasing in   implemented
    Risk Weighted Assets (A)64 40463 609
    Banking Book 59 446 58 651
    Trading Book 1 704 1 704
    Operational Risk 3 254 3 254
     
    Regulatory Capital
    Common Equity Tier I (B)5 3423 938
    Tier I (C)5 3424 003
    Tier II and Deductions 1 108 1 473
      Total (D)   6 450   5 476
     
    Common Equity Tier I Ratio (B/A)8.3%6.2%
    Tier I Ratio (C/A)8.3%6.3%
    Solvency Ratio (D/A)   10.0%   8.6%


    (1) – Preliminary data considering that the waiver of art. 84 (5) of CRR is obtained and that the minority interests in BESPAR do meet the eligibility requirements set out on art. 81 of the CRR; RWAs do not include the Sovereign Guarantee provided to BES Angola

    The Common Equity Tier 1 Ratio was 8.3%, according to phasing in rules (Bank of Portugal minimum requirement: 7%) and 6.2%, if fully implemented.

    According to Notice 6/2013, under the transitional regime, unrealised gains on assets measured at fair value (EUR 290.0 million in March 2014) are fully excluded from Common Equity Tier 1 in 2014.

    ESFG’s capital ratios are augmented by the full consolidation of BES. ESFG notes that on the 15 May 2014 BES announced a rights issue of EUR 1.045 billion. Following its successful completion BES expects to further strengthen its capital ratios by 162 bps in order to meet, and exceed, the new regulatory framework known as CRD IV, applicable to EU financial institutions from 1 January 2014 and also to meet the upcoming stress tests and Asset Quality Review (‘AQR’) to be completed before the ECB assumes the supervisory role for EU banks. ESFG’s continued consolidation of BES would translate into the consolidation of the improved solvency position.

    7.2 Recent Changes to ESFG Shareholding in BES

    Following the recent announcement by ESFG of the dissolution of BESPAR on 15 May 2014 ESFG no longer consolidates the full number of shares held at the jointly owned holding company with CrÉdit Agricole. On that date BES also announced its rights issue, ESFG informed that it intends to subscribe for new shares, in whole or in part, by subscription or by the sale of part of its subscribed rights in order to reinvest the proceeds of such a sale.

    As of 27 May 2014 ESFG holds, directly and indirectly, 27.36% of BES. Following the completion of the rights issue process, expected by mid-June, ESFG expects that its economic stake in BES will be reduced. The reduction in consolidated voting rights in BES following the dissolution of BESPAR, and the reduction in its stake following the rights issue is likely to cause the Bank of Portugal (‘BoP’) to review the need for ESFG to remain as the regulated entity in favour of BES. ESFG is awaiting the BoP’s decision.

    7.3 External Debt

    ESFG’s external debt at the end of the period remained unchanged from yearend 2013 at EUR 780.2 million (falling from a high of EUR 1.3 billion in late 2011). ESFG has reduced interest costs through liability management in recognition of reduced dividend income from its subsidiaries.

    On 25 November 2013, ESFG announced the launch of EUR 200.0 million bonds, exchangeable into BES. The coupon was set at 3.125% and matures in December 2018. The proceeds were used to repurchase EUR 135.6 million of an outstanding convertible into ESFG shares.

    ESFG’s EMTN and ECP programmes provides, and guarantees, the establishment of liquidity to its fully owned subsidiary EspÍrito Santo FinanciÈre (ESFIL). In 2013, ESFIL launched and priced its sole senior EUR 200 million two-year note from the EUR 2.0 billion EMTN programme. At the end of March 2014, ESFIL had utilised EUR 248.3 million of the EUR 1.0 billion ECP programme

    7.4 Credit Rating

    ESFG is rated by two international rating agencies: DBRS and Moody’s. The ratings as of 27 May 2014 are:

            Short Term       Long Term       Comment       Date of Rating    
    DBRS       R-2 (Middle)       BBB (Low)       Neg. Outlook       07/05/13
    Moody’s       NP       B2       Neg. Outlook       25/12/13


    8. DEVELOPMENTS DURING Q114 AND SUBSEQUENT EVENTS

  • On 15 May 2014 ESFG announced the dissolution and division of assets held at BESPAR.
  • On 15 May 2014 ESFG announced that the fully owned subsidiary Tranquilidade had purchased a 10.0% stake in ESAF and an additional 50.0% stake in BES Seguros.
  • On 28 April 2014 ESFG published its audited annual report and accounts and consolidated financial statements for the full year 2013. The report and accounts are to be approved at ESFG´s AGM on 30 May 2014.
  • On 2 April 2014, ESFG sold its remaining 9.0% stake in Banco BEST to BES.
  • On 18 March 2014, ESFG announced that it had sold a 10.63% stake in EspÍrito Santo SaÚde, as part of the healthcare company’s IPO, launched on 6 February. The sale, which included the over-allotment option, leaves ESFG with a 3.38% direct stake in the company.
  • On 7 March 2014, ESFG informed that Mr. MÁrio Mosqueira de Amaral, a member of the Board, had passed away.
  • On 14 February 2014, ESFG announced the sale of its 44.81% stake in BES VÉnÉtie to BES.

    CONTACTS

    EspÍrito Santo Financial Group     Taylor Rafferty
    Filipe Worsdell     Miles Chapman
    +44 (0) 203 4292 100     +44 (0) 207 614 2916

    fworsdell@esfg.com

       

    miles.chapman@taylor-rafferty.com



    The EspÍrito Santo Financial Group provides, through its subsidiaries, a global and diversified range of financial services to its clients including Commercial banking, Insurance, Investment banking, Stock-brokerage, Private banking and Wealth Management in Portugal and internationally. For additional information on EspÍrito Santo Financial Group, its subsidiaries, operations and results, please visit the Company’s website on www.esfg.com.

    – Tables to follow –

         
    ESPÍRITO SANTO FINANCIAL GROUP SA
     
    CONSOLIDATED BALANCE SHEET AS AT 31 MARCH 2014, 30 MARCH 2013 AND 31 DECEMBER 2013
     
    3/31/20143/31/201312/31/2013
     
    unauditedunauditedaudited
     
    (in thousands of euro)
     
    Assets
    Cash and deposits at central banks 1 950 725 1 462 145 1 828 674
    Deposits with banks 1 279 576 942 673 1 148 934
    Financial assets held for trading 2 641 829 4 160 199 2 488 465
    Other financial assets at fair value through profit or loss 3 724 724 2 481 350 3 564 118
    Available-for-sale financial assets 11 701 687 13 731 883 8 929 778
    Loans and advances to banks 2 794 757 2 574 391 4 827 790
    Loans and advances to customers 48 944 897 51 234 206 49 270 667
    Held-to-maturity investments 1 687 954 1 096 844 1 672 068
    Derivatives for risk management purposes 322 383 450 190 363 391
    Non-current assets held for sale 3 510 415 3 493 285 3 567 011
    Property and equipment 969 483 1 022 264 974 229
    Investment properties 715 355 749 849 719 422
    Intangible assets 604 894 696 924 608 269
    Investments in associates 540 255 642 867 606 473
    Technical reserves of reinsurance ceded 81 677 81 946 76 899
    Current income tax assets 36 142 26 408 40 967
    Deferred income tax assets 1 067 191 800 409 1 064 883
    Other assets 3 845 779 3 101 492 3 097 613
         
     
    Total assets86 419 72388 749 32584 849 651
         
     
    Liabilities
    Deposits from central banks 9 862 959 9 947 129 9 772 244
    Financial liabilities held for trading 1 424 239 1 938 168 1 336 768
    Deposits from banks 5 299 043 5 648 377 5 033 494
    Due to customers 36 934 480 38 404 878 38 093 807
    Debt securities issued 13 441 442 15 244 348 12 615 208
    Derivatives for risk management purposes 114 049 161 883 130 710
    Investment contracts 5 079 192 3 563 551 4 473 921
    Non-current liabilities held for sale 155 098 175 651 153 580
    Provisions 923 405 250 062 917 020
    Technical reserves of direct insurance 2 681 086 2 455 927 2 643 156
    Current income tax liabilities 169 853 239 708 122 313
    Deferred income tax liabilities 129 284 140 889 96 972
    Subordinated debt 1 319 126 1 174 553 1 403 188
    Other liabilities 2 254 909 1 298 744 1 345 833
         
     
    Total liabilities79 788 16580 643 86878 138 214
         
     
    Equity
    Share capital 207 075 207 075 207 075
    Treasury shares ( 2 786) ( 3 441) ( 3 459)
    Share premium 884 856 884 856 884 456
    Preference shares 51 367 55 978 51 367
    Other equity components 26 418 58 100 26 418
    Capital reserve not available for distribution 700 970 700 970 700 970
    Fair value reserve 56 794 22 063 ( 3 208)
    Other reserves and retained earnings ( 615 733) 312 208 284 548
    Result for the period attributable to equity holders of the Company ( 36 984) ( 13 130) ( 864 031)
         
     
    Total equity attributable to equity holders of the Company1 271 9772 224 6791 284 136
         
     
    Non-controlling interest 5 359 581 5 880 778 5 427 301
         
     
    Total equity6 631 5588 105 4576 711 437
         
     
    Total equity and liabilities86 419 72388 749 32584 849 651
     
       
    ESPÍRITO SANTO FINANCIAL GROUP SA
     
    CONSOLIDATED INCOME STATEMENT
    FOR THREE MONTH PERIODS ENDED 31 MARCH 2014 AND 2013
     
     
    3/31/20143/31/2013
    UnauditedUnaudited
    (in thousands of euro)
     
    Interest and similar income 865 618 900 640
    Interest expense and similar charges 583 987 664 627
       
     
    Net interest income281 631236 013
     
     
    Dividend income 4 206 1 872
    Fee and commission income 210 983 224 890
    Fee and commission expenses ( 50 984) ( 47 891)
    Net gains / (losses) from financial assets and financial liabilities at fair value through profit or loss ( 58 235) ( 65 004)
    Net gains / (losses) from available-for-sale financial assets 206 998 161 968
    Net gains from foreign exchange differences 13 300 19 162
    Net gains / (losses) from the sale of other assets 2 305 ( 4 790)
    Insurance earned premiums net of reinsurance 137 602 96 993
    Other operating income 25 048 29 975
       
     
    Operating income772 854653 188
       
     
     
    Staff costs 177 664 173 836
    General and administrative expenses 121 690 123 047
    Claims incurred net of reinsurance 118 603 130 406
    Change on the technical reserves net of reinsurance 17 911 ( 49 863)
    Insurance commissions 5 681 6 634
    Depreciation and amortisation 30 172 28 517
    Provisions net of reversals 6 299 ( 4 527)
    Loans impairment net of reversals and recoveries 270 089 180 510
    Impairment on other financial assets net of reversals 46 086 18 299
    Impairment on other assets net of reversals 54 625 42 134
    Other operating expenses 57 302 72 111
       
     
    Operating expenses906 122721 104
       
     
    Result on disposal of investments in subsidiaries and associates ( 2 837) -
    Share of profit of associates 5 322 2 771
       
     
    Profit before income tax( 130 783)( 65 145)
       
     
    Income tax
    Current tax 36 689 47 126
    Deferred tax ( 35 881) ( 49 525)
       
     
    808( 2 399)
       
     
    Profit for the period( 131 591)( 62 746)
       
     
    Attributable to equity holders of the company( 36 984)( 13 130)
    Attributable to non-controlling interest( 94 607)( 49 616)
       
     
    ( 131 591)( 62 746)
     





    Espirito Santo Fin

    Source: Espirito Santo Fin


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    Source: Business Wire (UK Regulatory)


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