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Banco Espirito Santo 2005 Consolidated Results (Unaudited).


LISBON Lisbon (lĭz`bən), Port. Lisboa, ancient Olisipo, city (1991 pop. 677,790), W Portugal, capital of Portugal and of Lisboa dist., on the Tagus River where it broadens to enter the Atlantic Ocean. , Portugal Portugal (pôr`chəgəl), officially Portuguese Republic, republic (2005 est. pop. 10,566,000), 35,553 sq mi (92,082 sq km), SW Europe, on the western side of the Iberian Peninsula and including the Madeira Islands and the Azores in the  -- Banco Espirito Santo Santo, New Hebrides: see Espíritu Santo.  (BVL BVL

bovine viral leukosis.
:ESF (1) (Extended SuperFrame) An enhanced T1 format that allows a line to be monitored during normal operation. It uses 24 frames grouped together (instead of the 12-frame D4 superframe) and provides room for CRC bits and other diagnostic commands. ) (BES; Bloomberg Bloomberg

A major global provider of 24-hour financial news and information including real-time and historic price data, financials data, trading news and analyst coverage, as well as general news and sports.
 BESNN PL; Reuters Reuters

British cooperative news agency. Founded in 1851 by Paul Julius Reuter, it was initially concerned with commercial news but began to serve a growing newspaper clientele after the London Morning Advertiser subscribed in 1858.
 BES.LS) announced today its 2005 results.

HIGHLIGHTS

--Net income (IFRS IFRS International Financial Reporting Standard(s)
IFRS Inter Frame Relay Service
IFRS Indiana Facilities Registry System
) reached euro 280.5 million in 2005, despite an extraordinary provision charge of euro 57.6 million for the merger of Banco Internacional de Credito into Banco Espirito Santo. This result represents an increase of 85% from 2004 (euro 151.6 million), under IFRS.

--Total customer funds were up by 12.4%, driven as much by on-balance sheet funds (+11.0%) as by off-balance sheet funds (+15.0%); customer loans, including securitisation, rose by 12.9%.

--New clients acquired: 120,000 individual clients (67,000 in 2004) and 730 corporate clients.

--International banking activity represents 31% of consolidated net income (20% in 2004).

--Banking income was up by 7.5% to euro 1,537.7 million.

--Significant increase in operating efficiency: cost to income ratio decreased from 62% in 2004 to 56% in 2005.

-- Asset quality improved: overdue OVERDUE. A bill, note, bond or other contract, for the payment of money at a particular day, when not paid upon the day, is overdue.
     2. The indorsement of a note or bill overdue, is equivalent to drawing a new bill payable at sight. 2 Conn. 419; 18 Pick.
 loans ratio (greater than 90 days) down to 1.3% (1.6% in 2004) while the corresponding provisions coverage rose to 197% (167% in 2004).

--The merger of BIC BIC

See: Bank Investment Contract
 into BES, initiated in the third quarter, was completed on 30.12.2005.

--New corporate identity: the entire branch network was adapted to the new brand image during January January: see month.  2006.

--Major equity holdings in the portfolio of "Assets available for sale" registered a significant appreciation, with potential gains of euro 472.1 million (vs. potential losses of euro 70.9 million in 2004).

--The Board of Directors will propose a dividend of EUR EUR

In currencies, this is the abbreviation for the Euro.

Notes:
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion.
 0.400 per share (EUR 0.368 in 2004) at the AGM AGM annual general meeting

AGM n abbr (= annual general meeting) → AG f

AGM n abbr (= annual general meeting) → JHV f 
.

Video/audio and transcript A generic term for any kind of copy, particularly an official or certified representation of the record of what took place in a court during a trial or other legal proceeding.

A transcript of record
 of the interview with the Chairman of the Executive Committee is available at http://www.bes.pt./ir
Press                                    Investors and Analysts
Paulo Padrao padrao@bes.pt  (+ 351 21     Elsa Jardim
 3501713)                                  investor.relations@bes.pt
                                           (+ 351 21 359 7390)
----------------------------------------------------------------------

BANCO ESPIRITO SANTO, S.A.
Public Traded Company
Corporate Registration no. 500 852 367
Headquarters: Avenida da Liberdade no 195, 1250 - 142 Lisbon, Portugal
Registered with the Lisbon Registrar of Companies under no. 1607
Share capital: EUR   1,500,000,000.00
INDEX

1.   Foreword on the new regulatory framework (IFRS)
2.   Economic overview
3.   Results
3.1  Net interest income
3.2  Fees and commissions
3.3  Capital markets results and other
3.4  Operating costs
                 4.    Activity summary
4.1  Retail banking
4.2  Corporate banking
4.3  Investment banking
4.4  International activity
5.           Asset quality and provisioning
6.   Solvency
7.   Productivity and efficiency
8.   Productivity
9.   Bank of Portugal reference indicators
10.      Phone and internet banking
11.  Merger by incorporation of BIC into BES
12.  New corporate identity


1. FOREWORD fore·word  
n.
A preface or an introductory note, as for a book, especially by a person other than the author.


foreword
Noun

an introductory statement to a book

Noun 1.
 ON THE NEW REGULATORY FRAMEWORK

Regulation no. 1606/2002 of 19 July July: see month.  2002 of the European Council European Council, a consultative branch of the governing body of the European Union (EU). It is composed of the heads of government of the EU nations and their foreign ministers, in conjunction with the president and two additional members from the European  and Parliament determines that companies having securities admitted to trading on a regulated market A regulated market is the provision of goods or services that is regulated by a government appointed body. The regulation may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged.  of any Member State should prepare their consolidated accounts for each financial year starting on or after 1 January 2005 in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[]

As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh.
 with the International Financial Reporting Standards International Financial Reporting Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards Board (IASB).

Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS).
 (IFRS), also known as International Accounting Standards (IAS See iPlanet Application Server.

1. (computer) IAS - The first modern computer. It had main registers, processing circuits, information paths within the central processing unit, and used Von Neumann's fetch-execute cycle.
). After this regulation was transposed trans·pose  
v. trans·posed, trans·pos·ing, trans·pos·es

v.tr.
1. To reverse or transfer the order or place of; interchange.

2.
 into Portuguese national legislation, the Bank of Portugal, through Notice no. 1/2005, established the standards and reporting model for the entities subject to its supervision.

Bearing in mind that BES is subject to these provisions, its consolidated financial information relative to financial 2005 was prepared based on the application of the IFRS.

On the other hand, and also deriving from the change in accounting regulations, the financial statements of BES Group for financial 2005 (prepared in accordance with the IFRS/IAS) are not directly comparable with the financial statements disclosed in the course of 2004, which had been prepared based on the regulations of the Portuguese Plan of Accounts for the Banking System (PABS), as set out in the Bank of Portugal's instructions no. 4/96 and 71/96.

Hence, for purposes of comparability of the financial statements, and in line with the recommendations of the Committee of European European

emanating from or pertaining to Europe.


European bat lyssavirus
see lyssavirus.

European beech tree
fagussylvaticus.

European blastomycosis
see cryptococcosis.
 Securities Regulators (CESR CESR Committee of European Securities Regulators
CESR Center for Economic and Social Rights
CESR Centre d'Etude Spatiale des Rayonnements
CESR Cornell Electron Storage Ring
CESR Corporate Environmental and Social Responsibility
) and the Portuguese Securities Market Commission The Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários), also known by its initials CMVM, was established in April 1991 with the task of supervising and regulating securities and other financial instruments markets (traditionally known  (CMVM CMVM Comissão do Mercado de Valores Mobiliários (Portugal)
CMVM Comissão de Mercado de Valores Mobiliários
), BES Group has restated its financial statements for financial year 2004 based on application of the IAS/IFRS with the exceptions, as permitted by IFRS 1, of comparable information that would arise from application of IAS 32 and IAS 39.

2. ECONOMIC OVERVIEW

In 2005 the world economy registered strong growth, estimated at slightly above 4%. The European and US economies benefited from a climate of low interest rates and expansionist ex·pan·sion·ism  
n.
A nation's practice or policy of territorial or economic expansion.



ex·pansion·ist adj. & n.
 budgetary policies, with GDP GDP (guanosine diphosphate): see guanine.  rising by 1.4% in Europe Europe (yr`əp), 6th largest continent, c.4,000,000 sq mi (10,360,000 sq km) including adjacent islands (1992 est. pop. 512,000,000).  and 3.7% in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies.  continued to profit from good conditions in the commodities markets and strong external demand, particularly from dynamic growth in China and other Asian economies. The oil price rose on average from USD USD

In currencies, this is the abbreviation for the U.S. Dollar.

Notes:
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion.
 38 in 2004 to almost USD 55 per barrel in 2005.

In the Euro-zone, where the currency depreciated Depreciated may refer to:
  • Depreciation, in finance, a reference to the fact that assets with finite lives lose value over time
  • Depreciated is often confused or used as a stand-in for "deprecated"; see deprecation for the use of depreciation in computer software
 by 12.7% against the USD, to EUR/USD 1.183, the European Central Bank European Central Bank (ECB)

Bank created to monitor the monetary policy of the countries that have converted to the Euro from their local currencies. The original 11 countries are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
 initiated a new cycle of interest rate hikes, citing potential inflationary in·fla·tion·ar·y  
adj.
Of, associated with, or tending to cause inflation: inflationary prices; inflationary policies.

Adj. 1.
 pressures in the medium term. Still, a high rate of unemployment (8.3%) and wage moderation kept inflation under relative control (2.2% in December December: see month. ), and the main reference rate rose by a mere 25 basis points in December, to 2.25%. The situation of ample liquidity arising from low interest rates did not translate into any significant increase in the core inflation but rather into marked rises in financial and real estate assets. In Europe, the Paris CAC See Consumer Advisory Council. 40, the Frankfurt DAX and the Madrid Madrid (mədrĭd`, Span. mäthhrēth`), city (1990 pop. 3,120,732), capital of Spain and of Madrid prov., central Spain, and the focus of its own autonomous region, on the Manzanares River.  IBEX ibex (ī`bĕks), wild goat, genus Capra, found in rugged country on mountain ranges from central Asia to the Himalayas, S Europe, and NE Africa. 35 stock market indices Commonly used stock market indices include: Global
Large companies not ordered by any nation or type of business (in alphabetical order).
  • BBC Global 30
  • MSCI World
  • S&P Global 100
  • S&P Global 1200
  • Russell Global 10000 Launched 17/01/07
 rose by respectively 23.4%, 27.1% and 18.2%, while the Japanese Japanese (jăp'ənēz`), language of uncertain origin that is spoken by more than 125 million people, most of whom live in Japan. There are also many speakers of Japanese in the Ryukyu Islands, Korea, Taiwan, parts of the United States, and  Nikkei Nikkei

Short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange.
 index surged by 40.2%. In the Unites States, the rising trend of reference interest rates to close to neutral range (from 2.25% to 4.25% in the full year) contributed to the not so positive performance of the stock markets: the Nasdaq and S&P500 were up by 1.4% and 3%, respectively, while the Dow Jones Dow Jones

the best known of several U.S. indexes of movements in price on Wall Street. [Am. Hist.: Payton, 202]

See : Finance
 dropped by 0.6%.

In Portugal, with domestic demand reined in by high unemployment (7.6% on average) and still depressed confidence levels, GDP is thought to have risen by 0.3%. Still, external demand registered a small recovery in the second half of the year. Average inflation dropped from 2.4% to 2.3%. The PSI-20 rose by 13.4%.

3. RESULTS

BES Group's consolidated net income reached euro 280.5 million in 2005, a year-on-year increase of 85% (under IFRS(1).

This result is of special significance as it was achieved in a particularly tough period, namely if we consider the following factors:

--the economic situation in Portugal was characterised by sluggish growth or even stagnation Stagnation

A period of little or no growth in the economy. Economic growth of less than 2-3% is considered stagnation. Sometimes used to describe low trading volume or inactive trading in securities.

Notes:
A good example of stagnation was the U.S. economy in the 1970s.
 and rising unemployment;

--strong competition throughout the year;

--several important reorganisations took place within BES Group, namely the merger by incorporation of BIC into BES, which was completed in four months;

--the changes to the regulatory framework that were adopted in 2005 (IFRS).

If an extraordinary provision of euro 57.6 million had not been made to meet the costs of the merger, net profit would have reached euro 322.3 million, which would represent:

(i) return on equity (ROE A fictitious surname used for an unknown or anonymous person or for a hypothetical person in an illustration.

A lawsuit is generally named for the persons who are parties to it.
) of 15.8%, or 22.0% if pensions had been reset on transition to the IFRS;

(ii) more than double the previous year's net profit (euro 151.6 million), determined on the same accounting basis (IFRS); and

(iii) an increase of 17.1% versus the 2004 net profit of euro 275.2 million as determined under the Plan of Accounts for the Banking System (PABS).

The international area contributed significantly to annual results, growing by 58% and accounting for 31% of BES Group's consolidated net income in 2005 (20% in 2004).

(1)Under IFRS 1, IAS 32 and 39 do not obligatorily o·blig·a·to·ry  
adj.
1. Morally or legally constraining; binding.

2. Imposing or recording an obligation: a bill obligatory.

3.
 apply retroactively ret·ro·ac·tive  
adj.
Influencing or applying to a period prior to enactment: a retroactive pay increase.



[French rétroactif, from Latin
.

The table below shows the income statement for full 2005 along with the 2004 comparative data:
INCOME STATEMENT

                                                          euro million
------------------------------------- -------- -------- --------------
                                 December               Chg%
                                                         IFRS
                             ----------------- --------
                                2004     2004     2005
                               PABS     IFRS     IFRS
------------------------------------- -------- -------- ---------

------------------------------------- -------- -------- ---------
  Net Interest Income          701.2    697.0    740.6      6.3
+ Fees and Commissions         545.8    549.6    555.1      1.0
= Banking Income ex-Markets  1 247.0  1 246.6  1 295.7      3.9
+ Capital Markets and Other    218.4    184.4    242.0     31.2
= Banking Income             1 465.4  1 431.0  1 537.7      7.5
- Operating Costs              750.2    887.5    861.1     -3.0
= Gross Results                715.2    543.5    676.6     24.5
- Net Provisions               357.7    322.3    320.6     -0.5
                   Credit      227.0    226.3    219.9     -2.8
                   Securities    7.5      7.5     30.0
                   Other       123.2     88.5     70.7    -20.1
  Income before Taxes and
=  Minorities                  357.5    221.2    356.0     60.9
- Income Tax                    42.3     46.7     65.9     41.1
= Income before Minorities     315.2    174.5    290.1     66.2
- Minority Interests            40.0     22.9      9.6    -58.1
= Net Income                   275.2    151.6    280.5     85.0  19.9%
------------------------------------- -------- -------- ---------


3.1 Net interest income

Net interest income reached euro 740.6 million, which corresponds to a year-on-year increase of 6.3%.

The last quarter of the year confirmed the recovery trend of net interest income initiated as from the second half, underpinned by business growth, particularly on credit, which was up by 12.9%, and also by the rise in reference interest rates, with an overall positive influence on funding.

3.2 Fees and Commissions

Fees and commissions totalled euro 555.1 million, up by 4.3% from 2004 on a comparable basis:
Comparable Fees and Commissions

                                                          euro million
----------------------------------------------------------------------
                                            December        Chg %
                                     -----------------------
                                       2004       2005
                                       IFRS       IFRS
----------------------------------------------------------------------

----------------------------------------------------------------------
Fees and Commissions based on
 applicable rules                      549.6      555.1     1.0
Deferral effect (a)                    (17.6)     -         -
----------------------------------------------------------------------
Comparable Fees and Commissions        532.0      555.1     4.3
----------------------------------------------------------------------
(a) Not considered in the 2004 restated financial statements as IAS 32
 and 39 were not applied retroactively, as allowed under IFRS 1.


If the 2004 fees and commissions on credit origination Origination

The process through which a mortgage lender creates a mortgage secured by some amount of the mortgagor's real property.

Notes:
Also known as loan origination, everyone must go through the origination process when securing a mortgage for a piece of real
 were stated under the accrual accrual,
n continually recurring short-term liabilities. Examples are accrued wages, taxes, and interest.
 principle, the increase would be 4.3%, which contrasts with the low rise determined under the rules applicable in each year (+1.0%).

Cross selling (+18.8%) was one of the main contributors to this business area's positive performance, namely from off balance sheet funds, which was fuelled by the commercial dynamics of the various sales networks.

3.3 Capital markets results and other

Capital markets and other results reached euro 242.0 million, which compares with euro 184.4 million under IFRS. These results were based on diversification Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.

Notes:
Diversification is possibly the greatest way to reduce the risk.
 of market risk in equities, credit and interest and exchange rates.

In 2005 the main stock market indices had a positive performance. The Brazilian market, that is of particular importance for the Group results, had a strong performance throughout the year, while the domestic market also performed well in the last quarter.

European and US interest rate and credit markets were characterised by the gradual flattening
Ellipticity redirects here. For the mathematical topic of ellipticity, see elliptic operator.


The flattening, ellipticity, or oblateness of an oblate spheroid is the "squashing" of the spheroid's pole, down towards its equator.
 of yield curves and the historically low levels of credit spreads. BES Group's strategy adopted at the beginning of the year of privileging interest and exchange rate trading in the emerging markets produced significant results.

3.4 Operating costs operating costs nplgastos mpl operacionales 

Operating costs decreased by 3.0% year-on-year, underpinned by lower staff costs as well as by a significant reduction in amortisation Noun 1. amortisation - the reduction of the value of an asset by prorating its cost over a period of years
amortization

reduction, step-down, diminution, decrease - the act of decreasing or reducing something

2.
 and depreciation.
OPERATING COSTS

                                                          euro million
 ---------------------------------------------------------------------
                       December
                                                              Chg %
                                                               IFRS
                       ---------------------------------------
                       2004           2004       2005
                       PABS           IFRS       IFRS
 ---------------------------------------------------------------------

 ---------------------------------------------------------------------

 Staff Costs, o.w.     330.2          486.4      453.7        -6.7
      Salaries         304.5          350.4      380.8        8.7
      Pension Costs    25.7           136.0      72.9         -46.4
 Admin costs           289.4          300.0      327.2        9.1
 Depreciation          130.6          101.1      80.2         -20.7

 ---------------------------------------------------------------------

 Operating Costs       750.2          887.5      861.1        -3.0


Staff costs increased by 8.7%, driven by the Group's international expansion, and to a smaller extent, by the annual salary increases and promotions. The increase in the last quarter of the year is explained by the final adjustment of bonuses to the employees and corporate bodies, and the record of seniority bonuses under IFRS.

The reduction in pension costs translates lower retirement costs, which was also the reason for the increase in pension costs in the third quarter of the year.

General administrative costs administrative costs,
n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided.
 were up by 9.1% in the year, mainly explained by the expansion of the international area.

The decrease in depreciation and amortisation is the outcome sustained efforts of the Group. The centralisation n. 1. same as centralization.

Noun 1. centralisation - the act of consolidating power under a central control
centralization

consolidation, integration - the act of combining into an integral whole; "a consolidation of two corporations";
 of the entire operations and systems logistics support, as well as the recent merger of BIC into BES, which should be further developed and consolidated in the near future, are amongst the main efficiency measures.

In 2005 the Group changed the following actuarial ac·tu·ar·y  
n. pl. ac·tu·ar·ies
A statistician who computes insurance risks and premiums.



[Latin
 assumptions used in the calculation of liabilities with retirement benefits:
Assumptions              31/Dec/04   31/Dec/05
----------------------------------------------------------

Mortality table   - Male    TV 73/77    TV 73/77(adjusted)
Mortality table   - Female  TV 73/77    TV 88/90
Discount rate               5.25%       4.75%


The change in actuarial assumptions, the current contributions for the year, and also the effect of the adjustments arising from the transition to the IFRS resulted in a contribution of euro 249 million to BES Group's Pension Fund. This amount is net of the actuarial gains in the funds' assets whose rate of return was close to 10%.

4. ACTIVITY SUMMARY

The Group's commercial activity was very strong, with customer loans rising by 12.9% and customer funds by 12.4%. This performance is strongly influenced by the acquisition of 120,000 new individual Clients and 730 corporate Clients this year, which was significantly higher than in 2004.
MAIN INDICATORS

                                                  euro million
 -------------------------------- ------- ------- -------------------
                                         December         Chg %
                                                          IFRS
                                  -----------------------
                                  2004    2004    2005
                                    PABS   IFRS    IFRS
 -------------------------------- ------- ------- ------- ----- -----

 -------------------------------- ------- ------- ------- ----- -----
   Total Assets (1)               64 734  61 634  71 767  16.4
 -------------------------------- ------- ------- ------- ----- -----

 -------------------------------- ------- ------- ------- ----- -----
   Assets                         45 901  43 083  50 302  16.8

   Gross Loans (including
    securitised)                  31 281  31 399  35 451  12.9
   Loans to Individuals           12 975  12 975  14 073  8.5
   - Mortgage                     11 249  11 249  12 270  9.1
   - Other Loans to Individuals   1 726   1 726   1 802   4.4
   Corporate Loans                18 306  18 424  21 379  16.0

   Customer Funds
 + Deposits (3)                   22 355  22 414  24 284  8.3
   Debt Securities placed with
 +  Clients                       5 160   2 693   3 590   33.3
   On-Balance Sheet Customer
 =  Funds                         27 515  25 107  27 874  11.0
 + Off-Balance Sheet Funds        13 644  13 644  15 685  15.0
 = Total Customer Funds           41 159  38 751  43 559  12.4

 -------------------------------- ------- ------- ------- ----- -----

   Transformation Ratio(%) (2)    99      110     111     1 p.p.

 -------------------------------- ------- ------- ------- ----- -----
   (1) Net Assets + Asset Management + Other off-balance sheet
    liabilities + Securitised credit
   (2) Assuming on-balance sheet credit
   (3) Includes: Customer deposits and Certificates of Deposits


On-balance sheet customer funds increased 11%, while off-balance sheet funds were up by 15%.

In bancassurance Bancassurance

A French term referring to the selling of insurance through a bank's established distribution channels.

Notes:
The result is a bank that can offer banking, insurance, lending, and investment products to a customer.
: retirement/education savings plans were up by +19%, other life insurance products increased 36% and investment funds Noun 1. investment funds - money that is invested with an expectation of profit
investment

assets - anything of material value or usefulness that is owned by a person or company
 increased by 13%.

In a year when the State Budget eliminated the main benefit offered by RSPs (earned income Sources of money derived from the labor, professional service, or entrepreneurship of an individual taxpayer as opposed to funds generated by investments, dividends, and interest.  allowance), Tranquilidade-Vida posted a 19.7% increase in this line of business, reaching a production volume of euro 494 million and a market share of 28.8%, according to according to
prep.
1. As stated or indicated by; on the authority of: according to historians.

2. In keeping with: according to instructions.

3.
 Portuguese Insurance Institute data. Tranquilidade-Vida maintained the leadership in retirement savings plans Noun 1. retirement savings plan - a plan for setting aside money to be spent after retirement
pension account, pension plan, retirement account, retirement plan, retirement program, retirement savings account
 over the last 10 years and with assets in excess of euro 2.5 billion and 368,000 subscribers.

4.1. Retail banking

Strong commercial performance is backed by the strategy adopted for retail banking, which relies on the following key factors:

--Reinforcing the value propositions and adapting them to the Clients' financial needs;

--Differentiating through quality,

--Focusing on higher value Clients and products,

--Increasing efforts to attract new Clients,

--Launching specific value proposition for the clients of Tranquilidade Tranquilidade (tranquility in english) is a Portuguese insurance company, founded in Oporto in 1871. It is part of the Portuguese economic group "Grupo Espirito Santo". .

On loans to individuals, mortgages grew by 9.1% year-on-year, underpinned by production growth of 15% versus 2004. In the BES 360 segment, mortgage credit was particularly strong growth (+17%), currently accounting for roughly 47% of BES Group's production. Together with the sophistication so·phis·ti·cate  
v. so·phis·ti·cat·ed, so·phis·ti·cat·ing, so·phis·ti·cates

v.tr.
1. To cause to become less natural, especially to make less naive and more worldly.

2.
 of risk assessment and tools, this has led to a sustained reduction in the portfolio's risk profile.

The assurfinance agents were responsible for 18% of the year's production (12% in 2004), giving a decisive contribution to the increase in mortgage credit production.

Other loans to individuals grew 4.4%, explained by credit associated to savings products. Growth of consumer credit remains subject to highly selective criteria, given the current economic conditions in Portugal.

A new phase of the Assurfinance Programme (joint initiative promoted by BES and Tranquilidade) was launched in 2005. With the T-card as the star product, this programme offers a value proposition specifically aimed at the Tranquilidade Clients that are not yet BES Clients. The results achieved were quite significant and in line with the proposed objectives: besides contributing to mortgage credit production, 23,000 new clients were attracted and 24,000 T-cards placed.

The number of credit cards rose to 35,000 in 2005, translating into a 10% increase in turnover. At the beginning of 2006 it was decided to integrate the cards operation (Crediflash) into BES, aiming to reach higher efficiency levels. This operation should be concluded before the end of the first semester se·mes·ter  
n.
One of two divisions of 15 to 18 weeks each of an academic year.



[German, from Latin (cursus) s
.

The approach to the higher value segments - BES 360 and small businesses was consolidated in 2005. In the 360 segment, financial involvement (credit and funds) and the number of loyal clients were up by respectively 13.0% and 8.2%. The launch in the last quarter of the year of the 360 Map - a financial planning Financial planning

Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against
 tool that is unique in the market - further reinforced the commercial approach to this segment. In the small businesses segment, financial involvement and the number of loyal clients grew by respectively 18.8% and 15.0%, translating the increasingly competitive positioning in this important market segment.

Retail banking total customer funds increased on the back of high value Clients (BES 360 and Small businesses), especially in off-balance sheet funds: mutual funds grew by 23% and savings plans were up by 25%. Advisory services advisory services

advisory services provided to the public, in their capacity as owners and managers of animals, are an important part of veterinary science. They may be provided by government bureaux, by commercial companies who deal in pharmaceuticals or animals or animal
, improved relationship with new Clients as well as development of the concept of BES being the retirement planning Retirement financial planning refers to a collection of systems, methods, and processes which, in their aggregate, support a family unit's (client's) desire to achieve a state of financial independence, such that the need to be gainfully employed is optional.  partner explain these results.

Mass market business unit placed more than 33,000 programmed savings plans"(2), where each Client defines the amount of monthly savings adjusted to his/her financial situation.

The results achieved in 2005 show an increase in the number of products per client in high net worth as well as success in simple savings products sales to the mass market. These results contributed to the improvement of cross-selling Cross-selling is the term used to describe the sale of additional products or services to a customer. Less frequently it is used to describe the sale of services to additional business units at an account or to different geographic units of a customer.  indicators, aligned with the strategy defined by the Group.

BES Acores also posted a good perfomance. Net assets Net assets

The difference between total assets on the one hand and current liabilities and noncapitalized long-term liabilities on the other hand.


net assets

See owners' equity.
 grew 12%, deposits by 10% and operating income Operating Income

The profit realized from a business' own operations.

Notes:
This would not include income from things such as investments in other firms. Also referred to as operating profit or recurring profit.
 by 30%. However, net income was up by only 2.5% due to a significant increase in taxes. Cost to income reached 53%.

At year-end year-end also year·end
n.
The end of a year.

adj.
Occurring or done at the end of the year: a year-end audit.

Noun 1.
, assets under management Assets Under Management (AUM) is a term used by financial services companies in the mutual fund and money management or investment management business to gauge how much money they are managing.  of Espirito Santo Activos Financeiros (ESAF ESAF Enhanced Structural Adjustment Facility
ESAF Escola de Administração Fazendária (Brazil)
ESAF Electric Safe Arm and Fire
) had surpassed euro 15.8 billion, corresponding to 13% year-on-year growth. This performance is the outcome of the change in the offer of mutual funds. Net income for the year grew by 51%, driven by business growth and in particular by the increase in assets under management.

(2)Concepts of two products: BES 95 and BES Junior Plan

4.2. Corporate banking

Overall, corporate loans were up by 16.0% in 2005, to euro 21.4 billion, being particularly significant in the middle market segment, where growth reached 17%. A fact worth highlighting is that 63% of Portuguese top 1,000 small and medium-sized Me´di`um-sized`

a. 1. Having a medium size; as, a medium-sized man s>.

Adj. 1. medium-sized - intermediate in size
medium-size, moderate-size, moderate-sized
 companies (SMEs) are Clients of BES Group. Credit to large corporations grew by 8%.

BES Group continued to reinforce its market share in the corporate business, which has already surpassed 20%.

During the year, 730 new SME (1) (Small and Medium-sized Enterprise) See SMB.

(2) (Subject Matter Expert) An individual who is well-versed in the policies and procedures of a particular department or division.
 clients were acquired, while a major focus was on trade finance, the international business and innovating start-ups.

Despite the sluggish economic environment, the leasing and factoring businesses had a strong performance in 2005. Besleasing e Factoring posted an increase in leasing production of 17.6% and in factoring production of 11.2%, which allowed the Company to maintain the second position in the Portuguese market in both products, with a market share of 18.1% and 21.2% respectively. Despite tough competition, Besleasing e Factoring reached net income of euro 13.0 million, 11% YoY.

For Locarent, a company specialising the renting/operational leasing of vehicles, 2005 represented the first year in full operation. Based on the market approach adopted, Locarent ended the year with 5,502 vehicles under management, from a total of 6,514 under contract. Net assets registered a three-fold increase, reaching euro 135 million.

4.3. Investment banking

Banco Espirito Santo de Investimento posted net income of euro 50.0 in 2005, corresponding to a year-on-year increase of 11.1%. Total assets were up by 36.0%, mainly driven by customer loans, which rose by euro 301 million. Operating costs rose by 12.0%, due to the increase in costs of the Brazilian subsidiary through the significant rise of the real, and also to the expansion of the bank's international presence into new markets.

BES Investimento do Brasil significantly increased its activity in 2005, having lead important transactions in the capital market (namely the placement of R$505m in Bradespar Bradespar S.A. is a Brazilian investment company headquartered in São Paulo. The company was formed in 2000 by Banco Bradesco in order to allow the bank to spin out some of its industrial investments.  preference shares, and US$100m in a Bradesco Eurobond Eurobond

A bond that is denominated in a different currency than the one of the country in which the bond is issued.

Notes:
A eurobond is usually categorized by the currency in which it is denominated, and is usually issued by an international syndicate.
) as well as M&A operations (sale of Rip (1) See ripping.

(2) (Raster Image Processor) The hardware and/or software that rasterizes an image for display or printing. RIPs are designed to rasterize a specific type of data, such as PostScript.
 to Thyssen for R$130 m), and increased its market share in brokerage.

In October October: see month. , BES Investimento established a joint venture with Concordia Concordia (kōng-kôr`thyä), city (1991 pop. 116,491), Entre Ríos prov., NE Argentina, a port on the Uruguay River.  Sp, a company based in Warsaw Warsaw (wôr`sô), Pol. Warszawa, city (1993 est. pop. 1,655,700), capital of Poland and of Mazowieckie prov., central Poland, on both banks of the Vistula River.  that specialises in financial advisory services. Under this joint venture, BES Investimento is now in a position to provide investment banking services to its clients, mainly in M&A and Project Finance, in the most important market in Eastern Europe Eastern Europe

The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991.
.

In project finance, the Bank's active role has earned it the title of the: "Arranger of the Year in Transportation" awarded by the Infrastructure Journal, and "Leveraged Infrastructure of the Year", for the SMIF SMIF Standard Mechanical Interface
SMIF Stream-based Model Interchange Format
SMIF Shared Materials Instrumentation Facility (Duke University)
SMIF Stanford Management Internship Fund
SMIF SMAD4-Interacting Transcription Factor
 - Secondary Market Infrastructure Fund transaction, awarded by the Project Finance magazine. In Portugal, the Bank concluded 19 operations, in sectors such as energy, oil and gas, leisure and health, having led 7 infrastructures projects in the United Kingdom.

4.4. International banking: euro 86.3 million contribution to consolidated net income

The international banking business has posted a good performance: the expansion of our presence in Angola Angola (ăng-gō`lə), officially Republic of Angola (2005 est. pop. 11,191,000), including the exclave of Cabinda, 481,351 sq mi (1,246,700 sq km), SW Africa. , the business done in Spain Spain, Span. España (āspä`nyä), officially Kingdom of Spain, constitutional monarchy (2005 est. pop. 40,341,000), 194,884 sq mi (504,750 sq km), including the Balearic and Canary islands, SW Europe. , and the already traditional positions in the United Kingdom, France, the United States, Brazil and Macao, yielded strong profits, whose contribution to consolidated income reached 31%, of which BESI was responsible for euro 14.6 million.

A Graph has been omitted. Please see http://www.bes.pt/iipl.asp?srv=1009&etp=1&file=36176 for the full report

The activity of BES Angola in 2005 translated into strong net income growth and the expansion of its geographic coverage of the country - the Bank opened four new branches in the Zaire, Huila, Benguela and Cunene provinces. BES Angola posted net income growth of 350%, to euro 34.6 million, while banking income rose by more than 120%.

The Bank also reinforced its corporate services Activities that combine or consolidate certain enterprise-wide needed support services, provided based on specialized knowledge, best practices, and technology to serve internal (and sometimes external) customers and business partners. , hiring new qualified professionals, so as to meet the rising requirements of Portuguese and international clients operating in the Angolan market as well as of the multinational companies wishing to invest in the country.

BES Angola's expansion strategy, initiated in 2002, will be pursued through 2006 with the opening of another 10 branches, in Luanda and in the provinces of Cabinda, Benguela, Malange and Huambo - an estimated investment of over 5 million dollars. The Bank's new headquarter head·quar·ter  
v. head·quar·tered, head·quar·ter·ing, head·quar·ters Usage Problem

v.tr.
To provide with headquarters:
 building was started and should be completed by April 2006.

Banco Espirito Santo (Spain) pursued its strategy for Private Banking as well as for Corporate banking in the Iberian peninsula Iberian Peninsula, c.230,400 sq mi (596,740 sq km), SW Europe, separated from the rest of Europe by the Pyrenees. Comprising Spain and Portugal, it is washed on the N and W by the Atlantic Ocean and on the S and E by the Mediterranean Sea; the Strait of Gibraltar , posting consolidated net income of euro 1.4 million. Assets under management reached euro 2,061 million, a year-on-year increase of 41.3%. This growth was underpinned by the good commercial performance of all the networks and also by the acquisition of Banco Inversion inversion /in·ver·sion/ (in-ver´zhun)
1. a turning inward, inside out, or other reversal of the normal relation of a part.

2. a term used by Freud for homosexuality.

3.
.

BES Venetie (France) posted a strong growth in mortgages -yet with low risk - among residents of Paris region The Paris region, Île-de-France, is the region surrounding France's capital city, Paris. It is the translation from the French expression, région parisienne. This most recent use of the term results in part from the creation in 1961 of the . In addition, structured credit products have gained a new dimension in 2005: the Bank received several mandates for preparation of LBO LBO

See: Leveraged buyout


LBO

See leveraged buyout (LBO).
 transactions for medium sized firms in France. Banking income reached euro 28.1 million, representing a 4.7% increase compared to 2004 figures, while net profit posted a 123.8% increase to euro 10.9 million. Cost to income was down from 55.8% in 2004 to 50.9% in 2005.

Espirito Santo Bank (USA) also increased in its loan portfolio. In this area, it is important to stress its new ECA ECA

See: Export Credit Agency
 export credit line guaranteed by the US government, which has shown consistent growth. With regard to asset quality, the respective indicators remain very positive.

As for international branches, London and New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
 operations reached net profits of euro 27.5 million (vs. euro 29.6 million in 2004) and 7.4 million (vs. a loss of euro 4.1 million in 2004) respectively. The Group's presence in London enabled many Portuguese firms to have access to international markets, while the presence in New York gave access to large domestic corporate Clients to the north American North American

named after North America.


North American blastomycosis
see North American blastomycosis.

North American cattle tick
see boophilusannulatus.
 market.

In Southeast Asia Southeast Asia, region of Asia (1990 est. pop. 442,500,000), c.1,740,000 sq mi (4,506,600 sq km), bounded roughly by the Indian subcontinent on the west, China on the north, and the Pacific Ocean on the east. , Banco Espirito Santo Group has lately reinforced its presence through the ever stronger intervention A procedure used in a lawsuit by which the court allows a third person who was not originally a party to the suit to become a party, by joining with either the plaintiff or the defendant.  of Banco Espirito Santo do Oriente (BESOR) at local and regional level. The high growth rates Growth Rates

The compounded annualized rate of growth of a company's revenues, earnings, dividends, or other figures.

Notes:
Remember, historically high growth rates don't always mean a high rate of growth looking into the future.
 registered by the area's economy have given rise to new opportunities, which, overall, give a key contribution to the increasingly strong presence of BES Group in these reference markets.

5. ASSET QUALITY AND PROVISIONING

Considerable improvements were achieved at asset quality level: the coverage of overdue loans over 90 days rose to 196.6% % (Dec/04: 167.1%) while the corresponding overdue loans ratio dropped significantly, to 1.33% (Dez/04: 1.62%). This good performance was underpinned by a good level of loan recoveries, the reinforcement reinforcement /re·in·force·ment/ (-in-fors´ment) in behavioral science, the presentation of a stimulus following a response that increases the frequency of subsequent responses, whether positive to desirable events, or  of provisions for the year and the sale, in the first half of the year, of overdue mortgage loans for an overall amount of euro 76.7 million. Together, these factors led to a reduction of euro 64.8 million in overdue loans and an increase of euro 57.5 million in credit provisions.
ASSET QUALITY


------------------------------ ------- ------- ------- -------- -----
                               Dec 04  Dec 04  Dec 05  Change
                               PABS     IFRS    IFRS    IFRS

------------------------------ ------- ------- ------- -------- -----

------------------------------ ------- ------- ------- -------- -----

Loans to Customers    (eur mn)
 (gross)                       28 088  28 488  31 662    3 174
Overdue Loans         (eur mn)  547.8   552.9   488.1    -64.8
Overdue Loans greater (eur mn)
 than  90 days                  462.1   462.1   422.1    -40.0
Overdue and Doubtful  (eur mn)
 Loans (B.Portugal)
 (a)                            567.1   567.1   564.3     -2.8
Provisions for Credit (eur mn)  772.4   772.4   829.9     57.5

------------------------------ ------- ------- ------- -------- -----

------------------------------ ------- ------- ------- -------- -----

Overdue Loans / Loans
 to Customers (gross)        %   1.95    1.94    1.54    -0.40  p.p.
Overdue Loans greater
 than  90 days / Loans
 to Customers (gross)        %   1.65    1.62    1.33    -0.29  p.p.
Overdue and doubtful
 loans / Loans to
 Customers (gross) (a)       %   2.02    1.99    1.78    -0.21  p.p.

Coverage of Overdue
 Loans                       %  141.0   139.7   170.0     30.3  p.p.
Coverage of Overdue
 Loans greater than
 90 days                     %  167.1   167.1   196.6     29.5  p.p.
Coverage of Overdue
 and doubtful loans          %  136.2   136.2   147.1     10.9  p.p.

------------------------------ ------- ------- ------- -------- -----
(a) According to Circular  Letter no. 99/03/2003 of
 Bank of Portugal


BES Group has pursued its prudent stance regarding provisioning coverage policy, particularly important in the current domestic economic environment.

6. SOLVENCY The ability of an individual to pay his or her debts as they mature in the normal and ordinary course of business, or the financial condition of owning property of sufficient value to discharge all of one's debts.


solvency n.


The main equity exposures in the available for sale portfolio had a significant appreciation, with overall potential gains amounting to euro 472.1 million at the end of the period (2004: euro 70.9 million potential loss).
MAIN EQUITY EXPOSURES IN AFS PORTFOLIO

                                                       euro million
-------------------------------------------------------------------
   Assets Available for Sale              Potential Gains or Losses
                                -----------------------------------
                                       31 Dec 04          31 Dec 05
-------------------------------------------------------------------
 Portugal Telecom                         -21.1               29.1
 PT Multimedia                            -60.1                0.0
 Banco Bradesco                            -2.9              397.7
 Bradespar                                 20.1               35.0
 B. Marocaine Com. Ext.                    -6.9               10.3
-------------------------------------------------------------------
                                          -70.9              472.1
-------------------------------------------------------------------


At the beginning of 2006 the Group acquired a 2.17% stake in EDP (Electronic Data Processing) The first name used for the computer field.

EDP - Electronic Data Processing
, thus re-entering the Portuguese energy sector, while also reinforcing this company's hard core of Portuguese shareholders.

Value fluctuations in these investments are reflected into fair value reserves of equity. For solvency ratio Solvency Ratio

One of many ratios used to gauge a company's ability to meet long-term obligations.

Notes:
Derived by taking a company's net worth and dividing by total assets.
See also: Asset, Asset Valuation, Balance Sheet, Fundamental Analysis, Income Statement
 purposes, only 45% of potential gains are eligible for Tier II.

As referred above, at the end of 2005 the Group changed the actuarial assumptions used to calculate pension liabilities Pension liabilities

Future liabilities resulting from pension commitments made by a corporation. Accounting for pension liabilities varies widely by country.
, with a negative impact on solvency ratios.
RISK WEIGHTED ASSETS AND SOVLENCY
             (Bank of Portugal)
                                                    euro million
----------------------------------------------------------------

                                             Dec 04   Dec 05(a)
----------------------------------------------------------------

----------------------------------------------------------------
 Risk Weighted Assets                         34 754     37 900
 Regulatory Capital                            4 190      4 583
  Tier I                                       2 343      2 319
  Tier II                                      1 912      2 319
  Deductions                                    ( 65)      ( 55)
 Preference Shares                               600        600
----------------------------------------------------------------

----------------------------------------------------------------
 Core Tier I                                     5.0%       4.5%
 Tier I                                          6.7%       6.1%
 Total                                          12.1%      12.1%
----------------------------------------------------------------
 (a) estimate


The Group's solvency ratio remains at comfortable levels compared with the minimum requirements of the Bank of Portugal. The net effect of realised capital gains in assets available for sale would translate into a Core Tier I ratio of 5.4%.

BES Group has conlcuded another securitization Securitization

The process of creating a financial instrument by combining other financial assets and then marketing them to investors.

Notes:
Mortgage backed securities are a perfect example of securitization.

May also be spelled as "securitisation.
 transaction amounting euro 1.2 billion in 2005, in line with its funding and capital management policies. This was a very successful transaction, since its pricing reached the lowest among all the triple A rated securitisation transactions that took place in Portugal.

The main international rating agencies have assigned as·sign  
tr.v. as·signed, as·sign·ing, as·signs
1. To set apart for a particular purpose; designate: assigned a day for the inspection.

2.
 the following ratings to BES:

Standard & Poor's: A- for medium and long term debt and A-2 for short term debt, with stable outlook. This rating is based on the Group's strong competitive position in retail, its adequate profitability based on operating efficiency as well as a more balanced funding Balanced Fund

A mutual fund that invests its assets into the money market, bonds, preferred stock, and common stock with the intention to provide both growth and income. Also known as an asset allocation fund.
 structure and asset quality.

FitchRatings: A+ for long term debt and F1 for short term debt, with stable outlook. This rating is based on the Group's strong positioning in the domestic market, its asset quality, low risk profile and adequate solvency and profitability levels.

Moody's: A1 for long term debt and P1 for short term, with stable outlook. This rating reflects the Group's strong and diversified diversified (di·verˑ·s  positioning in the domestic market and its financial strength.

7. PRODUCTIVITY AND EFFICIENCY

The Group's productivity and efficiency ratios continued to make good progress: operating costs as a percent of average net assets dropped from 2.14% to 1.87% while total assets per employee grew by 12%.

The cost to income also improved, having declined considerably in the period, to 56.0%, or 66.5% excluding capital market results.
PRODUCTIVITY INDICATORS


------------------------------------------ ------ ------ ------ -----
                                           Dec 04 Dec 05 Chg
                                            IFRS   IFRS  IFRS

------------------------------------------ ------ ------ ------ -----

------------------------------------------ ------ ------ ------ -----

 Cost to Income                             62.0%  56.0%  -6.0  p.p.
 Cost to Income ex-Markets                  71.2%  66.5%  -4.7  p.p.

Operating Costs / Average Net Assets        2.14%  1.87% -0.27  p.p.
Total Assets(a) per Employee (eur '000)    8 445  9 454   11.9      %

------------------------------------------ ------ ------ ------ -----
(a) Net Assets + Asset Management + Other Off-Balance Sheet items +
 Securitised Credit


8. PROFITABILITY

The net income posted in 2005 translates into return on equity (ROE) of 13.5% and Return on Assets Return on assets (ROA)

Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).
 (ROA ROA

See: Return on assets


ROA

See: Right of accumulation


ROA

See return on assets (ROA).
) of 0.61%.
PROFITABILITY
                                                                   (%)
----------------------------------------------------------------------
                                                 2004            2005
                                           ----------------- ---------
                                              PCSB     IFRS    IFRS
----------------------------------------------------------------------

----------------------------------------------------------------------

Return on Equity (ROE)
       Stated                                    13.9   6.4      13.5
       Ajusted for extraordinary provision          -     -      15.8
       Ajusted for provision and reset              -     -      22.0

Return on Assets (ROA)
       Stated                                    0.63  0.37      0.61
       Ajusted for extraordinary provision          -     -      0.70
       Ajusted for provision and reset              -     -      0.71


When assessing profitability levels, it is important to stress that BES Group's ROE is negatively influenced by the following effects, whose relevance is responsible for a significant impact on profitability:

--The creation of a restructuring restructuring - The transformation from one representation form to another at the same relative abstraction level, while preserving the subject system's external behaviour (functionality and semantics).  provision, with an impact on net consolidated income(3) of euro 41.8 million;

--The fact that, on transition to the IFRS(4), BES Group opted for recalculating retirement pensions liabilities. If it had chosen to reset these liabilities, equity would have suffered a reduction of euro 524 million.

Disregarding dis·re·gard  
tr.v. dis·re·gard·ed, dis·re·gard·ing, dis·re·gards
1. To pay no attention or heed to; ignore.

2. To treat without proper respect or attentiveness.

n.
 these two effects, the ROE would have risen to 22%(5) in 2005.

(3)Provision net of taxes

(4)In transition adjustments, BES Group could have opted for writing off retirement pension balances in the balance sheet or, alternatively, to recalculate re·cal·cu·late  
tr.v. re·cal·cu·lat·ed, re·cal·cu·lat·ing, re·cal·cu·lates
To calculate again, especially in order to eliminate errors or to incorporate additional factors or data.
 the liabilities.

(5)Does not include the impact arising from the change in the annual amortisation of actuarial deviations outside the corridor.

9. BANK OF PORTUGAL REFERENCE INDICATORS

The table below lists the reference indicators under Bank of Portugal instruction no. 16/2004, for both December 2005 and 2004.
BANK OF PORTUGAL REFERENCE INDICATORS

                                                                  (%)
 ----------------------------------------------- ------ ------ ------
                                                 Dec 04 Dec 04 Dec 05
                                                  PABS   IFRS   IFRS

 ----------------------------------------------- ------ ------ ------
 Solvency
 ----------------------------------------------- ------ ------ ------
 Regulatory Capital / Risk Weighted Assets       12.06  12.06  12.09
 Tier I Capital / Risk Weighted Assets            6.74   6.74   6.12
 Asset Quality
 ----------------------------------------------- ------ ------ ------
 Overdue & Doubtful Loans (a)/ Gross Loans        2.02   1.99   1.78
 Overdue & Doubtful Loans Net of Provisions (b)
  / Net Loans (b)                                 0.47  -0.74  -0.86
 Profitability
 ----------------------------------------------- ------ ------ ------
 Income before Taxes and Minorities / Average
  Equity ( c)                                    13.35   8.45  13.13
 Banking Income (d) / Average Net Assets          3.23   3.45   3.35
 Income before Taxes and Minorities / Average
  Net Assets                                      0.82   0.53   0.78
 Efficiency
 ----------------------------------------------- ------ ------ ------
 General Admin Costs (d)+ Depreciation / Banking
  Income (d)                                      52.9   62.0   56.0
 Staff Costs / Banking Income (d)                 23.3   34.0   29.5

 =============================================== ====== ====== ======
 (a) Calculated according to BoP Circular Letter no.
  99/03/2003
 (b) Credit net of provisions for overdue loans
  and for doubtful loans
 ( c) Includes Average Minorities
 ( d) Calculated according to BoP Instruction no
  16/2004
 ( e) December 2005 values are estimates


10. DIRECT CHANNELS AND ELECTRONIC BANKING

The number of users of Internet Internet

Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the
 Banking for individual customers - BESnet - reached 754,000 at the end of 2005, corresponding to a year-on-year increase of 6%.

The year saw a sharp increase in BESnet's role in the performance of day-to-day operations off-branch, whose ratio rose from 35.7% in December 2004 to 43.4% in December 2005.

Two new facilities were made available through BEsnet during the year - one is the possibility to view cheques online, and the other is the electronic statement, which permits to replace the traditional account statement in paper format.

The monthly average number of visitors to BES website reached 2.5 million, corresponding to a year-on-year increase of 24.9%.

The number of companies using the Internet banking service for corporate clients - BESnet Negocios - reached 43,000 in December 2005, a year-on-year increase of 15.6%.

Throughout the year BEST continued to reinforce its asset management product offer by selling mutual funds from highly recognised investment management firms. By the end of 2005 BEST was selling roughly 400 funds from 20 domestic and international fund managers. The Client base grew by 19%, to 42 thousand clients. Customer assets under management were up by 43% in the year, to surpass euro 550 million at year-end.

Pmelink.pt, the first online business centre in Portugal, promoted under a joint venture between BES, CGD CGD Chronic granulomatous disease, see there  and PT, reached turnover over euro 16 million, corresponding to a year-on-year increase of more than 50%. Total billing was in excess of euro 11 million, representing an increase of 30% when compared to 2004.

11. MERGER BY INCORPORATION OF BIC INTO BES

According to the decision of the BES's Board of Directors taken on 19 September 2005, a legal and accounting merger of Banco Internacional de Credito into Banco Espirito Santo took place on 30 December 2005.

This operation, which is part of the Group's strategy for creating shareholder value, was inspired by two major objectives: to improve the quality of service and to increase the competitiveness of the Banco Espirito Santo Group.

As a result, the clients can access the Bank through service network of 600 branches and a wider scope of products and services to suit their needs. This process also entailed converting all the branches to a new corporate identity, which was concluded on 31/01/2006.

A restructuring provision was charged, amounting to euro 57.6 million, of which euro 49 million is intended to cover retirement and redundancy costs, euro 2.2 million costs of closing down branches totalling, and euro 4 million of operating and systems costs. Management expects to reach euro 35 million annual savings, reducing the pay-back period of the restructuring costs.

12. NEW CORPORATE IDENTITY

At the beginning of 2006, Banco Espirito Santo unveiled its new institutional identity and visual image, initiating a process of communication repositioning repositioning Laparoscopic surgery The changing of a Pt's position during a procedure to improve access or visualization of the operative field, which may be linked to complications, as it changes anatomic planes of operation. Cf Laparoscopic surgery.  aimed at strengthening brand associations in terms of proximity, youth and modernity.

BES remains green, as that is its institutional colour. But BES's green is now the "Future Green" (Verde Futuro). This visual change extended the entire network of around 600 BES branches.

The launch of the new corporate identity was in place after many improvements have been developed in the areas of service quality, client segmentation and increased convenience and accessibility in customer services.

The BES brand stands amongst those with the highest value in the Portuguese market, having been valuated on 31/12/2004 and its value disclosed by Interbrand in 2005 as euro 813 million. Within the Portuguese financial sector, it boasts the highest brand value to stock market capitalisation Noun 1. market capitalisation - an estimation of the value of a business that is obtained by multiplying the number of shares outstanding by the current price of a share
market capitalization
 ratio (around 21% - December 2004).

The investment made in changing the visual identity of the 600 branches amounted to euro 6 million. The operation was executed in record time (35 business days), also involving a refurbishing of 35 regional divisions, 25 corporate centres, 32 private banking centres and 8 central buildings.

THE BOARD OF DIRECTORS
BANCO ESPIRITO SANTO, S.A..A
 CONSOLIDATED BALANCE SHEET AT 31
            DECEMBER 2005
                                                            (eur '000)
 --------------------------------------------- ----------- -----------
                                     Dec 04      Dec 04      Dec 05
                                      PCSB        IFRS        IFRS
 --------------------------------------------- ----------- -----------

 --------------------------------------------- ----------- -----------
 ASSETS
 Cash and deposits at central banks   999 036     999 499   1 005 008
 Deposits with banks                  602 182     602 182     655 180
 Financial assets held for trading  2 302 423   2 302 396   2 992 806
 Financial assets at fair value
  through profit or loss                    -           -   1 746 898
 Financial assets available for
  sale                              5 152 150   3 239 100   3 808 554
 Loans and advances to banks        5 434 552   5 463 525   6 164 044
 Loans and advances to customers   27 652 033  27 715 271  30 832 124
 (Provisions)                        (435 900)   (772 437)   (829 874)
 Held to maturity investments         476 202     476 202     596 840
 Financial Assets with repurchase
  agreements                                -           -           -
 Hedging derivatives                  249 200     249 200     124 505
 Non current assets held for sale           -           -     232 256
 Investment property                        -           -           -
 Other tangible assets                352 372     342 058     363 092
 Intagible assets                     132 989      69 920      72 035
 Investments in associated
  companies                            50 601      58 940      62 374
 Current income tax assets             15 943      15 943      17 112
 Deferred income tax assets                 -      94 158     187 380
 Other assets                       2 481 282   1 454 507   1 441 804

 --------------------------------------------- ----------- -----------
 TOTAL ASSETS                      45 900 965  43 082 901  50 302 012
 --------------------------------------------- ----------- -----------

 --------------------------------------------- ----------- -----------
 LIABILITIES
 Amounts owed to central banks        498 953     498 953     654 316
 Financial liabilities held for
  trading                             515 241     515 200   1 244 970
 Financial assets at fair value
  through profit or loss                    -           -           -
 Deposits from banks                5 713 249   5 737 417   6 264 892
 Due to customers                  20 371 090  20 418 790  20 753 083
 Debt securities                   12 702 526  10 233 454  14 402 291
 Financial liabilities associated
  to transferred assets                     -           -           -
 Hedging derivatives                  240 061     240 100     111 098
 Non current liabilities held for
  sale                                      -           -     112 428
 Provisions                           560 679      84 114     157 286
 Current income tax liabilities        23 086      23 086      46 174
 Deferred income tax liabilities            -      25 578     205 137
 Instruments representing capital           -           -           -
 Other subordinated loans           2 013 143   2 068 915   2 367 597
 Other liabilities                    363 710     650 299     929 208

 --------------------------------------------- ----------- -----------
  TOTAL LIABILITIES                43 001 738  40 495 906  47 248 480
 --------------------------------------------- ----------- -----------
 SHAREHOLDERS' EQUITY
 Share capital                      1 500 000   1 500 000   2 100 000
 Share premium                        300 000     300 000     300 000
 Other capital interests                    -           -           -
 Treasury stock                             -   ( 100 174)   ( 96 247)
 Fair value reserve                         -           -     368 318
 Other reserves and retained
  earnings                            178 643      87 377     ( 7 253)
 Profit for the period / year         275 179     151 643     280 481
 Anticipated dividends                      -           -           -
 Minority interests                   645 405     648 149     108 233

 --------------------------------------------- ----------- -----------
 TOTAL DO CAPITAL                   2 899 227   2 586 995   3 053 532
 --------------------------------------------- ----------- -----------

 --------------------------------------------- ----------- -----------
 TOTAL LIABILITIES AND
  SHAREHOLDERS' EQUTY              45 900 965  43 082 901  50 302 012
 --------------------------------------------- ----------- -----------
BANCO ESPIRITO SANTO, S.A..A
 CONSOLIDATED INCOME STATEMENT AT 31
             DECEMBER 2005
                                                            (eur '000)
 ----------------------------------------------- ---------- ----------
                                        Dec 04     Dec 04     Dec 05
                                         PCSB       IFRS       IFRS
 ----------------------------------------------- ---------- ----------

 ----------------------------------------------- ---------- ----------
 Interest Income                      2 217 984  2 210 319  2 027 285
 Interest expense                     1 516 811  1 513 361  1 286 658
 ----------------------------------------------- ---------- ----------
 Net interest income                    701 173    696 958    740 627
 ----------------------------------------------- ---------- ----------
 Dividends from securities               17 262     17 262     38 868
 Commissions and other similar income   450 194    454 024    486 048
 Commissions and other similar
  expenses                               52 100     52 100     62 491
 Gains and losses in financial assets
  at fair value                         ( 8 354)   ( 8 354)    38 630
 Gains and losses in financial assets
  available for sale                    161 532     72 199     92 321
 Gains and losses from foreign
  exchange revaluation                    9 927      9 927     92 007
 Gains and losses from sale of other
  assets                                129 283    129 283     34 843
 Ohter income from banking activity      51 887    107 193     69 176
 ----------------------------------------------- ---------- ----------
 Banking Income                       1 460 804  1 426 392  1 530 029
 ----------------------------------------------- ---------- ----------
 Staff expenses                         330 143    486 357    453 727
 Other administrative expenses          289 388    300 006    327 168
 Depreciation                           130 632    101 128     80 279
 Provisions net of reversals            107 818     73 034     75 005
 Loan impairment net of reversals and
  recoveries                            226 968    226 301    219 916
 Other financial assets' impairment
  net of reversals and recoveries        18 245     18 245     25 252
 Other assets' impairment net of
  reversals and recoveries                4 688      4 688        429
 Negative difference from
  consolidation                               -          -          -
 Equity in earnings of associated
  companies                               4 560      4 560      7 695
 ----------------------------------------------- ---------- ----------
 Income before tax                      357 482    221 193    355 948
 ----------------------------------------------- ---------- ----------
 Tax
     Current tax                         42 301     42 834     74 920
     Deferred tax                             -      3 866    ( 9 049)
 ----------------------------------------------- ---------- ----------
 Income after tax and before minority
  interests                             315 181    174 493    290 077
     o.w. after tax income from
      discontinued operations                 -          -          -
 ----------------------------------------------- ---------- ----------
 Minority interests                      40 002     22 850      9 596
 ----------------------------------------------- ---------- ----------
 Net income for the year                275 179    151 643    280 481
 ----------------------------------------------- ---------- ----------
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