Banco Espirito Santo 2005 Consolidated Results (Unaudited).LISBON, Portugal -- Banco Espirito Santo (BVL:ESF) (BES; Bloomberg BESNN PL; Reuters BES.LS) announced today its 2005 results. HIGHLIGHTS --Net income (IFRS) 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 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 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 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 0.400 per share (EUR 0.368 in 2004) at the AGM. Video/audio and transcript 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 ON THE NEW REGULATORY FRAMEWORK Regulation no. 1606/2002 of 19 July 2002 of the European Council and Parliament determines that companies having securities admitted to trading on a regulated market of any Member State should prepare their consolidated accounts for each financial year starting on or after 1 January 2005 in accordance with the International Financial Reporting Standards (IFRS), also known as International Accounting Standards (IAS). After this regulation was transposed 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 Securities Regulators (CESR CESR - Center for Earth Systems Research CESR - Center for Economic and Social Rights CESR - Center for the Economic Study of Religion CESR - Centre d'Etude Spatiale des Rayonnements CESR - Committee of European Securities Regulators CESR - Communications Electronics Schedule Review CESR - Computer Equipment or Service Request CESR - Consolidated Exercise Support Request CESR - Cornell Electron Storage Ring CESR - Customer Enhanced Service Ring (Sprint)) and the Portuguese Securities Market Commission (CMVM CMVM - Comissão do Mercado de Valores Mobiliários (Portugal)), 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 budgetary policies, with GDP rising by 1.4% in Europe and 3.7% in the United States. Latin America 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 38 in 2004 to almost USD 55 per barrel in 2005. In the Euro-zone, where the currency depreciated by 12.7% against the USD, to EUR/USD 1.183, the European Central Bank initiated a new cycle of interest rate hikes, citing potential inflationary 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), 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 CAC40, the Frankfurt DAX and the Madrid IBEX35 stock market indices rose by respectively 23.4%, 27.1% and 18.2%, while the Japanese Nikkei 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 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 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) 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 apply retroactively. 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 were stated under the accrual 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 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 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 decreased by 3.0% year-on-year, underpinned by lower staff costs as well as by a significant reduction in amortisation 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 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 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 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: retirement/education savings plans were up by +19%, other life insurance products increased 36% and investment funds increased by 13%. In a year when the State Budget eliminated the main benefit offered by RSPs (earned income 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 Portuguese Insurance Institute data. Tranquilidade-Vida maintained the leadership in retirement savings plans 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. 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 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. 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 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, improved relationship with new Clients as well as development of the concept of BES being the retirement planning 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 indicators, aligned with the strategy defined by the Group. BES Acores also posted a good perfomance. Net assets grew 12%, deposits by 10% and operating income 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, assets under management of Espirito Santo Activos Financeiros (ESAF ESAF - Electric Safe Arm and Fire ESAF - Enhanced Structural Adjustment Facility ESAF - Escola de Administração Fazendária (Brazil)) 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 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 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 preference shares, and US$100m in a Bradesco Eurobond) as well as M&A operations (sale of Rip to Thyssen for R$130 m), and increased its market share in brokerage. In October, BES Investimento established a joint venture with Concordia Sp, a company based in Warsaw 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. 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 - 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, the business done in Spain, 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 Benguela (bĕngĕl`ə, bĕng–), city (1983 est. pop. 155,000), W Angola, on the Atlantic. It is a rail terminus, export point, and commercial, fishing, and adminstrative center. A fort was built there in the late 16th cent., and the city was founded in 1617. Benguela's port played an important role in slave trading. and Cunene Cunene or Kunene (both: k  nā`nə), river, rising in W central Angola and flowing c.750 mi (1,200 km) S and W to the Atlantic Ocean. Its lower course forms part of Angola's border with Namibia. 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, 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 Cabinda (kəbĭn`də), Angolan exclave (1991 est. pop. 163,000), c.2,800 sq mi (7,300 sq km), W Africa; administered as a province. The town of Cabinda is the chief population center. The territory is bounded on the N by Congo (Brazzaville), on the E and S by Congo (Kinshasa), and on the W by the Atlantic Ocean., Benguela, Malange and Huambo Huambo (wäm`bō), formerly Nova Lisboa (nō`və lēzhvō`ə), city (1983 est. pop. 203,000), W central Angola. - an estimated investment of over 5 million dollars. The Bank's new headquarter 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, 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. BES Venetie (France) posted a strong growth in mortgages -yet with low risk - among residents of Paris region. In addition, structured credit products have gained a new dimension in 2005: the Bank received several mandates for preparation of 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 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 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 market. In Southeast Asia, Banco Espirito Santo Group has lately reinforced its presence through the ever stronger intervention of Banco Espirito Santo do Oriente (BESOR Besor (bē`sôr), in the Bible, stream, S ancient Palestine.) at local and regional level. The high growth rates 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 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 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, 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 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, 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 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 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 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 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 (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 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 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 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 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 - Caixa Geral de Depósitos (Portuguese bank) CGD - Canonical Gradient Descent CGD - Center for Global Development CGD - Chronic Granulomatous Disease CGD - Climate and Global Dynamics (US National Center for Atmospheric Research) CGD - Coast Guard District CGD - Combined Graphic Display CGD - Comptroller General Decision CGD - Course Graduation Date 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 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 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
----------------------------------------------- ---------- ----------
|
|
||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion