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Banco Espirito Santo 1Q2005 Consolidated Results -Unaudited-.

LISBON -- Banco Espirito Santo (BES; Bloomberg BESNN PL; Reuters BESN.IN) today announced its 1Q2005 results.

HIGHLIGHTS

--BES Group posted considerable first quarter growth in the main business areas: total customer funds were up by 8.9% and total customer loans by 10.5%.

--Banking income rose by 18.2%. Net income for the quarter, driven by high trading results, reached euro 80.3 mn, corresponding to ROE of 14.9%.

--Operating costs dropped by 6.1% due to lower pension costs related to retirements and to a considerable reduction (-17.5%) in depreciation and amortisation.

--Provisions for credit, in line with the previous policy, were strongly reinforced by euro 66.1 mn (+13.3%). In addition to this amount, BES made an exceptional provision charge of euro 27 mn during this quarter, due to the very recent implementation of the IFRS impairment models.

--Stable asset quality: ratio of overdue loans over 90 days at 1.65% and respective provision coverage at 173.8% (Mar 04: 147%, Dec 04: 167%).
INDEX


1. Prior Note on the New Regulatory Framework

2. Activity and Results in the 1st Quarter of 2005

 2.1 Economic Environment
 2.2 Results
 a. Net Interest Income
 b. Fees and Commissions
 c. Income from Financial Operations and Sundry
 d. Operating Costs
 2.3 Activity Highlights
 2.4 Asset Quality, Provisioning and Solvency
 2.5 Productivity
 2.6 Profitability
 2.7 Bank of Portugal Reference Indicators
 2.8 Electronic Banking


3. Impacts of Transition to the IFRS

 3.1 Adjustments to Opening Consolidated Balance Sheet
 (1/JAN/05)
 3.2 Adjustments to Consolidated Income Statement for the
 Year Ended 31 December 2004
 3.3 Regulatory Impacts



1. Prior Note on the New Regulatory Framework

Regulation no. 1606/2002 of 19/Jul/02 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 financial information relative to financial 2005, including interim financial information, was prepared based on the application of the IFRS. However, because the adjustments of transition to the IFRS must conform to the accounting and fiscal regulations in force on the date of closing of the 2005 financial year (in this case, 31 December 2005), the quantification of the effects of transition to the IFRS reported in this document must be considered as provisional and subject to changes, which, depending on the actual regulations on that date, could be materially relevant.

On the other hand, and also deriving from the change in accounting regulations, we point out that 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, having in mind the comparability of the financial statements, and in line with the recommendations of the Committee of European Securities Regulators (CESR) and the Portuguese Securities Market Commission (CMVM), 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.

With regard to the individual accounts, and only to these in so far as the consolidated accounts were prepared in accordance to the IFRS, and as determined by the Bank of Portugal Instruction no. 23/2004, the financial statements relative to 2005 and following years are prepared and presented in accordance with the Adjusted Accounting Standards (AAS), which provide a reference framework that is relatively close to that of the IAS/IFRS, except on the following matters:

--it maintains the method of valuation and provisioning of loans granted;

--it defers the accounting adjustment arising from recognition of certain liabilities with retirement pensions and post-retirement health benefits;

--it does not permit valuation of tangible assets at fair value.

2. Activity and Results in the 1st Quarter of 2005

2.1. Economic Environment

Although under strong constraints associated to the upward trend in the price of commodities - the barrel price of Brent climbed by 33%, to USD 53,4 - and despite the fact that some indicators point to a deceleration in economic activity, the world economy maintained a relatively strong growth pace in the 1st quarter of 2005.

In the United States, the favourable performance of domestic demand and the increased capacity of companies to pass on higher production costs to final prices, led to a stepping up of inflationary pressures. The Federal Reserve thus raised the target fed funds rate by 50 basis points, to 2.75%. In the Euro Area, economic activity accelerated moderately in the first three months of 2005, with the GDP growth rate rising from 0.2% to 0.4%.

Corporate restructuring efforts translated into a continuous deceleration of unit labour costs and in turn determined the absence of any inflationary pressures of note. The European Central Bank therefore maintained the interest rate for the main refinancing operations at 2%, while the yield on 10-year public debt securities dropped from 3.68% to 3.62%.

With stock markets affected by the upward trend of oil prices and growing expectations of interest rate hikes in the Unites States, the Nasdaq fell by 8.1% while the general Dow Jones and S&P 500 indices registered negative changes in the region of 2.6%. In Europe, the main stock market indices all gained ground, with the Paris CAC 40, the Frankfurt DAX and the IBEX 35 rising by respectively 6.45%, 2.18% and 1.96%.

In Portugal, domestic demand maintained a favourable performance during the 1st quarter of 2005, backed by a slight recovery in consumer confidence, which nevertheless remained at historically low levels. Less positive signs continued to come from industrial production and the constructing industry, as well as from the external accounts. With regard to the stock market, the PSI 20 gained 2.45%.

2.2 Results

Net income for the first three months of 2005 totalled euro 80.3 mn, which compares with euro 67.2 mn in the first quarter of 2004, under the accounting regulations in force at the time (PABS), or euro 26.7 mn, under the IFRS(1). We remind that the 2004 results, as restated on an IFRS basis, were negatively influenced by disability retirement costs that occurred in the first quarter of 2004 (euro 20 mn).

The chart below shows the income statement for the first quarter of the year together with the 2004 comparative data
Income Statement

 Euro million
----------------------------------------------------------------------
 March
 -----------------------
 2004 2004 2005 % Chg
 PABS IFRS IFRS IFRS
----------------------------------------------------------------------
----------------------------------------------------------------------
 Net Interest Income 178.4 179.1 178.8 -0.2
(+)Fees and Commissions 130.6 130.6 130.0 -0.5
(=)Commercial Banking Income 309.0 309.7 308.8 -0.3
(+)Trading and Other Results 26.5 15.1 75.1 -
(=)Banking Income 335.5 324.8 383.9 18.2
(-)Operating Costs 180.6 212.4 199.5 -6.1
(=)Gross Results 154.9 112.4 184.4 64.1
(-)Net Provisions 64.6 64.6 88.2 36.5
 Credit 58.3 58.3 66.1 13.3
 Securities -1.1 -1.1 1.8 -
 Other 7.4 7.4 20.3 -
(=)Income before Taxes and Minorities 90.3 47.8 96.2 101.2
(-)Taxes 13.1 14.2 14.9 4.9
(=)Income after Taxes 77.2 33.6 81.3 -
(-)Minority Interests 10.0 6.9 1.0 -85.5
(=)Net Income 67.2 26.7 80.3 -
----------------------------------------------------------------------

(1) IAS 32 and 39 were not applied in 2004, based on IFRS 1.


a. Net Interest Income(2)

Net interest income reached euro 178.8 mn, corresponding to a year-on-year evolution of -0.2%% that is aligned to the trend of previous quarters (up to Sep/04: -4.5%; full 2004: -3.5%) and mainly explained by the following effects:

--The pressure felt on credit spreads, particularly in lower risk segments, combined with the persistence of conditions that hamper the profitability of funds due to the historically low level of Euro interest rates; and

--The positive effect of the credit portfolio evolution, which grew by 7.7% in the 1st quarter of 2005 versus the same period last year.

Another factor adds on to the two referred, arising from the coming into force of the IFRS, which introduced more restrictive criteria in the definition of hedging policies. This obliged, as from 1 January 2005, to reclassify part of the derivatives transactions from the hedging to the trading portfolio, implying that the corresponding results recognized as results from financial operations instead of net interest income but.

b. Fees and Commissions(3)

Fees and Commissions show the usual volatility of the start of a new year, totalling euro 130.0 mn, which corresponds to a year-on-year increase of 6.7%, on a comparable basis, adjusted for the effect of the investment banking fees, and also for the upfront fees related to credit operations (accrued instead of being recognised at the transaction date).
Euro million
----------------------------------------------------------------------
 1st Quarter % Chg
 ------------------------
 2004 2005
----------------------------------------------------------------------
----------------------------------------------------------------------
Fees and Commissions based on
 applicable rules 130.6 130.0 -0.5
Investment Banking Effect (17.7) (13.2) -
 ------------------------------
 112.9 116.8 3.5
 ------------------------------
Deferred Commissions effect (3.4) - -
======================================================================
Comparable Commissions and Fees 109.5 116.8 6.7
----------------------------------------------------------------------


(2) Difference between "Interest and similar income" and "Interest and
 similar costs" in the income statement
(3) Includes: "Commissions and other similar income" + part of "Other
 net income from banking activity" - "Commissions and other similar
 expenses".


3.3 Capital Markets and Other Results(4)

The adoption of the IFRS brought major changes to the analysis of trading results, which arise from the following:

--Under the new classification and contrary to the previous method, securities portfolios must be subject to the principle of revaluation at fair value (marked to market or fair valued), whether or not they are held to maturity, with potential impacts on the income statement or equity.

--The introduction of more restrictive criteria in the definition of hedging policies, specifically when derivatives are used, which increases their volatility.

In the 1st quarter of 2005 the financial markets were characterised by increased volatility, at the level of both equities and interest rates.

Long-term rates witnessed an upward trend, which was slighter in the Euro and steeper in the USD (unlike what happened in the 1st quarter of 2004, when both markets had experienced sharp drops).

On the equity markets' front, the 1st quarter performance was mainly driven by the very positive behaviour of the emerging markets, in particular Brazil, having been sluggish in Europe, including Portugal, and negative in the North-American market.

BES Group's capital market results reached euro 79.6 mn in the 1st quarter of 2005. These results were positively influenced by gains in long-term interest rate and FX, amounting to euro 71.3 mn, and also from profits in equity positions, notably in the Brazilian market, which globally totalled euro 8.3 mn.

d. Operating Costs

The good progress made by operating costs (a reduction of 6.1%) was underpinned by a policy of streamlining investment, with impacts on depreciation and amortisation (-17.5%), and staff cost reduction of 15.4%. The drop in staff costs stemmed from the evolution of pension costs, which in the 1st quarter of 2004 had been influenced by retirement costs of euro 20 mn.
Operating Costs

 Euro million
----------------------------------------------------------------------
 1st Quarter % Chg
 ------------------------------------
 2004 2004 2005
 PABS IFRS IFRS IFRS
----------------------------------------------------------------------

----------------------------------------------------------------------
Staff Costs 80.4 117.8 99.6 -15.4
 Salaries 73.9 85.2 86.6 1.6
 Pensions 6.5 32.6 13.0 -60.1
Other Admin Expenses 67.1 69.4 79.1 14.0
Depreciation and
 Amortisation 33.1 25.2 20.8 -17.5
----------------------------------------------------------------------
Operating Costs 180.6 212.4 199.5 -6.1
----------------------------------------------------------------------


A note to the fact that the 2005 staff costs already include the accrual of employee bonuses, which will naturally be subject to adjustments during the year.

Other administrative costs, up by 14%, continue to be affected by expenses related to the adaptation of systems for compliance with Basel II and for the introduction of the IFRS, totalling euro 6 mn. Excluding this effect, administrative costs would have risen by 5.3%.

2.3 Activity Highlights

BES Group's activity during the first quarter of the year continued to focus on the following key commercial factors:

--Differentiation through quality;

--Commitment to the higher value Clients and products;

--Specific value proposition for the clients of Tranquilidade.

The measures taken translated into business growth, with total customer funds rising by 8.9% and customer loans increasing by 10.5%, including securitised credit.
Main Business Variables

 Euro million
----------------------------------------------------------------------
 March % Chg
 ---------------------------
 2004 2004 2005
 PABS IFRS IFRS IFRS
----------------------------------------------------------------------
----------------------------------------------------------------------
 Total Assets(1) 59,234 56,428 64,830 14.9
----------------------------------------------------------------------
 Net Assets 42,455 40,040 45,344 13.2
 Gross Loans (including
 securitised) 28,639 28,767 31,780 10.5
 Mortgage 10,477 10,477 11,455 9.3
 Other Loans to Individuals 1,488 1,488 1,651 10.9
 Corporate 16,674 16,802 18,674 11.1
 Loans to Individuals / Gross
 Loans (%) (2) 37.7 37.5 35.5 -2.0 p.p.
 Customer Funds
(+) Deposits 18,528 18,580 18,738 0.9
(+) Debt Securities placed with
 Customers 7,085 5,267 6,164 17.0
(=) On-Balance Sheet Customer
 Funds 25,613 23,847 24,902 4.4
(+) Off- Balance Sheet Customer
 Funds 12,480 12,480 14,651 17.4
(=) Total Customer Funds 38,093 36,327 39,553 8.9
----------------------------------------------------------------------
 Transformation Ratio (%) (2) 100 110 113 3 p.p.
----------------------------------------------------------------------


(1) Net Assets + Asset Management + Other Off-Balance Sheet Funds +
 Securitised Credit
(2) Considering On- Balance Sheet Credit


With regard to customer funds, the Group was particularly active in the placement of debt securities (certificates of deposit and bonds) and in the distribution of off-balance sheet products (mutual funds and bancassurance), which increased by 17.4%.

On the lending side, the Group was also quite dynamic, with mortgage loans rising by 9.3%, corporate loans by 11.1% and other loans to individuals by 10.9%. Included in other loans to individuals, Plano BES 95 achieved a stock of euro 134 mn at the end of the quarter, which almost entirely explains the increase achieved.
Loans to Customers
 Euro million
----------------------------------------------------------------------
 Mar,04 IFRS Mar,05 IFRS
 ---------------------------------------------------
 Excluding Including Excluding Including
 securitised securitised securitised securitised
 credit credit credit credit
----------------------------------------------------------------------

----------------------------------------------------------------------
Gross Loans 26,867 28,767 28,936 31,780
 Mortgage 8,615 10,477 8,611 11,455
 Other Loans to
 Individuals 1,450 1,488 1,651 1,651
 Corporate 16,802 16,802 18,674 18,674
----------------------------------------------------------------------

 Euro million
---------------------------------------------
 Chg IFRS (%)
 --------------------------
 Excluding Including
 securitised securitised
 credit credit
---------------------------------------------

---------------------------------------------
Gross Loans 7.7 10.5
 Mortgage 0.0 9.3
 Other Loans to
 Individuals 13.8 10.9
 Corporate 11.2 11.1
---------------------------------------------



During the 1st quarter of 2005 BES Investimento (BESI) continued to perform well:

--In M&A (i) financial advisory to the shareholders on the sale of 100% of the share capital of pharmaceutical Jaba, and (ii) financial advisor to Nutasa Group in the sale of the animal feed business to Saprogal (Carlyle Group).

--In project finance, among others (i) co-leader in the euro 150 mn financing of phase 3 of the M5 motorway (Hungary); (ii) the financing of the Chicago SkyWay motorway; and financial advisor in the structuring of the Trakia (Bulgaria) motorway concession, in the amount of euro 750 mn.

--In equity capital markets, co-leader in the private placement of Mota-Engil shares, in the amount of euro 110.25 mn.

--In debt capital markets, leader in the issues of Eurobonds by Portugal Telecom (euro 1,500 mn) and REFER (euro 600 mn), and also by Brazilian issuers, namely Banco Mercantil do Brasil (USD 30 mn), BGN (USD 50 mn) and Bradesco (euro 100 mn);

--In brokerage, the main highlight goes to the increase in business with institutional clients, and to a rise of 83% in assets under management in the Portfolio management business.

In the 1st quarter of 2005 ESAF's assets under management totalled euro 14.7 bn, which corresponds to a market share of 16.9%. Also noteworthy was the growth achieved in Mutual Funds - 10.4% - significantly outperforming the market. In Asset Management ESAF also performed very well, reaching a market share of 23%, and in Real Estate Funds it maintained the leadership of the Portuguese market, with a market share of 19.5%. In this quarter ESAF was distinguished by S&P with the prize for "Best Fund Management Company in Portugal" in 2004.

During this quarter Banco Espirito Santo (Spain) - BESSA concluded the acquisition of Banco Inversion and initiated the process of integrating its commercial network and asset managers. This operation boosted the amount of assets under management in Spain to euro 1,750 mn.

With regard to the higher value clients, the progress made in the 360(degree) and Small Businesses segments deserves a note.

The results achieved in the 360(degree) segment, which completed its first year in February, clearly prove that it was a correct decision to launch this new approach. During this first year financial involvement grew by 12% and new clients totalled 12,000.

The segment of Small Businesses also had a good performance, with loyal clients rising by 5% year-on-year and financial involvement growing by 13%.

In 2005 Banco Espirito Santo and Companhia de Seguros Tranquilidade initiated a new phase of the Assurfinance Programme, aiming to develop a new approach to the customers of Tranquilidade which are not BES clients. A specific value proposition was designed for the purpose, including a star product (T Card), which automatically gives the cardholders special advantages.

(4)Includes: "Gains and losses in financial assets held for trading" + "Gains and losses in financial assets available for sale" + "Gains and losses in foreign exchange revaluation" + part of "Other net income from banking activity" + "Equity in earnings of associated companies" + "Gains and losses in the sale of other assets".

2.4 Asset Quality, Provisioning and Solvency

The introduction of the IFRS led to significant changes in the provisioning rules:

--in loans granted, the methodology now applied is that set out in the IFRS to determine impairment, which differs from the former one by extending the method for discounting cash flows to all segments of credit;

--in the portfolio of securities available for sale, unrealised capital losses in securities are no longer fully provisioned, but only when there is evidence of impairment;

--with regard to the remaining assets and contingencies, there are no significant changes versus the former policy adopted by the Group.

Notwithstanding the change in the regulatory framework of provisions, at the transition to the IFRS, BES Group made an adjustment of euro 20 mn in provisions for credit, mainly through application of the discount technique to some categories of credit for which provisions were not being calculated under this method.

With regard to the provision charge in the quarter and bearing in mind that impairment is now calculated using a new methodology, which requires the collection of sufficiently far-reaching and tested statistical data, it was considered prudent to make an exceptional reinforcement of provisions of euro 27 mn above the needs identified so far, and which may be subject to revision during the year.

Besides this exceptional provision charge, provisions for credit were also increased (+13.3%), with a positive impact on the coverage ratios of overdue loans.
Asset Quality
----------------------------------------------------------------------
 Mar 04 Mar 04 Mar 05 Change IFRS
 PABS IFRS IFRS --------------------
 absolute relative(%)
----------------------------------------------------------------------
----------------------------------------------------------------------
Gross Loans (eur mn) 26,348 26,867 28,936 2,069 7.7
Overdue Loans (eur mn) 580.9 586.0 556.5 -29.5 -5.0
Overdue Loans
 greater than 90
 days (eur mn) 511.4 511.4 478.4 -33.0 -6.5
Overdue and
 Doubtful Loans
 (BoP) (a) (eur mn) 565.5 565.5 628.0 62.5 11.1
Provisions for (eur mn)
 Credit 751.6 751.7 831.4 79.8 10.6

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

Overdue Loans /
 Gross Loans % 2.20 2.18 1.92 -0.26 p.p.
Overdue Loans
 greater than 90
 Days / Gross
 Loans % 1.94 1.90 1.65 -0.25 p.p.
Overdue and
 Doubtful Loans
 / Gross Loans % 2.15 2.10 2.17 0.07 p.p.

Coverage of
 Overdue Loans % 129.4 128.3 149.4 21.1 p.p.
Coverage of
 Overdue Loans
 greater than 90
 Days % 147.0 147.0 173.8 26.8 p.p.
Coverage of
 Overdue and
 Doubtful Loans % 132.9 132.9 132.4 -0.5 p.p.
----------------------------------------------------------------------
(a) According to BoP Circular-Letter no. 99/03/2003


Overdue loans declined by euro 29.5 mn year-on-year, which compares with an increase of euro 79.8 mn in provisions for credit. As a result, the ratio of overdue loans over 90 days dropped to 1.65% (Mar 04: 1.90%) while its coverage by provisions increased to 173.8% (Mar 04: 147.0%).

The solvency ratio remained at the same level reached at the end of 2005 (Bank of Portugal).
Solvency

 Euro million
----------------------------------------------------------------------
 Dec 04 Mar 05 (a)
----------------------------------------------------------------------
----------------------------------------------------------------------
Risk Weighted Assets 34,754 33,777
Regulatory Capital
 Tier I 2,343 2,302
 Tier II 1,912 1,903
 Deductions ( 65) ( 35)
 ------------------------
 4,190 4,170
Preference Shares 600 600
----------------------------------------------------------------------
Tier I (%) 6.74 6.82
Core Tier I (%) 5.02 5.04
Total (%) 12.06 12.35
----------------------------------------------------------------------
(a) Estimate


As referred in a specific point of this report on the regulatory impacts of IFRS adjustments, the impact on Tier I capital will be deferred, of which euro 139 mn will impact 2005 ratio.

The medium and long-term debt ratings assigned by Moody's (A1), FitchRatings (A+) and Standard and Poor's (A-) reflect the strong competitive positioning of the Group in Portugal, its adequate risk and asset quality levels and a comfortable solvency level.

2.5 Productivity

In terms of productivity and efficiency, BES Group continued to progress in line with the previous trend, registering sustained gains both in Cost to Income and in productivity indicators, particularly in the "Total Assets per Employee" ratio, which rose by 16.0%.
Productivity

 Mar 04 Mar 04 Mar 05 Chg
 PABS IFRS IFRS IFRS
----------------------------------------------------------------------
----------------------------------------------------------------------
Cost to Income (incl. Capital
 Markets) 53.8% 65.4% 52.0% -13.4 p.p.
Cost to Income (excl. Capital
 Markets) 58.4% 68.6% 64.6% -4.0 p.p.

Operating Costs / Average Net Assets 1.70% 2.13% 1.84% -0.29 p.p.
Total Assets (*) per Employee (eur
 '000) 8,118 7,733 8,971 16.0%
----------------------------------------------------------------------

(*) Net Assets + Asset Management + Other Off-Balance Sheet Funds +
 Securitised Credit


2.6 Profitability

Based on the quarter's annualised results, Return on equity (ROE) was 14.9% and Return on Assets (ROA) 0.74%.
Profitability
 (%)
 -------------------------------------
 Mar 05
 -------------------------------------
 -------------------------------------
 Return on Equity (ROE) 14.9
 Return on Assets (ROA) 0.74
 -------------------------------------


2.7 Bank of Portugal Reference Indicators

According to Bank of Portugal Instruction no. 16/2004, credit institutions should disclose reference indicators (calculated in accordance with the methodology set forth in the above mentioned regulation), when releasing information concerning Solvency, Credit Quality, Profitability and Efficiency.

The table below lists these indicators for both March 2005 and 2004.
Bank of Portugal Indicators
 (%)
----------------------------------------------------------------------
 Mar 04 Mar 04 Mar 05
 PABS IFRS IFRS
----------------------------------------------------------------------
SOLVENCY
----------------------------------------------------------------------
Regulatory Capital / Risk Weighted Assets 11.41 11.41 12.35
Tier I Capital / Risk Weighted Assets 6.95 6.95 6.82
ASSET QUALITY
----------------------------------------------------------------------
Overdue & Doubtful Loans (a)/ Gross Loans 2.15 2.10 2.17
Overdue & Doubtful Loans Net of Provisions (b) /
 Net Loans (b) 0.56 0.55 -0.72
PROFITABILITY
----------------------------------------------------------------------
Income before Taxes and Minorities / Average
 Equity ( c) 13.86 7.50 14.90
Banking Income (d) / Average Net Assets 3.15 3.25 3.54
Income before Taxes and Minorities / Average Net
 Assets 0.85 0.48 0.89
EFFICIENCY
----------------------------------------------------------------------
General Admin Costs (d)+ Depreciation / Banking
 Income (d) 54.0 65.4 52.0
Staff Costs / Banking Income (d) 24.0 36.3 25.9
----------------------------------------------------------------------

(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



2.8 Electronic Banking

The first quarter of 2005 consolidated a trend for an increasing penetration of BES Group's direct channels.

The number of users of Internet Banking for individual customers - BESnet - reached 718,000 in March, corresponding to a year-on-year increase of 6%. The number of logins and transactions continued to grow at a sustained pace, rising year-on-year by respectively 14% and 13%.

Visitors to the site averaged 2.3 million per month between January and March, corresponding to an increase of 17% compared to the first quarter of 2004.

The number of companies using the Internet banking service for corporate customers - BESnet Negocios - surpassed 38,000, a year-on-year increase of 13%. Logins were up by 27% and transactions by 51%, proving the importance of this channel as a transactional support to the companies' activity.

Pmelink.pt, an online business centre for companies promoted under a joint venture between BES, CGD and PT, already has more than 16,500 companies as customers, a year-on-year increase of 25%. Through this expansion in the customer base, the number of purchases made through this channel rose by 14% versus the 1st quarter of 2004.

Banco BEST, a joint initiative of BES and PT, continued to capitalise of a differentiated value proposition addressed to the affluent segment, having already reached 37 thousand clients. Assets under management totalled euro 422 mn, corresponding to an increase of 10% versus December 2004.

3. Impacts of Transition to the IFRS

3.1 Adjustments to the Opening Consolidated Balance Sheet (1 Jan 05)

The changes introduced in the accounting policies led to the following adjustments to the assets, liabilities and shareholders' equity in BES Group's consolidated balance sheet as of 31 December 2004:
Euro million
----------------------------------------------------------------------
 Balance
 Balance Sheet as at Securities Pensions Consolidation SIBA
 Dec 31, of SPE and
 2004 Bonuses
 PABS
----------------------------------------------------------------------
----------------------------------------------------------------------
Assets
 Loans to
 Customers 27,652 282
 Financial Assets
 with Fair Value
 in Results 2,426 -2,011
 Financial Assets
 Available
 for Sale 5,627 60
 Deferred Taxes - 21 62
 Intangible Assets 133
 Other Assets 10,063 -66 -93 -100
 ----------------------------------------------------
 45,901 15 -31 -1,729 -100
 ----------------------------------------------------
Liabilities
 Customer Deposits 20,371
 Debt Securities 12,702 -1,607
 Financial
 Liabilities with
 Fair Value
 in Results 647
 Provisions 561
 Deferred Taxes - 13 58
 Other Liabilities 8,721 132 42
 ----------------------------------------------------
 43,002 13 190 -1,607 42
 ----------------------------------------------------
Shareholders'
 Equity 2,254 -24 -221 -111 -142
Minority Interests 645 26 -11
----------------------------------------------------------------------
Liabilities +
 Equity +
 Minorities 45,901 15 -31 -1,729 -100
----------------------------------------------------------------------



 Euro million
----------------------------------------------------------------------
 Balance Sheet Preference FGBR Intangible Other adjust. Balance
 Shares Assets and as at
 Reclassific.(*) Jan 1,
 2005
 IFRS
----------------------------------------------------------------------
----------------------------------------------------------------------
Assets
 Loans to
 Customers -253 27,681
 Financial Assets
 with Fair Value
 in Results 2,237 2,652
 Financial Assets
 Available
 for Sale -2,489 3,198
 Deferred Taxes 12 161 256
 Intangible Assets -48 -1 84
 Other Assets -675 9,129
 ----------------------------------------------------
 -36 -1,020 43,000
 ----------------------------------------------------
Liabilities
 Customer Deposits 48 20,419
 Debt Securities -876 10,219
 Financial
 Liabilities with
 Fair Value
 in Results 204 851
 Provisions -140 -337 84
 Deferred Taxes 85 156
 Other Liabilities -17 -154 8,724
 ----------------------------------------------------
 -17 -140 0 -1,030 40,453
 ----------------------------------------------------
Shareholders'
 Equity 617 140 -36 -9 2,468
Minority Interests -600 19 79
----------------------------------------------------------------------
Liabilities +
 Equity +
 Minorities 0 0 -36 -1,020 43,000
----------------------------------------------------------------------

(*) Includes reclassifications inherent to the opening balance


As the chart above shows, these adjustments had a positive impact on shareholders' equity, which rose from euro 2,254 mn to euro 2,468 mn. This increase - euro 214 mn - can be split between two main components: the first concerns the eligibility for capital of preferred shares amounting to euro 600 mn; the second, totalling euro 386 mn, reflects negative impacts of the transition adjustments in the remaining items of the consolidated balance sheet.

The adjustments made are briefly presented below:

a) Securities portfolio

Relates to two main accounting changes: potential capital gains in equity holdings (not recognised under previous local rules - PABS) and the effect of potential capital losses in financial investments that are not consolidated, including FX effects, previously in accordance with Bank of Portugal Notice no 4/2002. The prior investments were reclassified as available for sale, marked to market/fair value and subject to impairment tests.

b) Retirement pensions and other employee benefits

BES Group has recalculated its pension liabilities and other benefits. Therefore, liabilities associated with health benefits, unrecognised past service costs and recalculation of the corridor and actuarial deviations in the balance sheet have been adjusted.

c) Consolidation of SPEs

All Special Purpose Entities (SPE) with which BES Group establishes relations must be analysed in light of the consolidation rules applying to such entities (and expressed in SIC 12), namely those which may have been set up within the scope of securitisation transactions.

d) Stock-based incentive system (SIBA)

Loans to employees resulting from the sale of shares under the SIBA programme, were accounted for as assets. In accordance to IFRS, the shares under the SIBA programme should be reclassified as a reduction to equity. On the other hand, employee bonuses are now considered as staff costs.

e) Fund for General Banking Risks (FRBG)

The balance of the Fund for General Banking Risks not allocated to any purpose was transferred to reserves, since under IFRS perspective, it can only be set up through appropriation of reserves.

f) Preferred shares

Preference shares and respective dividends were accounted for as minority interests. Under IFRS, the preference shares issued by BES Group are eligible to equity, and the dividends paid are charged to reserves.

g) Deferred taxes

Under the previous criteria, deferred tax assets were not recognised. The IAS 12 permits the recognition of deferred tax assets, providing it is probable that taxable profits will be available to absorb deductible temporary differences (including tax losses).

The above-mentioned adjustments had been disclosed in the 2003 and 2004 annual reports.

3.2 Adjustments to Consolidated Income Statement for the Year Ended 31 December 2004

The impacts of IFRS in the 2004 income statement do not include the effects of IAS 32 and 39, as permitted by IFRS 1. Therefore, some of the most relevant P&L lines are not comparable, namely net interest income, gains and losses in financial assets held for trading and available for sale, assets impairment, among other.

The following table highlights the main adjustments to the consolidated income statement as of December 31, 2004, which, for the above-mentioned reasons, are not fully comparable to 2005:
Euro million
----------------------------------------------------------------------
 2004 Bonuses Pensions FGBR Intangibles
 (PABS)

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

----------------------------------------------------------------------
Interest income 2,218.0
Interest expense 1,516.8
Dividends on securities 17.3

Net Interest Income 718.4

Credit impairment 227.0

Net Interest Income
 after impairment 491.5

Commissions and other
 similar income 450.2
Commissions and other
 similar expenses 52.1
Gains and losses in
 financial assets held
 for trading (8.3)
Gains and losses in
 financial assets
 available for sale 161.5
Gains and losses in FX 9.9
Other net income from
 banking activity 181.2 59.6

Banking Income (net of
 impairment) 1,233.9 59.6

Staff costs 330.1 42.0 110.0
Other admin expenses 289.4 9.8
Depreciation and
 amortisation 130.6 (29.5)

Total operating income 483.7 (42.0) (50.4) 19.7

Securities impairment 7.5
Provisions and other
 impairments net of
 reversals 123.3 (35.5)
Equity accounted
 earnings in associated
 companies 4.6
Gains and losses in the
 sale of other assets -

Income before taxes 357.5 (42.0) (50.4) 35.5 19.7

Current taxes 42.3
Deferred taxes - 4.6 5.4

Income after taxes 315.2 (42.0) (55.0) 35.5 14.3

Minority interests 40.0 (0.4) (1.1)

Net Income 275.2 (41.6) (53.9) 35.5 14.3
----------------------------------------------------------------------



 Euro million
-------------------------------------------------------
 SPE Other 2004
 (IFRS)
------------------------------------------------------
------------------------------------------------------
Interest income 2,218.0
Interest expense ( 3.4) 1,513.4
Dividends on securities 17.3

Net Interest Income 3.4 721.8

Credit impairment 227.0

Net Interest Income
 after impairment 3.4 494.9

Commissions and other
 similar income 450.2
Commissions and other
 similar expenses 52.1
Gains and losses in
 financial assets held
 for trading (8.3)
Gains and losses in
 financial assets
 available for sale 161.5
Gains and losses in FX 9.9
Other net income from
 banking activity ( 97.1) ( 3.4) 140.3

Banking Income (net of
 impairment) ( 97.1) 1,196.4

Staff costs 3.0 485.1
Other admin expenses 299.2
Depreciation and
 amortisation 101.1

Total operating income ( 97.1) ( 3.0) 311.0

Securities impairment 7.5
Provisions and other
 impairments net of
 reversals 87.8
Equity accounted
 earnings in associated
 companies 4.6
Gains and losses in the
 sale of other assets - -

Income before taxes ( 97.1) ( 3.0) 220.2

Current taxes 42.3
Deferred taxes ( 6.1) 3.9

Income after taxes ( 97.1) 3.1 174.0

Minority interests ( 10.9) 27.6

Net Income ( 86.2) 3.1 146.4
------------------------------------------------------


The main adjustments made were:

a) Employee bonuses: see comment 3.1 d);

b) Pensions: correspond to the amortisation of the actuarial deviations in the balance sheet, in light of IFRS and to the costs with curtailments associated to disability retirements. In 2004, pension costs under IFRS would total euro 136 mn, of which euro 56 mn would be recurrent.

c) Fund for general banking risks: corresponds to the reversal of the year contribution.

d) Fixed assets: reversal of the amortisation and charge of 2004 costs that are not compliant with IAS 38.

e) Special Purpose Entities (SPE): changes in SPE consolidated under SIC 12.

3.3 Regulatory Impacts

In accordance to Bank of Portugal Notice no 2/2005 and 4/2005, IFRS regulatory impacts will be deferred by the following transition periods:

a) 7 years, i.e. until December 31, 2011, for health liabilities;

b) 5 years, i.e. until December 31, 2009, for unrecognised past service costs and remaining impacts of IAS 19;

c) 3 years, i.e. until December 31, 2007 for the remaining regulatory impacts.

The regulatory deferral should be made equally throughout the transition periods, as shown in the following table:
Euro million
----------------------------------------------------------------------
 IFRS Adjustements
 TIER -------------------------- Transition
 Total Coeff. Regulatory Period 2005
 Impact (Years)
----------------------------------------------------------------------

----------------------------------------------------------------------
Securities
 Gains T2 101 0.45 45 3 15
 Losses T1 -145 1.0 -145 3 -48
Pensions -- SAMS T1 -94 1.0 -94 7 -13
Pensions -- Other T1 -81 1.0 -81 5 -16
Consolidation of SPE T1 -110 1.0 -110 3 -37
Deferred taxes T1 138 1.0 (a) 138 3 46
SIBA T1 -100 1.0 -100 3 -33
Impairment T1 -20 1.0 -20 0 -20
Other T1 -54 1.0 -54 3 -18
======================================================================
Total
 Tier I -466 -466 -139
 Tier II 101 45 15
----------------------------------------------------------------------

(a) Limited to 10% of Tier I

 Tier I impact in 2005 totals euro 139 mn.



 THE BOARD OF DIRECTORS




 BANCO ESPIRITO SANTO, S.A.
 Consolidated Balance Sheet
 As at March 31, 2005

 Mar, 04 Mar, 04 Mar, 05
 PABS IFRS IFRS
 (eur '000) (eur '000) (eur '000)
----------------------------------------------------------------------

----------------------------------------------------------------------
 NET ASSETS
Cash and deposits at Central Banks 649,715 650,573 615,312
Loans and advances to credit
 institutions repayable on demand 429,160 429,160 390,421
Other loans and advances to credit
 institutions 5,940,702 5,972,999 6,004,392
Loans and advances to customers 25,928,831 26,115,420 28,105,032
(Provisions) 751,623 751,623 831,400
Financial Assets held for trading 1,360,540 1,360,540 4,611,320
Financial Assets available for
 sale 4,901,167 3,560,804 3,110,119
Financial Assets with repurchase
 agreements - - -
Fair value of Hedging derivatives - - 59,398
Financial Assets held to maturity 490,650 490,650 506,059
Investments in associated
 companies 53,741 53,741 50,655
Non current assets held for sale 77,082 77,082 119,325
Property and equipment 339,948 339,948 391,421
Intagible assets 158,391 97,682 67,749
Current tax assets 5,582 5,582 17,078
Deferred tax assets - - 265,681
Other assets 2,119,553 885,935 1,029,695

 TOTAL NET ASSETS 42,455,062 40,040,116 45,343,657
----------------------------------------------------------------------

----------------------------------------------------------------------
 LIABILITIES AND SHAREHOLDERS' EQUTY
Amounts owed to central banks 72,522 72,522 359,161
Amounts owed others credit
 institutions 5,896,674 5,915,835 6,171,074
Amounts owned to customers 18,528,139 18,580,362 18,737,583
Debt securities 11,886,884 10,069,423 12,463,843
Financial liabilities held for
 trading 644,853 644,853 1,355,295
Fair value of hedging derivatives - - 60,213
Non current liabilities held for
 sale - - -
Provisions 522,465 85,208 123,862
Subordinated debt 1,633,873 1,690,616 2,055,921
Current tax liabilities 30,889 30,889 26,217
Deferred tax liabilities - - 165,527
Other liabilities 301,857 262,903 1,154,265
Minority interests 773,144 791,064 91,455
Shareholders' equity 2,163,762 1,896,442 2,579,241
 Share capital 1,500,000 1,500,000 1,500,000
 Treasury stock - -100,174 -97,266
 Share premium 300,000 300,000 300,000
 Preference shares - - 600,000
 Other capital instruments - - -
 Revaluation reserves - - 109,027
 Other reserves and retained
 earnings 363,762 196,616 167,480

 TOTAL LIABILITIES AND
 SHAREHOLDERS' EQUTY 42,455,062 40,040,116 45,343,657
----------------------------------------------------------------------




 BANCO ESPIRITO SANTO, S.A.
 Consolidated Income Statement
 As at March 31, 2005

 Mar, 04 Mar, 04 Mar, 05
 PABS IFRS IFRS
 (eur '000) (eur '000) (eur '000)
----------------------------------------------------------------------
----------------------------------------------------------------------

Interest Income 478,913 478,913 465,451
Interest expense 300,565 299,802 286,627
Dividends on securities 1,004 1,004 1,832
 ---------- ---------- ----------

Net interest income 179,352 180,115 180,656

Commissions and other similar income 100,386 100,386 109,888
Commissions and other similar
 expenses 9,550 9,550 18,044
Gains and losses in financial assets
 held for trading 15,312 15,312 16,018
Gains and losses in financial assets
 available for sale 22,580 -1,386 64,119
Gains and losses in foreign exchange
 revaluation 3,775 3,775 4,724
Other net income from banking
 activity 22,373 34,996 24,409
 ---------- ---------- ----------

Banking Income (net of impairment) 334,228 323,648 381,770

Staff expenses 80,413 117,811 99,631
Other administrative expenses 67,058 69,374 79,061
Depreciation 33,118 25,224 20,825
 ---------- ---------- ----------

Total operating income 153,639 111,239 182,253

Loans impairment 58,318 58,318 66,102
Securities impairment -1,072 -1,072 1,778
Provisions and other impairments net
 of reversals 7,392 7,392 20,356
Equity in earnings of associated
 companies 1,208 1,208 1,648
Gains and losses in the sale of other
 assets - - 507

Income before taxes 90,209 47,809 96,172

Current taxes 13,073 13,073 15,513
Deferred taxes - 1,147 -602
 ---------- ---------- ----------

Income after taxes 77,136 33,589 81,261

Minority interests 9,955 6,854 995

----------------------------------------------------------------------
Net income for the year 67,181 26,736 80,266
----------------------------------------------------------------------



This news release may include certain statements relating to the Banco Espirito Santo Group that are neither reported financial results nor other historical information. These statements may include targets, forecasts, projections, descriptions of anticipated cost savings, statements regarding the possible development or possible assumed future results of operations and any statement preceded by, followed by or including words like "believes", "expects", "aims", "intends", "may" or similar expressions.

By their nature, forward-looking statements are inherently predictive, speculative and involve risk and uncertainty. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by forward-looking statements. These factors include, but are not limited to, changes in economic conditions in individual countries in which the BES Group conducts its business and internationally, fiscal or other policies adopted by various governments and regulatory authorities of Portugal and other jurisdictions, levels of competition from other banks and financial services companies as well as future exchange and interest rates.

Banco Espirito Santo does not undertake to release publicly any revision to the forward-looking information included in this news release to reflect events, circumstances or unanticipated events occurring after the date hereof.
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