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Banco Espirito Santo 3Q06 Consolidated Results (Unaudited).

LISBON, Portugal, Oct. 24 /PRNewswire-FirstCall/ -- Banco Espirito Santo (BES; Bloomberg BESNN PL; Reuters BES.LS) announced today its 3Q06 results.

 - Net income for the first nine months of 2006 increased 46.5% year-on-
 year to EUR 304.7 million, corresponding to a return on equity (ROE) of

 - Strong commercial performance: customer loans, including
 securitisations, were up 13.5% with total customer funds rising 9.6%.

 - Banking income increased 12.9%, fuelled by the international banking
 business that grew 26%; fees and commissions are 42% up in the
 international activity; total Group net interest income rose 14.9%.

 - Operating costs increased, on a comparable basis, 1.7%, leading to
 further efficiency gains: the cost to income decreased to 53.3% (56.0%
 in 2005).

 - Strict credit risk management had a positive impact on cost of risk:
 provision charge in the first nine months reached EUR 130.4 million,
 representing 0.51% of total credit (9M05: 0.79%).

 - Improved asset quality ratios: the overdue loans ratio (>90 days)
 reduced to 1.21% (1.45% in Sept. 05), while the respective provisions
 coverage rose to 207.9% (189.9% in Sept. 05).

 - Significant reinforcement of solvency levels, with the Core Tier I ratio
 increasing to 7.0% (Dec 05: 4.7%) and the Tier I ratio to 8.4% (Dec. 05:

 Paulo Padrao (+ 351 21 3501713)

 Investors and Analysts
 Elsa Jardim (+ 351 21 359 7390)

 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 2,500,000,000.00


 2.1. Net Interest Income
 2.2. Fees and Commissions
 2.3. Capital Markets Results and Other
 2.4. Operating Costs
 3.1. Retail Banking
 3.2. Corporate Banking
 3.3. Investment Banking
 3.4. Direct Channels and Electronic Banking
 3.5. International Activity


The global economic environment was marked, in 3Q 2006, by additional signs of slowdown in economic activity in the US, especially due to successive increases of the fed funds' target rate by the US Federal Reserve, interrupted only in August, and to the continued slowdown in the housing market. On an annualised basis, GDP grew 2.6% in 2Q. Growth for 3Q is expected to have been around 2%.

In the Euro Area, domestic demand continued in 3Q the recovery observed during the first half of the year, benefiting from the effects of strong external demand and favourable monetary conditions. The European Central Bank increased the main refinance interest rate by 25 basis points, to 3%, but long term interest rates followed the downturn trend that took place in the US: the 10 year Bunds yield fell from 4.071% to 3.709%. The Euro Area's GDP is expected to have grown 0.7% between July and September, after 0.9% growth in 2Q. The Euro slightly depreciated vs. the US dollar, with the exchange rage falling from EUR/USD 1.279 to EUR/USD 1.269.

Oil prices fell amid expectations of economic activity slowdown in the US combined with the more favourable risk conditions in the Middle East. The Brent price fell from the maximum nominal level of ca. USD 78 per barrel, in August, to USD 61 per barrel at the end of the quarter. Within this context, the mains stock markets performed well: in Europe, the Paris CAC 40, the Frankfurt DAX and the Madrid IBEX 35 went up quarter-on-quarter by 5.72%, 5.65% and 12.01%, respectively. The Japanese Nikkei index rose by 4.01%. In the US, the NASDAQ, S&P500 and the Dow Jones gained 3.97%, 5.17% and 4.74% respectively.

In Portugal, following a 0.9% year-on-year rise in GDP in 2Q, the economy continued the recovery trend throughout 3Q. This recovery was mainly driven by a stronger external demand, as well as by healthier confidence both at the corporate and consumer levels. The PSI20 index gained 8.45% in 3Q, in line with the main world stock index trends.


BES Group's consolidated net income reached EUR 304.7 million in the first nine months of 2006, a year-on-year increase of 46.5%.

 euro million
 9M05 9M06 Chg %

 Net Interest Income 534.8 614.3 14.9
 + Fees and Commissions 394.2 426.8 8.3
 = Banking Income ex-Markets 929.0 1 041.1 12.1
 + Capital Markets and Other 162.8 191.9 17.9
 = Banking Income 1 091.8 1 233.0 12.9
 - Operating Costs 608.9 657.2 7.9
 = Gross Results 482.9 575.8 19.2
 - Net Provisions 232.8 166.0 -28.7
 Credit 187.3 130.4 -30.3
 Securities 27.1 - 1.0 ...
 Other 18.4 36.6 98.9
 = Income before Taxes and Minorities 250.1 409.8 63.9
 - Income Tax 37.0 95.6 158.4
 = Income before Minorities 213.1 314.2 47.4
 - Minority Interests 5.1 9.5 85.4
 = Net Income 208.0 304.7 46.5

In addition to the positive impacts of the recovery of the Portuguese Economy and the improvement of the main confidence indices at corporate and private consumption levels, the following factors contributed to the BES Group results:
 - the strong growth in all areas of activity, especially in customer loans
 (+13.5%) and customer funds (+9.6%);

 - the good performance of banking income, which grew 12.9%, underpinned by
 the increase in net interest income (+14.9%);

 - the international banking business, with banking income rising by 26%,
 underpinned by fees and commissions that rose 42%;

 - the operating costs control through the implementation of
 rationalisation measures;

 - the reduction in the credit provisioning charge, as a result of a
 consistent loan policy focused on lower risk clients.

 2.1. Net Interest Income

Net interest income reached EUR 221.6 million in the third quarter, which corresponds to a significant quarter-on-quarter increase compared with the EUR 198.2 million in the previous quarter. On a year-to-date basis, the Net interest income reached EUR 614.3 million, a 14.9% year-on-year growth.
 The Net interest income increase is backed by:

 - the activity growth, especially in the customer loans and customer

 - the asset and liability management, adjusted to the new upward trend in
 interest rates, allowing a 9 basis points improvement in the net
 interest margin, despite strong competition in the domestic market;

 - the capital increase, which had a positive impact on net interest

However, the mortgage business is experiencing a fierce and increasing competition, which could condition net interest income growth in the future.

2.2. Fees and Commissions

The weight of Fees and commissions in banking income has been increasing, representing currently 35% of total, reaching EUR 426.8 million in 9M06, an 8.3% year-on-year increase.

Despite the general positive performance across fees and commissions lines, commissioning related to loans, project finance, securities custody services and investment funds performed particularly well.

During the third quarter the Bank continued to pursue the goals defined for its commercial strategy: investment in service quality, improving the commercial offers specifically designed for each client segment and promoting of a proactive cross-selling through the commercial network.

2.3. Capital Markets Results and Other

Capital markets and other results totalled EUR 191.9 million, a year-on- year increase of 17.9% and 53% higher than in the 1H06.

The continued positive equity capital markets results reflect adequate risk management and benefits reaped from positive performance of the main world stock indices.

As for interest rate and FX, the reduced volatility in the European and the US markets had a stabilising effect on the emerging markets. This in turn allowed to yield benefits from market position decisions taken in previous quarters and reinforced during the third quarter, among which the sale of a block of Bradespar shares that had a positive EUR 9 million impact on the net profit.

On the 27th June of 2006 BES bought 50% of BES-Vida (ex. Tranquilidade- Vida insurance company). As a consequence, the capital market results and other include EUR 1.4 million generated by BES-Vida in the third quarter, after the EUR 1.2 million amortisation of the value in-force.

2.4. Operating Costs

The operating costs totalled EUR 657.2 million in the first nine months of the year, detailed as follows:
 euro million
 9M05 9M06 Chg %
 Reported (1) Avg (2) (3) (3)/(1) (3)/(2)

 Staff Costs, o.w 310.1 340.3 351.6 13.4 3.3
 Salaries 251.9 269.8 279.9 11.1 3.7
 Retirement Benefits 58.2 70.5 71.7 23.2 1.7
 Admin Costs 238.9 245.4 253.2 6.0 3.2
 Depreciation 59.9 60.2 52.4 -12.6 -13.0

 Operating Costs 608.9 645.9 657.2 7.9 1.7

As mentioned in the previous quarters, seasonal factors affected the 2005 staff costs and explain the 7.9% year-on-year increase in the 9M06 operating costs. However, the comparison to the average figures is exempt from this impact and shows that operating costs increased 1.7%, detailed as follows:
 - staff costs increased 3.3%, mainly driven by the international area
 where the increase in the number of staff lead to a 23% staff costs

 - other administrative costs increased slightly above the inflation:
 consistent implementation of streamlining measures, in particular the
 merger of BIC and Crediflash into BES, reduced these costs. Other
 factors contributed to the increase in this cost line: the corporate
 identity change, that took place in the first quarter of 2006,
 advertisement expenses associated to the Portuguese national soccer team
 sponsorship in the World Cup 2006 and promotional campaigns of
 mortgages, credit cards and service accounts;

 - depreciation and amortisation decreased 13%, reflecting the
 restructuring process effects.


In line with the previous quarters of this year, the Group's commercial activity continued strong: customer loans increased EUR 4.6 billion, including securitisation transactions, or 13.5% year-on-year, while total customer funds were up by EUR 3.9 billion or 9.6%.

At the end of September the Bank executed the fifth mortgage backed securitisation transaction amounting EUR 1.4 billion.
 euro million
 2005 2006 Chg %

 Total Assets (1) 68,958 76,837 11.4

 Assets 49,033 53,657 9.4

 Gross Loans (including securitised) 34,335 38,974 13.5
 Loans to Individuals 13,775 15,133 9.9
 - Mortgage 12,062 13,057 8.2
 - Other Loans to Individuals 1,713 2,076 21.2
 Corporate Loans 20,560 23,841 16.0

 Customer Funds

 + Deposits (2) 20,830 23,172 11.2
 + Debt Securities placed with Clients 3,615 4,359 20.6
 Funds from SPV 1,200 - -
 = On-Balance Sheet Customer Funds 25,645 27,531 7.4
 + Off-Balance Sheet Funds 15,241 17,287 13.4
 = Total Customer Funds 40,886 44,818 9.6

 Transformation Ratio (%) (3) 120 121 1 p.p.

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

The above mentioned growth resulted from further implementation of the commercial strategy based on multi-specialist approach, international activity growth, cross-selling consolidation - mainly through assurfinance - and from specialised approach to new business opportunities.

As for customer funds, there are significant increases of on-balance sheet funds: customer deposits increased 11.2% and debt securities grew 20.6%. Off- balance sheet funds increased 13.4%, as a result of a wide range of life bancassurance products offer, investment funds and portfolio management.

ESAF, Espirito Santo Activos Financeiros made a major contribution on the customer fund increase in the following areas: (i) assets under management increased 49% in the private discretionary portfolio management area; (ii) the launch of the Espirito Santo Brazil Fund, an investment fund which gives investors access to Brazilian economy and market; (iii) the launch of three new closed-end real estate investment funds available to private investors amounted to EUR 11.5 million.

3.1. Retail Banking

Retail banking posted a strong commercial performance in 3Q06 in the small businesses and individual client segments. The main initiatives launched during the quarter were (i) reinforcement of client acquisition levels, by improving the anchor-product offer; (ii) increase the customer share-of-wallet at the Bank; and (iii) continued focus on the higher-value customers and segments.

These initiatives included the launch of an innovative commissioning system for retail customers: "BES 100% Service account" for the mass market customers and "BES 360 Service Account" for affluent Clients, which represent a basket of products for day-to-day banking needs, which are free for Clients with their salaries domiciled at BES and/or have a significant part of their savings at the Bank.

Parallel to creating this special product package, the Bank also reviewed the mortgage offer, a key element to foster client loyalty, through a more attractive offer for those Clients that concentrate a relevant part of their banking relations with BES. The Bank launched more incentives for product cross-selling and created an option of a zero spread for an extensive time period.

In addition, the bank launched an innovative products and services offer customised to the Tourism sector (small businesses segment), that contains a wide range of competitive solutions for cash management, point of sale payment systems, loans for investment, security, protection and support to promote services and brands among customers.

High net-worth client segments maintained a good performance during the quarter: total customer involvement (credit and funds) increased 10% in the affluent Clients segment - BES 360 - and 13% in the Small Businesses segment.
 These performances were backed by strong commercial efforts:

 * the growth of customer funds was underpinned by a 20.3% year-on-year
 increase in pension plans stock in retail, and outstanding growth in the
 discretionary asset management business;

 * the increase in customer loans was supported by high levels of mortgage
 credit production (+8.2% year-on-year, with over 47% of the production
 in the affluent segment and 15% of the period's total production
 channelled by assurfinance agents) and by 21.2% increase in Other loans
 to individuals, which was fuelled by consumer credit growth, and credit
 for savings products.

Cross-selling levels were particularly high in products that promote customer loyalty:
 * + 17% in credit cards;
 * + 13% in life insurance products;
 * + 7% in clients with their salary domiciled with BES.

The sustainability of results is backed by new client acquisition and current customer base retention initiatives. Since the beginning of the year BES Group attracted 84,100 new clients, of which 15,600 channelled by Assurfinance.

The strong performance of the main business variables was accompanied by significant increases in the customer satisfaction, evident not only from different surveys implemented internally but also from research performed by external independent firms.

3.2. Corporate Banking

Corporate loans increased by 16.0% year-on-year, reaching EUR 23.8 billion in September 2006. This growth was backed by recovering economy, namely increasing and geographic diversification of exports, and by the Bank's support to the internationalisation of the Portuguese firms. Trade Finance increased 19% year-on-year and derivatives grew 362% (EUR 3 million revenues). The number of loyal customers increased 17%, as a result of good customer relations and introduction of new products and services.

Special attention is still given to the Investment Incentive Programs in order to support Clients in their strategic investment decisions. BES has the leading position in the SIME/PRIME (incentives for corporate and economic modernisation) as well as in banking protocols with the Portuguese Tourism Institute (a 39% market share in loans), resulting from advising services and creation of specific solutions.

The Innovation and Entrepreneurship - two crucial factors for the Portuguese economic sustainability - were given a special attention at BES Group: the bank launched the second edition of the BES National Innovation Contest, signed special cooperation protocols with the main Research and Development promoting institutions nation-wide and developed a specific credit line and services for this area.

As for the specialised credit, the leasing e factoring continued to post strong business growth of 14%, keeping Besleasing & Factoring in the second place in terms of domestic market rating in both products.

3.3. Investment Banking

BES Investimento (BESI) had a positive performance, with a EUR 112.4 million banking income, representing a 32% year-on-year growth.

Mergers and acquisitions: BESI participated in four main operations, as (i) advisor to Aleluia Ceramicas to buy Viuva Lamego, (ii) advisor to Portugal Telecom to buy 34% of MTC (Namibia), (iii) advisor La Seda de Barcelona to buy Advansa (Turkey and UK) and (iv) advisor to 3i/Gebomsa to buy two firms: Bonorsa and Eurobombeos (Spain).

Project finance and securitisation: BESI was (i) leader in the financing of Parque Eolico de Penamacor II for Tecneira (Portugal); (ii) leader in the GBP 275 million financing of the M6 motorway, in the UK; (iii) leader in the GBP 220 million financing of the SMIF4 and GSL2 funds, and (iv) leader in the EUR 170 million financing of Gdansk port, in Poland. In the area of project finance advisory, we highlight the mandates by the Saudi Arabian Rapid Transit for the Makkah-Madinah Rail project and by the South African National Roads Agency for the motorway N3 in the UK.

Equity capital markets: BESI was (i) the leader in the issuance of Convertible bonds and the share capital increase of Orey Antunes, both in the amount of EUR 10 million; and (ii) co-manager of the IPO of the Bolsas y Mercados Espanoles em Espanha.

Debt Capital markets: BESI (i) co-lead a EUR 500 million Eurobond issue for EDP Finance; (ii) structured the financing of Zent Inversiones (Spain) in the amount of EUR 100 million; (iii) acted as agent in commercial paper programmes for Silampos (EUR 5 million), for Refrige (EUR 15 million) and for Portela (EUR 7.5 million), (iv) structured bond issue by subscription for Indasa (EUR 9 million).

Brokerage: the Group maintained its leadership in Portugal, with a market share of 15.2%, and advanced from 10th place in 2005 to 5th place (5% market share) in the ranking of the 64 brokers operating in Spain. Moreover, the Group's equity research was distinguished by the renowned AQ Research magazine: "Best Recommendations for Iberian Companies".

Private equity: three new investments totalling EUR 11.7 million: Neumaticos Andres, (a Spanish tires wholesale firm), with 38.5% of share capital (proprietary portfolio and SES Iberia I Fund); in Soprattutto Cafe by purchasing of the Portuguese part of the assets of Azkoyen (coffee distribution), buying a 44% stake; in Decomed (production and distribution of pharmaceutical products) with a 21.3% stake; in Enkrott (water treatment services) with a 30% stake. At the end of the third quarter the assets under management of the Espirito Santo Capital (venture capital unit) totalled EUR 135 million.

3.4. Direct Channels and Electronic Banking

More individual clients use the internet banking: the number of BESnet users surpassed 800,000 in September, which corresponds to a year-on-year increase of 8.0%.

Regular use of this channel also continued to make steady progress: the number of frequent users increased by 18.4%, while the number of log-ins increased by 35.2%. The number of transactions performed through BESnet grew by an expressive 62.2% year-on-year, raising the ratio of off-branch transactions to total transactions by 11 percentage point to 51.4% in 2006.

The number of companies using the Internet banking service for corporate clients - BESnet Negocios - surpassed 51,000 in September 2006, a year-on-year increase of 24.5%. The increase in the number of logins (27.5%) and transactions (36.3%) shows that companies are using this service with increased frequency for their business transactions. In July BESnet Negocios obtained the ISO9001 - 2000 certification, meaning that all internet banking processes are now part of the Quality Management System. In 2003 BESnet (individuals) was the first internet banking provider to obtain the quality certification.

During the first nine months of 2006, BEST - Banco Electronico de Servico Total reinforced its asset management product offer substantially, with a special emphasis in the investment funds area and equity trading.

The number of investment funds available for subscription more than doubled in 2006, to 944 funds from 27 investment firms, allowing an effective coverage of all possible investment strategies. Thus the total customer assets invested in funds increased 64% year-on-year, allowing BEST to reach in 2006 for the firs time since the beginning of its activity, the first place in terms of foreign investment funds market share, according to the CMVM (local market regulator). As for securities trading, the Bank increased the offer by launching Real Estate Investment Trusts (REITs) and Exchange Traded Funds (ETFs), allowing Clients more investment diversification alternatives.

The customer base grew 13% to 44,000 Clients year-on-year. The customer assets under management also grew substantially to EUR 721 million by the end of September 2006, 43% growth year-on-year., the online business centre for small and medium-sized companies promoted under a joint venture between BES, Caixa Geral de Depositos and Portugal Telecom, reached a year-on-year increase of 42.4% in the number of purchases made through the portal in 3Q06. This growth was to a large extent fuelled by the advertising campaigns targeting individual clients in partnership with the shareholder banks. Over the same period turnover grew 44.2%, reaching ca. EUR 8.8 million. The number of on-line purchasers rose from daily average of 158 in 2005 to 225 YTD in 2006.

3.5. International Activity

BES Angola inaugurated the new headquarters building in Luanda and at the same time opened the headquarter branches, Palanca agency and training branch. The latter is a training and orientation branch for new employees of BES Angola.

BES Angola posted a strong commercial activity: customer loans totalled EUR 181 million by the end of September (86% increase year-on-year) and customer funds increased 63% to EUR 466 million.

Strong activity had positive impact on the banking income, which reached EUR 39 million, a 11% year-on-year growth, despite the significant reduction in the Angolan interest rates.

Despite the investments in new branches, BES Angola managed to stabilise the cost-to-income ratio at 36.5% by September 2006.

The accumulated net profit of BES Angola rose to EUR 22.9 million, 16% year-on-year growth.

At the beginning of the month of July, the Boards of Directors of the institutions involved decided to transform Banco Espirito Santo (Spain) into a subsidiary of Banco Espirito Santo (Portugal), with the objective of operate directly in that market through a branch. This reorganisation should allow an increase in the activity with corporate Clients in Spain, obtaining higher efficiency levels by using common structures.

During the third quarter BES started its activity in Cape Verde, by creating a branch office. This new business unit, that is based in Cidade da Praia, aims to develop strong links with the emigrant communities from Cape Verde resident in the US, Portugal and France.


BES Group has been implementing a set of measures to improve the asset quality and control the cost of risk. These were achieved through improvements in risk control and assessment tools, focusing on lower risk customers and products, as well as reinforcement of recovery resources.

 Sept. 05 Sept. 06 Change
 absolute (%)

 Loans to Customers (gross) (eur mn) 31,642 34,072 2,430 7.7%
 Overdue Loans (eur mn) 526.6 492.3 -34.3 -6.5%
 Overdue Loans > 90 days (eur mn) 457.3 413.9 -43.4 -9.5%
 Overdue and Doubtful Loans
 (B.Portugal) (a) (eur mn) 607.5 558.3 -49.2 -8.1%
 Provisions for Credit (eur mn) 868.5 860.4 -8.1 -0.9%

 Overdue Loans / Loans to
 Customers (gross) % 1.66 1.44 -0.22 p.p.
 Overdue Loans > 90 days / Loans
 to Customers (gross) % 1.45 1.21 -0.24 p.p.
 Overdue and doubtful loans /
 Loans to Customers (gross) (a) % 1.92 1.64 -0.28 p.p.
 Coverage of Overdue Loans % 164.9 174.8 9.9 p.p.
 Coverage of Overdue
 Loans > 90 days % 189.9 207.9 18.0 p.p.
 Coverage of Overdue and
 doubtful loans % 143.0 154.1 11.1 p.p.
 Credit provisions reinforcement
 divided by Loans to customers % 0.79 0.51 -0.28 p.p.

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

 These efforts lead to significant improvements:

 (i) overdue loans over 90 days to total customer loans decreased to
 1.21% from 1.45% in September 05;

 (ii) corresponding provision coverage rose to 207.9% from 189.9% in
 September 05;

 (iii) cost of risk - measured by comparing the credit provisions
 reinforcements with loan portfolio - reached 0.51%, compared with
 0.79% same period last year.


The Group's capital ratios already reflect the effects of the capital increase, concluded last May. The Group's solvency ratios are now at comfortable levels for further business development and growth.
 The share capital increase had positive impact on the BES shares:

 - the share liquidity increased significantly, with the average daily
 trading volume reaching EUR 8.5 million (757,000 shares traded per day)
 from listing of the new shares (1st of June 2006) to 30th of September
 2006. This compares with a EUR 2.8 million average daily trading volume
 (or 273,000 shares) in 2005, implying a three fold increase in both
 volume and number of shares traded;

 - the stock price reached EUR 12.05 on the 30th of September 2006, which
 represents a 9% increase from EUR 11.06 at the end of May, when the
 share capital increase was concluded.

The share capital increase allowed strengthening the core capital by EUR 1,367 million, increasing the Core Tier I capital from 4.7% in December 2005 to 7.0% at the end of this quarter.
 (Bank of Portugal)
 euro million
 Sept. 05 Dec. 05 Sept. 06 *

 Risk Weighted Assets 37,485 38,046 42,393
 Regulatory Capital 4,424 4,689 5,696
 Tier I 2,357 2,373 3,554
 Tier II 2,129 2,372 2,225
 Deductions (62) (56) (83)
 Preference Shares 600 600 600

 Core Tier I 4.7% 4.7% 7.0%
 Tier I 6.3% 6.2% 8.4%
 Total 11.8% 12.3% 13.4%

 * estimate

The main equity exposures in the available for sale portfolio continued to show gains: overall pre-tax potential gains amounted to EUR 501.7 million at the end of the period (Dec 05: EUR 472.1 million).

 euro million
 Assets Available for Sale Potential Gains or Losses
 30 Sept. 31 Dec. 30 Sept.
 2005 2005 2006
 B. Marocaine Com. Exterieur 8.1 10.3 2.2
 Banco Bradesco 294.2 397.7 392.3
 Bradespar 40.9 35.0 5.2
 EDP 0.0 0.0 36.0
 Portugal Telecom 1.5 29.1 66.0
 PT Multimedia 14.5 0.0 0.0
 359.2 472.1 501.7

Potential gains in these investments, deducted of deferred tax liabilities, are accounted in fair value reserves (equity).


The Group's productivity and efficiency ratios continued improve: operating costs as a percentage of average net assets declined from 1.88% in 2005 to 1.74% at the end of third quarter.

 2005 9M06 Change

 Cost to Income 56.0% 53.3% -2.7 p.p.
 Cost to Income ex-Markets 66.5% 63.1% -3.4 p.p.

 Operating Costs / Average Net Assets 1.88% 1.74% -0.14 p.p.
 Total Assets* per
 Employee (eur '000) 9,444 10,196 8.0%

 * Net Assets + Asset Management + Other off-balance Sheet liabilities
 + Securitised credit

The cost to income decreased from 56.0% in 2005 to 53.3% in the reporting period; excluding the capital market results, the efficiency improvement is 3.4 percentage points.


Based on the 9M06 annualised results, Return on equity (ROE) reached 15.2%, and Return on Assets (ROA) increased to 0.81%. This significant improvement versus 2005 is explained by lower returns in 2005, which were negatively affected by an exceptional restructuring provision charge for the BIC merger.
 2005 9M06
 Return on Equity (ROE) 13.5 15.2
 Return on Assets (ROA) 0.61 0.81


The table below lists the reference indicators under Bank of Portugal instruction no. 16/2004, for both September 2006 and September 2005.
 Sep. 05 Sep. 06

 Regulatory Capital / Risk Weighted Assets 11.8 13.4
 Tier I Capital / Risk Weighted Assets 6.3 8.4

 Overdue & Doubtful Loans (a) / Gross Loans 1.92 1.64
 Overdue & Doubtful Loans Net of
 Provisions (b) / Net Loans (b) -0.85 -0.91

 Income before Taxes and Minorities /
 Average Equity (c) 12.6 15.2
 Banking Income (d) / Average Net Assets 3.22 3.27
 Income before Taxes and Minorities /
 Average Net Assets 0.74 1.09

 General Admin Costs (d) +
 Depreciation / Banking Income (d) 55.8 53.3
 Staff Costs / Banking Income (d) 28.4 28.5

 (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) June 2006 values are estimates


 (eur '000)
 Sept. 05 Dec. 05 Sept. 06
 Cash and deposits at central banks 672 949 1 005 008 840 719
 Deposits with banks 471 903 655 180 417 457
 Financial assets held for trading 3 606 152 2 995 743 3 772 406
 Financial assets at fair value
 through profit or loss 2 047 969 1 746 898 1 647 061
 Financial assets available for sale 3 167 460 3 808 554 4 869 164
 Loans and advances to banks 5 389 479 6 164 044 4 645 101
 Loans and advances to customers 30 773 298 30 832 124 33 211 669
 (Provisions) (868 541) (829 874) (860 364)
 Held to maturity investments 597 810 596 840 646 215
 Financial Assets with
 repurchase agreements - - -
 Hedging derivatives 59 268 124 505 247 640
 Non current assets held for sale - 157 536 -
 Investment property - - -
 Other tangible assets 350 774 363 092 367 828
 Intangible assets 73 893 71 940 63 802
 Investments in associated companies
 and affiliates excluded from
 consolidation 58 123 62 374 562 002
 Current income tax assets 20 601 13 089 14 436
 Deferred income tax assets 209 793 42 210 66 535
 Other assets 1 533 317 1 582 704 2 284 968

 TOTAL ASSETS 49 032 789 50 221 841 53 657 003

 Amounts owed to central banks 387 231 654 316 744 159
 Financial liabilities held
 for trading 1 622 362 1 271 732 1 233 708
 Financial assets at fair value
 through profit or loss - - -
 Deposits from banks 7 884 803 6 264 892 7 027 166
 Due to customers 18 157 059 20 753 083 18 549 002
 Debt securities 14 590 537 14 402 291 17 127 203
 Financial liabilities associated
 to transferred assets - - -
 Hedging derivatives 88 928 111 098 279 817
 Non current liabilities held for sale - 112 428 -
 Provisions 112 111 155 356 138 944
 Current income tax liabilities 23 032 48 945 34 329
 Deferred income tax liabilities 169 784 46 411 104 927
 Instruments representing capital - - -
 Other subordinated loans 2 080 827 2 367 597 2 229 086
 Other liabilities 972 725 1 004 080 1 578 185
 TOTAL LIABILITIES 46 089 399 47 192 229 49 046 526
 Share capital 1 500 000 1 500 000 2 500 000
 Share premium 300 000 300 000 669 724
 Other capital interests - - -
 Treasury stock (89 039) (96 247) (65 156)
 Preference shares 600 000 600 000 600 000
 Fair value reserve 313 992 365 691 385 816
 Other reserves and retained earnings 63 304 (26 065) 115 288
 Profit for the period / year 208 018 280 481 304 715
 Anticipated dividends (33 480) - -
 Minority interests 80 595 105 752 100 090

 TOTAL SHAREHOLDERS' EQUITY 2 943 390 3 029 612 4 610 477
 SHAREHOLDERS' EQUITY 49 032 789 50 221 841 53 657 003


 Sept. 05 Sept. 06
 (eur '000) (eur '000)

 Interest income 1 470 789 1 914 215
 Interest expense 935 989 1 299 914
 Net interest income 534 800 614 301
 Dividends from securities 31 350 26 856
 Commissions and other similar income 353 319 395 622
 Commissions and other similar expenses 48 365 60 789
 Gains and losses in financial
 assets at fair value (70 778) (24 447)
 Gains and losses in financial
 assets available for sale 113 839 147 489
 Gains and losses from foreign
 exchange revaluation 80 100 44 147
 Gains and losses from sale of
 other assets 33 773 13 580
 Other income from banking activity 58 898 70 145

 Banking Income 1 086 936 1 226 904
 Staff expenses 310 093 351 644
 Other administrative expenses 238 871 253 199
 Depreciation 59 929 52 384
 Provisions net of reversals 22 149 37 598
 Loan impairment net of reversals
 and recoveries 187 275 130 441
 Other financial assets' impairment
 net of reversals and recoveries 24 622 (729)
 Other assets' impairment net of
 reversals and recoveries (1 234) (1 247)
 Negative difference from consolidation - -
 Equity in earnings of associated companies 4 860 6 164
 Income before tax 250 091 409 778
 Current tax 57 570 61 437
 Deferred tax (20 595) 34 177
 Income after tax and before
 minority interests 213 116 314 164
 o.w. after tax income from
 discontinued operations - -
 Minority interests 5 098 9 449
 Net income 208 018 304 715

CONTACT: Press, Paulo Padrao, +351-21-3501713,; or Investors and Analysts, Elsa Jardim, +351-21-359-7390, both of Banco Espirito Santo
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Date:Oct 24, 2006
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