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Espirito Santo Financial Group S.A. (Euronext Lisbon and
NYSE: ESF) announces the 1Q2005 results for its subsidiary Banco
Espirito Santo ("BES").
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%).
-0-
*T
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
*T
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
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*T
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.
*T
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).
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*T
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".
*T
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.
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*T
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
----------------------------------------------------------------------
*T
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.
-0-
*T
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
*T
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.
-0-
*T
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
---------------------------------------------
*T
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.
-0-
*T
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
*T
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).
-0-
*T
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
*T
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%.
-0-
*T
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
*T
2.6 Profitability
Based on the quarter's annualised results, Return on equity (ROE)
was 14.9% and Return on Assets (ROA) 0.74%.
-0-
*T
Profitability
(%)
-------------------------------------
Mar 05
-------------------------------------
-------------------------------------
Return on Equity (ROE) 14.9
Return on Assets (ROA) 0.74
-------------------------------------
*T
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.
-0-
*T
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
*T
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:
-0-
*T
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
*T
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:
-0-
*T
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
------------------------------------------------------
*T
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:
-0-
*T
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.
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
----------------------------------------------------------------------
*T
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.