Espirito (NYSE:ESF)
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Espirito Santo Financial Group S.A. (Euronext Lisbon and
NYSE: ESF) announced today its preliminary un-audited consolidated
results for the first half of 2005.
-- Consolidated Net Profit reached 48.3 million Euros in June
2005 against 11.9 million Euros in June 2004;
-- Net Interest Income Results grew 5.7%,
-- Market Results increased 31.9%;
-- Employees Costs and other Administrative Expenses decreased
2.6%
New Accounting Framework
According with regulation 1606/2002 of the European Council and
Parliament, companies having their 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 1st January 2005
in accordance with IFRS.
The IAS 32, IAS 39 and IFRS 4 standards, as applicable, were
adopted by Banco Espirito Santo Group, Tranquilidade, ES Seguros and
Tranquilidade Vida on 1st January 2005, as permitted by IFRS 1. The
other standards, which have lesser impact, were adopted on 1st January
2004. The transition adjustments for the conversion of Generally
Accepted Accounting Principles in Portugal (the local principles) to
IFRS have been accounted for in Shareholders' Funds on 1st January
2005. However, because the transition adjustments must conform with
accounting standards in force on the 31st December 2005, the
quantification effects of such transition must be considered
provisional and subject to changes which, depending on the actual
standards, could be material.
Thus, the comparison between the first semester results for 2005
and those of the previous year are difficult. In order to somewhat
facilitate this comparison, the 2004 accounts have been reclassified
in accordance with IFRS, although the numbers have been calculated in
accordance with the local principles except for the IFRS standards
mentioned in the above paragraph.
For further information please consult the Annex to this document
entitled "Transition to the International Accounting Standards
(IFRS)".
General Comments
ESFG's consolidated performance in the first semester of 2005
highlights its resilience in the face of subdued economic and stock
exchange performances in Portugal in the same period. Indeed, dividend
yield compensated the decline in net interest income leading to an
increase in financial results. Fee and commission income showed some
growth in spite of the more volatile performance of investment banking
revenues, whilst trading results registered a good performance as a
consequence of increased diversification. The decrease in salaries and
administrative costs helped ensure a very positive result in the
circumstances presently prevailing in Portugal.
Principal Item Analysis
Consolidated Net Interest Income (including dividend income) grew
5.7% in the first semester of 2005, against the same period of 2004,
as a 77.9% growth in dividend revenue compensated a decline in pure
net interest income. This decline was a function of external
constraints that have been negatively influencing its progress for
some time, namely pressure on credit products spreads, particularly in
lower risk segments, and the continuing very low level of euro
interest rates, hampering the profitability of funds.
The adoption of IFRS has brought yet another constraint,
introducing more restrictive criteria for hedging policies definition.
This led to the reclassification of part of the derivatives
transactions from the hedging portfolio to the trading portfolio,
which means that the corresponding results were recognised as results
from financial operations instead of net interest income.
Consolidated Commissions and Similar Income posted a 1.8% increase
to reach 248.9 million Euros in June 2005. Again, this reflects the
performance at the banking subsidiaries in Portugal which, in the
first half of 2005 was conditioned by the volatile nature of
investment banking activities and the adverse effects of fierce
competition backed by aggressive promotion of sharp price reductions
and even free services. Furthermore, the introduction of IFRS has lead
to accrual of fees of commissions.
In terms of consolidated market results(1), these have shown a
growth of 31.9% in June 2005 to reach 161.2 million Euros, reflecting
strong gains in assets available for sale and in foreign exchange
revaluation at the banking operations in Portugal. As in the past,
these results were based on the diversification of market risk. In the
second quarter of 2005 there was increased emphasis on emerging
markets trading, with a special focus on Latin American countries.
Both interest rate and exchange rate performance was favourable, thus
compensating the flattening yield curves of European and US markets as
well as the negative performance of the Portuguese market.
Consolidated Insurance Premiums Acquired Net of Reinsurance posted
a 5.6% decrease in June 2005 compared with the same period of the
previous year. This was due mainly to the decline in life insurance
premiums, namely private pension plan premiums, which have been
marketed to a considerable extent on the basis of fiscal incentives at
entrance, that have been abolished by the government. However, by
August 2005, there was significant premium growth in all non-life
products and leadership in private pension plans in Portugal was
re-established. In turn, consolidated Insurance Claims Net of
Reinsurance increased 65.5% in the same period, due mostly to a very
substantial volume of maturities in capitalization products with
profit sharing, initiated some eight years ago, following a surge in
demand for this type of product.
Consolidated Employees Costs and Benefits and other Administrative
Expenses(2) posted a decline of 2.6%, as a consequence of the cost
containment strategy implemented at all levels of the ESFG group of
companies.
TRANSITION TO THE INTERNATIONAL FINANCIAL REPORTING STANDARDS
(IFRS)
CONVERSION TO THE INTERNATIONAL FINANCIAL REPORTING STANDARDS
According to Regulation no. 1606/2002 of the European Council and
Parliament, companies having securities admitted to trading on a
regulated market of any Member State should have adopted the
International Financial Reporting Standards as from 1 January 2005 in
the preparation of their consolidated financial statements.
The adoption of the IFRS implied considerable changes in the
accounting framework inherent in the current Portuguese Plan of
Accounts for the Banking Sector (PABS) and Portuguese Plan of Accounts
for the Insurance Sector (PAIS) used by ESFG until 31 December 2004 in
the preparation of its consolidated financial statements.
This information has been prepared in accordance with the IFRS
standards which are applicable at the current date and does not entail
all the financial information that should be disclosed in the
financial statements as at 31 December 2005. Neither does it consider
any accounting impacts that may result from changes that may occur in
the accounting standards by 31 December 2005. Moreover, the figures
presented have not been audited or reviewed by our external auditors.
Therefore the figures presented should be considered provisional
and reflect the best current estimate of the standards that will be in
place as at 31 December 2005.
Following the significant impact of the IFRS adjustments
introduced as at 1 January 2005, the financial statements as at 30
June 2005 are not comparable to the published financial statements as
at 30 June 2004 which followed the rules of PABS and PAIS. On this
basis, and following a recommendation of the CESR, the Group presents
as comparatives the 30 June 2004 financial statements as published and
the restated 30 June 2004 financial statements in accordance with IFRS
except for IAS 32, IAS 39 and IFRS 4 which were not applied to the
2004 comparative figures as permitted by IFRS 1.
Main adjustments required to comply with IFRS
The main purpose of this note is to present a brief summary of the
differences identified between the accounting policies used by ESFG -
which follow the PABS and PAIS - and the IFRS, which impacted the
consolidated financial statements.
a) Securities
Banking subsidiaries (PABS)
In accordance with the PABS rules, investment securities available
for sale are valued at the lower of cost or market value. Any
unrealized losses are fully provided for and charged to the statement
of income and unrealized gains are not recognized. In the case of
reversals of unrealized losses provided for, both for shares or
fixed-income securities, the provisions are written-back to the
statement of income.
Equity holdings that are not consolidated or accounted for under
the equity method, i.e., in principle, those where the percentage held
is less than 20%, were under PABS recorded at cost and the related
unrealized losses determined at balance sheet date, based on the
average market price of the last 6 months, were provided for over a
period of 5 to 10 years, as set forth in Bank of Portugal Regulation
no. 4/2002. Unrealized gains were not recognized.
Additionally, under PABS, unrealized losses resulting from foreign
exchange differences on equity holdings denominated in foreign
currencies were recognized under other assets.
Insurance subsidiaries (PAIS)
Debt securities held by insurance subsidiaries were classified as
available for sale and for PAIS purposes were carried at acquisition
cost, except for the investments for the benefit of life assurance
policyholders who bear the investment risk. Interest accrual was made
based on nominal value and on the applicable interest rate for the
period. Premium or discount was accrued over the period to maturity
against the Statement of income using the straight line method.
The equity securities portfolio, also classified as available for
sale, under Portuguese GAAP was valued at the balance sheet date, at
market value. Unrealized gains and losses resulting from the
difference between the book value and market value, at the balance
sheet date, were recorded in shareholders' equity under "Regulatory
revaluation reserve" or as a liability under "fund for future
appropriations" in the case of investment securities covering life
insurance liabilities arising out from insurance contracts with profit
sharing. Any losses not covered by the reserve or by the fund were
charged to the Statement of income.
Under IFRS, investment securities available for sale are marked to
market and unrealized gains or losses including any foreign exchange
differences are recognized under reserves, except if an impairment
loss is determined, in which case they are taken to the statement of
income. Impairment losses are reversed against the statement of
income, except for equity securities, in which case the reversal is
recorded against equity. Other equity holdings are classified as
securities available for sale.
IFRS allows for certain securities to be designated at fair value
through the statement of income.
Additionally, under IFRS, the provision for future policyholders
dividends is adjusted for the impact of net unrealized gains and
losses on investment securities to the extent that the policyholder
will participate in such gains and losses on the basis of contractual
or regulatory requirements where they are realized (shadow accounting
adjustment).
b) Retirement pensions and other employee benefits
Banking subsidiaries (PABS)
Bearing in mind that the date of transition to the IFRS was 1
January 2004, on 31 December 2003 and 2004, ESFG's Portuguese
subsidiaries decided to change the actuarial assumptions so as to
converge with the IAS 19 requirements.
Since Regulation no. 12/2001, applicable by the Portuguese banks
in the recognition of their pension liabilities, already allowed
actuarial gains and losses to be deferred under the corridor method,
the largest differences that were found in retirement pensions
concerned early retirements for disability and health benefits.
In accordance with Bank of Portugal rules, restructuring costs
with early retirements were amortized over a 10-year period. Under the
IFRS they are fully recognized in the year when the retirements occur.
As regards health benefits granted to the employees reaching
retirement age, it has been the practice in the market to recognize
such benefits in the statement of income in the year when they were
paid. The adoption of IAS 19 implies that the liabilities incurred
with such benefits are recognized based on actuarial valuations at
balance sheet date.
Insurance subsidiaries (PAIS)
Insurance subsidiaries accounted for pensions in accordance with
the rules of PAIS which required that any increase in vested benefits,
including actuarial gains and losses were recognized in the statement
of income when incurred. For IFRS, the corridor method was used.
b) Insurance reserves
Equalization Reserve
Under PAIS, an equalization reserve was set up for lines of
business that were characterized by greater uncertainty regarding the
evolution of claims. IFRS 4 prohibits provisions for possible claims
that are not in existence at the reporting date.
Liability adequacy test
In accordance with IFRS 4, at each reporting date, the insurance
companies shall assess whether their recognized insurance liabilities
are adequate, using current estimates of future cash flows under its
insurance contracts. Under PAIS, the above mentioned procedure was
only applicable to the non-life business.
d) Consolidation of Special Purpose Entities (SPEs)
According to PABS, assets, loans and securities assigned by ESFG's
Portuguese banking subsidiaries under securitization transactions were
derecognized providing that they met the conditions for sales
recognition. Securities purchased within the scope of such
transactions were recognized as investment securities and provided for
in accordance with the rules set forth in Bank of Portugal Regulation
no. 27/2000.
Under IAS 39, assets are only derecognized after ESFG's banking
subsidiaries have lost control over the contractual rights underlying
such assets, although IFRS 1 establishes that on transition local
rules will apply to the operations carried out up to 1 January 2004.
Moreover, all SPEs with which the Group establishes relations must
be analyzed under the light of the consolidation rules applicable to
such entities (and expressed in SIC 12), namely those which may have
been set up within the scope of the securitization transactions
carried out.
e) Treasury stock and Bonuses
According to PABS, shares underlying the SIBA plan were accounted
for by the banking subsidiaries as an asset. In accordance with IFRS
these shares were reclassified, by these subsidiaries, as treasury
shares.
Bonuses were accounted for under PABS and PAIS as a deduction from
equity as they were considered to be a transfer of the rights to the
dividends from the shareholders to the employees. Under IFRS these
bonuses are taken to income in the year to which they relate.
f) Preference shares
According to PABS, preference shares were classified under
minority interest and the accrual of the dividends were deducted from
the net income under minority interest.
Under IFRS when the option for redemption is within the control of
the issuer and dividends are only payable if and when declared by the
board of directors, the preference shares are considered permanent
equity of the issuer, a subsidiary of ESFG. Therefore, under IFRS no
accrual for the dividends is made as no dividends were declared at the
balance sheet date.
In this case reference shares are still classified as minority
interest as they represent equity of a subsidiary attributable to
third parties.
However, when the Group has a present obligation of paying
dividends, preference shares are considered as liabilities and
dividends are classified as interest expense.
g) General banking risk provision
Under PABS, the Group booked a General banking risk provision
which aimed to face non-specific unidentified banking risks inherit to
the Group activity and therefore was determined by cautious criteria
defined by management.
This type of provision does not qualify for recognition under IAS
37, and therefore it was reversed for IFRS on transition.
h) Property and equipment
Under PAIS, real estate held by insurance subsidiaries, for own
use and investment purposes, are valued at their market value which is
defined as the value on the date of the latest valuation of each
property, performed at least in the last 5 years, in accordance with
the methods recognized by the Portuguese Insurance Institute. Real
estate held by insurance subsidiaries is not depreciated.
Under IFRS 1, insurance subsidiaries elected to use the fair value
at transition date as the deemed cost of their real estate.
Additionally, in accordance with IAS 16, real estate for own use is
amortized over its estimated useful life and subject to impairment
test
i) Intangibles
In accordance with PABS and PAIS, internally developed software is
capitalized and amortized over a 3 year period.
In accordance with IAS 38, internally developed software can only
be capitalised if (i) it generates future economic benefits and (ii)
the cost can be determined reliably.
The cost that can be capitalised as part of an internally
generated intangible assets are identified under IAS 38 and excludes
expenditure incurred to restore or maintain the level of future
benefits.
j) Loan Portfolio Impairment
In accordance with PABS, provisions for loans and advances to
customers were set up in accordance with Bank of Portugal Regulations
nos. 3/95, 2/99 and 8/03. The Bank of Portugal rules on the setting up
of provisions had therefore, an essentially regulatory nature. At the
same time, this supervisory authority has established the obligation
of banks to submit, twice a year, a report analyzing economic
provisions to cover the specific risk in the loans portfolio. In the
application of the Bank of Portugal regulations, in the calculation of
loan losses provisions there was an overriding requirement that the
provision should be sufficient on an economic basis.
Under IAS 39, the loans portfolio is valued at amortized cost and
subject to impairment tests (performing and non performing
portfolios). Impairment losses are determined as the difference
between the carrying amount of the loan and the value of future
expected cash flows, discounted at the loan's original effective
interest rate. This method considers two main aspects: i) the
recoverable amount based on an economic analysis of the portfolio; ii)
the present value of expected cash flows at the original effective
interest rate.
k) Deferred taxes
According to PABS, deferred tax assets could not be recognized.
The IAS 12 permits the recognition of deferred tax assets, providing
it is probable that tax profits will be available to absorb deductible
temporary differences (including tax losses).
According to PAIS, insurance subsidiaries already recognized
deferred tax assets.
Therefore, the application of IAS 12 by the banking subsidiaries
implied the recognition of the total deferred tax asset calculated on
the differences as at the transaction date between the tax balance
sheet and IFRS balance sheet. For the insurance subsidiaries, the
impact under IAS 12, reflects mainly the tax effect of the IFRS
adjustments.
The Espirito Santo Financial Group provides, through its
subsidiaries, a global and diversified range of financial services to
its clients including Commercial banking, Insurance, Investment
banking, Stock-brokerage and Asset management in Portugal and
internationally. For additional information on Espirito Santo
Financial Group, its subsidiaries, operations and results, please
visit the Company's website on www.esfg.com.
(1) Aggregate of Net Result on Financial Assets at Fair Value, Net
Result on Financial Assets Available for Sale, Net Result on Sale of
Other Assets and Net Foreign Exchange Results
(2) Aggregate of Employees Costs and Benefits and Other
Administrative Expenses
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ESPIRITO SANTO FINANCIAL GROUP SA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
Unaudited Unaudited Unaudited
under PG under under
GAAP IFRS IFRS
June 30, June 30, June 30,
2004 2004 2005
---------- ---------- ----------
(In millions of Euro)
NET ASSET
Cash and deposits with Central Banks 703.7 704.5 719.6
Deposits with other banks 468.3 468.3 642.1
Loans and advances to other banks 4,068.1 4,027.9 3,556.0
Loans and advances to customers 29,294.3 29,462.7 31,637.5
(Provision) (829.4) (829.4) (859.3)
Financial assets held for trading 1,870.6 1,870.6 3,460.7
Financial assets at fair value with
results recognized in the P&L - - 2,133.9
Financial assets available for sale 9,180.0 7,736.1 8,141.5
Financial assets with repurchase
agreement - -
Fair value of hedging derivatives 165.6 165.6 53.5
Financial assets held to maturity 631.0 631.0 561.3
Investments in associated companies 25.4 25.4 50.4
Property and equipment 125.6 126.9 133.3
Non current assets held for sale 81.7 83.2 123.4
Other tangible assets 431.5 435.5 446.2
Intangible assets 174.6 117.7 100.3
Current tax assets 8.4 8.4 27.7
Deferred tax assets 31.2 136.6 243.9
Technical provision on reinsurance
ceded 46.2 46.2 52.7
Other assets 2,571.5 1,329.4 1,930.6
---------- ---------- ----------
TOTAL NET ASSETS 49,048.3 46,546.6 53,155.3
========== ========== ==========
LIABILITIES
Owned to Central Banks 106.9 106.9 464.1
Owned to other banks 6,200.7 6,505.0 7,516.2
Deposits from clients 20,553.8 20,329.1 17,543.9
Debt securities 10,466.4 8,563.4 13,707.6
Other financial liabilities at fair
value with results recognized in the
P&L - - -
Fair value of hedging derivatives 123.2 123.2 64.7
Non current liabilities held for sale 613.7 613.7 1,658.9
Liabilities on insurance investment
contracts 1,168.0 1,168.0 1,620.3
Provisions 567.1 90.7 122.2
Subordinated liabilities 1,634.1 1,932.6 2,324.4
Insurance technical provisions 4,520.8 4,527.2 4,629.6
Current tax liabilities 21.7 21.7 39.5
Deferred tax liabilities 4.7 36.4 108.6
Other liabilities 578.9 542.9 1,274.6
---------- ---------- ----------
TOTAL LIABILITIES 46,560.0 44,560.8 51,074.6
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Share capital 479.1 479.1 479.1
(Treasury stock) (35.2) (33.6) (30.2)
Revaluation reserve 17.5 17.5 86.8
Other reserves and retained earnings (376.3) (416.6) (459.8)
Net income 30.5 11.9 48.3
Minority interests 2,372.7 1,927.5 1,956.5
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 2,488.3 1,985.8 2,080.7
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 49,048.3 46,546.6 53,155.3
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ESPIRITO SANTO FINANCIAL GROUP SA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Unaudited Unaudited Unaudited
under under under
PG GAAP IFRS IFRS
June 30, June 30, June 30,
2004 2004 2005
---------- ---------- ----------
(In millions of Euro)
Interest and similar income 1,130.3 1,126.0 1,019.4
Interest and similar expenses 715.8 722.4 609.4
Dividends 23.1 23.1 41.1
---------- ---------- ----------
Net interest income 437.6 426.7 451.1
Commissions and similar income 244.6 244.6 248.9
Commissions and similar expenses 25.3 25.3 35.4
Net result on financial assets at
fair value 7.7 7.7 (44.5)
Net result on financial assets
available for sale 105.2 62.2 122.7
Net result on sale of other assets 35.1 35.1 30.2
Net foreign exchange results 17.2 17.2 52.8
Other net income from banking
activity 16.9 40.5 14.6
Insurance premiums acquired, net of
reinsurance 378.8 378.8 357.7
Insurance acquisition costs, net of
reinsurance 24.9 24.9 28.3
Insurance claims, net of
reinsurance 260.5 260.5 431.0
Net change in insurance technical
provisions, net of reinsurance 145.9 146.3 (42.0)
Net change in insurance investment
contracts 0.2 0.2 0.1
Other net income from non-banking
activity (3.1) (3.1) 2.8
---------- ---------- ----------
Income from banking and non-banking
activities 783.3 773.8 783.5
Employees costs and benefits 201.0 276.8 244.7
Other administrative expenses 148.8 153.0 174.0
Depreciation and amortization 74.2 57.7 47.3
Provisions net of reversal 27.5 3.5 11.4
Loans' impairement, net of reversal
and recoveries 133.9 133.9 123.6
Other financial assets' impairement,
net of reversal and recoveries 15.8 15.8 9.2
Other assets' impairement, net of
reversal and recoveries 2.5 2.5 (1.7)
Equity in earnings of associated
companies (0.2) (0.2) 0.9
---------- ---------- ----------
Income before taxes 179.4 130.4 175.9
Current taxes 27.2 27.2 37.2
Deferred taxes 0.7 2.1 (12.4)
---------- ---------- ----------
Net income before minority interest 151.4 101.0 151.1
Minority interests 120.9 67.9 102.8
---------- ---------- ----------
Net income for the period 30.5 11.9 48.3
========== ========== ==========
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