DBRS: ESFG’s Ratings Unchanged at BBBL After Sovereign Rating Action, Ratings Remain UR-Neg

DBRS, Inc. (DBRS) has today commented that its ratings of Espírito Santo Financial Group, S.A. (ESFG or the Group) remain unchanged following the extension of DBRS’s review of the Portuguese sovereign rating. DBRS rates ESFG’s Senior Long-Term Debt at BBB (low) and Short-Term Instruments at R-2 (middle). The ratings remain Under Review with Negative Implications, where they were placed on 24 May 2012, following DBRS’s similar action on the Republic of Portugal.

DBRS has recently announced the extension of its review on Portugal’s ratings given the unusually high degree of uncertainty regarding Portugal’s growth outlook, which is essential for debt stabilization. As a result, DBRS will wait for the conclusions of the EU-IMF 5th Program Review, which is expected in September 2012, and the 2013 budget proposal, which must be presented by October 15, 2012, prior to finalising its review. DBRS rates the Republic of Portugal at BBB (low). The Republic of Portugal’s long-term foreign and local currency ratings remain Under Review with Negative Implications, where they were placed on 22 May 2012.

ESFG’s ratings reflect the Group’s controlling interest in Banco Espírito Santo (BES), which is based in Lisbon, Portugal. DBRS rates BES’s Senior Long-Term Debt & Deposits at BBB (low) and Short-Term Debt & Deposits at R-2 (middle). BES’s ratings also remain Under Review with Negative Implications. While ESFG’s ratings are at the same level as the ratings of BES and the Republic of Portugal, ESFG’s Intrinsic Assessment (IA) of BBB (low) remains two notches below BES’s IA of BBB (high). BES’s intrinsic strength, which is incorporated into the IA, is the principal driver for continued dividend payments to the parent company, which translates into a significant share of ESFG’s net income. The two-notch differential incorporates the risk that this dividend flow could be subject to a sustained interruption at a time of stress. At the same time, there could be calls on ESFG to provide capital to support BES or other subsidiaries.

The conditions in Portugal remain difficult due to the elevated level of credit problems, the sustained weakness in the economy and increasing market concern about Portugal’s sovereign position, pressuring the ratings of ESFG. DBRS notes that potential negative rating action on the Portuguese sovereign would likely impact the ratings of ESFG.

With 1H12 results, ESFG reported net income of EUR 233.0 million, boosted by the positive impact from the acquisition of BES Vida by BES, which resulted in the revaluation of the 50% stake previously held by ESFG upon consolidation. The Group generated sufficient income before provisions and taxes (IBPT) of EUR 807.6 million in 1H12 to absorb net provisions and impairments of EUR 420.6 million. This follows net income of EUR 121.4 million in 2011, which was negatively impacted by a significant reduction in BES’s earnings.

The Group’s franchise is supported by banking businesses outside of Portugal as well as insurance and healthcare businesses in Portugal. With just 21.3% of net income generated from the Group’s ownership of BES in 1H12, ESFG has sustained its profitability through its successful banking businesses outside of BES (contributing to 71.8% of net income) which focus on private banking, corporate banking and investment banking, as well as its insurance business (17.4% of net income).

The Group continues to bolster capitalization levels. ESGF successfully concluded a EUR 500 million rights issues and BES successfully concluded a EUR 1 billion rights issue in 2Q12, helping ESFG to reach a Core Tier 1 ratio of 9.7% at June 2012, based on Bank of Portugal standards, and 9.5%, based on EBA requirements. DBRS notes that neither ESFG nor BES received assistance from the Portuguese state. ESFG met its regulatory requirements as of June 2012 and maintains a cushion above minimum regulatory requirements.

Notes:
All figures in Euros (EUR) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include DBRS's rating action on the Republic of Portugal, company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Roger Lister
Approver: Alan G. Reid
Initial Rating Date: 23 December 2011
Most Recent Rating Update: 29 June 2012

For additional information on this rating, please refer to the linking document under Related Research.