ESFG’s Ratings Confirmed at BBB (low), Negative Trend, After Sovereign Rating Action

DBRS, Inc. (DBRS) has today confirmed Espírito Santo Financial Group, S.A. (ESFG or the Group)’s Senior Long-Term Debt at BBB (low) and Short-Term Instruments at R-2 (middle). The trend on all ratings is Negative. These ratings have been removed from Under Review with Negative Implications, where they were placed on 24 May 2012. This rating action follows DBRS’s confirmation of the BBB (low) rating of the Republic of Portugal with a Negative trend on 30 November 2012.

The confirmation of the sovereign ratings reflects DBRS’s assessment that, despite an unfavourable external environment, Portugal has made significant progress consolidating public finances, unwinding external imbalances and implementing structural reforms. The statement from Euro area countries that additional financing would be available to Portugal, if necessary, as long as there is strict policy implementation in the context of the EU-IMF programme, provides additional support to the ratings. The Negative trend, however, recognises that there is substantial uncertainty regarding Portugal’s growth outlook with downside risks emanating from external demand, stressed economy-wide funding conditions and adverse effects from the fiscal consolidation effort.

ESFG’s intrinsic assessment (IA) of BBB (low) remains unchanged. However, in light of the continued difficult environment, DBRS will continue to evaluate the IA of the Group. Additionally, DBRS maintains its SA-3 support assessment for ESFG, indicating no expectation of timely systemic support.

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). The trend on all ratings is Negative. 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).

With 9M12 results, ESFG reported net income of EUR 254.4 million, helped 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 1,463 million in 9M12 to absorb net provisions and impairments of EUR 710 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 businesses in Portugal. However, DBRS notes that BES, ESFG’s principal banking subsidiary, reported net positive income of EUR 90.4 million in 9M12, despite elevated level of provisioning.

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 10.1% at September 2012, based on Bank of Portugal standards, and 9.6% at June 2012, 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 Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All 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: William Schwartz
Initial Rating Date: 20 April 2011
Most Recent Rating Update: 24 May 2012

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