DBRS Takes Rating Actions Following Resolution of BES, Creation of Novo Banco, S.A.

DBRS, Inc. (DBRS) has today taken certain rating actions following the Bank of Portugal’s announcement of the resolution of Banco Espírito Santo, S.A. (BES or the Bank). DBRS has downgraded the Dated Subordinated Notes issued by BES and its subsidiaries from CC (high) to C to reflect the greater certainty that these instruments will absorb losses. DBRS expects to assign a default rating to these instruments and withdraw these ratings upon default.

The senior debt, deposits and short-term debt of BES and its subsidiaries have been transferred to Novo Banco, S.A. (Novo Banco). The ratings for this transferred debt remain at BB (low) for Senior Long-Term Debt & Deposits and R-4 for Short-Term Debt & Deposits. DBRS has changed its review status on these ratings to Under Review Developing from Under Review with Negative Implications. DBRS has also transferred its B (low) Intrinsic Assessment (IA) for BES to Novo Banco, given the extent of the transfer of resources from BES.

On 3 August 2014 the Bank of Portugal announced it had applied a resolution measure to BES. Under this measure, certain problem assets, including exposures to Espírito Santo Group entities and Banco Espírito Santo Angola, remain in BES along with the subordinated liabilities and equity. At the same time, the remaining assets and liabilities, which comprise much of the Bank, were immediately and definitively transferred to Novo Banco. Novo Banco has been capitalized with equity of EUR 4.9 billion from the Resolution Fund, with EUR 4.4 billion of the amount being funded by a loan from the Portuguese State. This announcement follows BES’s reporting of a EUR 3.6 billion loss in its 1H14 results on 30 July and a Common Equity Tier 1 ratio of 5%, well below the regulatory minimum requirement.

During the review period, DBRS will continue to monitor the impact of this process on the customer franchise of Novo Banco, which could be significantly affected by recent events. In particular, DBRS will look for further clarification on the financial soundness of the new entity, including updated information on its funding and liquidity position. DBRS perceives that the long-term ramifications for the Novo Banco’s franchise could be significant and would view any franchise weakening, particularly within BES’s home market of Portugal, as having potential to negatively impact the rating. However, DBRS notes that as a re-capitalised bank with most problematic exposures having been kept within BES, Novo Banco may be able to successfully protect its franchise while under the ownership of the Resolution Fund. From a customer perspective, DBRS expects that there should be no major interruption in service and also notes that the transfer appears to have occurred successfully. Once further detailed information on the profile of Novo Banco is available, DBRS will provide further clarification regarding its ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents, SNL Financial and the Bank of Portugal. 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: Lisa Kwasnowski
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 19 April 2011
Most Recent Rating Update: 1 August 2014

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