Annual Report. Bombay, India. Photographer: Tom Parker.

Transcription

1 2011 Annual Report Bombay, India. Photographer: Tom Parker.

2 Index Management Report Joint Message from the Chairman of the Board of Directors and the Chief Executive Officer Governing Bodies and Executive Committee Senior Managing Directors Product Divisions, Departments and Units Branches, Subsidiaries and Representative Office Principles and Values Consolidated Financial Highlights Organisational Chart Rating Earnings Distribution Proposal Declaration of Conformity Economic Environment International Economic Environment Economic Environment in the Eurozone Economic Environment in Portugal Economic Environment in Spain Economic Environment in the United Kingdom Economic Environment in Poland Economic Environment in the United States of America Economic Environment in Brazil Economic Environment in Angola Economic Environment in India Activity Review Investment Banking Business Client Origination Private Banking Capital Markets Corporate Finance Mid-cap Financial Advisory Project Finance and Securitisation Acquisition Finance and Other Lending Private Equity Wealth Management This report is a free translation into English of the original Portuguese version. In case of doubt or misinterpretation on the Portuguese version will prevail. 2 Annual Report 2011

3 94 03 Human Resources Integrated Risk Management Consolidated Financial Statements and Notes Consolidated Financial Statements Notes to Consolidated Financial Statements Individual Financial Statements and Notes Individual Financial Statements Notes to Individual Financial Statements Annexes I Shares and Bonds Held by Members of the Board of Directors and Supervisory Bodies II Shareholder III Adoption of the Financial Stability Forum (FSF) and Committee of European Banking Supervisors (CEBS) Recommendations on Transparency of Information and Assets Valuation IV Corporate Governance Structures and Practices V Remuneration of the Board of Directors and Supervisory Board Members and Relevant Staff (Senior Managing Directors and Control Functions Staff, as per the Definition of Notice 5/2008 of Bank of Portugal) VI Affidavit on the Remuneration Policy of the Board of Directors and Supervisory Board Members VII Remuneration Policy for the Senior Staff of Banco Espírito Santo de Investimento, S.A. (Senior Managing Directors (SMDS), Managing Directors, Executive Directors, Directors, Vice-presidents, Assistant Vice-presidents and Managers) VIII Excerpts from Minutes of the Annual General Shareholders Meeting Held on March 21 st 2012 Espírito Santo Investment Bank 3

4 IJoint Message from the Chairman of the Board of Directors and the Chief Executive Officer Banco Espírito Santo de Investimento (BESI) developed its activity in 2011 in a climate of strong instability, as the Eurozone sovereign debt crisis, the slowdown of the global economy and the successive sovereign rating downgrades spawned uncertainty within the financial markets. Concerns about the capacity of the peripheral countries (Greece, Ireland and Portugal) to meet their sovereign debt obligations spread to core Eurozone economies such as Spain, Italy and France, eroding confidence, which fell to its lowest level since the Lehman Brothers collapse. Fears about the contagion of the sovereign debt crisis made financial institutions more reluctant to expose themselves to each other, causing a liquidity dry-up and a drastic reduction in the financing of investment. On the other hand, the restrictive policies adopted in the economies subject to contagion as a response to the crisis fuelled the contraction of economic activity and consumption, with a direct impact on the main European economies but also indirectly penalising the whole global economy, including the emerging economies. In May 2011 the Portuguese Government, the European Union, the European Central Bank and the International Monetary Fund agreed on the terms of a EUR 78 billion financial assistance package to Portugal. This agreement established a number of targets to be reached by the national financial institutions in the medium term, including balance sheet deleveraging, reinforcement of capital ratios and improvement of liquidity position, naturally conditioning banking activity during the year. Supported by the reinforcement of its international expansion, the increased weight of its advisory and intermediation businesses, less capital and liquidity intensive, and a higher loan portfolio rotation, BESI s activity proved quite resilient. Banking income totalled EUR 238 million, down by 8.1% on The Bank posted a net profit for the year of EUR 9.1 million, a year-on-year reduction of 85% that was mainly caused by the deterioration of operating performance, losses on the sale of assets and loans and an increase in credit impairments. Bearing out the Bank s international development strategy, the contribution of the international area to total banking income increased from 65% in 2010 to 72% in During the year we reinforced our expansion into markets with high growth potential, entering a 75/25 joint venture with a local partner in India, the Burman family. The aim is to develop brokerage activities in a first phase, subsequently consolidating our presence through an investment bank. We are also looking into alternatives to reinforce our presence in Hong Kong, where we already develop a brokerage business through Execution Noble, and to expand our activity in some of the main markets in Sub-Saharan Africa, particularly in Angola, Mozambique and South Africa. In those geographies where the Bank already has a well-rooted presence, we pursued the consolidation of the existing business areas, focusing on intermediation and financial advisory activities: In Portugal, we maintained our leading position, actively participating in the ongoing privatisations programme, namely providing advisory services to China Three Gorges Corporation on its acquisition of 21.35% of EDP Electricidade de Portugal, S.A. and to State Grid Corporation of China on its acquisition of 25% of REN Redes Energéticas Nacionais, SGPS, S.A.; In Spain, our growing penetration in the corporate segment allowed us to participate in several transactions with high market visibility; In Brazil, our activity remained vigorous during the year, especially in the Mergers and Acquisitions (M&A) and capital market business areas, which achieved relevant positions in the local rankings; In the United Kingdom, our efforts focused on reinforcing the activities of Execution Noble with the objective of setting a difference vis-à-vis the competition, namely by promoting the distribution of Iberian, Polish and Brazilian products in the UK market; In Poland, where the Bank achieved remarkable progress, we concentrated on the M&A and capital market activities, leading and participating in various transactions; In the United States, we developed the advisory and intermediation activities with the objective of creating a platform for the distribution of products originated in other geographies; In Mexico we continued to analyse opportunities to develop the project finance and M&A business areas, through our joint representative office with BES. 4 Annual Report 2011

5 Once again the Bank s strategy translated into leading or very prominent positions in its main business areas: We were considered Best Investment Bank in Portugal in 2011, by the World Finance magazine, and Best Equities House in Portugal and Best M&A House in Portugal in 2011 by the Euromoney magazine; In Mergers & Acquisitions, we remained market leaders in Portugal and Iberia, by number of announced transactions (Bloomberg rankings), and maintained the 5 th position in the Brazilian M&A market, by value of completed transactions (according to ANBIMA); In Capital Markets - Origination, we participated in the most important transactions taking place in all the geographies where we operate. In Brazil, we rubbed shoulders with the largest local and international banks in the structuring of financing and equity sale operations, reaching 11 th place in the respective ANBIMA rankings; In Brokerage, we remained market leader in Portugal, with a market share of 11.7%, and stood in 4 th place in the Madrid Stock Exchange s brokers ranking, with a market share of 7.3%. In Brazil, we advanced five positions in the Bovespa ranking, rising to 25 th place in a universe of roughly 100 brokers, underpinned by our recent creation of a derivatives desk. In Poland, we consolidated our 13 th position in the Polish brokers ranking, with a market share of 2%. In the United Kingdom, we focused our activity on the integration with Execution Noble. In Project Finance and Securitisation, we completed 23 transactions, playing a prominent role in the provision of advisory services. Leveraging on the bank s expertise in the infrastructures and renewable energy sectors, we took several initiatives to exploit alternative financing solutions, namely signing a Memorandum of Understanding with DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbh, a leading development finance institution in Europe, with the aim of originating, structuring and executing financing solutions in Latin America and other developing markets. The outlook for 2012 is marred by persisting uncertainties concerning the resolution of the public finance crisis in the Eurozone, to which add concerns about global and regional economic growth. In this context, we will certainly be facing another year of great challenges, which we are set on tackling with our usual resolve and determination. We will continue to develop our activity with an increased focus on optimising the available resources, with the firm conviction that the strategy we have outlined, and which has steered our activity, will breed opportunities that we will fully exploit, and that will help us surpass the current difficulties. We would like in first place to thank our Clients, whose preference for the Bank in 2011 we wish to reciprocate by increasingly improving the quality and innovation of our services. Our recognition also goes to our Employees, whose effort and dedication are all the more important in periods of greater difficulties. We also express our appreciation to the Supervisory Board and our Auditors for their contribution to the increasingly high standards in accounting and management information reporting, and also to the Bank of Portugal, the Portuguese Securities Market Commission and the supervision authorities in the countries where we are present, for their constant cooperation and the trust placed in Banco Espírito Santo de Investimento. Finally, in our name and on behalf of all the members of the Board, we wish to express our sorrow for the death of Mr. António Espírito Santo Silva Salgado, who will be missed by all of us. Mr. António Espírito Santo Silva Salgado was a member of the Board of Directors since 1990, and his personal and professional qualities were greatly valued. In Acquisition Finance and Other Lending, we concluded several transactions in Portugal, despite the current funding restrictions. Activity in Brazil was quite strong, particularly in structured loans. Ricardo Espírito Santo Silva Salgado Chairman of the Board of Directors In Private Equity, the year was marked by: i) the continuation of works to launch the 2bCapital fund in the Brazilian market, which should be incorporated early in 2012, and ii) the investments totalling EUR 16 million, mainly concentrated in two companies, namely Globalwatt in Portugal and GLT in Spain. José Maria Espírito Santo Silva Ricciardi Vice-Chairman of the Board of Directors and Chief Executive Officer Espírito Santo Investment Bank 5

6 Governing Bodies and Executive Committee GOVERNING BODIES General Meeting Board Chairman 1 Daniel Proença de Carvalho Secretary José Miguel Alecrim Duarte Board of Directors 2 Chairman Ricardo Espírito Santo Silva Salgado Vice-Chairmen José Maria Espírito Santo Silva Ricciardi Francisco Ravara Cary Rafael Caldeira de Castel-Branco Valverde Miguel António Igrejas Horta e Costa Ricardo Abecassis Espírito Santo Silva Other Members Amílcar Carlos Ferreira de Morais Pires Bernard Marcel Fernand Basecqz Bernardo Ernesto Simões Moniz da Maia Christian Georges Jacques Minzolini Diogo Luís Ramos de Abreu Duarte José Borges Coutinho Espírito Santo Silva Félix Aguirre Cabanyes Frederico dos Reis de Arrochela Alegria João Filipe Espírito Santo de Brito e Cunha José Manuel Pinheiro Espírito Santo Silva Luís Miguel Pina Alves Luna Vaz Moses Dodo Nicholas Mark Finegold Paulo José Lameiras Martins Phillipe Gilles Fernand Guiral Tiago Vaz Pinto Cyrne de Castro EXECUTIVE COMMITTEE Chief Executive Officer (CEO) José Maria Espírito Santo Silva Ricciardi Other Members Francisco Ravara Cary Rafael Caldeira de Castel-Branco Valverde Miguel António Igrejas Horta e Costa Ricardo Abecassis Espírito Santo Silva Christian Georges Jacques Minzolini Diogo Luís Ramos de Abreu Félix Aguirre Cabanyes Frederico dos Reis de Arrochela Alegria Luís Miguel Pina Alves Luna Vaz Moses Dodo Paulo José Lameiras Martins Tiago Vaz Pinto Cyrne de Castro Senior Managing Directors with a seat on the Executive Committee Alan do Amaral Fernandes José Luís de Saldanha Ferreira Pinto Basto Pedro Miguel Cordovil Toscano Rico Executive Committee Secretary Patrícia Salgado Goldschmidt Catanho Meneses Supervisory Board Permanent Members José Manuel Macedo Pereira (Chairman) Tito Manuel das Neves Magalhães Basto Mário Paulo Bettencourt de Oliveira Deputy Member Nuno Espírito Santo Leite de Faria STATUTORY AUDITORS Amável Calhau, Ribeiro da Cunha e Associados - Sociedade de Revisores Oficiais de Contas, represented by José Maria Rego Ribeiro da Cunha Senior Managing Directors Angus Macpherson Aníbal Paço Carl Adams Carlos Ferreira Pinto Carlos Nogueira Carolina Ibañez Charles Ashton Damien Devine Dipesh Patel Fernando Castro Solla Filipa Schubeius Garreth Hodgson João Arantes e Oliveira João Baptista Pereira José Gabriel José Miguel Rego Leonor Dantas Lucas Martínez Luís Sousa Santos Luís Vasconcelos Maria Luísa Baroni Mércia Bruno Miguel Guiomar Nuno Cardoso Patrícia Goldschmidt Paulo Araújo Pedro Ventaneira Ricardo Domenech Rodrigo Carvalho Rui Baptista Sílvia Costa Product Divisions, Departments and Units PRODUCT DIVISIONS Client Origination Pedro Toscano Rico (Portugal) Carolina Ibañez (Spain) Miguel Lins (BES Investimento do Brasil, S.A.) 3 Miguel Borges (United Kingdom) Bartlomiej Dmitruk (Poland) Nuno Cardoso (United States) Paulo Araújo (Execution Noble Limited) Jorge Ramos (Angola) Private Banking Lourenço Vieira de Campos Corporate Finance Leonor Dantas/ Luís Vasconcelos (Portugal) José Miguel Rego (Spain) Maria Luísa Baroni (BES Investimento do Brasil, S.A.) Lukasz Pawłowski (Poland) Daniel Pyne (United States) Angus Macpherson/ Richard Crawley/ John Llewellyn-Loyd (Execution Noble Limited) Tiago Félix (Cross-Border) Mid-cap Financial Advisory Leonor Dantas Acquisition Finance and Other Lending Rui Baptista/ Pedro Ruas (Portugal) Rui Baptista/ Gonzalo de Liñan Amusátegui (Spain) Rui Baptista/ Alan Fernandes (BES Investimento do Brasil, S.A.) Rui Baptista (Poland) Project Finance and Securitisation Luís Sousa Santos (Portugal and Poland) Carlos Álvarez Fernández (Spain) Alan Fernandes (BES Investimento do Brasil, S.A.) Robin Earle (United Kingdom) Carl Adams (United States) Capital Markets - Origination Sílvia Costa (Portugal and Spain) Miguel Guiomar (BES Investimento do Brasil, S.A.) Maciej Ptak/ Krzysztof Rosa (Poland) Angus Macpherson/ Peter Tracey (Execution Noble Limited) Tara Cemlyn-Jones (International) 1 Appointed by the General Meeting of March 31 st, Pedro Manuel Castro Simões Ferreira Neto renounced his position as Member of the Board of Directors and Member of the Executive Committee on June 15 th, Nicholas Mark Finegold was appointed Member of the Board of Directors on July 14 th, Board Member António Espírito Santo Silva Salgado passed away on November 21 st, Nigel Keith Purse left his position as Member of the Board of Directors and Member of the Executive Committee on November 30 th, Since February 1 st, Annual Report 2011

7 Fixed Income Carlos Ferreira Pinto (Portugal and Spain) Roberto Simões (BES Investimento do Brasil, S.A.) Krzysztof Rosa (Poland) Marcus Ashworth (Execution Noble Limited) Treasury Carlos Nogueira (Portugal) Roberto Simões (BES Investimento do Brasil, S.A.) Krzysztof Rosa (Poland) Capital Structure Advisory Cristina Frazão (Portugal and Spain) Global Loan Syndication Lucas Martínez Vuillier (United Kingdom) Thomas Friebel (United States) Global Markets Rui Borges de Sousa (Portugal) Martim Amaral Neto (Spain) Roberto Simões (BES Investimento do Brasil, S.A.) Krzysztof Rosa (Poland) Secondary Market - Equities João Baptista Pereira (Portugal and Spain) Rui Marques (BES Securities do Brasil, S.A.) Rodrigo Carvalho (Poland) Garreth Hodgson (United States) Dipesh Patel (Execution Noble Limited) Nick Paulson-Ellis (Espírito Santo Securities - India) José Martins Soares (Global Equity Research) Martin Dolan (Global Equity Research) Scott Evans (Global Equity Research) Asset Management Fernando Castro Solla (Portugal and Spain) Paulo César Werneck (BESAF BES Activos Financeiros, Lda.) Private Equity João Arantes e Oliveira (Espírito Santo Capital - Sociedade de Capital de Risco, S.A.) Reinsurance Neil Strong (Execution Noble Limited) Wealth Management Francisco Brant de Carvalho / José Carlos Mendes (Espírito Santo Serviços Financeiros DTVM) DEPARTMENTS Compliance Patrícia Salgado Goldschmidt Corporate Communication and Image Pedro Pereira Santos Accounting Pedro Ventaneira Delfina Mendes Information & Documentation Paula Ramalhete Information and Management Reporting Systems Pedro Ventaneira António Pacheco Information Technology Rui Trindade de Sousa Legal Patrícia Salgado Goldschmidt Operations Pedro Ventaneira João Pereira da Silva Organisational Resources José Gabriel Corporate Development José Pinto Basto Human Resources José Gabriel Aníbal Paçó Risk Credit Risk Analysis Filipa Schubeius Rui Brigantim Pereira Risk Risk Control Pedro Ventaneira Luís Pereira UNITS Project Management Office & Change Management Rui Trindade de Sousa Branches, Subsidiaries and Representative Office BRANCHES Spain Félix Aguirre Cabanyes Ricardo Domenech Zamora London Rafael Caldeira de Castel-Branco Valverde Aníbal Jorge Campos Paçó New York Moses Dodo Nuno David Fernandes Cardoso Poland Christian Georges Jacques Minzolini Rodrigo Ferreira Cunha Metelo Carvalho SUBSIDIARIES BES Investimento do Brasil, S.A. - Banco de Investimento (Brazil) Ricardo Abecassis Espírito Santo Silva BES Securities do Brasil, S.A. - Corretora de Câmbios e Valores Mobiliários (Brazil) Ricardo Abecassis Espírito Santo Silva BESAF - BES Activos Financeiros, Ltda. (Brazil) Ricardo Abecassis Espírito Santo Silva Espírito Santo Serviços Financeiros DTVM (Brazil) Ricardo Abecassis Espírito Santo Silva Espírito Santo Capital - Sociedade de Capital de Risco, S.A. (Portugal) Francisco Ravara Cary João Carlos Mendes Reis Arantes e Oliveira Espírito Santo Investment p.l.c. (Ireland) Tiago Vaz Pinto Cyrne de Castro John Patrick Andrew Madigan Execution Noble Limited (United Kingdom) Luís Miguel Pina Alves Luna Vaz Execution Noble (Hong Kong) Limited Luís Miguel Pina Alves Luna Vaz Espírito Santo Securities (India) Luís Miguel Pina Alves Luna Vaz Nick Paulson-Ellis REPRESENTATIVE OFFICE Mexico City Moses Dodo Hugo António Villalobos Velasco Espírito Santo Investment Bank 7

8 Executive Committee José Maria Espírito Santo Silva Ricciardi Chief Executive Officer (CEO), Vice-Chairman of the Board of Directors, Chairman of the Global Management Committee (Compliance, Legal, Human Resources, Organisational Resources and Information and Management Reporting Systems). Francisco Ravara Cary Deputy Chief Executive Officer, Vice-Chairman of the Board of Directors, Chief Financial Officer, Assets and Liabilities Committee (ALCO), Risk Policies Committee, Global Credit and Risk Management Committee, Europe Credit and Risk Management Committee, Operational Committee, (Treasury, Espírito Santo Capital Sociedade de Capital de Risco, S.A.). Rafael Caldeira de Castel-Branco Valverde Executive Vice-Chairman of the Board of Directors, Senior Country Officer for Portugal, Senior Country Officer for the United Kingdom, Chairman of the Portugal Geography Committee, (Portugal Client Origination, Acquisition Finance and Other Lending, Family Offices, London Branch, London Client Origination and Information & Documentation). Miguel António Igrejas Horta e Costa Executive Vice-Chairman of the Board of Directors (Corporate Communication and Image, Institutional Relations and Premium Clients). Ricardo Abecassis Espírito Santo Silva Executive Vice-Chairman of the Board of Directors, Senior Country Officer for Brazil, Chairman of Brazil Geography Committee, Joint Chairman of the Americas Credit and Risk Management Committee, (Wealth Management, BES Investimento do Brasil, S.A. Banco de Investimento and its subsidiaries, Brazil Client Origination). Christian Georges Jacques Minzolini Executive Board Member, Senior Country Officer for Poland, Chairman of the Poland Geography Committee, (Poland Branch, Espírito Santo Investment Sp. Z.o.o., Secretary General, Corporate Development and Poland Clients Origination). Diogo Luís Ramos de Abreu Executive Board Member (Capital Structure Advisory). 8 Annual Report 2011

9 Executive Board Member, Senior Country Officer for Spain, Chairman of the Spain Geography Committee (Spain Branch and Spain Client Origination). Executive Board Member, (Global Markets). Félix Aguirre Cabanyes Frederico dos Reis de Arrochela Alegria Executive Board Member, (Capital Markets Origination, Secondary Markets Equity, Fixed Income and Asset Management, Execution Noble Limited and its subsidiaries). Executive Board Member, Senior Country Officer for the United States, Chairman of the United States Geography Committee, Joint Chairman of the Americas Credit and Risk Management Committee (New York Branch, Representative Office Mexico City and Global Loan Syndication). Luís Miguel Pina Alves Luna Vaz Moses Dodo Paulo José Lameiras Martins Executive Board Member, (Corporate Finance and Mid-cap Financial Advisory). Tiago Vaz Pinto Cyrne de Castro Executive Board Member, Senior Country Officer for Ireland, Chief Risk Officer, Chief Operations Officer, (Risk - Risk Control and Credit Risk Analysis, Accounting, Operations, Information Technology, Project Management Office & Change Management, Operational Risk (included in the Compliance Department), Information and Management Reporting Systems and Espírito Santo Investment, p.l.c.). Espírito Santo Investment Bank 9

10 Senior Managing Directors with a seat on the Executive Committee Alan do Amaral Fernandes Project Finance and Securitisation (Global), Project Finance and Securitisation (Brazil), Acquisition Finance and Other Lending (Brazil). José Luís de Saldanha Ferreira Pinto Basto Corporate Development, Global Loan Syndication. Pedro Miguel Cordovil Toscano Rico Portugal Client Origination. 10 Annual Report 2011

11 Principles and Values Banco Espírito Santo de Investimento business is built upon the following set of Principles and Values: Ownership A strong identification with the Bank s mission and corporate values and a strong sense of belonging to a team, involving a firm commitment to being an active and participant member. Feel the Bank as his/her own, living intensely its successes and failures. Behave with a strong sense of responsibility in terms of performance and risks in relation to both the Bank and its Clients. Client Orientation Conquer, maintain and develop the Client s trust by means of a professional attitude, focusing on its needs and trying to exceed its expectations, by defining strategies to maximise value and establish a true partnership. Excellence Provide quality services and the potential that results from innovative and creative solutions. Constantly seek perfection by paying attention to the details and obtaining results that exceed expectations. People Orientation Behave towards employees with respect and dignity, giving them room for personal and professional realisation. Respect the knowledge, skills and individuality of every employee. Learning Organization An attitude of continuous learning and innovation, promoting the diversity of ideas and the sharing of information. A permanent search for greater knowledge, making the Bank a source of distinctive knowhow in the market. Passion to Win Show involvement and determination to keep growing, using exceptional levels of energy and motivation. Communication Demonstrate the ability to express opinions and points of view objectively and clearly at the same time as providing others with the space to express and affirm themselves. Enhance the value of information through assertiveness and active listening. Value a consistent, non-hierarchical open-door policy towards people at every level of the organisation, creating the appropriate level of transparency. Think and Act Internationally Be aware of global trends affecting business and informed of relevant business developments in a global context. Be able to assess and estimate how global events may impact local business and vice-versa, developing tasks in a global environment. Respect the differences between the regions where the Bank operates, guaranteeing the integrity of businesses. Ethics and Transparency Align corporate thought and behaviour to respond appropriately to the need for human solidarity and respect for human dignity. Respect regulations and implement corporate rules when developing businesses, always behaving in the best interests of the Bank. A high level of transparency in terms of annual reports, financial accounts and other corporate documents, ensuring that employees, shareholders, regulators, Clients and the market in general are provided with adequate information. Espírito Santo Investment Bank 11

12 Consolidated Financial Highlights Consolidated Income Statement (EUR thousand) % Restated Change Consolidated Banking Income 237, ,912 (8.1%) Fees and Commissions Income 131, ,743 (5.9%) Net Interest Income and Market Results 106, ,169 (10.7%) Total Operating Expenses (178,603) (137,836) 29.6% Staff Costs (109,218) (87,652) 24.6% General and Administrative Expenses (63,866) (46,741) 36.6% Depreciation and Amortisation (5,519) (3,443) 60.3% Operating Income 59, ,076 (51.0%) Impairment and Provisions (44,169) (38,602) 14.4% Non-controlling interests (212) (4,400) (95.2%) Profit before Income Tax 14,950 78,074 (80.9%) Income Tax (5,889) (17,699) (66.7%) Consolidated Net Profit 9,061 60,375 (85.0%) Consolidated Balance Sheet (EUR thousand) Restated % Change Assets Financial assets held for trading 1,977,051 2,012,802 (1.8%) - Securities 1,133,978 1,276,023 (11.1%) Available-for-sale financial assets 303, ,005 (56.4%) Loans and advances to banks 246, ,610 (33.8%) Loans and advances to costumers 2,257,945 2,244, % Held-to-maturity investments 727, , % Other assets 1,046, , % Total Assets 6,559,785 7,012,269 (6.5%) Equity and Liabilities Share Capital 226, , % Non-controlling interests 79,322 80,727 (1.7%) Total Equity 606, ,316 (3.5%) Financial liabilities held for trading 791, % Deposits from banks 2,452,209 2,313, % Due to costumers 859,247 1,338,765 (35.8%) Debt securities issued 1,299,619 1,172, % Other liabilities 550, ,874 (41.0%) Total Equity and Liabilities 6,559,785 7,012,269 (6.5%) 12 Annual Report 2011

13 Organisational Chart Board of Directors Executive Committee Project Management Office & Change Management Assets and Liabilities Committee Risk Policies Committee Credit and Risk Management Comittees Global Management Committee Operational Commitee Product Committees Geography Committees Client Origination Private Banking Product Divions Corporate Finance Mid-cap Financial Advisory Acquisition Finance and Other Lending Project Finance and Securitisation Capital Markets - Origination Fixed Income Treasury Capital Structure Advisory Global Loan Syndication Global Markets Equities Secondary Market Asset Management Departments Audit and Inspection (BES GROUP) Compliance Corporate Communication and Image Accounting Information and Documentation Information and Management Reporting Systems Information Technology Legal Operations Organisational Resources Corporate Development Human Resources Risk Espírito Santo Investment Bank 13

14 Rating In March 2011, Standard & Poor s (S&P) made two successive downgrades of the Republic of Portugal s long and short-term ratings, to BBB-/A3, with negative outlook (from A-/A-2). On December 5 th, 2011, S&P placed Republic of Portugal s ratings on CreditWatch negative, which were downgraded on January 13 th, 2012 to BB/B. In a press release issued in October 2011, Moody s announced the downgrade of BES Investimento do Brasil, S.A. s credit ratings to Ba2/Not Prime, from Ba1/Not Prime (long-term global local-currency deposit rating), and to Aa3.br/BR-1, from Aa2.br/BR-1 (long-term Brazilian national scale deposit rating). As a consequence, the ratings of the Portuguese banks were also revised downward, namely the long-term rating assigned to Banco Espírito Santo de Investimento, S.A., which on March 31 st, 2011 was lowered to BBB-, with negative outlook (from A-). On December 16 th, 2011, after revising its rating methodology for evaluating financial institutions, S&P downgraded the rating of Banco Espírito Santo de Investimento, S.A. to BB, placing it on CreditWatch negative in January 2012 to reflect the rating and outlook of the Republic of Portugal. On February 14 th, 2012, after the Banking Industry Country Risk Assessment revision, S&P downgraded the long-term rating of Banco Espírito Santo de Investimento S.A. to BB-, from BB, removing it from CreditWatch negative. The outlook remained negative. The agency reaffirmed the B short-term rating. With regard to the Bank s subsidiaries, in December 2011, S&P announced a downgrade of BES Investimento do Brasil, S.A. s credit ratings to BB/B, from BB+/B (global scale) and to braa/bra-1, from braa+/bra-1 (Brazilian local scale), both with negative outlook. The rating on the external debt issue in foreign currency was also lowered, to BB, from BB+, with negative outlook. Moody s also lowered the long-term foreign currency deposit rating to Ba2/Not Prime (from Ba1/Not Prime), the long-term foreign currency senior unsecured debt rating to Ba2/Not Prime (from Ba1/Not Prime), both with negative outlook, and the bank financial strength rating to D (from D+). These ratings downgrades reflected the downward revision of the parent company s risk profile following the downgrade of the Republic of Portugal s sovereign credit risk rating. Moody s report highlighted the recent expansion of the loan operations associated with investment banking activities, the good asset quality of the loan portfolio, and the satisfactory profitability ratios of BES Investimento do Brasil, S.A. as a result of the bank s fee-based operations, such as project finance and corporate finance. In a press release issued on February 16 th 2012, S&P announced the downgrade of BES Investimento do Brasil, S.A, s global scale credit ratings to BB-/B (from BB/B) and Brazilian national scale credit ratings to bra/bra-2 (from braa+/bra-1). This revision reflected the downgrades of BES Investimento do Brasil, S.A. s main shareholder ratings, which in turn resulted from the downgrade of the Republic of Portugal s sovereign credit risk rating. The stand-alone credit profile (SACP) of BES Investimento do Brasil, S.A. was left unchanged at BB, the same as that of its main shareholder. S&P based its rating on the company s adequate capitalisation, expertise, brand recognition in its key business segments, and adequate liquidity. 14 Annual Report 2011

15 Earnings Distribution Proposal Considering that the individual income statement of Banco Espírito Santo de Investimento, S.A. for the year ended on December 31 st, 2011 showed a net loss of EUR 9,377, (nine million three hundred and seventy seven thousand four hundred thirty three euros and eighteen cents), the Board of Directors submits to the Annual General Meeting the following proposal for the distribution of earnings for the year: (EUR) To Other Reserves and Retained Earnings: ( 9,377,433.18) Espírito Santo Investment Bank 15

16 Declaration of Conformity In accordance with Article 245, number 1, paragraph c) of the Portuguese Securities Code, the Members of the Board of Directors of Banco Espírito Santo de Investimento, S.A. hereby declare that, to the best of their knowledge: a) The individual financial statements of Banco Espírito Santo de Investimento, S.A. for the year ending on December 31 st, 2011 were prepared in accordance with the legally applicable accounting standards; b) The consolidated financial statements of Banco Espírito Santo de Investimento, S.A. for the year ending on December 31 st, 2011 were prepared in accordance with the legally applicable accounting standards; c) The financial statements referred to in paragraphs a) and b) above provide a true and accurate image of Banco Espírito Santo de Investimento, S.A. and consolidated companies assets, liabilities, equity and earnings; d) The Management Report describes faithfully Banco Espírito Santo de Investimento, S.A. and consolidated companies business evolution, performance and financial position for the year ending on December 31 st, 2011 and includes a description of the main risks and uncertainties that could affect the business. Lisbon, March 21 st, 2012 Ricardo Espírito Santo Silva Salgado (Chairman of the Board of Directors) José Maria Espírito Santo Silva Ricciardi (Vice-Chairman of the Board of Directors and Chief Executive Officer) Francisco Ravara Cary (Vice-Chairman of the Board of Directors and Executive Board Member) Rafael Caldeira de Castel-Branco Valverde (Vice-Chairman of the Board of Directors and Executive Board Member) Miguel António Igrejas Horta e Costa (Vice-Chairman of the Board of Directors and Executive Board Member) Ricardo Abecassis Espírito Santo Silva (Vice-Chairman of the Board of Directors and Executive Board Member) Amílcar Carlos Ferreira de Morais Pires (Member) Bernard Marcel Fernand Basecqz (Member) Bernardo Ernesto Simões Moniz da Maia (Member) Christian Georges Jacques Minzolini (Executive Board Member) Diogo Luís Ramos de Abreu (Executive Board Member) Duarte José Borges Coutinho Espírito Santo Silva (Member) Félix Aguirre Cabanyes (Executive Board Member) Frederico dos Reis de Arrochela Alegria (Executive Board Member) João Filipe Espírito Santo de Brito e Cunha (Member) José Manuel Pinheiro Espírito Santo Silva (Member) Luís Miguel Pina Alves Luna Vaz (Executive Board Member) Moses Dodo (Executive Board Member) Nicholas Mark Finegold (Member) Paulo José Lameiras Martins (Executive Board Member) Philippe Gilles Fernand Guiral (Member) Tiago Vaz Pinto Cyrne de Castro (Executive Board Member) 16 Annual Report 2011

17 Espírito Santo Investment Bank 17

18 01 Economic Environment

19 Lisbon Room (Lisbon)

20 Economic Environment GDP Growth, Selected Economies International Economic Environment was marked by the difficulties bred by the Eurozone debt crisis. In addition to fears over Greece s default, there was a visible contagion effect not only to peripheral economies such as Spain and Italy, but also to some of the core economies, namely France and Austria. The loss of confidence and growing risk aversion associated to financial instability in the Eurozone led to a liquidity dry-up in the money and credit markets, which was particularly acute as from August/September. In this context, and already close to the end of the year, the EU leaders agreed on a reinforcement of budget consolidation and control rules. On the other hand, the European Central Bank (ECB), after raising the key benchmark rate from 1% to 1.5%, reversed its monetary policy course, lowering the benchmark rate to 1%, with two 25 bps cuts in the 4 th quarter. At the same time, the ECB significantly reinforced liquidity injections in the financial system, loosened collateral rules and reduced the reserve requirement ratio for European banks. In December, the monetary authority conducted the first of two unlimited threeyear refinancing operations, with demand reaching EUR 489 billion. Aversion to risk caused the yields on 10-year bunds to fall from 2.963% to 1.829% in the year. The Euro dropped by 3% against the dollar, from EUR/USD to EUR/USD 1.296, with this trend becoming sharper towards the latter part of the year. Main Stock Market Indices Jan. 2001= IBEX Dow Jones Nasdaq 50 DAX Nikkei PSI Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Source: Bloomberg Fears over the debt crisis contagion, especially within the financial sector, also fed into the equity markets, with the main European indices suffering considerable drops: the DAX, CAC40, IBEX35 and PSI20 fell in the year by 14.7%, 17.0%, 13.1% and 27.6%, respectively. In the US, the Fed s more aggressive monetary policy stance and the relatively bright outlook for economic activity afforded the equity markets a less negative performance: the Dow Jones gained 5.5%, the S&P500 remained flat and the Nasdaq slid by 1.8%. In China and Brazil, fears over inflation and the monetary authorities price control efforts (particularly in China) led the Shanghai Composite and Bovespa indices to fall by 21.7% and 18.1%. % China s GDP rose by 9.2% in 2011, slowing down from 10.3% in However, declining inflation towards the end of the year buttressed the monetary policy s support of economic activity, allaying concerns about a steeper fall of economic growth. In the 4 th quarter of 2011 the Chinese GDP grew by 8.9% year-on-year, after rising by 9.1% in the previous quarter. Index (points) CRB s Food and Metals Indices 1,200 1,100 1, Source: Bloomberg Source: IMF, National Statistics Institutes USA Eurozone China Brazil Japan CRB Metals (left axis) CRB Food (right axis) Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 The easing of global inflationary pressures at the end of 2011 was supported by the downward trend of commodity prices. The Commodity Research Bureau s Food and Metals price indices fell year-on-year by 8.3% and 7.7%, respectively. In 2011 the price of Brent crude rose from USD 94.3 to USD per barrel, despite falling by 8.2% in the last three quarters of the year as expectations of global demand became increasingly subdued Index (points) 20 Annual Report 2011

21 USD/ Barrel Oil Price Brent WTI fiscal deficit dropped from 6.2% of GDP in 2010 to 4.1% in 2011), but also by the deceleration of private consumption as labour market conditions deteriorated (the rate of unemployment reached 10.4% of the working population). Exports also slowed down, reflecting the cooling of external demand, especially from the emerging economies, as well as the rise of the euro in the first half of the year. itraxx Index 0 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec Source: Bloomberg Basis Points itraxx Main 5 years itraxx Financials Senior 5 years Economic Environment in the Eurozone After sharply accelerating at the beginning of 2011 due to a strong expansion of investment, particularly in construction, which benefitted from good weather conditions, the Eurozone economy s growth gradually decelerated for the remainder of the year, and activity actually contracted in the 4 th quarter. Overall the Eurozone economy grew by 1.5% in 2011, down from 1.9% in Economic growth was very uneven within the EU member states: while Germany, Europe s main economy, grew by a robust 3%, the performance in most other countries was much more subdued, with Greece and Portugal registering negative GDP growth and Spain and Italy growing by less than 1%, as activity in these economies was much restricted by the strong efforts towards fiscal consolidation under way during the year. Economic Sentiment Indicator, Core vs. Periphery 0 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Bloomberg Growing uncertainty and tensions in the financial markets, particularly in the debt markets, and the dry-up of liquidity in the interbank money market that became especially acute since the summer, penalised confidence levels among economic agents and restricted bank funding across Europe, in a context of growing interconnection between the evolution of the public debt markets and the banking sector. The recapitalisation requirements imposed on European banks, and these banks increasing difficulty in accessing the money and credit markets resulted in shrinkage of credit flows to families and companies, further contributing to scale down consumption and investment. Index Core (Germany, France, Netherlands, Belgium, Austria and Finland) Periphery (Spain, Portugal and Greece) The annual average inflation rate reached 2.7%, up from 1.6% in 2010, being mostly driven by the rising price of energy (especially fuels) and food. However, the underlying inflation rate, which excludes these components, was more contained (+1.7% year-on-year), translating the absence of demand-driven inflationary pressures, to which the high level of unused installed capacity and the rise of unemployment also contributed. 60 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Source: Bloomberg, ES Research Economic performance in the Eurozone was also irregular throughout the year. As economic sentiment worsened and fiscal policy became more restrictive, the 4 th quarter also saw a quarter-on-quarter retraction of economic activity in core economies such as Germany, the Netherlands and Austria. The slackening pace of economic growth during the year was not only driven by this strong fiscal consolidation effort (the overall Eurozone The risk that the increase in prices could in time lead to an increase in salaries led the European Central Bank to lift the key benchmark rate from 1% to 1.5% (one increase in April and another in July). However, with growth prospects deteriorating and confidence levels falling sharply, especially after the summer months, and in the absence of significant inflationary pressures, the European monetary authority once again cut back the key rate to 1%, in two movements, respectively in November and December. In relation to the so called non conventional monetary policy measures, which are intended to minimise tensions and instability in the financial markets, the ECB provided ample liquidity to the banking system, conducting regular liquidity injection operations by unlimited amounts at 1 week and 1 month at fixed rate and at 3 months at the average rate in force in the period. In addition, the ECB announced two new long-term Espírito Santo Investment Bank 21

22 (3 years) liquidity facilities in the amounts that may be requested by the banking sector and at the average rate of the main refinancing operations in force in the corresponding period. The first of these operations took place on December 21 st, 2011, with the ECB lending a total of EUR 489 billion to 523 banks. Euro Zone - Refi Rate % Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Bloomberg Furthermore, the ECB announced a new covered bond purchase programme taking place between November 2011 and October 2012, with purchases in the primary and secondary markets in the amount of EUR 40 billion (the ECB had already conducted a similar programme, in the amount of EUR 60 billion, for a period ending in June 2010). The ECB also maintained the secondary market public debt purchase programme initiated in May 2010, under which it purchased a total of EUR 200 billion until the end of In order not to increase money supply, the amount purchased under this programme was sterilised through shortterm deposits made by commercial banks with the ECB. In July the ECB announced its decision to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for refinancing operations in the case of debt securities issued or guaranteed by the Portuguese Government, a measure it had already taken with regard to Greece and Ireland. The euro showed a rising trend against the dollar during the first half of 2011, mirroring the widening gap between Eurozone and US interest rates in fact, while the ECB was lifting key interest rates and further hikes were anticipated, the Federal Reserve was increasingly expected to maintain its monetary policy unchanged for a long period, particularly with regard to the fed funds rate. Hence the euro reached against the dollar at the end of May, a record high since the end of However, increasing global aversion to risk contributed to reverse this movement during the second half of the year: the deterioration of economic sentiment allied to the debt crisis in the Eurozone exerted downward pressure on the Euro, which closed the year at to the dollar. EUR/ USD EUR/ USD Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Bloomberg Economic Environment in Portugal In Portugal, 2011 was mar ked by contagion effects from the Eurozone debt crisis and the start of implementation of the financial adjustment programme. To the overall deterioration in financing conditions and investors growing aversion to risk, there added, in the case of Portugal, the successive cuts of the sovereign debt rating (to BBB- by S&P, and Ba2 by Moody s, at the end of 2011). The yield on 10-year public debt securities rose from 6.6% to 13.4%, widening the spread against the German bunds yield by 789 basis points, to 1,153 basis points. Eurozone European Central Bank Balance Sheet 3,000 2,500 Yields Spreads on 10-year Government Bonds vs. Germany, Selected Economies 3,500 EUR billion 2,000 1,500 1,000 Basis Points 3,000 2,500 2,000 1,500 3,313 Greece 500 Source: Bloomberg Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 1, Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 1,153 Portugal 660 Ireland 528 Italy 326 Spain Source: Bloomberg 22 Annual Report 2011

23 The financial adjustment programme agreed with the IMF-EU-ECB, under which the Portuguese economy receives a bailout package of EUR 78 billion, started to be implemented in May and has already been subject to two favourable assessments by the official creditors. On the fiscal consolidation front, the public deficit has been reduced from 9.8% to close to 4% of GDP. Although this was in part achieved through extraordinary measures (mainly the partial transfer of banks pension funds to the general public pension system), it also translates the important effort undertaken to reduce public expenditure, which grew below budget, and good budget implementation, in line with estimates. Significant headway was also made on structural reforms, in an environment of political and social stability. Main measures included: (i) changes in the labour market intended to increase flexibility and reduce production unit costs, with a positive impact on competitiveness; (ii) the reform of the rental market, promoting mobility, the reduction of indebtedness and the absorption of housing supply; and (iii) improving the competition environment, namely through a programme of privatisations, the end of golden shares, a new competition law aligned to the European practice, the reform of the transport sector, the introduction of rules enhancing competition in telecommunications and electricity, and the reform of the judicial system, namely introducing greater flexibility in insolvency and corporate recovery processes. Economic Environment in Spain Following a steep recession in 2009 (-3.7%) and a period of stagnation in 2010 (-0.1%), the Spanish economy posted a more dynamic performance in the first half of 2011, which was offset, however, in the second half of the year. This was due to the contagion effects from the Eurozone debt crisis, the deterioration of domestic financing conditions and confidence levels, and the announcement of a more restrictive fiscal policy. With GDP contracting by 0.3% in the fourth quarter (QoQ), the annual GDP increase was 0.7%. Private consumption was heavily penalised by a rising unemployment rate, which reached 22.9% of the labour force at year-end. Domestic demand continued to be held back by the ongoing adjustment in the housing and residential construction sector. Gross fixed capital formation dropped by more than 5%, with construction retreating by ca. 8%, after falling by 11.1% in Reflecting the persistently unfavourable conditions in the sector, housing prices tumbled by 6.8%. Although somewhat abating towards the end of the year, exports growth remained strong in 2011, at around 8%, thus allowing an increase in the contribution of net external demand to growth. Unemployment Rate On the other hand, the fiscal consolidation effort induced a contraction of domestic demand in 2011, with public and private consumption retreating by ca. 3% and investment by ca. 11% (average annual terms). Exports of goods and services continued to grow at a brisk pace (close to 7% in real terms), with Africa, Latin America and Asia becoming increasingly important destinations. The performance of exports cushioned the annual contraction of GDP (1.6%), and above all contributed, alongside the ongoing deleveraging process in the various sectors of the economy, to a significant decrease of the external deficit - from 8.3% to ca. 5.1% of GDP with an additional reduction being expected for 2012, to around 2% of GDP. Portugal s net stock of external liabilities has also diminished, down to close to 103% of GDP, which compares to a peak of 110% in % labour force Source: Bloomberg Portugal Main Economic Indicators (real growth rates (%), except as otherwise indicated) Housing Prices (YoY) E GDP (2.9) 1.4 (1.6) 15 Private Consumption (2.3) 2.1 (3.9) Public Consumption (0.6) (3.9) Investment 3.7 (0.9) (0.6) 2.1 (0.1) (13.3) (3.6) (14.0) Exports (0.1) (10.9) Imports (10.0) 5.4 (5.5) Inflation (CPI) (0.8) Budget Deficit (% of GDP) (3.4) (5.9) (4.1) (3.1) (3.6) (10.1) (9.8) (4.0)* Public Debt (% of GDP) Unemployment (% of labour force) Current & Capital Account balance (% of GDP) (6.0) (8.2) (9.1) (8.9) (11.1) (10.1) (8.3) (5.1) % Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 E: Estimate (*) Includes the impact of the integration of banks pension funds Source: INE, Bank of Portugal, Finance Ministry, European Commission, OECD, ES Research Source: Bloomberg Espírito Santo Investment Bank 23

24 As a result of the worsening of the Eurozone debt crisis and its contagion effects, the yields on the Spanish 10-year public debt securities rose from 5.4% to 6.7% in November, subsequently dropping until reaching 5.1% at the end of the year. Risks of further contagion heightened fiscal consolidation concerns, especially as the public deficit grew above the initial target for 2011 (6% of GDP), to just over 8% of GDP, largely due to the higher than expected public deficits of the autonomous regions. In this context, the new government elected on November 20 th, supported by an absolute majority in parliament, announced a reinforcement of fiscal saving measures and structural reforms, including the flexibilisation of the labour market and new measures to increase stability in the financial sector. Fiscal Balance (% of GDP) bearing in mind a public deficit of 8.4% of GDP (in the fiscal year), also contributed to the deceleration of growth. Moreover, domestic demand and investment also suffered from high family indebtedness, rising inflation, growing unemployment and low consumer confidence. The average inflation rate reached a peak of 5.2% in September, subsequently dropping to 4.2% in December (3.3% in December 2010). The hike of the VAT rate at the beginning of the year, from 17.5% to 20%, as well as the increase in energy, commodity and imports prices were the main drivers of this acceleration in prices, which took a heavy toll on private consumption. Although the inflation rate rose above the target established by the Bank of England, the monetary authority opted for holding the key rate at 0.5%, while increasing its quantitative easing programme (repurchase of assets) in October by GBP 75 billion, thus adopting a clearly more expansionary monetary policy in Bank of England Balance Sheet % GBP billion Source: European Commission, ES Research 0 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 According to the European Banking Authority, the capital requirements of Spanish Banks amount to approximately EUR 26 billion (or EUR 17 billion if considering the convertible bonds which the Spanish banks have included as equity). Due to the financial sector s rising funding difficulties, banks increasingly resorted to the ECB s liquidity facilities, with ECB loans to the Spanish banks reaching EUR 119 billion in December. In this economic and financial context the main rating agencies downgraded Spain s public debt rating, which stood at AA- at the end of the year. Despite a slowdown in the last months of the year, the average annual inflation rate increased from 1.8% in 2010 to 3.2% in 2011, reflecting the lagged effects of the VAT rise in 2010 and the increase in energy prices. Economic Environment in the United Kingdom Source: Reuters Ecowin Reflecting the fiscal measures adopted and the deepening of the Eurozone sovereign debt crisis in the second half of the year, the yields on the 10-year gilts (UK public debt securities) displayed a downward trajectory throughout the year, hitting a low of 1.963% in the last session of In an environment of high uncertainty in the markets and increasing aversion to risk on the part of investors, the UK debt was seen as a safe haven, benefitting from a general flight-to-safety movement. This trend was also evident in the performance of the sterling against the euro: while the euro rose during the first half of the year up to a high of EUR/GBP , the pound subsequently gained ground until reaching EUR/GBP 0.84 at the end of the year. The pound remained relatively stable against the dollar, registering a slight increase of 0.53% in annual terms. The United Kingdom economy slowed down during 2011, growing by 0.9%, after expanding by 2.1% in Despite a moderate performance in the first three quarters, culminating with a 0.5% increase in the 3 rd quarter, the last three months of the year saw GDP retreating by 0.2% (QoQ). The fall in manufacturing and construction output allied to the near stagnation of the services sector, and also the slowdown of exports due to difficulties arising from the Eurozone debt crisis, penalised activity in the latter part of the year. Strong fiscal consolidation efforts, 24 Annual Report 2011

25 EUR/ GBP % EUR/ GBP Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Bloomberg Economic Environment in Poland In 2011 the Polish economy continued to display robust growth. In contrast to the general slowdown of economic activity in the European Union, Poland s GDP grew by 4.3%, after rising by 3.9% in Domestic demand was one of the mainstays of this performance, with the improvement of the labour market driving a 3.4% increase in private consumption and investment expanding by 8.7%, being fuelled by the organisation of the European Football Cup in Private Consumption and Investment (%, annual change) Private Consumption Source: European Commission Investment Net external demand, underpinned by a weaker Zloty, also gave a positive contribution to GDP growth. Exports surged by 7.3%, offsetting the lower increase in imports (ca. 7%). Reflecting the Polish economy s vulnerability to the performance of the Eurozone economies, as well as the global economic scenario, the Zloty fluctuated during the year between 3.84 and 4.56 against the euro, closing the year at 4.46, which translates a fall of 11% vis-à-vis the European currency. EUR/ PLN EUR/ PLN EUR/ PLN USD/ PLN Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Bloomberg If on the one hand this performance benefitted the trade balance, on the other it also amplified inflation risks. The strong inflationary pressures to which the Polish economy was subject during the year as a result of rising energy and food prices and the increase in taxes led the National Bank of Poland to lift the benchmark rate four times between January and April, holding it at 4.5%. This monetary policy tightening contained the rise in prices, and after reaching a peak of 5% in May, the rate of inflation closed the year at an average of 4.2%, above the Central Bank s medium-term inflation target of 2.5% was also marked by rising concerns about the public accounts. The fiscal deficit reached 5.6% of GDP and the public debt increased to 56.7% of GDP. Following the October parliamentary elections, which returned to office the PO-PSL coalition, the government announced their priorities, namely the implementation of structural reforms and the consolidation of the public accounts, the latter by increasing taxes and cutting expenditure. Economic Environment in the United States of America The United States GDP grew by 1.7% in 2011, decelerating from 3% in Despite the expanding pace of annualised quarterly growth, with the rate of GDP rising from 0.4% to 2.8% between the 1 st and the 4 th quarters, annual growth fell below expectations, being pulled down by a number of external shocks, including disrupted supply chains after the Japanese earthquake, the rise in oil prices, and the impact of the European debt crisis. This performance is mainly explained by weaker investment (with annual growth slumping from 17.9% to 4.7%) and the contraction of public consumption (-2.1%) in so far as private consumption held on relatively well (+2.2% in 2011, after rising by 2% in 2010) USD/ PLN Espírito Santo Investment Bank 25

26 GDP, annualised quarterly growth US Federal Reserve Balance Sheet ,000 % USD billion 2,500 2,000 1,500 1, Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Bloomberg Source: Reuters EcoWin Lacking its traditional support from the equity and housing markets, the growth of household consumption was mainly driven by the improvement of the labour market and a declining saving rate. In fact more than 1.6 million jobs were created during the year, the rate of unemployment dropped from 9.1% to 8.5% of the labour force and the saving rate declined from 5.2% to 4% of disposable income. Given the persistence of a surplus of vacant homes, the housing market continued the adjustment process of previous years, characterised by reduced new housing construction, low confidence levels among property developers and falling house prices, notwithstanding the low level of mortgage interest rates. Year-on-year inflation was 3% at year end, above the 2% target established by the monetary authority but showing a markedly downward trend and with inflation expectations anchored in the medium term. In this context the Federal Reserve conducted a second round of quantitative easing (QE2) during the first half of the year, buying USD 600 billion of long-term Treasury securities, while holding the fed funds target rate at an historically low level (in a range of 0% %). The relatively weak traction of the economic recovery led the Fed to adopt additional monetary policy measures in the second half of the year. The first of these measures was to maintain the size of its balance sheet, replacing securities coming to maturity through the acquisition of new securities. Second, it announced its intent to keep key interest rates at exceptionally low levels at least until mid Finally, the Fed announced the Twist operation, which was intended to extend the maturity of its balance sheet. This will involve, until mid-2012, selling Treasury notes with maturities of three years or less and using the money to buy debt with maturities of between seven and 30 years. The programme will be worth USD 400 billion. Economic Environment in Brazil Despite a lower real growth rate than in 2010 (7.5%), the Brazilian GDP grew by 2.7% in 2011, which is close to its estimated growth potential (4%). This performance was mainly fuelled by the expansion of private consumption, supported by favourable conditions in the labour market where average annual unemployment registered an historical low (6% of the labour force), enabling a 5.2% real increase in the wage bill. Unemployment Rate (% labour force) % Source: Bloomberg Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 If on the domestic front Brazil showed a bright outlook, the situation was no less different regarding its balance of payments. Supported by the good performance of the emerging economics and the ample liquidity provided by the advanced economies central banks, commodity prices pushed the trade balance above its level in 2010, virtually preventing the deterioration of the current account balance (there was only a marginal increase in the deficit, from USD 47.5 billion in 2010 to USD 52.6 billion in 2011). The Brazilian economy s solid fundamentals, allied to the opportunities arising from the sports events which the country will host in the coming years, namely in terms of the necessary infrastructure building, attracted a total of USD 66.7 billion in foreign investment, which contributed to propel international reserves to USD 352 billion. This buttressed the real, whose average exchange rate against the dollar retreated from BRL/USD 1.76 in 2010 to BRL/USD 1.67 in Annual Report 2011

27 BRL/USD and BRL/ EUR Economic Environment in Angola USD/ BRL; EUR/ BRL EUR/ BRL USD/ BRL Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Source: Bloomberg The acceleration of economic activity growth in Angola during 2011 was mainly fuelled by the improving performance of the oil sector, with the country consolidating its position as the second largest oil producer in Sub-Saharan Africa. In fact, once the technical problems occurred at the start of the year had been solved, oil production intensified, reaching close to 1.8 million barrels/day at the end of the year. For the Angolan oil sector, the rebound in oil prices and in world demand for oil was of upmost importance as it will permit to go ahead with planned projects in oil exploration that require very large investments as they are located in deep and ultra-deep waters off the Angolan coast. The persistently strong pace of demand gave rise to inflationary pressures, with consumer prices closing the year at the upper limit of the tolerance interval permitted for inflation (6.5%). Despite this inflationary scenario and the resilience shown by the Brazilian economy to the effects of the troubled international financial situation, the Central Bank of Brazil decided to reverse the monetary tightening process initiated in the first half of the year, cutting the basic interest rate as from August: the SELIC rate was reduced from an annual high of 12.5% to 11% in December (10.75% at the end of 2010). The Central Bank justified this strategy with fears that the local economy could sharply lose momentum. Hence, other than its habitual focus on fighting inflation, the monetary authority expanded its objectives of defending economic activity. USD billion Angola - Net External Reserves and Oil Production Sources: OPEC, National Bank of Angola External Reserves (left axis) Oil Production (right axis) ,0 1,9 1,8 1,7 1,6 1,5 1,4 mb/ day Inflation (YoY) and SELIC interest rate % SELIC Interest Rate IPCA But investments in the Angolan economy have not been limited to the oil sector. Angola is currently one of the four African countries with more than USD 3 billion of foreign investment, with the bulk of this amount being channelled to the manufacturing industry. The governmental authorities have maintained as one of their objectives to invest in a diversified range of major infrastructures, namely in areas such as roads, railways and housing, while also promoting projects to recover domestic production, which is less reliant on external intermediate consumption. 2.0 Source: Bloomberg Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 The upgrade of Angola s risk rating by the three main rating agencies, with stable outlook in all three cases, shows the existing confidence in the country s economy. To sum up, the Brazilian economy s performance throughout 2011 showed its strong resilience capacity against a difficult international scenario. In July Standard & Poor s lifted Angola s rating from B+ to BB-, outlook stable, placing it in a better position than many of its regional neighbours, including Nigeria. Moody s, in May, and Fitch, in June, also raised Angola s debt rating. This was seen as recognition for the country s capacity to maintain robust and consistent macroeconomic growth, for the good assessment made by the IMF within the scope of its monitoring of the USD 1.4 billion loan facility to Angola, and for the progress made by the Government in reducing arrears on debt to contractors from 2008 and Espírito Santo Investment Bank 27

28 AOA/USD and AOA/EUR Economic Environment in India 160 EUR/ AOA and USD/ AOA 140 AOA / EUR AOA/USD Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Source: Bloomberg On the foreign exchange front, ever since the monetary authorities decided to abandon the Angolan currency s peg to the dollar the Kwanza trended within a range of USD/AOA However, stability against the dollar meant an appreciation against the euro, given the losses recently sustained by the European single currency. Therefore, and in so far as the majority of Angola s imports come from the European Union, this behaviour of the Angolan currency did not benefit the Angolan authorities policy of stabilising inflation thus continued to see an upward trend in prices, which was mainly driven by the rise in food and beverages prices. This effect on the price of food products, which continues to translate the existing constraints at the level of logistics and distribution capacity, further emphasised the pressing need for investment in logistics infrastructures (warehousing, transport and distribution), as well as for greater domestic production capacity. In this context, annual inflation in 2011 rose to close to 15%. At monetary policy level, the National Bank of Angola, citing the need to promote the growth of the national economy, cut in April the rediscount rate from 25% to 20%, holding it at that level until the end of the year. Real GDP Growth In contrast to other economies, where in the course of 2011 the political focus shifted from the combat of inflation to the management of activity growth, the Indian economy continued to strive to curb inflation and contain inflationary expectations, with signs of a reversal in the rising trend of prices only becoming visible towards the end of the year. Price resistance thus only permitted a small decline in the average annual rate of inflation, from 9.6% to 8.7% (fiscal year). Inflationary factors consistently changed as the initial rise in food and energy prices gradually fed into other components. The major problem lies in the consistently high level of core inflation, which reflects inflation at the level of non-food manufactured goods and shows a strong correlation with global commodity prices. The decline of inflation at the end of 2011 thus stemmed in part from the easing of commodity prices in the second half of the year. At monetary policy level, India s Central Bank (the Reserve Bank of India) maintained a markedly anti-inflationary stance, lifting the repo rate seven times in 2011 (from 6.25% to 8.5%), the last time in October. YoY Inflation Rate % Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Bloomberg % The restrictive nature of economic policy induced a cooling of economic activity across all sectors, with GDP growth dropping from 8.5% to 7% (in the fiscal year). Private consumption and gross capital formation growth decelerated from 8.6% to 6%, and from 8.6% to 4.2%, respectively. In line with the global increase in aversion to risk, the rupee (INR) fell by 10% against the dollar in 2011, and in average annual terms is estimated to have reached INR/USD 49 in fiscal 2011/ Source: IMF 28 Annual Report 2011

29 Espírito Santo Investment Bank 29

30 02 Activity Review

31 Room of the Presidency (Madrid)

32 Investment Banking Business As the investment banking arm of the Banco Espírito Santo Group, Portugal s second largest privately held financial institution, Banco Espírito Santo de Investimento 4 (Espírito Santo Investment Bank) has increasingly focused its strategy on the expansion of its international activity, being present in 4 continents and having access to the main financial markets in the world: London, New York and Hong Kong. Ever since entering its core Spanish and Brazilian markets in 2000 up until its recent expansion into Mexico, the Bank has supported its Clients in their internationalisation processes while actively seeking opportunities to expand abroad its distinctive technical and commercial capabilities. As part of its internationalisation strategy Espírito Santo Investment Bank acquired in 2010 a controlling stake in Execution Noble, an investment banking and brokerage group with presence in the United Kingdom, India, Hong Kong and the United States. This acquisition facilitated access to the Asian markets, and in 2011 the Bank established a joint venture with a local partner in India, the Burman family, to develop brokerage activities and provide non credit investment banking services. Espírito Santo Investment Bank s main objective is to provide services to medium-sized and large companies, institutional Clients, and in some specific segments, retail Clients. The Bank s main source of income is derived from commissions arising from advisory services, brokerage and distribution of securities and from income generated by structured credit underwriting and asset and risk management. The Bank has adopted in the various geographies where it operates a matrix-based team structure with the Client origination teams working closely together with the product and execution teams. Business Teams Client Relations Deal Origination Wholesale cross-selling with the BES Group Geographical Focus In 2011, the international expansion strategy and the development of business opportunities with other entities resulted in a number of initiatives, including: March 8 th, 2011: sale of the entire stake held in Execution Noble LLC, a North-American broker dealer held by Execution Noble. The transaction complied with the North-American authorities requirements as part of the authorisation process to allow the Bank to acquire a controlling position in Execution Noble. CLIENTS Industry Expertise Product know-how October 21 st, 2011: approval to open a subsidiary in Mumbai, followed by the incorporation of Espírito Santo Securities India Private Limited. November 7 th, 2011: filing of request to open a subsidiary in Mexico under the form of a Sociedad Financera de Objecto Múltiple ( SOFOM ), mainly intended to obtain funding in local currency in the Mexican market and to grant financings, also in the local market. Product Teams Equity Capital Markets Fixed Income Corporate Finance Mid-cap Financial Advisory Capital Structure Advisory Project Finance and Securitisation Acquisition Finance and Other Lending Private Equity Wealth Management December 5 th, 2011: resolution to increase the Bank s share capital by EUR 46,269, (from EUR 180,000, to EUR 226,269,000.00), to be fully subscribed by the sole shareholder Banco Espírito Santo, S.A. ( BES ), through contributions in kind in the form of securities issued by the Bank which had been the object of an exchange offer launched by BES, whose results were announced on December 2 nd, All references to Espírito Santo Investment Bank are deemed to refer to Banco Espírito Santo de Investimento, S.A. and/or any of its subsidiaries or branches, taken together or separately. 32 Annual Report 2011

33 December 12 th, 2011: partial amortisation, in the amount of EUR 46,269,000.00, of the perpetual subordinated bonds with conditional interest previously issued by the Bank, which it acquired as a result of the capital increase referred to above. December 22 nd, 2011: reinforcement of the indirect stake in Espírito Santo Investment Holdings Limited (the entity that has full control over Execution Noble Limited), through a GBP 20,000, capital increase of this company and the direct acquisition of holdings to shareholders. Fireplace Room (Madrid) Espírito Santo Investment Bank 33

34 Client Origination Client Satisfaction A Responsibility and a Permanent Challenge. Satisfying our Clients is the Best Measure of our Success. We follow a Client centric approach, based on a long lasting relationship, committing our best human and technical resources to providing solutions that meet our Clients objectives and needs.

35 London Room (Lisbon)

36 Client Origination The Client Origination Team strives to originate transactions for all the Bank s product areas. It works closely with corporate Clients to identify their needs and projects, supported by its extensive knowledge of the market opportunities. The Client Origination Team is specialised by industry sectors in a proactive and innovative approach aimed at developing sustainable and lasting Client relationships. The Bank s leadership of the Portuguese investment banking market and the increasing globalisation of its Clients propelled the internationalisation of its operations in the context of a global economy. In line with this strategy, the Bank continued in 2011 to reinforce its direct international presence in Spain, Brazil, Angola, the United Kingdom, Poland, and the United States, a presence we believe is increasingly valued by our Clients. were propelled by the growing internationalisation of a large number of Portuguese and foreign companies, increasing the Bank s cross-border business, but also by the identification of opportunities in the local markets. The Client Origination Team continued to assist its Clients in achieving their goals, by implementing the following principles: Strengthening relations with Clients in different regions, providing an integrated, cross-border package of investment banking products and services; Increasing selectivity in the identification of commercial opportunities, namely to pre-empt any balance sheet restrictions susceptible of affecting the closing of deals; Maintaining a proactive support and permanent dialogue with the Clients, in anticipation of and in response to market events; 2011 was a year of great instability in the world economy, with every attempt at stabilisation successively disappointing the markets. The situation was particularly harsh in the South Mediterranean countries, which were penalised by a very negative sentiment regarding their sovereign risk that virtually shut them out of the funding markets and warded off investors. In Portugal, a fastly deteriorating climate during the year forced the country to call early elections and to accept an international bailout programme to support its economy. Even so, several important investments were concluded during the year in the various geographies where the Bank is present. These investments Increasing cross-border activities in a full range of areas direct investment, alliances and partnerships, trade flows, etc. - taking full advantage of the Bank s growing direct presence in different countries; Improving the capacity of the Bank s teams in different locations to originate and coordinate value-added business proposals. The commitment and professionalism of the Bank s staff supported the efficiency and effectiveness of its commercial and product teams, a performance reflected in the significant deal flow and in the results attained despite the recessionary climate that characterised Client Origination by Geography Portugal Spain Brazil United Kingdom Poland USA Angola Client Origination by Sector Cluster 1 Transports & Infrastructure Public Sector Environment Health Care Metals and Mining Cluster 2 Capital Goods Distribution Packaging Cluster 3 Electricity, Oil & Gas Pulp & Paper Auto Forestry Cluster 4 Telecoms, Media & Technology Chemical Sports & Leisure Cluster 5 Construction Building Materials Road Concessions Banking & Insurance Cluster 6 Real Estate Tourism Mid-caps All the sectors 36 Annual Report 2011

37 Client Relationship - Portugal As a result of the extremely adverse economic and financial conditions during 2011, a large number of operations (both financing and capital market transactions) had to be discontinued, naturally forcing a shift in the Bank s business approach and in the profile of its Clients. On the other hand, this unfavourable economic climate also gave rise to a number of business opportunities in the domestic market, namely on the sell side and also involving Portuguese companies in the process of expanding abroad. Hence, despite the lower transaction volume in the market as a whole, the Bank s proximity to and knowledge of its Clients allied to their confidence in the work developed over the years by the Bank s teams allowed Espírito Santo Investment Bank to be involved in most of the relevant businesses and deals taking place in Portugal in The Bank was particularly active in the Privatisations Programme approved by the Portuguese Government, once again confirming its leading market position. Pedro Toscano Rico Luís Valadas Its brand and reputation are today valuable assets for the Bank, allowing it not only to identify foreign investors with an interest in Portugal but also to support the Portuguese companies in their internationalisation efforts. The Bank s international platform, in the origination and execution of cross-border operations, and coordination with Banco Espírito Santo Group s different business areas in identifying opportunities and arranging transactions, were also key factors in the success obtained. Luís Bandeira Danielle van der Grinten Alexandra Beato Luís Boavista Espírito Santo Investment Bank 37

38 Client Relationship - Spain Notwithstanding the adverse context for the development of its business, the Bank s M&A and equity capital markets activities were particularly successful in The Bank participated in most of the capital market transactions concluded during the year, advised on several M&A operations, and also obtained several cross-border M&A mandates, namely with Brazil and Portugal. The Client Origination Team continued to reinforce the relationship with the existing Clients and to promote contacts with potential Clients in various sectors of activity. Carolina Ibañez The start of 2012 does not permit to anticipate any improvement in current market conditions, at least in the short-term. Nevertheless, the Bank will continue to explore any potential business opportunities capable of translating into successfully concluded operations. The commercial efforts, jointly undertaken with the various BES Group teams, will mainly target the origination of cross-border business opportunities. Building ever closer relationships with existing Clients while striving to capture new Clients will remain a priority in Alfonso Ponce de León Carlos Paramés 38 Annual Report 2011

39 Client Relationship Brazil Despite the difficulties faced by the more advanced economies, which impacted the growth pace of the Brazilian economy, the Bank achieved significant successes in Brazil in A highly competitive environment characterised by fierce dispute over Clients and transactions put margins and commissions under strong pressure. The ambitious targets set for the year represented important challenges that had to be overcome. A focused commercial strategy permitted to expand the Client base in various clusters and consolidate relations with the existing Clients, allowing the Bank to meet its objectives. As a result of close coordination with the Bank s product areas and with BES Group s other international units, it was possible to close important deals that enhanced the Bank s visibility in the market. Miguel Lins Cooperation with other BES Group units resulted in strong growth in the activities of the International Premium Unit (UIP) in Brazil, with the completion of 49 investment banking operations in the areas of treasury and risk management, capital markets, project finance, acquisition finance, and corporate finance. This activity benefits from BES Group s internationalisation strategy, and strengthens the loyalty of Iberian and multinational companies operating in new markets. Geraldo Rinaldi The outlook for the Brazilian market remains positive: a flow of investments in the infrastructures and commodities sectors is expected, but also in manufacturing, commerce and services, with a key focus on the domestic consumer market. However this scenario could change, depending on how severe the financial crisis becomes, and particularly on how it affects the European market. Silvan Suassuna Eduardo Garcia da Silva Espírito Santo Investment Bank 39

40 Client Relationship United Kingdom The integration of Execution Noble s brokerage and investment banking activities into Espírito Santo Investment Bank s organisation was concluded in 2011 allowing the Bank to offer its Clients a securities distribution platform with direct access to investors in the world s main financial markets together with a solid Mid-cap Pan European Research. The increased allocation of resources to off-balance sheet fee generating activities and the integration of the Client Origination Team within the structure of Execution Noble enhanced the visibility of companies based in Iberia, Brazil and Poland, leading to a significant increase in cross-border activities with UK-based companies while permitting to launch the bases for the development of a specialised approach to the UK market, based on a value proposition that is set to make a difference within the available offer in this market. Miguel Borges In 2012 the Client Origination Team will enhance its sector specialisation focus, concentrating its activity on the Natural Resources, Financial Institutions, Professional Services and Financial Sponsors sectors with a view to promoting the equity capital markets, corporate finance and debt restructuring business areas. 40 Annual Report 2011

41 Client Relationship Angola Investment banking operations in Angola, developed through the Investment Banking Office jointly created with Banco Espírito Santo Angola (BESA), have been mainly geared in recent years towards assisting BESA in preparing and structuring finance for public entities involved in Angola s national reconstruction programme and for private investment projects, particularly in the real estate sector. A licensing request for an Angolan investment bank was submitted to the Angolan authorities with a view to (i) increasing coverage of the Angolan market by means of a local presence with a special focus on the infrastructure sector (specifically transport, energy, etc.); and (ii) tapping opportunities for financial advisory services with the aim of increasing cross-border activities with other geographies where the Bank operates (specifically Portugal and Brazil), exploiting this advantage in the local market. Jorge Ramos In addition, a licensing request to open a brokerage firm has also been submitted. This unit will allow the Bank to develop capital markets operations in Angola s future securities and derivatives market, as soon as the scheduled opening of the Bolsa de Valores e Derivados de Angola (BVDA) takes place. This important initiative by the Angolan authorities should foster the rapid development of a domestic capital markets (both primary and secondary) and stimulate greater activity in the banking sector, leading to greater differentiation between the strategies of different operators as they enter new business areas. Espírito Santo Investment Bank 41

42 Client Relationship Poland In line with the strategy defined locally, in 2011 the Client Origination Team focused its efforts on establishing and strenghtening commercial relations with the new Clients, and on the origination of operations for the Bank s different business areas. Throughout the year the Client Origination Team worked with the product teams on the development of a more efficient business model permitting to create new business opportunities and to identify cross-selling opportunities within the ongoing transactions and relationships. Bartlomiej Dmitruk Two specific areas deserved particular attention, also yielding visible results: 1) intervention in the ongoing privatisations process, based on a closer relationship with the Ministry of Treasury; and 2) development of commercial relations with the corporate Clients in the non-credit areas of M&A and equity and fixed income origination. The team has also been developing the trade finance business, namely through the provision of guarantees to the construction and transport sectors. Łukasz Pierzkała Ryszard Hermanowski 42 Annual Report 2011

43 Client Relationship United States In 2011 the Client Origination Team in the United States focused its activity on: Providing support to the Bank s Clients from other geographical regions with operations or interests in the Americas, particularly in North America; In Mexico the Client Origination Team pursued the process of presenting the Bank and establishing commercial relationships, in which it was remarkably successful, namely originating credit lines for the Bank, supporting the completion of project finance transactions, submitting proposals for capital market operations, and securing financial advisory mandates. Widening the North and Latin American Client base by leveraging the Bank s specific expertise as a factor of differentiation and generation of business opportunities; Strengthening ties with Portuguese companies based in the US with a view to develop cross-selling opportunities and to position the Bank in the US as the go to bank for all their investment banking needs; Positioning the Bank as the reference institution in investment banking in the strategic triangle: Iberia, Africa and Latin America; Developing business ties with Mexican companies to capitalise on the opening of the representative office in Mexico City. The Client Origination Team consolidated its activity in the US and in Spanish Latin America, being instrumental in the origination of new project finance and financial advisory operations, as well as supporting the securities distribution activity. In cooperation with the different business areas, a significant number of visits to North American companies with economic interests in the strategic triangle were completed, generating various cross-border mandates. The team was also directly involved in the organisation and promotion of the following events: The Second Meeting of American Politicians of Portuguese Ascendancy, held in Washington under the aegis of the Portuguese Embassy in the United States, brought together more than 45 US politicians and dozens of Portuguese-American entrepreneurs. A huge success and the year s most important event for the Portuguese-American community in the US, it was attended by Mr. Aníbal Cavaco Silva, President of the Republic of Portugal, and Mr. Paulo Portas, Portugal s Minister for Foreign Affairs. As the main sponsor of the event, Espírito Santo Investment Bank invited to the meeting several of its corporate Clients with businesses in the US, namely Soares da Costa, Sovena, WeDo, EIP and S&F Concrete. The Portugal-Mexico Business Club, held in Mexico City in November 2011 under the aegis of the Portuguese Embassy in Mexico, brought together more than 100 entrepreneurs with business relations with Portugal. It was an opportunity for the Bank to present its activities and draw attention to the support it can provide in the intermediation of business relations not only with Portugal but with other business partners. Nuno Cardoso Espírito Santo Investment Bank 43

44 Private Banking Value Creation. Sophisticated Clients require a tailor made service. Together with Banco Espírito Santo Private Banking Division, we have a dedicated team holding distinctive investment banking and wealth management experience in order to better endorse the specific needs of the very high net worth individuals.

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46 Private Banking The activity of the Private Banking Division in 2011 is presently developed only in Portugal and was therefore impacted by the deterioration of the sovereign risk crisis, which eroded investor confidence, weighing heavily on investors asset allocation decisions and leading to an increase in demand for liquid, short-term investments. Despite these constraints, which were responsible for the small number of operations executed, the business model implemented joint market approach by the Private Banking Division and the Bank s Product Areas has permitted to offer the Clients value-added investment propositions and extend the distribution basis of operations originated in the bank to a market segment that traditionally was not approached in a systematic manner. Lourenço Vieira de Campos The Private Banking Division looks to 2012 with great expectations, being confident that, while the adverse climate lived in 2011 is set to continue, past threats can be turned into future opportunities and a focused, close and systematic approach to the product areas will translate into concrete investment opportunities for our Clients. 46 Annual Report 2011

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49 Capital Markets Focus on New Market Opportunities and Products. In spite of the uncertain context that characterised 2011, the focus on new market opportunities and products lead to resilience of results. Trading Room (Lisbon)

50 Equity Capital Markets Equity Primary Market Market Background 2011 was characterised by a climate of extreme volatility in the financial markets, which was the result of various factors, namely: (i) the deterioration of the sovereign debt crisis and uncertainty about the unfolding of the situation in Greece, whose contagion effects led Portugal to request for external assistance and subsequently to sign an agreement with the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF), with fears arising towards the end of the year that the crisis would spread to other Eurozone countries such as Italy and Spain; (ii) the geopolitical instability due to tensions in North African and Middle Eastern countries; (iii) the earthquake in Japan; (iv) the fears of a new deceleration of growth in the North-American economy; and (v) the combat to inflation in the emerging markets. Most of the main international stock market indices had a negative performance in The Dow Jones, which benefitted from being seen by investors as a safe haven, was one of the few exceptions. Leading Stock Market Performances in 2011 DOW JONES IRISH OVERALL S&P 500 NASQAD FTSE 100 IBEX 35 DAX CAC 40 EUROSTTOXX 50 NIKKEI 225 BOVESPA WIG 20 PSI 20 ATHEX COMPOSITE -51.9% Source: Bloomberg -13.1% -14.7% -17.0% -17.1% -17.3% -18.1% -21.9% -27.6% -1.8% -5.6% 0.6% 0.0% 5.5% In the primary market, the amount of share and equity-linked offerings at global level reached approximately USD 618 billion in 2011, slumping by 28% versus the previous year, with Initial Public Offerings (IPOs) plummeting by 40% and secondary offerings dropping by 22%. The year s overall gloomy performance translates the sharp contraction of activity during the second semester, as the first had actually seen a year-on-year increase of 27%. The financial sector maintained a prominent role in global primary market activity, representing 24% of the total. IPOs in 2011 totalled USD 75 billion, with the emerging economies representing 40% of the total and sales by private equity firms accounting for 17%. In the EMEA (Europe, Middle East, and Africa) region, total offerings amounted to USD 155 billion, having decreased by 11% compared to the previous year. IPOs in the region amounted to USD 38 billion (-11% YoY), capital increases with pre-emptive rights totalled EUR 39 billion (-6% YoY) and equity linked offerings were USD 12 billion (-13% YoY). In Brazil, the volume of funding raised in share offerings reached BRL 19 billion, one of the lowest in the last few years, with follow-on offerings representing 60.7% of this total (BRL 11.5 billion). More than 70% of the offerings took place in the first half of the year, and only 6 offerings were concluded in the second half, the result of the deterioration of the world economic crisis. Iberian Peninsula In Portugal there were no new company listings in 2011, with share offerings being restricted to those made under capital increases and exchange offerings of debt for equities. In Spain there were two IPOs in the financial sector, as well as a number of transactions in the MAB - Mercado Alternativo Bursátil (Alternative Investment Market) and block-trades of listed companies. The Brazilian stock market was not immune to the European crisis, and the Ibovespa index closed the year with a fall of more than 18%, representing market value losses of USD billion. Petrobras was one of the main contributors to this dire performance, having suffered the second largest market value loss in the world, of BRL 85.2 billion, or 23%. In this context, Espírito Santo Investment Bank acted in Portugal as Global Coordinator of the capital increase and issue of mandatory convertible securities of Sporting SAD (EUR 73 million), of Reditus s capital increase (EUR 21.6 million), of CIPAN s capital increase (EUR 2.5 million) and of Orey s tender offer for own shares (EUR 2.7 million). In Spain, the Bank was Co-Bookrunner of Banca Cívica s IPO (EUR million) and Sole Bookrunner of Catenon s IPO in the MAB (EUR 5 million). 50 Annual Report 2011

51 IPO 599,207,989 IPO 5,000,000 as Joint Bookrunner in the privatisation of 11.9% of Tauron, an utility (PLN 1.3 billion), as Joint Bookrunner in the privatisation of 12.1% of Banco BGZ (PLN 312 million) and as Sole Global Coordinator and Bookrunner of the capital increase of Kredyt Inkaso, a financial services company (PLN 47 million). In 2012 the Bank should continue to play an active role in the Polish privatisations programme and capital markets development. Co-Bookrunner Sole Bookrunner IPO Accelerated Bookbuilding of existing shares Rights Issue and Mandatory Convertible Securities Rights Issue PLN 312,000,000 Joint Bookrunner PLN 1,282,139,700 Joint Bookrunner 73,000,000 21,636,190 Joint Lead Manager Global Coordinator Share Capital Increase PLN 47,094,113 Rights Issue Public Tender Offer Global Coordinator 2,499,840 2,674, Global Coordinator Lead Manager United Kingdom Poland In the first half of 2011 the Polish stock market was not much penalised by the capital flight that affected the emerging economies in general to the benefit of the advanced economies, and at the end of the period the WIG20 was gaining 2.1%. However, the downward trend initiated during the 2 nd quarter persisted throughout the year, causing the WIG20 to suffer an annual loss of 21.9%. The primary equity market remained buoyant, fuelled by the government s ongoing privatisations programme and the increase in private-sector corporate funding operations. Espírito Santo Investment Bank further reinforced its credentials in the Polish market, where it participated The UK primary equity market remained sluggish in 2011, reflecting a lack of confidence bred by the persisting uncertainty surrounding macroeconomic conditions. In these circumstances, most of the transactions planned for 2011 in the market segment where the Bank operates were postponed or even cancelled. This scenario is set to persist for as long as there is no change in current market conditions. Capital raisings will be possible for companies aiming to grow, either by expansion or organically, however the markets anticipate that the restructuring programmes under way in the last 18 months are now practically concluded. Espírito Santo Investment Bank 51

52 Despite the unfavourable context, Espírito Santo Investment Bank acted as Bookrunner of Shaftesbury PLC s GBP million placement of shares, as Sole Bookrunner of GlobeOp Financial Services GBP 81 million private placement and as Joint Bookrunner of Workspace Group Plc s GBP 66 million capital increase. Follow-on Sale of Group BES Stake (Block Trade) R$ 810,724,020 R$ 3,179,331,755 Rights Issue Cashbox Placing of 22.7 million shares to Fund Acquisitions Joint Global Coordinator & Bookrunner Global Coordinator GBP 66,000,000 GBP 102,200,000 Joint Broker, Bookrunner & Underwriter Joint Corporate Broker & Bookrunner IPO Follow-on R$ 465,020,860 R$ 398,305,000 Co-Manager Co-Manager Placing of Secondary Shares GBP 81,000,000 Sole Bookrunner There are a significant number of companies in pipeline aiming to enter the equity market, which are only awaiting an improvement in market conditions to do so. When this happens, the Bank s activity in this area is set to register significant improvements. The sports events that will be hosted by Brazil in 2014 and 2016, the privatisation by auction of Brazil s main airports and the Growth Acceleration Programme ( Programa de Aceleração do Crescimento, or PAC ) are expected to generate large investment and funding needs, consequently boosting fund raising in both the local and the international capital markets that should translate into good business opportunities in this activity. Brazil In 2011 Espírito Santo Investment Bank acted as Joint Global Coordinator and Bookrunner of a secondary offering of shares corresponding to a 13.8% stake in EDP Energias do Brasil (BRL 811 million), as Sole Placement Agent in the sale of BES Group s stake in Bradesco (BRL 3,179 million), as Co-Manager of Tecnisa s secondary offering of shares (BRL 398 million) and as Co-Manager of Sonae Sierra Brasil s IPO (BRL 465 million). Investor Store (Lisbon) 52 Annual Report 2011

53 Equity Secondary Market Iberian Peninsula The main concerns at this point are how much further the crisis will deepen and spread at both European and world level, the impact which it will have on the economy in general and in corporate results in particular, and how long it will last. The sovereign debt crisis that started in 2010 became increasingly severe in the course of 2011, hitting Italy and Spain at the end of the year and contributing to a widespread deterioration of confidence among economic agents in general and investors in particular. All in all, Europe s prospects for 2012 are not very promising. High uncertainty levels and lack of confidence should persist, the markets are unlikely to see a strong comeback from investors, and therefore no significant recovery in volumes is to be expected. Portugal was one of the worst affected markets, with the PSI20 index falling by 27.6% and trading volumes in the NYSE Euronext Lisbon slumping by nearly 30% compared to In Spain the IBEX35 lost 13.1% in 2011, with trading volumes in the Bolsa y Mercados Españoles, the Spanish stock exchange, retreating by 11%. Espírito Santo Investment Bank maintained its leading position in equity trading in Portugal, with a market share of 11.7%, and in Spain stood in 4 th place in the brokers ranking, with a market share of 7.3%. Expected revenues growth in 2012 should thus come from new Client account openings, in part in the geographies where the Bank is already present but especially in the United Kingdom, where an important team integration and restructuring work was conducted during Business in the equity secondary market should see significant growth in 2012, driven not only by the development of the activity in London but also in the United States, where the Bank has been consolidating a new distribution unit. Brazil NYSE Euronext Lisbon Ranking and Market Share 15.9% 14.2% 12.4% 11.3% 11.7% 11.7% In 2011 the Bovespa index had its worst performance since 2009, falling by 18.1%. However this did not imply a drastic reduction in trading volumes, whose daily average was BRL 6.5 billion, down by 0.2% only on Through its subsidiary BES Securities, the Bank continued to rise in the Bovespa brokers ranking, reaching the 25 th position at the end of the year. The activity continued to be largely supported by the development and consolidation of the new business areas implemented over the last 3 years, which should continue to be important growth drivers in Source: NYSE Euronext Lisbon 1º 2º 1º 1º 1º 1º Despite a net outflow by foreign investors of BRL 1.4 billion from the equity market, the share of these investors in total trading volumes rose from 29.5% in 2010 to 34.7% in In the last quarter of 2011, the Government withdrew the IOF 5 tax on foreign inflows for investment in shares, which will likely boost volumes in 2012 (the net inflow into the Brazilian equity market reached ca. BRL 5.5 billion in January 2012). Madrid Stock Exchange Ranking and Market Share 7.6% 7.9% 6.0% 5.6% 4.6% 7.3% Notwithstanding the uncertainty surrounding the European economy at the start of 2012, the Brazilian equity market is expected to benefit from the new cycle of interest rate cuts and the acceleration of economic growth. Poland 5º 5º 5º 3º 3º 4º The performance of the Polish equity market in 2011 was in general aligned to the global markets. The first half of the year was fairly positive, however the deterioration of the sovereign debt crisis led to sharp falls in the markets in the second half of the year, to which the Warsaw Stock Exchange was not immune. Source: Six TeleKurs 2011 was marked by legislative elections in Poland, which returned to power the former coalition Government. The political stability thus 5 IOF - Tax on Financial Transactions. Espírito Santo Investment Bank 53

54 ensured should maintain Poland in the route of convergence towards EU wealth levels. During the year the Polish Government executed a significant part of its privatisation programme in various sectors, namely banking and utilities. Espírito Santo Investment Bank had an active role as advisor to the Government, and participated two privatisation operations in Despite the reform of the Polish pension fund system, which significantly reduced its participation in the market, trading volume grew by approximately 20% relative to The Bank pursued its strategy of selling its Polish equity research product, both to local funds and to international asset managers, using for the purpose the London and New York platforms. This enabled an increase of ca. 25% in intermediated volumes, allowing the Bank to maintain the 13 th position in the Polish brokers ranking, with a market share of 2%. The research team also expanded coverage of certain sectors to companies in the Czech Republic and Hungary, thus enhancing the regional nature of the research product. United Kingdom Trading volumes in the UK equity market declined in 2011, being impacted by the general climate of uncertainty bred by the sovereign debt crisis, which has impacted European and global markets. In this context, the Bank has been taking several measures that will allow it to be in a better position when the markets start to recover. The integration of this activity within the universe of Espírito Santo Investment Bank will permit to intensify the distribution of Iberian, Polish and Brazilian products in the UK market, allowing the Bank to differentiate itself from the competition. In 2011 the Bank started to act as market maker of a set of small and mid-cap listed companies. This activity will develop closer ties with the corporate segment and thus support the Bank s franchise in the market. A local emerging markets sales desk was also created in Overall, the Bank has been focusing on the products and services where it has greater expertise, which has translated into a better service provided to the Clients. The outlook for the European markets remains very uncertain due to the sovereign debt crisis and concerns about global economic growth. However, the level of integration of its UK activity with that developed in other geographies should allow the Bank to benefit from the expected market recovery, once a solution has been found for the current crisis. Asset Management Iberian Peninsula 2011 was marked by a particularly adverse context for the Asset Management business in Iberia, and especially in Portugal. Volatility in the equity markets, which further intensified as from August, and the increasing deterioration of the debt crisis, drove investors in Portugal and Spain to opt for lower risk alternatives (namely deposits and bonds), taking advantage of the high rates on offer in the market. Assets under Management at the Bank were naturally penalised by this context, decreasing by 22%, to ca. EUR 200 million but suffering a smaller drop than the market s. Spain saw Assets under Management rise by 3.3%, to EUR 12.3 million, although suffering from the same adversities that in Portugal harmed growth in the second half of the year. This performance benefited from the diversification and expansion of the Client base (currently 150 Clients, representing a YoY increase of 39%). Portfolio value fell by approximately 7% in Although negative, this performance was in line with the expectations created over nearly 10 years of activity, which buffered the return, in particular vis-à-vis the European indices where falls reached close to 20%, namely in the case of the Eurostoxx50. The management strategy continued to be based on flexibility and diversification, and these key mitigation factors proved an important factor of Client retention in a particularly challenging period. There was also an intensification of direct investment in fast growing markets where the Bank is present, notably Poland, with the growing understanding about the local market increasingly enhancing the performance of the various vehicles under management. In this context, one of the challenges for 2012 is to deepen the knowledge about the pan-european equity market, banking on Execution Noble s know-how in this area, as well as about the other geographies where the Bank has a direct presence, namely Poland, India and Brazil. The Bank will also pursue its objective of expanding its distribution channels, at both domestic and international level, and always in partnership with the commercial networks of the Banco Espírito Santo Group. A new project to be developed in 2012 relates to the London-based institutional distribution platform targeting the various geographies, which will seek to leverage on synergies arising from the existing contacts in the brokerage business. 54 Annual Report 2011

55 Brazil The Asset Management business in Brazil maintained the growth trend of the previous years, albeit at a slower pace. Assets under Management grew by 12%, to BRL 1.9 billion, which compares with increases of 22% in 2009 and 17% in Funds raised were mostly channelled to fixed income and pension funds, while net redemptions mainly occurred in equity and multi-market funds. At the end of 2011 BESAF BES Activos Financeiros had total Assets under Management of BRL million, distributed by 39 funds (+15% YoY), with exclusive and open funds representing 66% and 34%, respectively, of the total. Funds raised totalled BRL million while redemptions amounted to BRL million, representing a net redemption balance of BRL million. However, the average volume of funds raised was kept close to BRL 1 billion. This lacklustre performance resulted from the following factors: (i) poor performance of the multi-market funds and the Stock Exchange during 2011; (ii) increased fund raising by financial institutions through the issuance of fixed income securities (CDBs 6 and LFs 7 ), with more attractive prices; and (iii) macroeconomic scenario of turmoil in Europe. The Asset Management business strategic plan for was revised in 2011, entailing the definition of medium-term targets and strategies to promote the company s growth, namely: (i) revision of local and offshore products; (ii) launch of new products and establishment of new partnerships; and (iii) investment in the reinforcement of the team and systems. This strategic repositioning will also focus on cross-selling with the BES Group units and the expansion of the direct relationships with the independent distributors operating in the local market and with family offices. In this context, BESAF made significant investments in its structure, still in 2011, namely reinforcing the investment management and commercial areas with the objective of finetuning the investment process, expanding distribution capacity and increasing its participation in the Brazilian investment funds industry. The company maintains its expectation that Assets under Management will grow in 2012, supported by the investments made in The aim is to reach BRL 2 billion, through increased penetration in the segments of Institutional, Corporate and Private Banking Clients and Distributors/Family Offices. Cross-selling will be critically intensified in 2012: BESAF will focus on coordination with BES Group s commercial network, namely in Portugal, Spain, Switzerland, the United States and Asia, offering its range of Brazilian market products as an investment alternative. Madrid Room (London) 6 CDB - Bank Deposit Certificate. 7 LF - Financial Bond. Espírito Santo Investment Bank 55

56 Fixed Income PT Internacional Finance B.V. Market Background 5.875% Notes Due % Notes Due 2016 Activity in the primary market registered some improvement early in the year, supported by prospects of economic growth led by the emerging markets, the possibility that the rebound of the North-American economy would gain strength in response to the cycle of monetary stimuli (quantitative easing 2), and the growth of the Eurozone core economies, with Germany at the lead. The corporate sectors benefited from the improvement in economic indicators, increasing demand relative to the financial and public sectors debt issuers. 750,000,000 Joint Lead Manager 600,000,000 Joint Lead Manager However, in view of the likelihood of a slowdown in global economic activity, the sluggish recovery of the North-American economy and the worsening of the Eurozone debt crisis, global activity in the fixed income market became increasingly selective. The downfall in activity was particularly sharp in Europe during the second half of the year, especially in the financial sector, for which the semester was one of the worst ever. Fixed Rate Notes Due ,000,000 Ascendi Financing B.V. Fixed Rate Notes Due ,000,000 Debt Primary Market Lead Manager Lead Manager Iberian Peninsula Activity in the fixed-income market was subdued during the year, with only two large senior debt issues taking place in Portugal, both in January For the rest of the year, the activity was much restricted by the sovereign debt crisis that impacted the Eurozone peripheral markets in general and Portugal in particular. Contagion from the crisis in the Eurozone periphery also held back activity in the Spanish primary capital market, although to a lesser extent, as there were several debt issues by financial institutions, autonomous regions, corporations and the Spanish Treasury. As a result of the increased core capital requirements imposed on the European financial sector, banks liability management operations were particularly important during the year. In this context, Espírito Santo Investment Bank acted as Joint Dealer Manager of two Exchange Offers on subordinated debt issued by BES Group (totalling EUR million) and two Exchange Offers on subordinated debt issued by Espírito Santo Financial Group (ESFG), totalling EUR million. In 2011 the Bank acted as Joint Lead Manager of senior debt issues by EDP Finance B.V. (EUR 750 million) and Portugal Telecom Finance B.V. (EUR 600 million), and as Lead Manager of issues by Ascendi Financing B.V. (EUR 15 million) and ESF Portugal (EUR 17 million). Debt Exchange Offer 149,141,000 Debt to Equity Exchange Offer 627,437,000 Sole Dealer Manager Joint Dealer Manager 56 Annual Report 2011

57 Brazil Local Fixed Income Convertible Debt Tender and Exchange 317,950,000 Joint Dealer Manager In addition, the Bank acted as Joint Lead Manager of the Public Offers for Subscription of EDP bonds (EUR 200 million) and Sporting SAD bonds (EUR 20 million). Public Bond Offer 200,000,000 Debt to Equity Exchange Offer 374,650,000 Joint Dealer Manager Public Bond Offer Debt issuance volume in the local market totalled BRL 93.7 billion in 2011, slightly above the 2010 figure of BRL 93.3 billion. The majority of the securities (around 84.6%) was distributed under restricted placement efforts (legal basis ICVM 476), reflecting the strong concentration of institutional investors in the Brazilian market as well as the financial institutions weight in this market. Debentures were the most widely used instrument to raise funding in Brazil s local market (43% of the total), followed by Promissory Notes (16%), while the FIDCs (credit receivable investment funds), the fastest growing debt instrument since 2009, accounted for 15% of the total. The Bank participated in 12 fixed-income offerings in the local market, notably acting as: (i) Joint Bookrunner of Unidas issues of debentures (BRL 500 million) and promissory notes (BRL 325 million), (ii) Lead Manager of Ouro Verde s issue of debentures (BRL 165 million), (iii) Joint Bookrunner of TCI s issue of debentures (BRL 66 million), (iv) Lead Manager of Ejesa s issue of promissory notes (BRL 91.5 million), (v) Lead Manager of Ongoing Participações issue of promissory notes (BRL 60.5 million), (vi) Joint Bookrunner of CRT s issue of promissory notes (BRL 484 million), (vii) Joint Bookrunner of IESA s issue of debentures (BRL 60 million); and (viii) distributor of units in Banco Pine s FIDC (BRL 207 million). Joint Lead Manager Joint Lead Manager Finally, Espírito Santo Investment Bank organised and led nine new commercial paper programmes for an overall amount of ca. EUR 926 million. Debentures Debentures Poland R$ 500,000,000 R$ 165,000,000 In 2011 the Bank reinforced its credentials in the Polish fixed income primary market, where it acted as Joint Lead Manager of Mazovian Railways EUR 100 million, 5-year Eurobonds issue. Joint Bookrunner Lead Manager 6.75% Notes Due 2016 Debentures Commercial Paper 100,000,000 CDI+4.5% R$ 66,000,000 R$ 484,200,000 Joint Lead Manager Joint Bookrunner Joint Bookrunner Espírito Santo Investment Bank 57

58 Portugal s and BES Group s ratings led to greater concentration on the Bank s core Clients. Debentures R$ 60,000,000 Joint Bookrunner CDI +2% Asset Backed Securities R$ 207,000,000 Co-Manager The value of structured products placed on the primary market registered an increase of 82% in 2011, while structured debt issuance transactions increased from 75% of the total amount traded in 2010 to ca. 90% in 2011, mainly due to the reduction of derivatives transactions in Spain. Activity on the secondary market decreased its contribution to results, in both absolute and relative terms, not only due to market conditions in the second half of the year but also because the secondary market had to be tapped for certain issues (guarantee of amounts and minimum spreads). International Fixed Income The Clients maintained their preference for equity and credit-linked structured products. On the international fixed income front, activity was quite strong in the first half of the year, despite the instability of the global economic scenario. The total volume of externally sourced funding was USD 37.4 billion in 2011, slightly below the previous years volume (USD 40.3 billion). Despite the segment s dynamism, the market placed some restrictions on funding by companies with below investment grade ratings. The financial and oil&gas sectors represented more than 68% of the new issues. In a troubled global scenario, the world s three main rating agencies raised Brazil s risk rating, bearing out its financial strengthen and the positive momentum lived in the country. Risk Management and Trading & Sales Trading & Sales In 2011, the Trading and Sales strategy was based on: (i) focusing on regular business with Clients, (ii) presenting investment ideas, (iii) raising funding for the Bank, and (iv) pricing primary market issues. The continuous effort to develop and consolidate the Bank s institutional Clients base was a key driver of activity growth, more than making up for the reduction in the primary market. Brazil Risk Management / Structuring Iberian Peninsula Risk Management for Corporate Clients The financial crisis was responsible for a lower activity in 2011 in the area of Risk Management for Corporate Clients. In an environment of low interest rates, there was little appetite for interest rate hedging, while liquidity restrictions prevented credit concession as well as the participation in certain derivative restructuring transactions. On the other hand, there was a keen interest for commodity price hedging, namely for oil price derivatives and carbon allowance derivatives, due to this market s sharp growth in Iberia. Moreover the climate of foreign exchange volatility lived in 2011 permitted to maintain a considerable volume in foreign exchange derivatives. In line with the Bank s international strategy, cross-border operations deserved particular attention in order to better support the Clients with international operations. Risk Management for Institutional Clients The Bank maintained a strategic focus on the improvement and innovation of its structuring and execution services. The downgrade of Despite the strong volatility that characterised 2011 not only at global level but also in the Brazilian market (vide the performance of the real and of the local stock market, especially in the second half of the year), there was an increase in capital inflows to Brazil. Indeed, notwithstanding the new taxation imposed by the Brazilian Government (6% IOF 8 tax rate on fixed-income foreign investments), the wide gap between local and international interest rates continued to act as a spur on arbitrage activity in the foreign exchange and interest rate markets. The cuts in the Central Bank of Brazil s benchmark interest rate initiated in the second half of the year, which risks jeopardising the Government s anti-inflationary policy, also contributed to increase volatility in the local interest rate market. As a result of the liquidity problems induced by the global crisis, there were less Brazilian companies resorting to the international market for funding in 2011, especially in the second half of the year, which translated into an increase in debt issuance in the more liquid domestic market. In this context of high uncertainty, there was an increase in demand for short-term (up to 1 year) foreign exchange hedging operations, whose margins are lower and which are subject to fierce competition among banks, with demand for longer-term operations consequently decreasing. 8 IOF - Tax on Financial Transactions. 58 Annual Report 2011

59 The Bank has been able to stand out from the competition, advising its Clients through a dynamic outlining of interest rate, exchange rate and equity scenarios, bearing in mind these markets relative volatility and the available hedging instruments. The first half of 2012 is expected to see the same level of market volatility observed in 2011, although a possible improvement in the international scenario combined with the declining trend of local interest rates could benefit all assets in general, leading to an increase in capital market transactions and leveraging opportunities for the risk management activity. Trading & Sales Local Market capital market (primary and secondary), consequently boosting liquidity as well as opportunities in this market. In 2011 BES Investimento do Brasil started its activities in the international fixed income market through its subsidiary in the Cayman Islands, with the objective of participating in the secondary market, especially in Latin America (LatAm), and supporting the issues led by the Bank in the primary market. This will enable the Bank to widen its product range and reinforce its relations with the Clients, within and outside Brazil. Treasury Iberian Peninsula 2011 was marked by ample liquidity in the local fixed income market, translating into an increased number of issuers, lower spreads and longer maturities. Companies with a not so obvious credit profile engaged in syndicated transactions with potential for future distribution in the secondary market (public offerings with restricted placement effort - ICVM 476). Firm underwriting remained the main characteristic of the market, where high liquidity made competition over mandates among underwriting banks increasingly fierce. In this context, the Bank sought to position itself as the market leader in syndicated transactions, leveraging on the good relationship with its institutional Clients to submit firm underwriting proposals based on an accurate reading of bond placements. Espírito Santo Investment Bank was leading coordinator of issues of debentures by Ouro Verde (BRL 165 million), TCI (BRL 66 million), Unidas (BRL 500 million) and IESA (BRL 60 million), also participating in the distribution of debentures issued by WTorre Properties (BRL 200 million) and JHSF Participações (BRL 270 million) and in the distribution of units in Banco Pine s FIDC (BRL 207 million). In 2011 the Bank asserted a position as one of the largest players in the local fixed income secondary market, thus increasing its relationship with the investors and buttressing its readings for the submission of proposals for primary market issues. Approximately BRL 700 million were traded in the secondary market during the period, with an average volume per transaction of BRL 5 to 10 million. International Market The uncertainty provoked by the crisis in the Eurozone and consequent sharp increase in liquidity restrictions led the Bank s institutional investors Clients to adopt a more prudent stance vis-à-vis the primary issuance of Brazilian securities in the external market. In 2012 the international fixed income market will likely remain very volatile, in contrast to the domestic market, where the trend should be for an extension of maturities and a narrowing of spreads for new issues. With domestic interest rates decreasing, pension funds and institutional investors are expected to step up their participation in the domestic The credit market was relatively stable during the first half of 2011, but this stability was shattered in July as fears of sovereign risk contagion spread to Italy and Spain. The rating agencies were in the limelight, making multiple (and sometimes consecutive) rating downgrades of sovereigns and financial institutions that severely penalised the peripheral countries and their banking systems. This course of action by the rating agencies, besides increasing the aversion to risk, also led to a reduction in the stock of collateral eligible for rediscount with the European Central Bank (ECB). In this context the performance of the corporate market was much less negative, as it was seen as a safe haven. Portugal, along with the other peripheral countries, was under huge pressure during the year. The 5-year CDS spread, which at the beginning of the year stood at 500 basis points, increased to more than 1,000 basis points at year-end, having an effect of contagion on the national financial assets, particularly those of the banking sector, which remained virtually locked out of the debt markets. The ECB maintained its key role in ensuring the smooth operation of the markets, adopting a more flexible stance on collateral eligibility criteria and liquidity provision through repos, as well as making selective purchases of government debt. The ECB also conducted Longer Term Refinancing Operations (LTROs), introducing 3-year repos, with the objective of creating a more stable funding basis. Overall, the Eurozone financial institutions difficulties to access the debt markets in 2011 led them to increase their dependence on funding from the ECB. In this context, Espírito Santo Investment Bank s capacity to access the debt markets remained restricted, and no substantial improvements are expected in the coming quarters for any of the Portuguese banks. Debt issued in the form of Medium Term Notes (MTNs) totalled EUR 921 million in December 2011, a decrease of EUR 184 million over December The MTN Programme remained a fundamental tool in the Bank s funding strategy. Given the expected market constraints, the amount of debt to be issued in 2012 under the EMTN Programme (as well as debt issuance in general) Espírito Santo Investment Bank 59

60 should remain broadly in line with the 2011 level. The Bank will maintain its focus on serving the Clients and improving its funding profile. On December 31 st, 2011, the Treasury portfolio (excluding Brazil) amounted to EUR 279 million (market value), made up of cash products (EUR 264 million) and synthetic products (EUR 15 million). The assets that matured in 2011 were not replaced, while in addition the Bank made a number of selective sales aimed at improving its liquidity position. EMTN Programme / Total Outstanding Amount EUR million The cash products portfolio should be reduced in 2012, as the amount coming to maturity will not be reinvested, while the synthetic portfolio will likely increase by seizing opportunities that may arise during the year. Brazil The Brazilian market ran a surplus of liquidity during 2011, largely, but not only, as a result of the large inflow of funds into the country. 0 Source: Espírito Santo Investment Bank In this context, BES Investimento do Brasil maintained high levels of liquidity in its balance sheet, taking advantage of market conditions to reduce its funding costs while diversifying its funding sources, either by obtaining lines of credit with new local and international investors or by placing differentiated funding instruments with varying maturities. At year-end BES Investimento do Brasil carried a liquidity surplus that will provide for its forecast needs in the coming semesters. 60 Annual Report 2011

61 Espírito Santo Investment Bank 61

62

63 Corporate Finance Success Built on Specialisation. Our sectoral specialisation is fundamental to provide high value-added services to our Clients. In 2011, we advised 28 transactions (announced transactions), with a global value of approximately EUR 5.2 billion. Executive Floor (Lisbon)

64 Corporate Finance Market Background The gradual recovery of the Mergers and Acquisitions (M&A) activity observed since late 2009 lost sustainability in the second half of 2011, after which the level of business declined when compared to the same period in In 2011 M&A activity grew by 2% in value, to USD 2,280 billion, and by 12% in number of announced transactions. However this incorporates a negative performance in the second half of the year, when the value of announced deals fell year-on-year by 20%, despite an increase of 11% in the number of announced transactions. Iberian Peninsula The crisis in the Eurozone financial markets, which had impacted Portugal and Spain in 2010, further deteriorated in The rising cost of the sovereign debt and consequent increase in banks funding costs combined with marginal or even negative growth once again adversely affected M&A activity in the Iberian Peninsula, as had already happened in Hence, according to data published by Bloomberg for 2011, the M&A market in the Iberian Peninsula registered a fall of 19% in both the value and the number of announced transactions, which totalled USD 80 billion. In Portugal, the value and number of announced transactions shrank by 40% and 50%, respectively, down to USD 12.7 billion, while the larger Spanish market (it represents 85% of the Iberian market) fell by 25% in value and 14% in number of announced deals, to USD 68 billion. In 2010 the M&A business had grown by 28% in value and 13% in number of announced transactions. Europe performed in line with the global trend, with the M&A market rising by 3% in value, to USD 874 billion, and by 16% in number of announced deals, according to Bloomberg data. Brazil Brazil stood out amongst the emerging markets as the second largest market for M&A activities, after China. Despite a 38% drop in the value of announced M&A transactions in 2011, they grew by 30% in number, according to Bloomberg data, reaching a total of USD 100 billion. In 2011 cross-border transactions represented 46% of total transactions announced at global level (49% in 2010). In Europe, cross-border transactions remained the main driver of the M&A market, accounting for 80% of the total value of announced transactions, the same as in Announced transactions in the emerging economies ca. 26% of the global market fell by 14% in value in China, Brazil and Russia continued to be the more active geographies (representing a 42% share of the total emerging markets). Announced Transactions Worldwide Value No.of Deals Notwithstanding the market s decline in value, the strong growth in the number of deals in a context of global financial crisis reflects the solid fundamentals of the Brazilian economy and its resilience to the turmoil and uncertainties that plagued the external market. The economy s sustained growth, driven by the expanding consumption of the B and C classes, confirms the buoyancy of the domestic market, a key factor for maintaining the appeal of the Brazilian market for foreign investment within the overall international scenario. Regarding the transactions profile, there was a significant increase in domestic market deals, which grew by 23% year-on-year, reaching 50% of the total M&A transactions in the year (according to KPMG Brazil data). There was also a significant increase in transactions involving Brazilian family businesses, which hit a new growth record in USD billion 1,400 1,200 1, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Units United Kingdom 2011 was a difficult year in the UK for the M&A business, which fell by 13% in value, to USD 245 billion, while remaining flat in terms of number of announced transactions. A sluggish capital market and difficulties in obtaining financing for the operations are pointed as the main causes of this performance. Source: Bloomberg Transactions involving private equities (35% of the total in value) together with those with companies in financial distress and strategic opportunities continued to be the growth drivers of the UK s M&A market. All in all, the UK is essentially an international market, with cross-border transactions accounting for 92% of the total announced transactions in value and 69% in number, according to Bloomberg data. 64 Annual Report 2011

65 Poland BLOOMBERG Ranked by number of announced transactions The Polish market is currently one of the most attractive in Europe, the fruit of a stable financial system, a broad consumer base and high economic growth (GDP growth of 4.0% in 2011, which compares with 1.6% in the EU-27). Its attractiveness is also underpinned by a strong programme of privatisations, relative ease of access to acquisition finance and a dynamic local capital market. In 2011 the Polish M&A market grew by 10% in value, to USD 20 billion, and by 35% in number of announced transactions. This growth was all the more significant bearing in mind that 2010 had already seen an exceptional performance (growth in value of ca. 287%) as a result of Santander s acquisition of BZ WBK, a Polish bank. BLOOMBERG League Tables st Place M&A Financial Advisory Portugal (number of deals) Bloomberg Portuguese Target - Portugueses Acquirer 1 Banco Espírito Santo de Investimento 15 2 Caixa Banco de Investimento 6 3 BBVA 3 4 UBS 2 4 Citi 2 4 JP Morgan 2 4 Morgan Stanley 2 4 Rothschild 2 4 Credit Suisse 2 4 BTG Pactual 2 The biggest M&A deal carried out in 2011 in Poland was the acquisition by a local financial investor of Polkomtel, the largest Polish mobile phone operator, for EUR 4.2 billion. United States In the US, M&A activity registered positive growth compared to the previous year, rising by 21% in value, to USD 1,180 billion, and by 29% in number of announced deals (Bloomberg data). Activity of Espírito Santo Investment Bank BLOOMBERG League Tables st Place M&A Financial Advisory Iberia (number of deals) Bloomberg Iberian Target Iberian Acquirer 1 Banco Espírito Santo de Investimento 21 2 BBVA 20 3 Société Générale 18 4 Goldman Sachs 14 4 Citi 13 4 Morgan Stanley 13 4 JP Morgan 11 4 Barclays Capital 11 4 Santander 10 4 UBS 9 Overall, in 2011 Espírito Santo Investment Bank acted as an advisor in 28 M&A announced transactions, for a total value of approximately EUR 5.2 billion. The Bank acted as an advisor in 32 M&A completed transactions, for a total value of approximately EUR 6.0 billion. Iberian Peninsula In 2011 the Bank maintained the leadership of the Portuguese M&A market and once again ranked in 1 st place in the Iberian Peninsula (both by number of announced deals), thus further consolidating its position as a reference player in Iberia in the provision of investment banking services. Note: Information provided on February 14 th, 2012 Source: Bloomberg Despite the adverse context in Portugal and Spain, 2011 was one of the best years for Espírito Santo Investment Bank s M&A activity. The results achieved reflect on the one hand the Bank s strategic focus on the international players, which seek to take advantage of the prevailing economic uncertainty and valuation adjustment process, and on the other hand the Bank s expertise in a number of sectors. In the energy sector, which remained a prominent area of activity, the Bank has been working with international Clients interested in actively participating in the ongoing restructuring in Spain, and in the privatisations programme taking place in Portugal. Main transactions in which Espírito Santo Investment Bank was involved in Iberia in 2011 included: Acquisition of 400 MW in a CCGT plant plus an option to acquire a second 400 MW unit to Gas Natural Acquisition of 800 MW CCGT plant to Gas Natural SDG,S.A. 200,000,000 (EV) 313,000,000 Financial Adviser Financial Adviser Espírito Santo Investment Bank 65

66 ANBIMA Ranked by value of completed transactions (BRL milion) Brazilian Target Brazilian Acquirer Establishment of a 50/50 Joint Venture with First Reserve Energy Infrastructure Advisers, L.L.C. related to a 259 MW wind portfolio 743,000,000 Financial Adviser Acquisition of a 21.35% stake in EDP - Energias de Portugal, S.A., in EDP s 8 th reprivatisation phase* 2.7 billion Financial Adviser League Tables th Place M&A Financial Advisory Brazil (deal value) 1 BTG Pactual Morgan Stanley Santander JP Morgan Banco Espírito Santo de Investimento HSBC Caixa BI BofA Merrill Lynch Bradesco BBI Citigroup Source: ANBIMA Financial advisory to Ângelo Mesquita Lda in the disposal of 34.98% of Acções Mais, SGPS, S.A. Financial Adviser Acquisition of 55% of Saludães Produtos Alimentares, S.A. by M101, SGPS, S.A. 6,000,000 Financial Adviser The most significant M&A transactions in which Espírito Santo Investment Bank was involved in 2011 included: (i) the conclusion of financial advisory to Portugal Telecom Group on its acquisition of a stake in Oi Group and on the establishment of a strategic partnership between the two groups, and (ii) financial advisory to Drogarias Pacheco on its merger with Drogarias São Paulo, from which emerged Drogarias DPSP, the largest drug retail chain in Brazil, with gross annual revenues of BRL 4.4 billion. Financial Advisory to TDR Capital, LLP and Capricorn Associates, LTD in the divestment of Pizza Marzano,S.A. to Thesan Capital, S.L. Acquisition of Lafarge Betões 65,000,000 Acquisition of Hypermarcas food division R$ 180,000,000 Merger with Drogaria São Paulo to create Drogarias DPSP S.A. 51% (stake of Drogarias Pacheco in Drogarias DPSP S.A.) (pending) Financial Adviser Financial Adviser Financial Adviser Financial Adviser * Operation announced, pending regulatory approval Brazil In addition to a strong presence in the cross-border market, in 2011 the Bank also achieved success in advisory services to domestic M&A transactions, in line with the market trend. According to ANBIMA, 179 M&A transactions, totalling BRL billion, were announced in the Brazilian market in Espírito Santo Investment Bank reached the 5 th position in the ranking of completed deals by value. Acquisition of 25.3% in Telemar Norte Leste S.A. R$ 8,321,000,000 Financial Adviser Valuation to determine the economic value of its 50% stake in Carbocloro Financial Adviser 66 Annual Report 2011

67 In 2011 Espírito Santo Investment Bank completed the following transactions in Poland: Advisory to the shareholders of Atech in the sale of a 50% stake to Embraer Defesa e Segurança Advisory to SAG in the capitalization of Unidas S.A. through the sale of a 47.3% stake in the company to 3 PE Funds Kinea Investimentos,Vinci Capital, Gávea Investimentos Financial Adviser R$ 300,000,000 Financial Adviser Acquisition of 100% shares of PUDiZ Spólka z o.o. Sale of Bukowsko 18 MW Operational Wind Farm to IKEA Financial Adviser Financial Adviser Financial Advisory in the sale of its 20.6% stake in Owens-Illinois do Brasil Ind. e Com. S.A. Sale of 50% stake to Espírito Santo Property Brasil S.A. US$ 140,000,000 Financial Adviser Financial Adviser Sale of Leki Dukielskie 10 MW Operational Wind Farm to IKEA Financial Adviser Poland The last two years were focused on strengthening the position of Espírito Santo Investment Bank in the Polish market. The introduction of new product lines in 2010 and the reinforcement of the local team with experienced professionals with knowledge about and access to the local players fostered the activity developed during the year and allowed the Bank to complete three M&A transactions in the renewable energy and construction sectors. Although Polish companies currently show little interest in investing in the foreign markets, notably in those that form Espírito Santo Investment Bank s strategic axis Portugal, Spain and Brazil -, the Bank maintains its ambitious objective of supporting and acting as the preferred financial partner of Iberian and Brazilian companies expanding into the Polish market, and vice-versa, of Polish companies expanding into the Iberian and Brazilian markets. United Kingdom 2011 was a positive year for M&A activity in the United Kingdom, where growth was supported by the gradual return of private equity funds and companies to the M&A market. In terms of deal size, transactions remained essentially focused on the middle market, leading to increased competition among the market operators. The most dynamic sectors continued to be natural resources, commodities and technology in general was Espírito Santo Investment Bank s first full year of M&A activity in the United Kingdom, following the integration of Execution Noble. In this business area, the Bank mainly focuses on the middle market, while using the local market as a basis for cross-border transactions. In addition to its core M&A activity, the local team has also successfully advised on various debt restructuring processes. During the year the Bank advised the Carlyle Group on the acquisition of the Velosi Group (GBP 88 million) and AssetCo on the restructuring of its debt (GBP 103 million). Espírito Santo Investment Bank 67

68 Outlook Acquisition of Velosi GBP 88,000,000 Financial Adviser Debt Restruturing GBP 103,000,000 Financial Adviser 2012 will be fraught with new challenges for the M&A business area of Espírito Santo Investment Bank. With no solution in sight for the Eurozone crisis and many unsolved questions concerning the future behaviour of the main markets where the Bank operates, raising acquisition finance continues to be an extremely complex issue. At the same time, the differing valuations made by sellers and buyers are still very difficult to conciliate, and the investors assessment of businesses risks has tended to deteriorate. All these factors have hindered the execution of M&A transactions across the various markets. United States The M&A team in the United States mainly concentrates its activity on cross-border transactions with the Iberian Peninsula, but also with Latin America, namely Brazil and Mexico. The main target of this activity continues to be the energy sector, particularly in the areas of the renewable energies and transmission grids, and the focus on this sector is expected to be maintained in Nevertheless, Espírito Santo Investment Bank maintains its ambitious objectives for the M&A activity in The Bank will continue to target those sectors which have better weathered the crisis, and where it has developed strong and well tested competencies, namely energy and infrastructures. Geographically, the Bank will continue to target cross-border transactions in the markets where it is present, banking on the growth potential of the emerging markets and harnessing value opportunities arising in the more mature markets. Madrid Room (Warsaw) 68 Annual Report 2011

69 Espírito Santo Investment Bank 69

70 Mid-cap Financial Advisory A Well Organised and Integrated Team. The ambition of our Clients is more important than their size. We have created, in partnership with Banco Espírito Santo, a dedicated team to provide advisory services to mid-sized companies.

71 Executive Floor (Lisbon)

72 Mid-cap Financial Advisory Espírito Santo Assessoria Financeira was created in 2004, in partnership with the Mid-cap Corporate Division of Banco Espírito Santo, with the aim of providing investment banking services to the mid-cap corporate segment. Business and revenues in 2011 were in line with expectations. A total of 11 mandates were originated and completed, including: The investment banking services provided to this market segment include financial advisory services for mergers and acquisitions and for financial restructuring processes, as well as pure financial consulting services, namely valuations and economic and financial feasibility studies. Commercial efforts continued to be primarily undertaken by Banco Espírito Santo s Corporate Banking Centres, which remain important sources of business for Espírito Santo Assessoria Financeira. The business opportunities tracked by these Centres permit to schedule a plan of visits to introduce the services provided to potential clients, viewing the origination of financial advisory mandates. Disposal of 100% of Ecometais Financial Adviser Debt Restruturing 41,000,000 Financial Adviser In order to expand its business canvassing channels, Espírito Santo Assessoria Financeira has established a cooperation agreement with the Private Banking Division of Banco Espírito Santo. The aim is to offer financial advisory services that will support private banking Clients in the development of their investment projects as well as in the acquisition or disposal of equity holdings. Despite the adverse economic environment, Espírito Santo Assessoria Financeira s objectives for 2012 are to maintain the same level of activity and earnings achieved in The joint work undertaken with BES s Corporate Centres teams viewing the identification of new business opportunities will be pursued in Internal cooperation with Banco Espírito Santo de Investimento s Client Origination and Corporate Finance Divisions will also be emphasised in order to benefit from synergies in the offer of services and in the attraction of businesses. 72 Annual Report 2011

73 Espírito Santo Investment Bank 73

74 Project Finance and Securitisation Know-how and International Experience. Combining specific skills with solid international experience to provide our Clients with top quality Project Finance services. We work hard to find the best financial solutions, promoting the confluence of interests and looking for the most efficient sources of funding for the projects.

75 Executive Floor (Lisbon)

76 Project Finance and Securitisation 2011 was marked by the deterioration of macroeconomic and financial conditions in the Eurozone, which was especially acute in Portugal and the other European peripheral countries. This backdrop, allied to a climate of high uncertainty in the financial and credit markets, considerably impacted the development of the Project Finance and Securitisation activity, and in particular the execution of financing and financial advisory operations. Even so, Espírito Santo Investment Bank maintained an active stance in the lookout for business opportunities, having completed a total of 23 operations in Having its teams spread out into various geographies - the Project Finance and Securitisation division benefits from having a local presence and a good level of expertise on several international markets the Bank has emphasised a selective approach while fostering activity in regions in a healthy phase of the economic and financial cycle. In Brazil the project finance activity maintained a brisk pace, mainly on the back of the investments required to reduce constraints in the country s infrastructure sector. In Poland and Angola where countless opportunities are arising, particularly in the infrastructures and renewable energy sectors the Bank has maintained a consistent intervention in the structuring of finance transactions for investment projects. The main transactions completed in 2011 were: PV Loiral - Leadership in the arrangement and structuring of a EUR 14 million financing to PV Loiral, Produção de Energia, Lda. for the construction of a 7 MW solar photovoltaic park in Madeira; ELOS Leadership in the provision of guarantees totalling EUR 488 million to the European Investment Bank (EIB) for the construction, operation and maintenance of the high-speed railway link between Lisbon and Madrid (Poceirão - Caia stretch and Évora station); Vale Grande Wind Farm EUR 2.2 million refinancing to the company in charge of building, operating and maintaining a wind farm with installed capacity of 12.3 MW developed by Ventinveste, S.A. in Arganil; Lagoa Funda Wind Farm EUR 2.8 million refinancing to Iberwind Produção for the repowering and overpowering of the Lagoa Funda wind farm, involving the replacement of turbines and a capacity increase from 10MW to 12MW; Concessões Ascendi Financial advisory and EUR 45 million financing to Ascendi O&M, S.A. for the acquisition of toll equipment to be installed in the Costa de Prata and Grande Porto motorway concessions. At the same time, Espírito Santo Investment Bank actively countered the current restrictions on liquidity by focusing on non liquidity intensive activities, such as financial advisory and portfolio management services, while also searching for alternative financing solutions. In this context, the Bank signed a Memorandum of Understanding with Deutsche Investitions-und Entwicklungsgesellschaft mbh ( DEG ) and is negotiating a loan from the Inter-American Development Bank ( IDB ). The memorandum signed with DEG governs cooperation in the area of project finance and was designed to maximize synergies drawing upon each Institution s respective strengths and capabilities to originate structure and execute financing solutions in Latin America and other developing markets. The loan obtained from the IDB is earmarked to finance projects in Latin America and the Caribbean. Financing the construction of a solar photovoltaic power generation facility, with a total installed capacity of 7 MW in Paúl da Serra, Madeira Island 14,000,000 Mandated Lead Arranger Financing of Lisboa-Madrid high speed railway connection: Poceirão-Caia section and Évora Station 488,400,000 Mandated Lead Arranger Portugal In 2011, Espírito Santo Investment Bank reaffirmed its position as a reference player in Portugal in the Project Finance and Securitisation area, playing a leading role in the main transactions concluded during the year, both in structuring and coordinating finance transactions and in financial advisory services. Financing to acquire the equipment to introduce tolls in the concessions of Costa de Prata and Grande Porto 45,000,000 Arranger Refinancing for Parque Eólico Vale Grande, S.A. to increase the capacity of the wind farm in Arganil, Portugal, to 12.3 MW 2,230,000 Mandated Lead Arranger 76 Annual Report 2011

77 Refinancing the replacement of turbines and the capacity increase from 10 MW to 12 MW in the Lagoa Funda wind farm In 2011, the Bank acted as Financial Advisor and Mandated Lead Arranger of a financing to Tecneira s Villanueva Cosolar project for the construction and operation of a 3.5 MW photovoltaic park in Córdoba, representing a total investment of EUR 17.9 million. 2,800,000 Mandated Lead Arranger Financing a 3.5MW solar PV Plant in Cordoba, Spain 17,900,000 Although the global outlook for 2012 points to low economic growth or even recession in certain regions, namely the Eurozone, and prospects for the Portuguese economy continue to be hampered by the ongoing adjustment programme and the deleveraging process taking place in various sectors of activity, this business area is expected to maintain a good performance, underpinned by the strategy which has been consistently implemented. Spain Macroeconomic conditions and liquidity strains have impacted the Project Finance and Securitisation activity in Spain during Spain s efforts to reduce its deficit and public expenditure, and the downgrade of its sovereign debt rating contributed to a reduction in the number of public private partnership projects undertaken during the year, while in the renewable energy sector changes in the regulation also resulted in a decrease in the number of projects. In this context, the Bank adopted a strategically selective posture regarding transactions in both the renewable energy and the infrastructure sectors, while focusing on the revision of projects in portfolio with the aim of ensuring their viability. Despite a strong contraction in the Bank s project finance activity in 2011, the close ties developed over the years with the main players in this market were further reinforced, permitting to secure a number of advisory mandates that are expected to bear fruit in Market conditions are not expected to change in The Bank will continue to develop financial advisory, portfolio management and other non lending activities, maintaining a selective approach in the choice of transactions while focusing on pipeline diversification. United Kingdom Financial Adviser and Mandated Lead Arranger Espírito Santo Investment Bank s Project Finance activity in London was penalised by the liquidity restrictions that led to an overall market contraction and to a sharp fall in the number of projects financed by the Bank. There was also a widening of spreads and an increase in commissions for transactions concluded in this market. In 2011 the Bank participated in the refinancing of Blue Ocean, a company that holds container terminals in the Pacific coast, namely in the United States, China and Japan. This operation gives a clear clue to the ongoing market trend for widening spreads. Espírito Santo Investment Bank 77

78 The London team also pursued the project viewing the creation of a Euro denominated Credit Fund for Infrastructure Projects, in association with Sequoia Investment Management Company, an independent fund manager. Structure of Bridge Loan through the issue of Promissory Notes Letter of credit to guarantee the obligations of Renova Energia S.A. with BNDES Refinancing of the Blue Ocean portfolio of container ports on the pacific (USA, China and Japan) R$ 484,200,000 Lender R$ 410,000,000 Guarantor 400,000,000 Mandated Lead Arranger In 2012 the London team will continue to take part in the works viewing the launch of the Credit Fund, which will permit to originate new transactions for the Bank. Compared to previous years, the project pipeline is smaller, however the quality of its assets is better and prices are aligned to the new market conditions. Letter of credit to guarantee the obligations of Viabahia Concessionária de Rodovias S.A. with BNDES R$ 87,000,000 Guarantor Letter of credit to guarantee the obligations of Hidrotérmica Autódromo Energética S.A. with BNDES R$ 79,000,000 Guarantor Brazil 2011 was a vibrant year for the Project Finance activity in Brazil, reflecting the investments which have been taking place in the infrastructure sector, namely in energy, road concessions, urban mobility and wastewater systems. Main operations completed by the Bank during the year included: Renova S.A. - Structuring and issuance of a BRL 410 million letter of credit in favour of BNDES to guarantee the financing of wind farms with installed capacity of 195 MW; Hidrotérmica S.A. - Structuring and issuance of a BRL 158 million letter of credit in favour of BNDES to guarantee the financing of the construction of small hydropower plants; Letter of credit to guarantee the obligations of Hidrotérmica Boa Fé Energética S.A. with BNDES R$ 79,000,000 Guarantor Letter of credit to guarantee the obligations of GPA - Gestores Prisionais R$ 46,000,000 Guarantor VIABAHIA S.A. - Structuring and issuance of BRL 87 million letter of credit in favour of BNDES to guarantee the obligations of the motorway concession in the State of Bahia, held by Isolux and Engevix (total financing of BRL 650 million); CRT, S.A. - Structuring of a BRL 484 million bridge loan to finance the development of the motorway concession in the state of São Paulo; The outlook for 2012 is extremely bright in view of the auctions for infrastructure concessions already scheduled to take place during the year, particularly for airports, motorways, public transport systems, water and sanitation, and energy generation and transmission. A total BRL 240 billion are expected to be invested in 2012 in infrastructures, including in the oil and gas sector. GPA - Structuring and issuance of a BRL 46 billion letter of credit in favour of BNDES to develop the public private partnership project to build prison establishments in the state of Minas Gerais, (total financing of BRL 225 million). 78 Annual Report 2011

79 Americas The Project Finance & Securitisation activity maintained a good dynamics in 2011, namely in the United States renewable energy sector and in Canada s infrastructures sector. In the United States, the infrastructures sector did not perform so well as a result of market fragmentation. The Spanish speaking countries in Latin America continued to invest in the infrastructures and energy sectors, bolstered by new regulations and incentives. On the whole, Latin America continues to attract foreign capital as well as to expand its local capital base. In particular, the renewable energy sector in Mexico and in the Andean region has been especially active, both at the level of regulation and in terms of new projects coming to light in the market. Due to the restrictions faced in the European market, the Japanese and Canadian banks have been strategically positioning themselves in the region, and this trend is set to continue in The Bank s activity in North-America and in the Spanish language regions of Latin America was very subdued in 2011 as a result of the sovereign risk crisis in Portugal and the general deterioration of the financial markets in Europe. The consequent credit constraints and high funding costs led the Bank to suspend its project finance activity in the United States and Canada, and to limit its activity in Latin America to the provision of financial advisory and, in certain selected cases, to project finance structuring, in association with international and local development agencies. In line with this strategy the Bank has obtained a number of mandates that will be executed in the course of The outlook for 2012 suggests that the 2011 restrictions will be maintained. Assuming this scenario, several measures and initiatives have been taken in order to maximise the business area s profitability, maintaining a strategically selective allocation of credit to transactions that may be financed by development banks (such as the DEG, IDB, NAFIN Nacional Financiera, BANOBRAS - Banco Nacional de Obras y Servicios Públicos, CAF Banco de Desarrollo de América Latina, or COFIDE - Corporación Financiera de Desarrollo S.A..), while using the available resources to originate, subscribe, structure and distribute fee-generating transactions. Carlos Reis ( ) Executive Floor (Lisbon) Espírito Santo Investment Bank 79

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81 Acquisition Finance and Other Lending Increasing our International Presence. We support our Clients in their corporate acquisitions and other structured finance deals. We operate not only in the Iberian Peninsula but also in Poland, in Brazil and in the United States. Reception (Lisbon)

82 Acquisition Finance and Other Lending Market Background The acquisition finance market has been under pressure since 2007, and after staging a recovery in 2010, was further penalised in 2011 due to the continuing financial crisis associated to the sovereign debt risk in the Eurozone. According to S&P data, the total volume of European leveraged debt reached EUR 43.5 billion in 2011 (139 completed transactions). Although apparently similar to the 2010 performance, the 2011 figures in fact reflect a different reality: whilst the first semester maintained the previous year s growth trend, the second half of the year saw a steep fall in this type of operations as a result of a huge squeeze on market liquidity. EUR billion Senior Financial Debt European Market 180,0 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0 Debt Amount No. of Deals No. of Deals Transactions completed by Espírito Santo Investment Bank in Portugal included: PortQuay The Bank acted as Mandated Lead Arranger in the EUR 22 million financing of PortQuay s acquisition of 10% of Media Capital Group; J.F. Edwards Construction Company - The Bank acted as Mandated Lead Arranger in the refinancing of J.F. Edwards Construction Company s debt, totalling USD 9 million; Secil - The Bank acted as Mandated Lead Arranger in the EUR 75 million financing of Secil s acquisition of 100% of Lafarge Betões; Águas do Ribatejo - The Bank acted as Mandated Lead Arranger in the EUR 10 million financing to support Águas do Ribatejo s business expansion plan; Mares Lusos - The Bank acted as Mandated Lead Arranger in the EUR 42.5 million financing of Mares Lusos, S.A. s acquisition of the ETE Group; Fomentinvest - The Bank acted as Mandated Lead Arranger in the EUR million financing of Fomentinveste Energia, SGPS, S.A. s acquisition of Floponor - Florestas e Obras Públicas, S.A.. Acquisition of 10% of Grupo Refinancing of the Debt J.F. Media Capital SGPS by Edwards Construction PortQuay West I B.V. Company Source: Standard & Poor s 22,042,500 US$ 9,000,000 Espírito Santo Investment Bank Activity Mandated Lead Arranger Mandated Lead Arranger Growing restrictions on the financing of transactions led to a sharp fall in Espírito Santo Investment Bank s activity, especially in Spain and Poland, where no new operations were concluded. Despite this adverse environment, the Bank maintained its support to BES Group s Clients, and in particular to those involved in international expansion processes, which explains why most of the transactions concluded during the year took place in Portugal and Brazil. Acquisition of 100% of Lafarge Betões by SECIL 75,000,000 AR - Águas do Ribatejo EIM 10,000,000 Mandated Lead Arranger Mandated Lead Arranger 82 Annual Report 2011

83 Acquisition of Grupo ETE by Mares Lusos Acquisition of Floponor by Fomentinvest Energia Loan Facility Syndicated Loan 42,500,000 1,782,000 R$ 40,000,000 R$ 280,000,000 Mandated Lead Arranger Mandated Lead Arranger Leader Co-Manager In Brazil, the Other Lending activity was particularly strong in structured finance, with 53 deals closed in 2011, for a total of BRL million (includes renewals and new loans), out of more than 100 operations assessed during the year. There was also a strong increase (20% YoY) in lending to Portuguese Clients of Banco Espírito Santo Group that are expanding their business activity to Brazil. Main operations completed in 2011 included: Haztec Structuring and execution of a BRL 280 million syndicated loan for the extension of the debt maturity profile, together with Banco Santander and Banco Bradesco; Structure of Bilateral Loan R$ 25,000,000 Lender Structure of Bilateral Loan R$ Lender Ouro Verde Leadership of a BRL 100 million debentures issue in the local market (under the Brazilian Securities Market Commission ( CVM ) instruction 476) to finance the company s investment in 2011 and 2012; Louis Dreyfus Structuring of a BRL 40 million loan facility; IESA Structuring and execution of a BRL 28.5 million debentures issue in the local market; Copobras Structuring and execution of a BRL 25 million bilateral loan; Logoplaste Structuring and execution of a BRL 25 million bilateral loan. Outlook The contraction of the economy and the continuing deleveraging process taking place in the financial system should continue to condition the acquisition finance activity in Although with different degrees of severity, this process is expected to affect all European countries, creating obstacles to growth and to the financing of economic activity. In the Iberian Peninsula, companies will likely continue to suffer from funding difficulties, thus restricting the execution of transactions, especially large ones. In Poland, the weakening of confidence among the economic agents and falling external demand due to the international crisis are expected to lead to a slowdown of economic activity in 2012, impacting the Bank s activity in this business area. In the Other Lending business, the credit portfolio is expected to grow, while risk sharing, by means of syndicated transactions, will be emphasised. Espírito Santo Investment Bank 83

84 Private Equity Turning Difficulties into Opportunities. In 2011 we took advantage of market opportunities, investing selectively in new promising companies and developing the existing portfolio, generating value to our investors.

85 Executive Floor (Lisbon)

86 Private Equity Investment Portfolio and Financial Highlights (individual basis) Activity in 2011 Notwithstanding the deterioration of macroeconomic conditions, the investment made by Espírito Santo Capital increased in 2011 compared to 2010, particularly in the infrastructure and energy sectors. Follow-on investments registered the highest growth, while only one later stage investment was made during the year. The proprietary portfolio and the portfolios of Funds under Management were revalued in accordance with the practices established for each sector and the methodology regularly used. The market value of the total portfolio as of December 31 st, 2011 was EUR 121 million, which represents a year-on-year increase of ca. 8%. The good performance of the shareholdings proprietary portfolio had a positive impact on the net income for the year, which reached EUR 7.4 million. Espírito Santo Capital s equity totalled EUR 47 million. In terms of deals origination, there was an overall reduction of 24% in the flow of projects analysed, reflecting the increased prudence on the part of the economic agents when launching new investment initiatives. The total amount invested from the proprietary portfolio and the SES Iberia and ESIF funds reached EUR 16 million. Main investments were, in later stage, the buyout investment in GLT, a Spanish goods carrier, and in infrastructures, the follow-on investment in Globalwatt to finance the construction of the PV Loiral solar power plant, in Madeira. Total divestments amounted to EUR 10.3 million, permitting to obtain net capital gains of EUR 1.3 million. A total of EUR 0.9 million was distributed to the investors, corresponding to the reimbursement of shareholder loans and supplementary capital from the subsidiaries Logic, Amal and Iberwind. Fund raising activities continued to focus on the launch in Brazil of the 2bCapital fund, which should be finally incorporated at the beginning of Funds under management reached EUR 215 million at the end of the year, of which 59% corresponded to third-party funds. Evolution of Funds under Management Equity FCR PME BES FRIE IMIT SES Iberian I ESIF 250 Other Outlook Iberian Peninsula Investment and fund raising activities were conditioned by an adverse macroeconomic outlook for the Iberian market during the entire year. In Portugal, a weak credit market was particularly harmful for the buyout activity, but also for the financing of new infrastructure and energy projects, and this situation is expected to persist throughout Brazil The macroeconomic context in Brazil, although differing substantially from Iberia s, saw a slowdown of economic growth during the second half of Even so, there persisted a positive trend in the institutional segment s allocation of funds to the private equity activity, with new players being drawn to the sector. Economic indicators are expected to improve in 2012, and this could stir up the interest in private equity investments. Brazil is currently one of the most attractive emerging markets, with sectors such as oil, airports, renewable energy, infrastructures and consumer goods drawing the attention of countless foreign investors. EUR million Source: Espírito Santo Capital 86 Annual Report 2011

87 Espírito Santo Investment Bank 87

88 Wealth Management Increasing Demand for Financial Advisory Business. With the continuous growth in the Private Banking business in Brazil, Espírito Santo Serviços Financeiros has been operating in the local market with a mission to actively advise Clients in managing their financial portfolios. 88 Annual Report 2011

89 Reception (Sao Paulo) Espírito Santo Investment Bank 89

90 Wealth Management BES DTVM centralises all the financial wealth management services of BES Group in Brazil. The company bases its activity on the open architecture concept in investment advisory services, seeking to proactively identify the best financial products for its Clients and in this manner ensure their loyalty. The economic situation in the country, which once again managed to stay relatively secluded from the international turbulence, has favoured the growth of the wealth management business, leading an increasing number of business people, independent professionals and families to seek specialised asset management and financial advisory services. The Brazilian wealth management market lived a period of strong growth in the second half of the 90s. The privatisations and mergers process launched by President Fernando Henrique Cardoso produced a great number of former company owners with an expressive volume of funds to invest and the need for custom financial advisory services. The current development surge in the wealth management business (according to Forbes magazine, Brazil has been adding 19 millionaires per day) is explained by the fact that the Brazilians have regained their lost confidence in the local market, and are leaving an increasing share of their assets in national territory, away from the turmoil of the world markets. In 2011 the Brazilian private banking sector repeated its good performance of 2010, growing by 24% in nominal terms (by Assets under Management and returns), according to Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais ( ANBIMA ), and reaching more than BRL 460 billion in Assets under Management. Although the bulk of wealth remains concentrated in the large centres (São Paulo, Rio de Janeiro and the Southern region) the Northeast has been increasing its weight due to a high economic growth rate in recent years. This is the overall context in which BES DTVM has been operating in the local market. Having as its mission to actively advise the Clients on the management of their available financial resources, its objective is to achieve maximum return, while maintaining an adequate control over risks and a constant concern with cost reduction. In 2011, its second year of activity, BES DTVM closed the year with BRL million in Assets under Management, representing a year-on-year increase of 14.5%. BES DTVM s commercial team has been mainly operating in Brazil s largest cities, namely São Paulo and Rio de Janeiro, but also in others such as Salvador, Belém and Manaus. The exploitation of synergies with the Bank s other companies in Brazil has generated an increase in cross-selling, especially in M&A transactions and treasury products is set to be another year of growth. BES DTVM will seek to serve its Clients independently, with excellence and with the best products available. The company will maintain as a priority its investment in qualified professionals and new IT platforms to ensure the best monitoring of investments and portfolios. Reception (Lisbon) 90 Annual Report 2011

91 Espírito Santo Investment Bank 91

92 03 Human Resources

93 Madrid Room (Warsaw)

94 Human Resources The Talent Management Division The reduction in the number of Employees in 2011 reflects the deterioration of the international crisis and its impact on activity in some of the geographies where Espírito Santo Investment Bank is present. Headcount Dec-11 Dec-10 Change % Total Group (51) (5.6%) PORTUGAL (11) (4.1%) Banco Espírito Santo de Investimento (12) Espírito Santo Capital SPAIN Branch (15) (12.1%) BRAZIL (5) (2.6%) BES Investimento do Brasil (5) BES Securities do Brasil BESAF bCapital 0 4 (4) BES Refran Invest 0 1 (1) BES Refran Consultoria Financeira 0 1 (1) ES Serviços Financeiros DTVM UNITED KINGDOM (31) (13.5%) Branch (6) Execution Noble (25) IRELAND Espírito Santo Investment plc % POLAND Branch % UNITED STATES Branch % Source: Espírito Santo Investment Bank The Bank s staff numbers were reduced in all geographies, except in Poland and in the United States where the increase reflects the countries economic vigour as well as the expansion of the Bank s activity into new business areas. The acquisition of Execution Noble and consequent integration process led to a repositioning of the activities developed, from which resulted a reduction in the number of Employees. Training The Bank has been placing a strong focus on cost cutting. As part of this effort, the Talent Management Division promotes the internal mobility of the Employees through a programme of internal recruitment. The underlying principle is to offer new opportunities for career development, while allowing the Bank to allocate its executives according to the activity levels and needs of its various departments and geographies. The Your Career application a web platform where the employees can record their experiences, qualifications, ambitions and professional interests - has been a key tool in the implementation of this policy. The results have been very positive, permitting to spread the Bank s culture while taking advantage of the existing synergies within the various geographies and products. The Talent Management Division is also in charge of organising internal workshops that capitalise on the know-how that exists in the Bank. In 2011 a workshop on the Capital Markets in which all the Bank s Employees could participate was held simultaneously in Lisbon and London. This proved an important asset for all those who attended, and in consequence there are plans to organise similar initiatives in the future. Social Responsibility Initiatives Main social responsibility initiatives in which the Bank and its Employees were involved during the year included: Raising funds to support the victims of the earthquake and tsunami in Japan, which were delivered to the Portuguese Red Cross; Participation in the Banco do Livro Escolar, a social and educational movement, involving individual donations of basic and secondary education school books; Awareness raising to the Portuguese Red Cross s Happier Portugal project, through the invitation made to the Bank s Employees to take part in the solidarity race Run for a Happier Portugal ; Despite the adverse economic context, Espírito Santo Investment Bank maintained its commitment to the professional training of its staff, namely sponsoring English language courses (English is the official language of the Bank) as well as training for executives, both in Portugal and abroad. Sponsorship and awarding of a donation to the Rastrillo 2011 solidarity market, organised by Associação Novo Futuro, a private charity; New donations of furniture to various social and charity institutions. 94 Annual Report 2011

95 Espírito Santo Investment Bank 95

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97 04 Integrated Risk Management Lisbon Room (Sao Paulo)

98 Integrated Risk Management THE RISK FUNCTION IN THE BES GROUP The Risk Management function identifies, assesses and monitors all the material risks to which each institution of the BES Group is subject, both internally and externally, so that such risks remain contained and therefore do not affect the BES Group s financial situation. It also contributes towards the achievement of BES Group s value creation objectives, through the fine-tuning of tools to support the decision-taking process, structuring and pricing of operations, and the development of internal techniques for performance assessment and capital base optimisation. Efficient risk management and control have always played a fundamental role in the balanced and sustained growth of BES Group, contributing to optimise risk/return across the various business lines while simultaneously providing a consistently conservative risk profile in terms of solvency, provisioning and liquidity. The powers and duties of the Risk Management function are exercised independently from the other operational areas of the BES Group. Organisation of the Risk Management function in the BES Group The risk profile is determined at the BES Group level and it is the responsibility of the Executive Committee of Espírito Santo Investment Bank to ensure and supervise compliance with this profile, guaranteeing that the Bank possesses the necessary skills and resources to meet the established objectives. At operational level, Espírito Santo Investment Bank s risk analysis and control teams work closely and in coordination with BES s Global Risk Department (GRD), which centralises the risk function of BES Group at domestic and international level, covering all categories of risk: credit, market, liquidity, interest rate, balance sheet and operational. Within this relationship, the investment banking risk management function is based on the following principles: Permanent and ongoing assessment of risk; Pre-established tolerance limits which take into account solvency levels and seek to achieve optimum risk/return trade-off; Risk analysis, quantification, control and monitoring by entities that are independent from the business areas; Use of different methodologies, namely internal and external ratings (the latter supplied by the leading international rating agencies), Value at Risk (VaR) and sensitivity and position analyses; Analysis of the specific factors for each market where the Bank operates, as well as for each portfolio (trading, investment or held to maturity). Risk control and supervision are carried out by the Executive Committee of Espírito Santo Investment Bank, which delegates the setting of rules and procedures to the Risk Policies Committee, the approval of transactions to the Credit and Risk Management Committee, and the definition and monitoring of balance sheet and liquidity management policies to the Assets and Liabilities Committee (ALCO). BASEL II In 2009 the BES Group was authorised by the Bank of Portugal to use the Internal Ratings Based (IRB Foundation) approach to calculate regulatory capital requirements to cover credit risk and the Standardised Approach (TSA method) to calculate regulatory capital requirements for operational risk. As the first Portuguese bank to obtain this authorisation, the BES Group once again assumed a position of market leader. Furthermore, and in so far as it was granted in a context of economic depression, this authorisation bears out the reasonableness and prudence of the criteria used in the internal models. The fact that the BES Group has in place risk management tools allowing it to apply the best international practices in this area, thus having developed a business culture of great sensitivity to risk that is well rooted in the entire organisation, was also vital for obtaining this authorisation. This achievement, while culminating a phase of significant investment made by BES Group since 2000 in its risk models, processes and systems, also marked the beginning of another phase corresponding to the implementation of a 3-year roll-out plan that will extend these models and processes to all the Group s units. Roll-Out Plan The authorisation to use the IRB Foundation method was granted to BES s head office, BES s London Branch and the Espírito Santo Investment Bank Group. Since June 2009 and over the coming years the utilisation of this method will be rolled out to cover various entities and portfolios of the BES Group, in order to ensure: (i) high levels of rating coverage (>95%) of the IRB portfolios, both in the entities already certified and in those that have applied for certification (included in the roll-out plan); (ii) the realisation of user-tests to make sure that risk tools are used in origination, monitoring, pricing, provisioning, reporting and strategic management; and (iii) the continuous validation and updating of risk models. 98 Annual Report 2011

99 1 st phase 2 nd phase 3 rd phase 4 th phase 5 th phase Entities/ Portfolios ES p.l.c. SFE BES NY BES Cayman Leasing (corp) BAC BES Espanha ES Bank BES Vénétie BES Oriente Factoring The roll-out process is under way. BES s New York Branch, Cayman Branch, Madeira off-shore branch and Espírito Santo p.l.c. have already submitted their applications and are now pending the Bank of Portugal s authorisation. Final acceptance of the applications to use the IRB Foundation approach to calculate regulatory capital requirements to cover credit risk and the Standardised Approach (TSA method) to calculate regulatory capital requirements for operational risk requires compliance with certain conditions identified by the Bank of Portugal. Regular progress reports on compliance with these conditions are sent to the Bank of Portugal. The last report on Operational Risk was sent in 2011, and the last one on Credit Risk should be sent in the first quarter of ICAAP Internal Capital Adequacy Assessment Process In addition to the regulatory perspective, BES Group, and in the case at hand, Espírito Santo Investment Bank, also consider their risks and available financial resources ( Risk Taking Capacity or RTC ) from an economic standpoint in order to conduct a self-assessment exercise of internal capital adequacy, as foreseen in Pillar 2 of Basel II and Bank of Portugal Notice 15/2007. The economic standpoint of the risks and RTC addresses both the going concern perspective where Espírito Santo Investment Bank wants to have the financial capacity to absorb losses without having to change its business strategy -, and the liquidity perspective where it intends to protect its capacity to redeem senior debt and deposits. The two perspectives of capital adequacy assessment use different confidence levels to evaluate risks, and different concepts of the available financial resources to meet such risks, in line with the risk appetite defined for Espírito Santo Investment Bank. In the ICAAP exercise conducted in 2011, with reference to December 31 st, 2010, BES Group opted for focusing only on the liquidity perspective. This was due to the fact that, in view of the new regulatory capital requirements (minimum Core Tier I ratio of 9% in 2011 and 10% in 2012) and consequent changes in the business model, which namely entailed the deleveraging process currently underway, the going concern perspective, which assumes that the previous model is maintained, is not applicable at present. In order to quantify risks, BES Group has developed several economic capital models that estimate the maximum potential loss over a period of one year based on a predefined confidence level. These models cover the various types of risk to which BES Group is exposed, namely credit risk, market risk (trading book and banking book), property risk, pension fund risk, operational risk, reputational risk, liquidity risk and strategy and business risk. Economic capital requirements to cover the last three risks are calculated through stress tests. The value of the economic capital requirements for each risk is aggregated taking into account inter-risk diversification effects. In addition to calculating economic capital requirements, the main risk factors are subject to stress tests in order to identify any weaknesses or risks which the internal models failed to uncover. The capital adequacy analysis carried out at the end of each year is complemented by a forward looking analysis of capital requirements (risks) and available financial resources over a three-year timeframe, under both the basic planning scenario and a scenario of further deterioration in the macroeconomic environment was marked by the aggravation of the adverse economic environment and high volatility in the capital markets already observed in the previous years. The resulting increased risks implied an increase in economic capital requirements. In line with the Group s business strategy, the main risks to which Espírito Santo Investment Bank is subject are credit risk, the trading book s market risk, and the banking book s interest rate risk and other market risks. The credit risk implicit in the banking relations with the Clients derives from the BES Group s core business, mainly originated in the corporate segments, with a significant contribution from the international area and the project finance segment. The trading book s market risk is measured in accordance with the policies on VaR and Stop Loss limits implemented. The banking book s market risk mainly derives from the bonds credit spread risk. In 2010 the economic capital requirements increased by ca. 23% relative to 2009 (after diversification effects), essentially through an increase in requirements for credit risk and for the banking book s interest rate risk. Economic capital distribution by type of risk did not change much compared to the previous year, when the banking book s credit and market risks were already the more materially relevant risks. The results obtained through the ICAAP exercise conducted with respect to December 31 st, 2010, which were delivered to the Bank of Portugal in September 2011, permitted to conclude that Espírito Santo Investment Bank s own funds are sufficient to cover the risks incurred, from either the regulatory or the economic standpoint. Espírito Santo Investment Bank 99

100 BASEL III RECOMMENDATIONS SOLVENCY At the end of the third quarter of 2010, the Basel Committee on Banking Supervision took several decisions regarding the functioning of the global financial system, that have resulted in a set of recommendations, named Basel III. Banks will have a transitory period (from January 1 st, 2013 to January 1 st, 2019) to comply with the approved rules, aimed at strengthening financial institutions and preventing new financial crises in the future. Basel III rules have established the following regulatory framework to be gradually implemented until January, 1 st, 2019: Minimum Core Tier 1 of 7%, of which 4.5% minimum common equity and 2.5% capital conservation buffer; BES Group s solvency ratios are calculated under the Basel II regulations. As referred, from the first quarter of 2009 onwards the Group has been authorised by the Bank of Portugal to use the IRB Foundation approach for credit risk and the TSA method for operational risk. In the second quarter of 2011, in the context of the Financial Assistance Programme to Portugal that determined the reinforcement of capital levels within the Portuguese banking system, the Bank of Portugal issued Notice 3/2011 of May 10 th establishing minimum levels for the Core Tier I ratio on a consolidated basis of no less than 9% by December 31 st, 2011 and 10% by December 31 st, Capital Requirements under the EBA Methodology Minimum Tier 1 of 8.5%, of which 6.0% minimum and 2.5% capital conservation buffer; Total solvency ratio of 10.5%; Introduction of a countercyclical buffer, ranging from 0% to 2.5% of Core Tier 1 elements, under conditions to be defined by the regulatory authorities; Definition of transitory periods for the absorption of deductions to capital not eligible under BIS III and for the new deductions to capital; Definition of the leverage and liquidity ratios (short and long-term) in certain conditions to be determined. BES Group closely follows the development process of the future regulatory framework, as well as all the efforts carried out to define the final rules for new capital ratios. In light of the increase in systemic risk triggered by the sovereign debt crisis in the Eurozone, it was decided that banking groups subject to the European Banking Authority s (EBA) stress test exercise are required to strengthen their capital positions in order to reach a Core Tier 1 capital ratio of 9% by June 30 th, 2012, following a prudent assessment of their sovereign debt exposures at market prices as at September 30 th, The total amount of capital identified as needed under the EBA methodology, as of September 30 th, 2011, was calculated at the BES Group level. Espírito Santo Investment Bank Capital Increase On November 11 th, 2011 Banco Espírito Santo resolved to increase its share capital by new contributions in kind, through exchange offers over securities issued by Banco Espírito Santo, Banco Espírito Santo de Investimento and BES Finance. The exchange offers took place from November 14 th to 30 th. SPECIAL INSPECTIONS PROGRAMME (SIP) The Programme of Economic and Financial Assistance agreed in May 2011 between the Portuguese authorities and the EC, ECB and IMF established a Special Inspections Programme (SIP) covering the eight largest Portuguese banking groups. The SIP had the objective of validating, as of June 30 th, 2011, the credit risk data used in the valuation of these groups financial strength, through an independent valuation of their loan portfolios, and the adequacy of their risk management policies and procedures, as well as confirming the calculation of their capital requirements for credit risk. At Espírito Santo Investment Bank, this exercise focused on the valuation of credits amounting to EUR 1,752 million, covering 54.4% of the Espírito Santo Investment Bank Group s total credit portfolio. This valuation determined the need to reinforce the value of individual impairments accounted in the Group s consolidated financial statements by EUR 1.3 million. On December 5 th, 2011, Banco Espírito Santo de Investimento resolved to increase its share capital by new contributions in kind made by its sole shareholder through the delivery of 46,269 undated deeply subordinated notes with par value EUR 1,000 each issued by Banco Espírito Santo de Investimento, S.A., to be purchased by Banco Espírito Santo in the exchange offer referred to above. As a result of this operation the share capital of Banco Espírito Santo de Investimento, S.A. increased from EUR 180,000,000 to EUR 226,269,000 through the issuance of 9,253,800 new shares with par value EUR 5 each. This transaction permitted to reinforce the Bank s Core Tier I capital, as detailed below. Solvency Ratios Essentially as a result of the capital increase, Core Tier I capital increased by EUR 46 million on December 31 st, The acquisition of issued subordinated Tier II debt led to a reduction in the eligible regulatory balance to EUR 33 million. Risk weighted assets dropped by EUR 300 million, to which contributed mostly the trading book. 100 Annual Report 2011

101 As a result of the measures implemented, the Core Tier I ratio increased significantly, to 9.1%, which meets the Bank of Portugal s requirements set for December 31 st, 2011 (Notice no. 3/2011). The Tier I ratio increased to 8.9%, and the total solvency ratio reached 9.5%. Risk Weighted Assets and Regulatory Capital (Bank of Portugal) Variables Net Assets A 6,559,785 7,012,269 Risk index B/A 83.7% 82.6% Risk weighted assets B 5,493,073 5,793,310 Banking Book 4,125,928 4,165,942 Trading Book 891,582 1,200,780 Settlement Risk 2 1 Operational Risk 475, ,587 Total Own Funds C 522, ,949 Basic Own Funds (TIER I) D 489, ,261 Core TIER I E 500, ,477 Other (11,583) 48,784 Complementary Own Funds and Deductions 32,964 74, Basel II (IRB) (EUR thousand) 2010 Basel II (IRB) Credit and Counterparty Risk As referred further up, Espírito Santo Investment Bank uses the Internal Ratings Based (IRB) approach for exposures subject to credit risk, in accordance with the rules set out in Annex IV to Bank of Portugal s Notice 5/2007. Risk Weighted Assets (per risk category) Central Authorities and Central Banks 58,700 8% Institutions 697,416 33% Corporates 3,029,336 82% Retail 6,126 68% Shares 110, % Others 224,171 45% Total 4,125,928 59% (1) Risk Weight: Risk weighted assets / original exposure Source: Espírito Santo Investment Bank Risk Weighted Assets (EUR thousand) Risk Weight (1) Core Tier I ratio E/B 9.1% 7.8% Tier I ratio D/B 8.9% 8.7% Solvency ratio C/B 9.5% 10.0% By categories of risk, the corporate segment represented 73% of total Risk Weighted Assets, which is in line with its predominant role in the activity of both Espírito Santo Investment Bank and BES Group. Source: Espírito Santo Investment Bank Regulatory Capital Market Risk Regulatory capital decreased by ca. EUR 55 million, mainly due to deductions to Tier I and Tier II and the acquisition of Tier II subordinated debt. Risk Weighted Assets As of December 31 st, 2011, Risk Weighted Assets totalled EUR 5,493 million, of which EUR 4,126 million (75% of the total) corresponded to credit and counterparty risk, EUR million to market risk and EUR million to operational risk. Capital requirements for market risk are calculated using the standardised method. As of December 31 st, 2011 the capital requirements for Risk Weighted Assets amounted to EUR million, with the main contributors being Interest Rate/Debt Instruments risk (general and specific) and Equity Instruments risk (general and specific). Annual Change in Risk Weighted Assets (EUR thousand) Change Debt Instruments Specific Risk 504, , ,310 General Risk 318, ,565 (249,255) Equity Instruments Specific Risk 19,179 29,232 (10,053) General Risk 21,600 26,885 (5,285) Foreign Exchange Risk 26, ,181 (217,650) Commodity Risk 1, ,734 Settlement Risk Total 891,582 1,200,780 (309,198) Source: Espírito Santo Investment Bank The reduction in requirements in 2011 translates an overall decrease in the various categories of risk, and particularly in Foreign Exchange Risk. Espírito Santo Investment Bank 101

102 Operational Risk This approach is backed by: Capital requirements for operational risk are determined under the Standardised Approach as the average over three years of the sum of the Risk-Weighted relevant indicators calculated each year across the regulatory business lines. In 2011 Risk-Weighted Assets increased by EUR 49 million year-on-year through the higher contribution of both the Corporate and Trading and Sales segments, which was not offset by the reduction in Commercial Banking. Risk Weighted Assets Variables GBESI 38, ,561 34, ,587 Corporate Finance 7,228 90,348 5,346 66,831 Trading and Sales 12, ,531 8, ,174 Retail Brokerage 760 9, ,497 Commercial Banking 16, ,456 18, ,583 Retail Banking Payment and Settlement (4) (54) 0 0 Agency Services Asset Management 702 8, ,502 Note: CR capital requirements Source: Espírito Santo Investment Bank CREDIT, MARKET, LIQUIDITY AND OPERATIONAL RISKS Credit Risk CR 2011 RWA CR (EUR thousand) 2010 RWA continuous development of the credit risk modelling system, with a consequent reduction in subjective criteria in the assessment of credit; continuous improvement of the decision procedures and circuits, namely the independence of the risk function, the delegation of powers according to rating levels, and the systematic adjustment of prices, maturities and guarantees to the clients credit rating; continuous improvement of the information systems that produce the various elements required for credit risk assessment, allowing regular and timely access to these data by all the intervenients in the credit process; the independence of the process of formalisation/execution of operations vis-à-vis the origination structure. As a result of the vast set of initiatives taken over the previous years, namely within the scope of the global project of revising and adjusting the credit-decision process in the various commercial segments, combined with the near full coverage of credit exposures by internal rating classification, the loan granting process within BES Group is now supported by the widespread use of risk-adjusted return metrics. The use of rating classifications for purposes of establishing portfolio ceilings that limit credit granting by both product and rating levels, and in particular restrict the amounts lent when higher risks are involved, is now a broad-based practice. Compliance with the established ceilings is monitored on a regular basis. The resulting information is distributed to the commercial areas and submitted to the Credit and Risk Management Committee. Management Practices Credit portfolio management is carried out as an ongoing process that requires the interaction between the various teams responsible for the management of risk during the different stages of the credit process. Hence, in line with BES Group s practices, Espírito Santo Investment Bank has in place a strict lending policy that significantly contains exposure to its Clients, and which was further reinforced in recent years in light of the recessive economic environment and the crisis lived in the financial markets. This approach is backed by intervention at the following levels: Origination Stricter limits on new credit; Increase of credit related guarantees; Improved price to risk adjustment; Increased coverage with ratings; Automatic availability of supporting information to credit decisions, namely in the front office. Monitoring Senior management strongly involved in the monitoring process; Credit risk information available to the commercial areas; Credit follow-up actions (prior to default) according to impairment triggers; Improved guarantee management processes and controls. Recovery Early recovery steps; Monitoring of borrowers and assets received as guarantees; Credit recovery process adjusted to business sector, recovery, and divestment areas. 102 Annual Report 2011

103 Internal Risk Rating Systems In line with the specific characteristics of BES Group s various Client segments, different internal risk rating systems and risk parameters were developed for both corporate and individual Clients. In accordance with the new rules on minimum regulatory capital requirements (Basel II) and following the best risk management practices, the internal risk rating systems used by Espírito Santo Investment Bank are regularly validated at central level by the Independent Validation Unit. The annual internal validation exercise applied to the various rating models for the main credit portfolios confirmed that these models were robust and well calibrated for assessing credit risk. Internal Rating Models for Corporate Credit Portfolios Espírito Santo Investment Bank essentially uses rating models for corporate credit portfolios. Corporate Credit portfolios are approached differently, according to Client size and industry sector, using different models specifically adapted to project finance, commodity finance, object finance, and acquisition finance. Segmentation Criteria Model Type Description Expert Judgement Sector, Dimension, Product: Financial Institutions Municipalities Institutional Clients Local and Regional Admin Large Corporates [Turnover > EUR 50m] Real Estate (Investment / Promotion) Acquisition Finance Project Finance Object Finance Commodity Finance Template Ratings assigned by teams of analysts, using sector specific models (templates) as well as financial and qualitative information. Companies Mid-sized: [Turnover EUR 1.25m to EUR 50m] Semi-automatic Rating Model based on financial and qualitative information validated by analysts. Statistical Small Businesses: [Turnover up to EUR 1.25m ] Start-Up s and Entrepreneurs Automatic Rating Model based on financial, qualitative and behavioural information. Rating Model based on qualitative and behavioural information. Espírito Santo Investment Bank 103

104 For the main segments in which Espírito Santo Investment Bank operates - Large Companies, Financial Institutions, Institutional Clients, Local and Regional Administration, and Specialised Finance (i.e. project finance, object finance, commodity finance and acquisition finance) credit ratings are assigned by a rating desk. The Rating Desk, formed by specialised technical analysts organised into multi-sectoral teams, also validates at central level the ratings submitted by the credit risk analysts geographically spread through BES Group s various units. To assign internal risk ratings to these risk segments, classified as Low Default Portfolios, these teams use expert-based rating systems (templates) that include quantitative and qualitative variables strongly linked to the industry sector in question. Except for Specialised Finance, the rating methodology used by the Rating Desk includes a risk analysis of the maximum consolidation scope, identifying the status of each subsidiary within the respective conglomerate. Market Risk Assessment The main measures used for assessing market risk are Value at Risk (VaR), Basis Point Value (BPV), and Stress Tests. As no single measure of risk covers every facet of market risk, additional risk assessment tools are used, including stop losses, profit taking, open positions, concentration of positions, turnover levels, and Greeks. When the bank trades in over-the-counter (OTC) financial instruments, theoretical risk assessment models are applied, which are subsequently used to manage and control positions in accordance with the Bank s approved limits. Monitor all the relevant risk parameters for the Bank s activity; As applicable, delegate approval powers to business units within pre-established risk profiles, taking into account ratings as well as total and partial amounts for each rating bucket by maturity, sector, country and other criteria. The Credit and Risk Management Committee has the following specific responsibilities: Analyse and approve or disapprove the transactions submitted by the business units in each geography, ensuring they comply with the risk profile established by the Executive Committee and approved by the Risk Policies Committee, taking into account current legal and regulatory requirements as well as the best market practices; Approve alterations to individual and aggregate limits in accordance with the business areas and products. This ensures that the minimum levels for ratings, VaR, BPV, stop losses and profit taking, open positions, concentration of positions, turnover levels and Greeks submitted and approved, are attributed taking fully into consideration the specific characteristics of markets, products, currencies and maturities. Before limits are defined, a careful analysis of the markets, particularly regarding their liquidity, is conducted to ensure that the Bank s strategic objectives can be reached at both individual and consolidated level. Risk limits are reviewed annually or whenever justified by changes in markets or in the strategic positioning of the business areas. Back testing and price testing are used regularly to (i) improve the calibration of existing models and test their suitability for the instruments concerned; (ii) assess the reasonableness, independence and consistency of the data used in the models; (iii) check the consistency of the algorithms used; and (iv) compare results with those of other market operators. Exposure and Limits Approvals All transactions involving credit or market risk, as well as the risk control limits for each Espírito Santo Investment Bank business unit (in Portugal, Spain, Poland, the United States, Brazil, and Ireland), are approved by the Credit and Risk Management Committee. In addition, a Risk Policies Committee has been created, with the following main responsibilities: Approve and review the Global Risk Policy covering all the geographies where the Bank is present; Set global and regional risk exposure and tolerance limits, based on solvency and the best possible balance between return and risk; Monitoring and Control Monitoring and control operations are designed to quantify and control Credit and Market Risks to ensure concrete measures are prepared and implemented in a timely manner to deal with specific situations signalling an increase in risk and also to permit to outline global management strategies for the Bank s different portfolios. Espírito Santo Investment Bank s teams in each business unit work closely with the risk management team in Portugal and with BES s Global Risk Department to ensure risk monitoring and control operations are properly implemented. This involves the following processes: Daily collection, preparation, control and distribution of information to the different business areas on loan positions, bond portfolios, derivatives and the usage of approved limits; Preparation of a Weekly Risk Report addressing each category of risk, namely: Credit risk profile of the Bank s credit portfolio divided by its different instruments, total exposure by instrument, country, rating, industry sector, maturity, P/L, capital requirements, approvals by the 104 Annual Report 2011

105 Credit and Risk Management Committee, limits exceeded and impairment signs, etc.; Credit Risk Market (interest rate and equities) P/L by instrument, foreign exchange positions, Vo1 for the different portfolios, Vega, DEaR, etc. Preparation of support material for external and internal reporting on credit, counterparty risk, liquidity risk and market risk. To strengthen monitoring and control of the loan portfolio, an Impairment Committee was created for the specific purpose of assessing the Bank s loan portfolio, especially Clients with overdue loans on both an individual and portfolio basis. The Committee uses credit risk model information in conjunction with analysis, among other criteria, of: Credit Portfolio (i) Loan Portfolio Breakdown Consolidated Loan Portfolio Breakdown (EUR thousand) Dec-11 Dec-10 Change Gross Loan Portfolio 2,309,133 2,287,250 1% Project Finance 1,281,826 1,376,850 (7%) Acquisition Finance 531, ,588 (2%) Other Loans 495, ,812 34% Source: Espírito Santo Investment Bank The Client s overall exposure and the existence of overdue loans; The economic and financial viability of the Client s business and its capacity to generate sufficient resources to service its debt in the future; The existence of privileged creditors; Both the rating profile and the sectoral breakdown of the loan portfolio reflect the growth of credit activities developed by the Bank in recent years in the different regions where the Bank and/or BES Group have a presence, particularly in project finance (in the transport infrastructure and energy sectors). The existence, nature and estimated value of collaterals; The Client s exposure in the financial sector; The amount and timing of expected recoveries. A loan made to a Client or a loan portfolio is considered to be impaired, when: (i) there is objective evidence of impairment resulting from one or more events occurring after its initial recognition; (ii) the event or events have an impact on the recoverable value of the future cash flows of the loan or loan portfolio, as far as this can be reasonably estimated. Sectoral Breakdown of the Loan Portfolio EUR thousand 1,400,000 1,200,000 1,000, , , , ,000 0 Acquisition Finance Project Finance Other Loans Transport Infrastructure Financials Commercial Services & Supplies Telecommunication Capital Goods Construction Materials & Commodities Press Energy Utilities Environment Tourism, Leisure & Sports, Hotels & Restaurants Conglomerate Food, Beverage & Tobacco Media Other Source: Espírito Santo Investment Bank The international activity already represents 60% of the total loan portfolio, this share having remained stable during The sale of international loans mainly led to a reduction in the Spanish and US loan portfolios, which was compensated by activity growth in Brazil. Espírito Santo Investment Bank 105

106 Geographic Breakdown of the Loan Portfolio EUR million 2,500 2,000 1,500 1, International Activity Domestic Activity Credit Quality Client loans (gross) 2,330,842 2,262,945 Overdue loans and interests 18,952 8,583 Provisions for client loans 104,394 72,077 Overdue loans and interests/ Client loans 0.81% 0.38% Provisions for client loans/ Overdue loans and interests 550.8% % Non-performing loan ratio (*) 0.81% 0.38% (*) Calculated according to Bank of Portugal Circular Letter no. 99/2003/DSB Source: Espírito Santo Investment Bank Dec-11 (EUR thousand) Dec Credit Risk Dec-11 Source: Espírito Santo Investment Bank Loans at Risk (*)/ Loans Portfolio 8.60% Net Loans at Risk/ Net Loans Portfolio 5.50% (ii) Loan portfolio breakdown by rating (*) Calculated according to Bank of Portugal Instruction 23/2011 Source: Espírito Santo Investment Bank To support credit decisions and credit risk monitoring Espírito Santo Investment Bank uses the internal rating systems developed at the BES Group level. The average probability of default given by these ratings reflects the current context of economic slowdown which affected both the corporate segments and the project finance and acquisition finance activities. Internal Ratings Profile Loan Portfolio (EUR thousand) Internal rating Exposure Portfolio % weight Average PD [aaa;a-] 37, % 0.05% [bbb+;bbb-] 226, % 0.23% [bb+;bb-] 527, % 0.80% [b+;b-] 692, % 3.88% [ccc+] 77, % 25.41% [ccc;lccc] 218, % 27.68% Default 146, % % Total 1,926, % 5.81% Source: Espírito Santo Investment Bank Approximately 13.7% of the loan portfolio with internal credit ratings was rated investment grade. Non-investment grade loans, with bb+ and bb- ratings, accounted for around 35% of the portfolio, most of them representing highly complex credit transactions, usually secured by real guarantees that are not reflected in the internal ratings assigned but which constitute important risk mitigation factors, especially in the calculation of expected losses. The non-performing loans ratio increased to 0.81%, from 0.38% in December Credit at risk reached 8.6% of the loan portfolio, but was reduced to 5.5% through the reinforcement of provisions made during the year. The provision coverage of total overdue loans declined compared to 2010, although remaining at a comfortable level of 550.8% in December The increase in provisions had a negative impact on the provisioning cost, which increased by 11 bps, to 1.47% in December 2011 (see chart below). Provisioning Cost 1.55% 1.47% 1.36% (iii) Credit Quality Source: Espírito Santo Investment Bank Notwithstanding BES Group s efforts to continuously improve decision procedures and circuits, focus on lower risk Client segments and products, and reinforce the recovery support structure, the adverse economic environment at national and international level inevitably penalised credit quality indicators, as shown in the table below: Counterparty Risk - Interest Rate, Exchange Rate, and Equity Derivatives Portfolio Credit risk related to the Bank s portfolio of interest rate, exchange rate, and equity derivatives (calculated in accordance with the rules set forth in Bank of Portugal Notice no. 5/2007, based on the sum of replacement 106 Annual Report 2011

107 cost and potential future credit risk) remained practically flat, at EUR 1,067 million at the end of From the total exposure to derivative instruments, around 30% related to counterparties with investment grade rating, and 51% was exposure to the financial sector. Internal Ratings Profile (Interest Rate, FX, and Equity Derivatives) (EUR thousand) Fixed Income Portfolio - Internal Rating Profile (EUR thousand) Rating Exposure Portfolio % weight [aaa;a-] 22,185 1% [bbb+;bbb-] 1,476,281 72% [bb+;bb-] 287,654 14% [b+;b-] 75,144 4% NR 185,386 9% TOTAL 2,046, % Source: Espírito Santo Investment Bank Rating Exposure Portfolio % weight [aaa+;a-] 182,921 17% [bbb+;bbb-] 133,691 13% [bb+;bb-] 527,606 49% [b+;b-] 113,547 11% ccc+ 2,209 0% NR 107,118 10% TOTAL 1,067, % Fixed Income Portfolio by Sector 12% Other 3% Transport Infrastructures 4% Transports 12% Financial Source: Espírito Santo Investment Bank 69% State/ Central Admin. Credit Derivatives Portfolio At the end of 2011 the Bank only had a residual exposure to credit derivatives (ca. EUR 6 million), which is in line with the reduction trend initiated in The risk is calculated based on the notional value of the underlying contracts and the risk of the underlying reference issuer, should Espírito Santo Investment Bank be selling protection, or of the counterparty, in case the Bank is buying protection (from financial institutions). Fixed income portfolio Source: Espírito Santo Investment Bank Exposure to Emerging Markets The main emerging economies remained vigorous in 2011, posting strong GDP growth rates. BES Group and Espírito Santo Investment Bank operate in several countries within the emerging world, namely in Brazil and Angola. At the end of 2011 the net foreign currency exposure to emerging markets, as determined under the Bank of Portugal s assessment criteria for country risk, totalled EUR 2,294 million. At the end of 2011 the fixed income portfolio amounted to EUR 2,046 million, having declined by 18.5% year-on-year. Exposure to Emerging Markets (EUR thousand) Due to the full consolidation of BES Investimento do Brasil s portfolio, essentially made up of Brazilian Treasury Notes and Brazilian Central Bank Notes (issued and funded in local currency), and in so far as the Republic of Brazil rating was kept unchanged, the risk profile of the fixed income portfolio in 2011 continued to be concentrated in investment grade issuers. In terms of the breakdown by sector, about 81% of the fixed income portfolio consisted of securities issued by state, central administration and financial entities from Brazil and Portugal. Emerging Countries Bank of Portugal Risk ratio Gross Exposure Dec-11 Provisions Guarantees & Other Deductions Net Exposure Dec-10 Net Exposure Latin America Mexico 10.0% 12, ,820 1,873 1,358 Chile 0.0% 26, ,396 0 Brazil 0.0% 2,264, ,945 2,262,270 2,320,284 Colombia 25.0% 2,871 (59) (2,319) Africa Angola 10.0% 3, ,839 1,923 Total Exposure to Emerging Markets 2,309, ,447 2,293,871 2,324,284 Total Exposure/ Consolidated Net Assets 35.15% 0.01% 0.16% 34.91% 33.12% Exposure Funded in Local Currency 2,029, ,029,656 2,045,664 Exposure Funded in Local Currency/ Total Exposure 87.88% 0.00% 0.00% 88.48% 88.01% Source: Espírito Santo Investment Bank Espírito Santo Investment Bank 107

108 Market Risk Market risk is the possible loss resulting from an adverse change in the value of a financial instrument due to fluctuations in interest rates, foreign exchange rates, share prices, commodity prices, volatility and credit spreads. Management Practices Market risk management is linked to balance sheet management through the ALCO committee. This committee is responsible for defining policies for the structuring and composition of the balance sheet, and for controlling the Bank s exposure to interest rate, foreign exchange rate and liquidity risks, in coordination with the policies approved by BES Group s ALCO committee. The main measure of market risk is given by Value at Risk (VaR), which represents the potential loss in adverse market conditions. VaR is calculated using the Monte Carlo simulation, to a 99% confidence level and an investment period of 10 days. The identification, valuation, monitoring and control of market risk are the responsibility of a specific unit of Espírito Santo Investment Bank, the Market Risk Control unit, which works in full independence from the Bank s business areas. To give a clear picture of the risks incurred and to provide the whole organisation with clear messages regarding the desired risk profile, a wide range of risk assessment measures are used, complemented by position, stop loss, and concentration limits. Risk assessment measures used include VaR (Value at Risk) and, in terms of sensitivity tests, BPV (Basis Point Value) and Greeks (Vega and Rho). VaR is calibrated using back testing analysis. The Bank s different market risk positions are also fed into simulated extreme scenarios at the BES Group level. These simulations are based on the most positive and the most negative 10-day shifts occurred in the last 20 years. The markets in which each geographical business unit operates involve specific factors that require adaptations in the way the risk assessment and control methods described above are implemented. VaR assessment is further improved through back testing exercises, which compare the losses foreseen by VaR with actual losses. These exercises permit to fine-tune the model s accuracy and improve its predictive capacity. As a complement to the VaR model, stress testing is also carried out at the BES Group level, in order to assess the impact of extreme potential losses. Market Risk Analysis In functional terms, the Market Risk Control unit reports directly to an Executive Board Member, as well as to the Executive Committee in general. In organisational terms, Market Risk Control functions are distributed geographically among the Bank s different business units, which have the appropriate skills and resources to evaluate the specific activities and risks incurred by each company of the Espírito Santo Investment Bank Group. The Market Risk Control unit is responsible for analysing the relevant factors of each risk using statistical techniques, measuring market volatility, analysing depth and liquidity indicators, and simulating the transactions concerned under different market conditions to establish appropriate limits for each business area. In addition to the technical basis for setting appropriate limits, the Market Risk Control unit also takes into account the track record and experience of the business area concerned and its strategic objectives to ensure that the limits reflect the Bank s guidelines for each category of risk. The proposed limits are submitted to the approval of the Credit and Risk Management Committee of each business unit and subsequently to the Global Credit and Risk Management Committee in Lisbon. The limits are reviewed at least annually and whenever strategic options or market conditions so require. Espírito Santo Investment Bank s value at risk (VaR) on December 31 st, 2011, relating to trading positions in equities, interest rate instruments as well as FX positions totalled EUR 7.9 million, representing an increase of 19.7%, from EUR 6.6 million at the end of Value at Risk - 99% at 10 days Foreign Exchange Rate Risk Interest Rate Risk Shares Covariance (5.06) (4.81) (5.46) (5.49) (6.14) Total Source: Espírito Santo Investment Bank December (EUR million) Annual Maximum Minimum December Average Some of the instruments traded by the Bank are not valued based on prices in regulated markets but rather through theoretical valuation models. These models are subsequently incorporated into the management and control of positions, namely for comparison with the established limits. 108 Annual Report 2011

109 The Price Testing methodology used by the Bank thus seeks to ensure: Models accuracy and suitability to the instruments concerned; The reasonableness, independence, and consistency of the data used in the models; BES Group s Liquidity Risk management is a centralised process covering all its activities and all its investment vehicles. Espírito Santo Investment Bank s liquidity risk management and monitoring, under the responsibility of the Treasury Department, is coordinated with and incorporated into the overall liquidity risk management and monitoring of BES Group, and involves the following tasks: The reasonableness of the algorithms used; The checking of results obtained against those of other market operators. Execution of the financial plan based on the approved budget and projected funding needs. This plan is monitored on a regular basis and revised in the course of the year, as necessary; Liquidity Risk Monitoring and control of liquidity risk, in accordance with BES Group s policies; Liquidity risk arises from the inability to meet financial commitments at any time, location or in any currency, without incurring in substantial losses. Banks are subject to liquidity risk by virtue of their business of providing long-term loans and receiving short term deposits. During 2011 liquidity risk continued to be one of the main risks faced not only by the BES Group but by the entire banking sector. Initially concentrated on the peripheral European countries that requested external assistance this risk spread across almost the whole of Europe as the crisis deteriorated. The debt markets did not show much interest in the European financial issuers, and were fully closed for the Portuguese issuers. In this context, access to rediscount operations with the ECB continued to be instrumental, while the short and medium-term international markets were inaccessible. In order to reinforce its liquidity buffer, during 2011 BES Group increased the portfolio of securities eligible for rediscount with the European Central Bank by ca. EUR 2,900 million (net of haircuts). Participation in the stress tests conducted at central level, which consider additional funding needs based on extreme, but plausible scenarios; the aim is to pre-empt any constraints liable of impacting BES Group s liquidity; Production of documentation and holding of regular ALCO Committee meetings, submitting the conclusions to the Executive Committee. Developments occurred in 2011 at BES Group level Under the Memorandum of Understanding signed in May by the Portuguese Government, the European Commission, the European Central Bank and the International Monetary Fund to preserve the stability of the Portuguese financial system, maintain liquidity and support a balanced and orderly deleveraging of the banking system, Banks were required to reach a loan to deposits ratio of 120% and a stable funding ratio (limiting reliance on European Central Bank and wholesale short term funding) of 100% in December BES Group s planning aims to achieve compliance with these limits. In this adverse environment, Espírito Santo Investment Bank, in tandem with BES Group, gave particular attention to liquidity risk management and alignment to best market practices. This entailed the update of liquidity risk identification, assessment and reporting tools, further reinforcing the Bank s capacity for the timely compliance with all responsibilities, not only in normal times but also in periods of stress. In order to pre-empt possible constraints, the BES Group uses stress tests simulating extreme liquidity scenarios, calculating the impacts over three months of various levels of severity. On - and off - balance sheet cash flows are assessed under scenarios that replicate specific or systemic problems in order to evaluate the impact of extreme, but plausible, events, on liquidity positions. The results obtained are compared against the liquidity buffer and the contingency plan in order to ensure that it is possible to generate sufficient liquidity to deal with extreme events. Operational Risk Operational risk may be defined as the probability of occurrence of events with a negative impact on earnings or capital resulting from inadequate or negligent application of internal procedures, information systems, staff behaviour, or external events. Legal risk is also included in this definition. Therefore operational risk is considered as the sum of the following risks: operative, information systems, compliance and reputation. Management Practices To manage operational risk, there are a set or procedures in place that standardise, systematise and regulate the frequency of actions viewing the identification, monitoring, control and mitigation of this risk. Espírito Santo Investment Bank 109

110 The operational risk management model is supported by a structure within the organisation exclusively dedicated to its design, monitoring and maintenance. This structure works in close coordination and counts with the active participation of the following elements: Operational risk representatives from the relevant departments, branches and subsidiaries, who are responsible in their units for the day-to-day management of operational risk and for guaranteeing that the defined procedures are followed; The Compliance Department, which is responsible for the management of the Internal Control System, and plays an important role in guaranteeing that the processes are well documented, detecting specific risks and verifying the controls implemented, ascertaining the rigour of control design and identifying required steps for improvement and full effectiveness, while maintaining continuous reporting to and from the operational risk management; Awareness raising to operational risk in several subsidiaries and branches, including actions related to the implementation of processes to control the registration of events with the objective of assessing the effectiveness of the event identification and reporting model. Operational Risk Analysis An analysis of Espírito Santo Investment Bank s operational risk profile shows a high percentage of incidents with low financial impact. >100, % 0.00% Frequency Severity The Internal Audit Department (BES Group), which tests the efficacy of risk management and controls, identifies required steps for improvement and assesses their implementation; ] 20,000 ; 100,000 ] ] 5,000 ; 20,000 ] 0.44% 1.26% 28.31% 39.14% The Security Management and Coordination Department (BES Group), with responsibility for data security, the safety of people and property, and business continuity. 5, % 98.31% Espírito Santo Investment Bank has an Operational Risk representative who is responsible not only for coordinating this area with BES Group s Global Risk Department, but also for prompting the implementation of the operational risk management procedures within the Bank and in its branches and subsidiaries. Such functions are attributed to the Compliance Department. Source: Espírito Santo Investment Bank Distribution of events by risk category The Execution, Delivery & Process Management category accounts for nearly all the events identified reflects the consolidation of the governance model that was gradually built and implemented. The following actions developed during the year had a positive impact on operational risk management: Frequency Severity Self-assessment exercise conducted within Espírito Santo Investment Bank and its various subsidiaries and branches aimed at evaluating the main risks incurred. The exercise permitted to define the operational risk profile of the Espírito Santo Investment Bank Group in accordance with the methodologies implemented. Implementation in Espírito Santo Investment Bank of the Key Risk Indicators (KRI) defined in 2010 in accordance with the risk categories established by the Bank of Portugal s Risk Assessment Model ( MAR ). Business or system failures Execution, Delivery & Process Management Clients, Products & Business Practices 0.24% 0.00% 0.05% 0.13% Source: Espírito Santo Investment Bank 99.71% 99.87% 110 Annual Report 2011

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