Investment. 09 ESPÍRITO SANTO INVESTMENT Institutional Report

Transcription

1 Investment 09 ESPÍRITO SANTO INVESTMENT Institutional Report

2 Table of Contents VASCO ARAÚJO b. 1975, Portugal, Trabalhos para nada e as árvores morrem de pé, 2008, Wood, painted glass, tissue, b/w photo, gloves and cane, 130 x 110 x 18 cm, Edition: unique Laura Castro Caldas Espírito Santo Investment 2

3 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, Branches and Subsidiaries New Organisation and Management Model Espírito Santo Investment Principles and Values Consolidated Financial Highlights Organisational Chart Rating Net Profit Distribution Proposal Declaration of Conformity Economic Outlook Economic Outlook - International Economic Outlook - Eurozone Economic Outlook - Portugal Economic Outlook - Spain Economic Outlook - Poland Economic Outlook United States Economic Outlook - Brazil Economic Outlook - Angola Activity Review The Investment Banking Business Client Origination Private Banking Equity Capital Markets Fixed Income Corporate Finance Mid-cap Financial Advisory Project Finance and Securitisation Acquisition Finance and Other Lending Private Equity Human Resources Integrated Risk Management Financial Information Consolidated Financial Statements and Notes Individual Financial Statements and Notes Annexes Shares and Bonds held by Members of the Board of Directors and Supervisory Bodies Shareholder Adoption of the Financial Stability Forum (FSF) and Committee of European Banking Supervisors (CEBS) Recommendations on Information Transparency and Asset Valuation Compensation of the Members of the Board of Directors and Supervisory Bodies Extract of the Minutes of the Annual Shareholders Meeting held on April 5, Annual Report

4 Joint Message from the Chairman of the Board of Directors and the Chief Executive Officer Banco Espírito Santo de Investimento is proud to announce that in it achieved the highest level of banking income in its history. In a particularly difficult year in which a serious economic and financial crisis continued to affect the world economy, the Bank reached a consolidated banking income of EUR 229 million, 21% higher than in This performance results from the growth strategy implemented by the Bank in recent years, a strategy focused on consolidating its operations in Portugal, Spain, Brazil and the United Kingdom and selectively expanding into new markets: Poland, Angola and the United States. International operations again made a decisive contribution to our performance: in more than 60% of our activity in terms of banking income, net profit and number of employees, was generated outside Portugal. Net profit rose to EUR 50 million in, an increase of 6% on the previous year. Performance was affected by an increase in asset impairment (mainly credit) during the year. In addition to the financial results achieved, our performance was rewarded with the Best Investment Bank in Portugal by World Finance magazine. This reflected the leadership we achieved in many business areas, and the market s recognition of our attainments, which was expressed in the attribution of a number of internationally important awards: the Year for the USD 1.3 billion Odebrecht Oil & Gas financing operation in Brazil; (ii) Global Americas Transport Deal of the Year for the USD 944 million financing operation for the Rodoanel highway project in Brazil; (iii) Asia/Pacific PPP Deal of the Year for the AUD 1.9 billion financing operation for the desalination plant in Australia; and (iv) Renewables Deal of the Year for the EUR 580 million financing operation for an Acciona Group thermal solar plant in Spain. In Capital Markets, we continued to achieve an outstanding performance, leading and participating in important equity and fixedincome operations in the markets where we operate. In Private Equity, the year was marked by an increase in the amounts raised by the Espírito Santo Infrastructure Fund I (ESIF), which reached approximately EUR 96 million and by the signing of a partnership agreement with Banco Bradesco for the joint development of private equity operations in Brazil through the creation of the joint subsidiary 2bCapital. Despite the adverse conditions that characterised, we continued with our plans for international expansion, which received unequivocal support from our single shareholder, Banco Espírito Santo, which, at the end of June, subscribed to the full amount of a EUR 110 million capital increase. As a result: In Mergers and Acquisitions, we maintained the leadership of the Portuguese market both in number and value of transactions and achieved leadership of the Iberian market in terms of number of transactions (Bloomberg and Mergermarket rankings). We were considered as Best M&A Bank in Portugal (Euromoney Awards for Excellence) and Best Bank for M&A Advisory in Portugal (Euromoney Real Estate Awards) by Euromoney magazine. In the United Kingdom, we sold our shareholding in Evolution Group Plc. and, at the beginning of February 2010, we announced an agreement on the terms of a recommended offer for the acquisition of 50.1% of Execution Noble, a reputed investment banking and brokerage group based in London, which focuses on covering large and medium-sized pan-european companies and has a distribution platform centred on the London, New York and Hong Kong markets. Espírito Santo Investment In Brokerage, we maintained our leadership in Portugal with a 15.9% market share and rose to the third position in the ranking of leading Spanish brokerage houses with a market share of 7.6%. In Project Finance and Securitisation, we were the world s leading financial advisor for the renewable energy sector and maintained our place among the world s top ten Mandated Lead Arrangers (MLAs) in the same sector, according to Infrastructure Journal. We also received awards for some of the transactions that we led: (i) Americas Deal of 4 In Poland, we concluded the acquisition of 100% of the capital of Concórdia Espírito Santo Investment, now Espírito Santo Investment Sp, z.o.o., and continued to develop existing business areas (M&A and Brokerage). In the United States, we began operations at our New York branch and successfully concluded important project finance transactions.

5 In Angola, we are waiting for approval and the granting of a licence by the Bank of Angola to proceed with the creation of an investment bank. We also plan to begin capital markets operations through a brokerage house in The economic outlook for 2010 is expected to be characterised by continued recovery in the leading economies, albeit at different paces, and by the persistence of some risk factors. In spite of this environment, we are confident that we will be able to continue our growth strategy with the same ambition we have shown in recent years but with the prudence required. We would like to thank our Employees, whose commitment and dedication were decisive for the Bank s performance in, and our Clients, for their preference, which continues to honour us. 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 We are grateful to the Supervisory Board and to our Auditors for the contribution they continue to make to developing and improving the standards of excellence to which the Bank aspires in its financial and management reports. To conclude, a word of thanks to the Bank of Portugal, to the Portuguese Securities Market Commission (CMVM) and to the supervisory bodies in all the countries in which we operate for their permanent cooperation and for the trust they place in Banco Espírito Santo de Investimento. 5 Annual Report

6 Governing Bodies and Executive Committee GOVERNING BODIES 1 GENERAL MEETING BOARD Chairman Filinto Elísio Monteiro Gomes Secretary José Miguel Alecrim Duarte BOARD OF DIRECTORS 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 Pedro Manuel de Castro Simões Ferreira Neto Ricardo Abecassis Espírito Santo Silva Other Members Amílcar Carlos Ferreira de Morais Pires António Espírito Santo Silva Salgado 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 Arrochela Alegria 2 João Filipe Espírito Santo de Brito e Cunha José Manuel Pinheiro Espírito Santo Silva Luís Miguel Pina Alves Luna Vaz Moses Dodo Nigel Keith Purse 3 Paulo José Lameiras Martins Philippe Gilles Fernand Guiral 4 Tiago Vaz Pinto Cyrne de Castro EXECUTIVE COMMITTEE Chief Executive Officer (CEO) José Maria Espírito Santo Silva Ricciardi Francisco Ravara Cary Rafael Caldeira de Castel-Branco Valverde Miguel António Igrejas Horta e Costa Pedro Manuel de Castro Simões Ferreira Neto Ricardo Abecassis Espírito Santo Silva Christian Georges Jacques Minzolini Diogo Luís Ramos de Abreu Félix Aguirre Cabanyes Frederico dos Reis Arrochela Alegria Luís Miguel Pina Alves Luna Vaz Moses Dodo Nigel Keith Purse Paulo José Lameiras Martins Tiago Vaz Pinto Cyrne de Castro Senior Managing Directors with a seat on the Executive Committee 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 Alan Amaral Fernandes Carlos Manuel Fatal Pires Nogueira Carlos Alberto Ferreira Pinto Carolina Ibañez López Doriga João Carlos Mendes Reis Arantes e Oliveira João Eduardo Morais Simão Baptista Pereira José Eduardo Folgado Gabriel José Miguel Aleixo Nunes Guiomar José Miguel Marques Rego Maria Leonor Betencourt Silva Dantas Jorge Lucas Martínez Vuillier Luís Nunes Sousa Santos Maria Luísa Hueb Baroni Nuno David Fernandes Cardoso Paulo Augusto Luz Ferreira Saba Paulo José Falcão Araújo Pedro Miguel Nunes Ventaneira Ricardo Domenech Zamora Sílvia Maria Rosado Costa Honrado Product Divisions, Departments, Branches and Subsidiaries PRODUCT DIVISIONS Client Origination Pedro Toscano Rico (Portugal) Carolina Ibañez (Spain) César Ciavolih (BES Investimento do Brasil, S.A.) Gregg Egen (United Kingdom) Bartlomiej Dmitruk (Poland) 1 Nuno Cardoso (United States) Manuel Reis (Angola) Private Banking Lourenço Vieira de Campos Corporate Finance Leonor Dantas (Portugal) José Miguel Rego (Spain) Maria Luísa Baroni (BES Investimento do Brasil, S.A.) Alexandre Lopes (Poland) Daniel Pyne (United States) Tiago Félix (Cross-Border) Mid-Cap Financial Advisory Leonor Dantas Espírito Santo Investment 6 1 The Governing Bodies of Banco Espírito Santo de Investimento, S.A. were elected for a four-year term, -2012, at the Universal General Meeting held on March 16,. 2 Frederico dos Reis Arrochela Alegria took office on 13 April, 3 Nigel Keith Purse took office on 13 April, 4 Philippe Gilles Fernand Guiral took office on 13 April, Acquisition Finance and other Lending Rui Baptista (Portugal, Poland) Rui Baptista/Lucas Martinez Vuillier (Spain) 2 Carl Adams (United States) 1 Client Origination activity started in From January 2010

7 Project Finance and Securitisation Nuno Gil/Luís Sousa Santos (Portugal) Lucas Martinez Vuillier (Spain) Alan Fernandes (BES Investimento do Brasil, S.A.) Robin Earle (United Kingdom, Poland) Carl Adams (United States) Manuel Reis (Angola) Capital Markets - Origination Sílvia Costa (Portugal and Spain) Márcio Pepino (BES Investimento do Brasil, S.A.) Miguel Guiomar (International) Fixed income Carlos Ferreira Pinto (Portugal and Spain) Paulo Saba (BES Investimento do Brasil, S.A.) Krzysztof Rosa (Poland) 1 Andrea Czarniak (United States) Treasury Carlos Nogueira (Portugal) Paulo Saba (BES Investimento do Brasil, S.A.) Norberto Zaiet (United States) Global Markets Rui Borges de Sousa (Portugal) Martim Amaral Neto (Spain) Paulo Saba (BES Investimento do Brasil, S.A.) Krzysztof Rosa (Poland) Norberto Zaet (United States) Capital Structure Advisory Cristina Frazão (Portugal and Spain) Secondary Market - Equities João Baptista Pereira (Portugal and Spain) Rui Marques (BES Securities do Brasil, S.A.) Rodrigo Carvalho (Poland) Andrea Czarniak (United States) Asset Management Fernando Castro Solla (Portugal) Afonso Barbosa (BESAF BES Activos Financeiros, Lda.) Private Equity João Arantes e Oliveira (Espírito Santo Capital Sociedade de Capital de Risco, S.A.) Manuel Ferrão de Sousa (Espírito Santo Capital Brasil, S.A.) DEPARTAMENTS Compliance Rui de Sousa 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 Luis Orozco Legal Patrícia Salgado Goldschmidt Operations Pedro Ventaneira João Pereira da Silva Organisational Resources José Gabriel Corporate Development José Pinto Basto Human Resources José Gabriel Risk - Credit Risk Analysis Filipa Schubeius Rui Brigantim Pereira Risk - Risk Control Pedro Ventaneira Luís Pereira BRANCHES London Rafael Caldeira de Castel-Branco Valverde Nigel Keith Purse Spain Félix Aguirre Cabanyes Ricardo Domenech Zamora Poland Christian Georges Jacques Minzolini Rodrigo Ferreira Cunha Metelo Carvalho New York Moses Dodo Nuno David Fernandes Cardoso 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) Diogo Luís Ramos de Abreu Espírito Santo Capital - Sociedade de Capital de Risco, S.A. (Portugal) Francisco Ravara Cary João Arantes e Oliveira Espírito Santo Capital Brasil, S.A. (Brazil) Ricardo Abecassis Espírito Santo Silva Manuel Ferrão de Sousa Espírito Santo Investment p.l.c. (Ireland) Tiago Vaz Pinto Cyrne de Castro John Madigan Espírito Santo Investment Sp. Z.o.o. (Poland) Christian Georges Jacques Minzolini 1 Fixed Income operations started in Annual Report

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

9 Frederico dos Reis de Arrochela Alegria Félix Aguirre Cabanyes Luis Miguel Pina Alves Luna Vaz Moses Dodo Executive Board Member (Global Markets). Executive Board Member, Senior Executive Board Member (Capital Executive Board Member, Senior Country Officer for Spain, Chairman Markets Origination, Secondary Country Officer for the United Spain Geography Committee Markets Equity, Fixed Income and States, Chairman of the United (Spain Branch and Spain Client Asset Management). States Geography Committee, Joint Origination). Chairman of the Americas Credit and Risk Management Committee (New York Branch). Nigel Keith Purse Paulo José Lameiras Martins Tiago Vaz Pinto Cyrne de Castro Executive Board Member (Project Executive Board Member (Corporate Executive Board Member, Chief Risk Finance and Securitisation). Finance and Mid-cap Financial Officer, Chief Operations Officer, Advisory). (Risk - Risk Control and Credit Risk Analysis, Accounting, Operations, Information Technology, Operational Risk (included in the Compliance Department), Information and Management Reporting Systems and Espírito Santo Investment, Plc.). 9 Annual Report

10 Senior Managing Directors with a seat on the Executive Committee José Luís de Saldanha Ferreira Pinto Basto Corporate Development Pedro Miguel Cordovil Toscano Rico Portugal Client Origination Espírito Santo Investment 10

11 New Organisation and Management Model Banco Espírito Santo de Investimento, S.A. s medium and long-term growth, characterised by the increasing internationalisation of its business areas, has demanded adjustments in the Bank s current organisational model. As a result, the Bank has decided to alter its current organisational and management structure in order to decentralise, create responsibility at and enhance the decision-making capacity of each of its operating units. The Bank s new Organisation and Management Model: Simplifies and increases the transversal nature of the top management structure, composed of Senior Managing Directors elected by the Executive Committee Members and by the Senior Managing Directors with a seat on the Executive Committee; Increases the participation of Senior Managing Directors in the corporate governance of the Bank; Strengthens the Commitment to Client Service; Ensures a more collaborative business structure in which teamwork is given priority and the Bank s close ties with Banco Espírito Santo s operating structures are maintained; Strengthens the Risk Management and Control Functions; Gives additional weight to Human Resources Policies. The implementation of the new model was largely concluded in, including the appointment of 19 new Senior Managing Directors by the Members of the Executive Committee and the Senior Managing Directors with a seat on the Executive Committee, their peers. One of the roles of the Senior Managing Directors is to develop team spirit and to disseminate the Bank s Principles and Values among its operating units. 11 Annual Report

12 Espírito Santo Investment Principles and Values Following the implementation of the New Organisation and Management Model, the Bank redefined its 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. 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. Passion to Win Show involvement and determination to keep growing, using exceptional levels of energy and motivation. Espírito Santo Investment 12

13 Consolidated Financial Highlights (thousands euros) Consolidated Income Statement 2008 % Change Consolidated Banking Income 228, ,744 Commissions 113,921 94,332 Net Interest Income and Market Results 114,713 94,412 Total Operating Expenses (105,840) (90,859) Staff Costs (68,307) (56,361) General and Administrative Expenses (34,939) (32,016) Depreciation and Amortisation (2,594) (2,482) Operating Income 122,794 97,885 Impairment and Provisions (52,924) (30,311) Minority Interest (7,315) (2,804) Profit before Income tax 62,555 64,770 Income Tax (12,171) (17,219) Consolidated Net Profit 50,384 47, % 20.8% 21.5% 16.5% 21.2% 9.1% 4.5% 25.5% 74.6% 160.9% (3.4%) (29.3%) 6.0% (thousands euros) Consolidated Balance Sheet 2008 Assets Financial assets held for trading 1,365,581 1,213,954 - Securities 755, ,295 Available-for-sale financial assets 528, ,287 Loans and advances to banks 747, ,633 Loans and advances to costumers 2,072,859 1,724,128 Other assets 1,163,272 1,003,751 Total Assets 5,877,475 5,331,753 Equity and Liabilities Share Capital 180,000 70,000 Minority Interest 59,983 24,713 Total Equity 526, ,725 Financial liabilities held for trading 456, ,035 Deposits from banks 1,657,092 1,177,679 Due to costumers 833,456 1,111,755 Debt securities issued 1,941,066 1,343,244 Other liabilities 462, ,315 % Change 12.5% 19.5% 11.2% 18.3% 20.2% 15.9% 10.2% 157.1% 142,7% 74.0% (35.8%) 40.7% (25.0%) 44.5% (32.5%) Total Equity and Liabilities 5,877,475 5,331, % 13 Annual Report

14 Organisational Chart Board of Directors Executive Committee Asset and Liabilities Committee Risk Policies Committee Credit and Risk Management Committees Global Management Committee Operational Committee Product Committees Geography Committees Client Origination Private Banking Product Divisions Corporate Finance Mid Cap Financial Advisory Acquisition Finance and Other Lending Project Finance and Securitisation Capital Markets - Origination Fixed Income Treasury Global Markets Capital Structure Advisory Equities Secondary Market Asset Management Departments Audit and Inspection (BES GROUP) Compliance Corporate Comunication and Image Accounting Information & Documentation Information and Management Reporting Systems Information Technology Legal Operations Organisational Resources Corporate Development Human Resources Risk Espírito Santo Investment 14

15 Rating In February, Standard & Poor s reaffirmed the A long-term and A-1 short-term ratings assigned to Banco Espírito Santo de Investimento, S.A. and revised the outlook from stable to negative, reflecting the possibility that further deterioration of the Portuguese economic environment might put greater pressure on profitability and asset quality. At the end of November, the Bank concluded its annual ratings revision process with Standard & Poor s. It is expected that the ratings resulting from this process will be assigned in the second quarter of In regard to the Bank s subsidiaries, Moody s assigned a national scale Aaa.br/BR-1 rating to BES Investimento do Brasil, S.A. in October. The global rating assigned for deposits in local currency was Baa2/P-3 and for deposits in foreign currency Baa3/P-3. The outlook is stable. In January 2010, Standard & Poor s assigned a global scale BBB-/A-3 rating and a braaa/bra-1 national rating scale to BES Investimento do Brasil, S.A.. The outlook is stable. The ratings assigned reflect the support the Bank receives from its shareholders and its strategic importance as a subsidiary of Banco Espírito Santo de Investimento, S.A. 15 Annual Report

16 Net Profit Distribution Proposal Considering that the individual profit and loss account for the year ending on 31 December, showed a profit of EUR 38,388, (thirty eight million, three hundred and eighty eight thousand, one hundred and thirty five euros and ninety six cents), the Board of Directors submits to the Annual General Meeting the following proposal for the distribution of net profits for the year: (euros) i. to the legal reserve 3,838, ii. to the free reserves 13,208, iii. for distribution as dividends 21,340, of which EUR 18,340, already paid as anticipated dividends during the year. TOTAL 38,388, In addition, the distribution of part of the free reserves in the amount of EUR 1.659,641,17 was approved at the General Meeting held on 14 December,. Espírito Santo Investment 16

17 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 31 December, 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 31 December, 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, and includes a description of the main risks and uncertainties that could affect the business. Lisbon, March 29, 2010 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) Pedro Manuel de Castro Simões Ferreira Neto (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) António Espírito Santo Silva Salgado (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) Nigel Keith Purse (Executive Board Member) Paulo José Lameiras Martins (Executive Board Member) Philippe Gilles Fernand Guiral (Member) Tiago Vaz Pinto Cyrne de Castro (Executive Board Member) 17 Annual Report

18 01 Economic Outlook GDP Growth in Selected Economies 13,0% Economic Outlook - International 9,0% 8,7% as a whole was marked by strong falls or a slowdown in activity in the main economic areas, following the global financial crisis initiated in This was mainly the result of a sharp deterioration of confidence among the economic agents, leading to a retreat of demand and to a collapse of international trade flows in the first half of the year. The general backdrop of this recession was a shrinking of available liquidity in the financial markets, breeding an environment of stricter criteria in the financing of economic activity. To address this situation, the authorities put into practice aggressive programmes of financial stabilisation and stimulus to growth, which included cutting reference interest rates to levels close to zero, a massive injection of liquidity into the financial system (namely through the central banks purchase of private and public debt securities), and on the budgetary policy front, fiscal stimuli to the consumption of durable goods, and an increase in public investment in infrastructures. Thanks to the aggressive nature of these stimuli, clear signs that global activity was picking up and financial conditions were stabilising started to emerge as from the second half of the year and in particular in the fourth quarter. Demand deriving from these stimuli resulted in a strong recovery in industrial activity and international trade flows in the world s leading economies. However, emerging economies showed greater dynamism than developed countries. A lower direct exposure to the financial crisis in part explains this resilience, as well as, in some countries, a faster and more aggressive action in providing stimuli to economic activity. This was particularly true in the case of China, an unavoidable force within the destinies of the world economy. China s strong economic growth not only fosters intra-asian growth but also fuels the exporting sectors of the main advanced and emerging economies. The Chinese GDP grew by 8.7% in, closing the year in acceleration, at a twodigit growth rate moving towards the levels observed prior to the global financial crisis. The performance of the Chinese economy was mainly underpinned by the strong increase of investment and consumption. In fact, China responded swiftly to the downturn in global activity, shifting its growth pattern towards a domestic demand-oriented model, fuelled by a strong acceleration in the volume of credit granted (benefiting consumption and housing investment) and an aggressive investment effort in infrastructures. 5,7% 5,1% 2,1% 2,8% 2,3% 0,4% 0,6% -0,2% -1,2% -2,4% -4,0% -5,3% US Euro Zone China Brazil Japan Source: IMF This financial stabilisation reflected an abatement in aversion to risk and greater confidence on the normalisation of the financial sector, leading to a gradual slimming down of spreads in the money and credit markets. In the Euro Zone, with the key interest rate sliding from 1.5% to 1%, the 3-month Euribor dropped over the year from 2.89% to 0.7%. While remaining above pre-crisis levels, credit spreads tended to narrow down (the itraxx Financials index, which tracks the spreads on Credit Default Swaps, fell from a high of 206 basis points in March to 75 basis points at the end of the year). Financial Sector Liquidity Premiums (Cash Bonds vs. CDS Spreads) Basis Points iboxx EUR Financials itraxx Financials Senior 5 yr 50 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Source: Reuters Notwithstanding the steep rise in oil prices in the course of (the price of Brent crude rose from USD 42 to USD 77 per barrel), the acceleration of productivity observed in the main economies allowed growth to recover in an environment of low inflation and interest rates. The equity and credit markets benefited from this environment, especially as from the second quarter. In the United States the Dow Jones, Nasdaq and S&P500 indices registered annual gains of 18.8%, 43.9% and 23.5%, respectively, while in the Euro Zone the DAX, CAC40 and IBEX were up by 23.9%, 22.3% and 29.8%. Reflecting the improved outlook for the emerging economies, the Bovespa (Brazil), Shanghai Composite (China) and Sensex (India) indices advanced by 82.7%, 79.9% and 81%, respectively. Espírito Santo Investment 18

19 Inflation Refi and Euribor Rates (%) % China US Euro Zone 5,5 5,0 4,5 4,0 3,5 3,0 6-month Euribor 3-month Euribor 1-month Euribor Taxa Refi 2 2,5 2, ,5 1,0 0,5 0,0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Source: Bloomberg Source: Bloomberg Main Share Price indexes 190 IBEX Jan = Dow Jones 90 PSI Nikkei DAX 50 Nasdaq Source: Bloomberg Economic Outlook - Euro Zone In the Euro Zone the economy s performance may be divided into two different periods. The first half of the year pursued the recession initiated in the second quarter of 2008, witnessing a strong contraction of activity (QoQ falls of 2.5% and 0.1% in the first two quarters), and sharp drops in exports and investment. This performance should still be seen in light of the consequences of the financial crisis, which reached its height between September and October In fact, the liquidity crunch and strong deterioration of confidence in the last months of that year induced a general retreat of demand and in particular a sharp contraction of external demand (this was especially the case in Germany, where GDP is thought to have registered a fall of nearly 5% in, the worst on record since World War II). At the same time, several economies in the Euro Zone continued to suffer from the effects of recession in the housing sector, which magnified the negative adjustment of demand. In the full year, the Euro Zone s GDP was down by 4%. However, the third and fourth quarters of already saw a return to positive growth (QoQ increases of 0.4% and 0.1% respectively), following five consecutive quarters of contraction. This improvement benefited from a rebound in exports, the positive impact of investment in the rebuilding of stocks (favouring industrial activity) and the monetary and fiscal stimuli put in place by the authorities. On the other hand, internal demand was still sluggish, suffering from restrictions on credit to consumption and private investment, the deterioration of conditions in the labour market (the unemployment rate kept rising to reach 9.9% of the labour force at year-end) and an increase in savings, warranted by a general attitude of caution. In terms of prices, the average annual inflation rate was 0.3% (3.3% in 2008), translating the absence of upward pressures on prices on the side of demand, as well as the trend in energy prices, namely the statistical effect of the decline in oil prices when compared to Under these circumstances, the European Central Bank (ECB) maintained until May the sliding trajectory of key rates, cutting the key interest rate twice by 50 basis points (in January and March) and twice by 25 basis points (in April and May). Since October 2008 this rate fell from 4.25% to 1%. Between January and May the ECB also slashed the discount and deposit rates by 125 and 175 basis points, respectively. In addition, the ECB also provided ample liquidity to the banking system, namely under three 12-month unlimited liquidity provision operations for a total of EUR 614 billion, the first two at a fixed rate of 1%, and the third at a rate tied to the rate of the main refinancing operations. The Euro Zone Spreads on 10-Year Public Debt Securities vs. Germany, Selected Economies 300 Greece 250 Basis Points 200 Ireland 150 Italy 100 Portugal 50 Spain 0 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Source: Bloomberg The expansionary fiscal policies conducted by the national governments in an attempt to stir up domestic demand led to a significant deterioration in the public accounts, with the Euro Zone s overall budget deficit rising from 2% to ca. 6% of GDP. In particular, Greece, Ireland and Spain saw their general government deficits climb to over 10% of GDP. The result was an increase in these countries sovereign risk (a widening of the government bonds yield differential between these countries and Germany), which mostly penalised Greece and Ireland (whose ratings were downgraded at the end of the year) but also the other economies in the periphery of the Euro Zone (Italy, Spain and Portugal, the last two seeing a downward revision of the outlook on their credit ratings). 19 Annual Report

20 Espírito Santo Investment EUR/USD Exchange Rate 1,7 1,6 1,5 1,4 EUR/USD 1,3 1,2 1,1 1 0,9 0, Source: Bloomberg Economic Outlook - Portugal Reflecting the impact of the global economic recession, in the Portuguese economy suffered a GDP contraction of 2.7%. However, this performance was less unfavourable than that observed in Portugal s main partners in the European Union (GDP fell by 3.6% in Spain, 5% in Germany and 4.8% in the United Kingdom). Besides this relatively weaker intensity of the recession, Portugal was also one of the first economies in the EU to exit the cycle of GDP negative growth, as early as the second quarter of, despite a 0.2% GDP contraction in the fourth quarter of the year. This behaviour is explained by the fact that demand was not affected, as elsewhere, by strong negative wealth effects associated to corrections in the real estate market, or by disruptions in the financial system. In this sense, the recession that hit the Portuguese economy in mainly resulted from the fall in external demand, as well as from the natural deterioration in the confidence of families and companies, with a negative impact on consumption, and particularly on investment. In addition, both consumption and investment suffered from greater restrictiveness of credit to finance economic activity due to the shrinking of available liquidity on the international financial markets. Hence exports fell by 11.6% in, after retreating by 0.5% in the previous year. This decrease affected goods and services alike, as well as all the destinations of Portugal s exports within the European Union. Good exports to Angola fell only slightly (0.6% in nominal terms), reinforcing Angola s position as Portugal s fourth largest export market and increasing its share of total Portuguese exports from 6% in 2008 to 7.2% in. Reflecting the contraction of internal demand, imports fell by 9.2%, after having risen by 2.7% in Worsening expectations regarding the behaviour of internal and external demand, high levels of uncertainty, and lower availability of credit, all weighed heavily on investment, which registered a real fall of 12.6%. Besides the reduction of fixed capital expenditure, the contraction in stock levels further emphasised the negative contribution of investment to GDP. Hence investment by companies is reckoned to have registered a real fall of nearly 15%, which was not offset by the strong increase in public investment (of close to 13%), this being the main sign of the fiscal stimuli to economic activity, in so far as public consumption registered 20 a real increase of 3.5%. Housing investment by families further stressed the downward trend observed in 2008, falling by close to 12% in. Dwindling confidence levels and growing uncertainty amidst families translated into a drop in private consumption of around 0.8%. Considering that the decline in interest rates, and in particular the increase in State contributions, effectively resulted in an increase in the available income of families, the decline in private consumption is mainly explained by the cautious attitude adopted by families. Hence was marked by a significant increase in the savings ratio, which rose to just over 8% of disposable income, thus breaking the downward trend observed since The adverse behaviour of private consumption is explained by the sharp drop in consumption of durable goods, in so far as expenses in non durable goods registered a slim increase. The purchasing power of families benefited in from negative inflation. In average annual terms, inflation fell from 2.6% to -0.8%. This primarily reflects a statistical effect linked to the steep rise in the price of commodities (mainly oil) in But it also translates the recessive environment lived in, which is thought to have strongly constrained the price-setting capability of companies. Main Economic Indicators - Portugal Notwithstanding the negative performance of exports, will also be marked by a correction of the combined current and capital account balances, or external deficit, from 10.3% to around 9.4% of GDP. This was mainly the result of the deleveraging process undertaken by the private sector in, but it also reflects a decline in the energy deficit. While the private sector s financing needs declined, the general government s financing needs increased. This was mainly the result of the fiscal stimuli provided to economic activity, but also reflects the impact of the cyclical downturn on the public accounts. Hence the public deficit climbed from 2.7% to 9.3% of GDP. Economic Outlook - Spain Real growth rates (%), except as otherwise indicated GDP 0,8-0,8 1,5 0,9 1,4 1,9 0,0-2,7 Private Consumption 1,3-0,1 2,5 2,0 1,9 1,6 1,7-0,8 Public Consumption 2,6 0,2 2,6 3,2-1,4 0,0 1,1 3,5 Investment -4,7-8,3 2,5-1,5-0,3 3,4 0,5-12,6 Exports 1,5 3,9 4,0 2,0 8,7 7,8-0,5-11,6 Imports -0,7-0,8 6,7 3,5 5,1 6,1 2,7-9,2 Inflation (IPC) 3,6 3,3 2,4 2,3 3,1 2,5 2,6-0,8 Budget Deficit (% of GDP) -2,8-2,9-3,4-6,1-3,9-2,6-2,7-9,3 Public Debt (% of GDP) 55,5 56,9 58,3 63,6 64,7 63,6 66,3 77,2 Unemployment (% of labour force) 5,1 6,4 6,7 7,6 7,7 8,0 7,6 9,5 Current & Capital Account Balance (% of GDP) -6,0-3,3-5,7-8,3-9,3-8,1-10,3-9,4 Sources: INE, Bank of Portugal, Finance Ministry, European Comission, OECD, Espírito Santo Research In the Spanish economy further stressed its growth pattern of recent years, which was marked by the adjustment of the various imbalances bred over the last decade (growth excessively dependent on construction and consumption, rising indebtedness, insufficient competitiveness).

21 Following a relatively modest contraction of activity in the last quarter of 2008, the recession became increasingly severe during the first half of, with private consumption and investment being the hardest hit. In the full year GDP retreated by 3.6%, after growing by 0.9% in The strong downfall in activity, the sharp rise of unemployment, and lower inflation of energy goods (through the statistical base effect) placed average annual inflation on negative ground (-0.3%, versus +4.1% in 2008). The main factors behind the fall of private consumption (close to 5% in annual terms) were the sharp increase in unemployment (to nearly 18% of the labour force), the negative wealth effect associated to the drop in housing prices (-6.2% YoY in the fourth quarter) and an increase in household savings, in a context of falling confidence levels and tighter lending conditions. Investment plunged by 15.6% in, suffering from the adjustment in the construction industry (which fell by 11.2%), but also by a retreat in expenditure in capital goods of close to 23%. As was the case with consumption, investment expenses were penalised by a more restrictive credit environment, worsening expectations in view of the trend in demand, and widespread concerns about the correction of the level of indebtedness to a more sustainable level. Falling domestic demand contributed to curb imports by about 18%. In this context, and despite a 11.5% drop in exports, net external demand still gave a positive contribution to GDP growth, while the current account deficit dropped from 9.5% to around 5% of GDP. Spain - Unemployment % of labour force Economic Outlook - Poland Poland was the only European Union economy not to suffer a technical recession in. Less external economic dependence (compared with other East European countries) and the resilience of the domestic economy, combined with a degree of exchange rate flexibility, enabled Poland to achieve GDP growth of 1.7% in (compared with 5% in 2008) despite the global recession being at the lowest point of its cycle. Private consumption, which grew more than 3%, continued to be the main engine of economic growth. Investment is estimated to have fallen marginally in, a substantially less negative evolution than in most European economies. Domestic demand continued to be supported by a solid banking sector, which was not exposed to the credit products that caused the global financial crisis or to the bursting of a housing bubble, a boom which did not exist in Poland. As a result, the Polish economy was not affected in by the private sector deleveraging that had a negative impact on other economies. Expansionist monetary and fiscal policies enabled Poland to control the natural deceleration of economic growth derived from the global recession. Among other measures designed to stimulate consumption and investment, the Polish Central Bank cut the main reference interest rate from 6% to 3.5% and the Government reduced direct taxation of household income. Investment continued to benefit from EU structural funds and Poland s hosting of the 2012 European Football Championship, which stimulated infrastructure investment. The deceleration in economic growth (both global and domestic) and the domestic stimulus measures had a negative impact on the public accounts, resulting in the budget deficit increasing from 3.6% of GDP to 7.2%. Source: Bloomberg Faced with the sharp downturn in activity, the Spanish authorities implemented a wide set of economic stimulus measures, including the so called Plan E and the Bill for sustainable economic growth. Plan E included four courses of action: supporting families and companies in order to promote employment; measures to support the financial system; fiscal stimulus measures; and structural measures for economic modernisation. The Bill for sustainable economic growth addressed a wide set of issues, aiming, among others, at reducing bureaucracy, improving education standards, supporting the internationalisation of the Spanish companies, providing fiscal incentives to innovation, and supporting investment in certain industry sectors, namely the renewable energy sector. These factors, combined with the decline in revenues and the increase in social expenditure, caused the budget deficit to surpass 11% of GDP. The deterioration of fiscal prospects prompted the S&P rating agency to downgrade Spain s sovereign rating in January, to AA+, from AAA, and to revise its outlook from stable to negative, in December. EUR/PLN 5,0 4,8 4,5 EUR/PLN 4,3 4,0 3,8 3,5 3,3 3,0 Jan-06 Jan-07 Jan-08 Jan-09 Source: Bloomberg Price deceleration was more moderate in Poland, given that the economy was not exposed to recessionary and deflationary pressures as other economies were. Annual average inflation fell from 4.2% in 2008 to 3.5% in, while year-on-year inflation increased from 3.3% at the 21 Annual Report

22 end of 2008 to 3.5% at the end of (against a Central Bank target of 1 percentage point above or below 2.5%). Core year-on-year inflation was 2.6% at the end of. After depreciating sharply between the second half of 2008 and the first months of, when it fell about 40% against the Euro, the Polish Zloty (PLN) strengthened to around EUR/PLN , ending at close to the lower limit of that range. Economic Outlook - United States The United States economy was marked in by high uncertainly regarding the evolution of economic activity and the stability of the financial system. GDP registered a sharp fall in the first half of the year, dropping in annualised terms by 6.4% and 0.7%, respectively in the first and second quarters. Faced with this scenario, the authorities took decisive action. On the monetary policy front, the Federal Reserve, after placing the key interest rate at between 0% and 0.25% and adopting a number of liquidity injection measures still in 2008, further reinforced the use of non conventional measures in. Among others, these included a programme of acquisition of mortgage-backed securities (up to USD 1,200 billion) and another to purchase public debt securities (up to USD 300 billion). The action taken by the Fed permitted to contain the rise of the yield on 10-year Treasuries (from 2.21% to 3.83% in the whole year). On the fiscal policy side, an effort to stimulate the economy was also evident: the American Recovery and Reinvestment Act, a stimulus package of nearly USD 800 billion, involved measures such as tax cuts, tax credits on the purchase of homes and certain durable goods (including cars), social and financial aid to the unemployed, and an increase in public investment (mainly in infrastructures and energy). US Federal Reserve Balance Índice DXY USD, Real Exchange Rate Source: Bloomberg Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 The authorities pledge towards economic and financial stabilisation shored up the confidence of the economic agents, allowing a climate of optimism to return to the markets as soon as in March. This was made clear by a strong rally of the main stock market indices and the narrowing down of credit spreads. In addition to an improved economic outlook, the financial markets also benefited from expectations of low inflation (-0.3% in ), combined with a large surplus production capacity (of which the most visible expression was the unemployment rate, which at year end stood at 10% of the labour force). In the ensuing environment of persistently low interest rates, the market turned to the US dollar as the main carry trade instrument, used to fund investments in higher return assets, mainly in emerging, commodity exporting economies. This sustained the fall of the US currency, which surpassed an effective drop of 16% between March and December. Economic Outlook - Brazil Espírito Santo Investment USD thousands of millions Fonte: Reuters Underpinned by fiscal and monetary stimuli, the US economy exhibited a recovering trend in the second half of the year, posting an annualised growth rate of 5.9% in the fourth quarter. Hence GDP fell by 2.4% only in the whole year, which is not as bad as anticipated at the start of the year. Private consumption and investment registered annual declines, although significantly improving in the second half of the year (in particular the consumption of durable goods and residential investment). Other factors that contributed decisively to the improvement in activity were the beginning of a favourable cycle in restocking investment, clearer signs of stabilisation in the housing sector, and the impact of the depreciation of the USD on the competitiveness of US exports. 22 The resilience shown by the Brazilian economy to the worst phase of the global recession in permitted a fast recovery of its main economic and financial indicators in line with those of its BRIC peers, such as China or India. While Brazil implemented an expansionary economic policy similar to those adopted by the main global economies, this did not lead to any significant deterioration in the sustainability indicators of its public and external accounts, allowing the country positive prospects concerning the reduction of its medium and long term credit risk indices. Brazil s sovereign ratings were affirmed by Standard & Poor s and Fitch at the lowest investment grade level (BBB-) and upgraded by Moody s to Baa2, from Baa3, with a positive outlook in. The markets perception of Brazil s capacity to recover allowed for a reduction in the sovereign risk premium as expressed by the reduction of the spread of 5-year credit default swaps (CDSs) from basis points to basis points in the course of. Such shrinking of aversion to risk led to a reversal in capital flows, from a USD 48.9 billion outflow in 2008 to a net inflow of USD 18.8 billion in, with the result that the Central Bank s international reserves increased to an historical peak of USD 239 billion (USD 207 billion in 2008) and the Brazilian currency appreciated by 25.5% against the dollar, to USD/BRL1.74.

23 CDS Spread BRL/USD, BRL/EUR and 5-year CDS Spreads Source: Bloomberg 5Y CDS (LHS) EUR/BRL (RHS) ESD/BRL (RHS) The monetary policy was conducted with a view to containing the negative effects of the recession initiated towards the end of In an environment of low inflation, the SELIC rate (Brazil s benchmark interest rate) was successively cut, dropping from 13.75% in December 2008 to an historical low of 8.75% in July, after which it was kept unchanged until the end of the year. The inflation rate (Broad Consumer Price Index) closed the year below the central target of 4.5%, dropping to 4.3%, from 5.9% in The fiscal indicators reflect the slowdown of economic activity and the adoption of stimuli, which led to a reduction in tax revenues in an environment of growing expenditure, resulting in an increase in the nominal deficit to 3.3% of GDP in, from 1.9% in Even so, after discounting the impact of interest charges on the public debt, the primary budget result in reflected a surplus of 2.1% of GDP, which compares with a surplus of 3.5% in The net debt of the consolidated public sector reached 43% of GDP until November, which is higher than in 2008 (37.4%), but not much higher than in 2007 (42.8% of GDP). In this context, the Brazilian GDP is reckoned to have registered a 0.2% contraction in, following its strong expansion in 2008 (+5.1%). Still, the activity indicators showed a positive trend from the first to the second half of the year, mainly on the back of growing internal demand (consumption and investment). Bearing in mind the relatively low degree of openness of the Brazilian economy, the evolution of economic activity is to a large extent influenced by domestic factors. In the fourth quarter of, GDP is already estimated to have risen by some 4%, and for 2010 the Brazilian economy is forecast to grow by around 5%. 4,0 3,5 3,0 2,5 2,0 1,5 USD/BRL ; EUR/BRL An environment of improving economic indicators and low key interest rates allowed the volume of domestic credit to rise to 45% of GDP in (from 40.8% of GDP at the end of 2008). This was the result of an increase in the share of credit provided by the public sector combined with a contained deterioration in the overdue loans ratio, from 4.4% of the total financial sector portfolio in 2008 to 5.8% in. The financial system maintained strong solvency levels, and the Basel Index was kept above the minimum required of 11% (at 18.4%, according to the available data for the consolidated banking system in June, which compares with 17.7% in December 2008). Being more vulnerable to the global downfall in economic activity and consequent decline in commodity volumes and prices, the Brazilian exports fell by 21.8% in (+23.2% in 2008), while imports retreated by 25.3% (+43.5% in 2008). Even so, the trade balance registered a positive inflow of USD 24.9 billion in, which compares with USD 25.3 billion in The current account deficit declined to 1.4% of GDP, from 1.8% in The decline in global foreign direct investment observed in was also felt in Brazil, with inflows dropping to USD 26 billion in, from USD 45 billion in The balance of risks attests to the solid basis for the recovery of the Brazilian economy, which in a first moment contributed to a strong reduction in aversion to risk, and subsequently to the mounting propensity to risk observed in the course of. In turn this induced a rising trend in the value of assets exposed to the potential for economic expansion in the medium and long term, the most visible expression of which is the increase in the Bovespa stock market index of close to 83%. Economic Outlook - Angola Within Africa, the impact of the world recession was initially felt in the economies with a greater degree of integration in the international financial markets, such as South Africa. Subsequently this impact spread on to the oil exporting countries, among which Angola, where economic activity was directly hit by the downfall of oil exports. The decline in oil revenues (and consequently in tax revenues) adversely impacted the economy s liquidity, thus penalising investment in the non oil sectors. Under these circumstances, GDP growth fell from 13.2% to around 2% in. Angola Oil Production Brazil Retail Sales (year-on-year growth) 1,9 % mb/d 1,8 1,7 1,6 0 1, ,4 Jan. Ap. Jun. Oct. Jan. Ap. Jul. Oct. Jan. Ap. Jul. Oct Source: Bloomberg Source: OPEC 23 Annual Report

24 However, shored up by the upturn in global activity and the rise in oil prices observed in the second half of, in the latter part of the year the Angolan economy was already showing clear signs of a recovery, in both the oil sector and the non oil sectors. In Angola s oil production averaged 1.8 million barrels a day (mb/day), having rebounded from the fall registered in the first months of the year. By year-end Angola was already the seventh largest exporter of oil to the United States, and the largest exporter to China. Other factors that contributed to the improvement of general economic conditions in the second half of were the efforts undertaken by the Angolan authorities to fuel the recovery of domestic production, to curb the operating costs of private businesses and to improve the population s social conditions, while maintaining an environment of macroeconomic stability. In this context, the country is expected to grow by close to 10% as soon as in Angola Foreign Exchange Reserves USD billion EUR/AOA ; USD/AOA Angola 140 EUR/AOA USD/AOA Jan-00 Mai-01 Out-02 Fev-04 Jul-05 Nov-06 Abr-08 Ago-09 Source: Bloomberg continued to be marked by inflationary pressures, mainly as a result of the kwanza s depreciation against the currencies of Angola s main trade partners, which contributed to raise the price of imports (mainly of food products), an effect that is further intensified by constraints at logistics and distribution capacity level. YoY inflation thus rose from 12.5% to nearly 14%. This upward trend of inflation called for the adoption of restrictive fiscal policy measures, while further stressing the urgent need for investment in logistics infrastructures (storage, transport and distribution) and for increasing the domestic production capacity Source: Bank of Angola Espírito Santo Investment The decline in oils revenues led the Angolan authorities to take a set of economic policy measures in order to stabilise external reserves and ensure the regular financing of the economy. At monetary policy level, these measures included the increase in the ratio of obligatory reserves required from financial institutions, setting a limit on capital transfers abroad, and raising the rediscount rate to 30%. On the foreign exchange front, following an initial adjustment of the Kwanza s exchange rate in the second quarter (from USD/AOA 75 to USD/AOA 78), and faced with mounting pressure for further depreciation, the authorities opted in October for abandoning the Angolan currency s peg to the US dollar. This prompted further drops in the following months, with the currency closing the year at USD/AOA 89. In fiscal terms, the Government cut public spending and reprogrammed investments, while also seeking to intensify the process of sectoral diversification of the economy. With the balance of payments under pressure, the Angolan government agreed with the IMF on a USD 1.4 billion loan, the second biggest loan on record to a sub-saharan country and representing a vote of confidence on the Angolan economy. On the one hand, the funds thus obtained aim to contribute to the stabilisation of external reserves (and hence to the economy s financial stability), and on the other, to finance a set of structural projects intended to promote the economy s diversification beyond the oil sector. 24

25 02 Activity Review The Investment Banking Business As the investment banking unit of the Banco Espírito Santo Group, Portugal s second largest financial group, Banco Espírito Santo de Investimento, S.A. has a strong international activity built along the Iberian Peninsula - Brazil axis. In addition to these markets, Espírito Santo Investment seeks to assist its clients in their respective internationalisation processes and to use its technical and commercial skills proactively to explore opportunities for internationalisation in new markets such as the United Kingdom, Angola, Poland and the United States. On April 30, BES Investimento do Brasil also increased its share capital by BRL 50 million (fifty million Brazilian reais) through an incorporation of reserves to BRL 200 million (two hundred million Brazilian reais). On June 29, Banco Espírito Santo de Investimento, S.A. increased its share capital through a cash capital increase of EUR 110 million, wholly subscribed by Banco Espírito Santo. The capital increase was aimed at strengthening the bank s financial resources as it expands its domestic and international operations. On November 4, ESSI Sociedade Gestora de Participações Sociais, S.A., the holding company 100% owned by Banco Espírito Santo de Investimento, S.A. sold 9.60% of the share capital and voting rights of Evolution Group Plc. Espírito Santo Investment s main objective is to provide services for medium to large companies, institutional clients and, in some specific segments, private 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 from structured debt underwriting and asset and risk management. On November 17, BES Investimento do Brasil increased its share capital through a cash capital increase of BRL 100 million (one hundred million Brazilian reais) to BRL 300 million (three hundred million Brazilian reais). This share capital increase was fully subscribed by the shareholders. Banco Espírito Santo de Investimento, S.A. subscribed the amount of BRL 80 millions. The Bank has adopted a matrix-based team structure with the client origination teams working closely together with the product and execution teams. On November 19, Espírito Santo Serviços Financeiros DTVM was formally constituted in Brazil for the purpose of providing domestic private banking services. Business Teams Client Relations Deal Origination Wholesale cross-selling with the BES Group Geographical Focus CLIENTS Product Know-how Product Teams Capital Markets - Equity Fixed Income Corporate Finance Mid-cap Financial Advisory Capital structure Advisory On February 7, 2010, the Boards of Directors of Banco Espírito Santo de Investimento, S.A. ( BESI ) and Execution Holdings Limited ( Execution Noble ), an international investment banking group based in London, announced their agreement on the terms of a recommended offer for BESI to acquire a shareholding of 50.1% in Execution Noble. Industry Expertise Project Finance and Securitisation Acquisition Finance & Other Lending Private Equity In, our international expansion strategy and the development of business opportunities with other entities resulted in a number of new initiatives, including. On January 15, Espírito Santo Investment increased its shareholding in Concórdia Espírito Santo Investment from % to 100%. Subsequently, the company changed its name to Espírito Santo Investment Sp, z.o.o. On April 30, BES Securities do Brasil increased its share capital by BRL 30.5 million (thirty million, five hundred thousand Brazilian reais) through an incorporation of reserves to BRL 52.5 million (fifty-two million, five hundred Brazilian reais). 25 Annual Report

26 LEE FRIEDLANDER b. 1934, USA, New York City, 1980, from the series, Letters from the people, Gelatin silver print, 50,8 x 40,6 cm Lee Friedlander, courtesy Fraenkel Gallery, San Francisco and Galerie Thomas Zander Cologne Espírito Santo Investment 26

27 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 provide solutions that meet our clients objectives and needs. 27 Annual Report

28 Client Origination The Client Origination Team strives to originate deals for all the Bank s product areas. It works closely with existing clients to identify their needs and projects supported by its extensive knowledge of the market opportunities. Experience has validated the Client Origination Team s focus on sector specialisation in a proactive and innovative approach aimed at developing sustainable and lasting client relationships. Leadership of the investment banking sector in Portugal has also encouraged the Bank to expand its international operations in response to increasing globalisation and new markets development. As part of its expansion strategy, the Bank continued to enlarge its international footprint in Spain, Brazil, Angola, the United Kingdom, Poland and the United States, a presence we believe our Clients will increasingly value. Clear signs of economic stabilisation and moderate recovery were registered in, although these did not yet extend to every business sector or geographical region. Debt markets reopened and companies, taking advantage of low interest rates and asset re-pricing, began considering domestic and international investment and growth projects while seeking to consolidate their balance sheets, by refinancing their debt and extending their debt maturities. In Portugal, although economic recovery was just at the beginning, important privatesector investments, related to the internationalisation of a number of Portuguese groups were concluded. In, the Client Origination Team continued to assist is clients in achieving their goals, by adopting the following principles: i. Strengthen relations with Clients in different regions, providing an integrated offer of investment banking products and services. ii. Maintain a proactive approach, providing Clients with permanent support ahead of and in response to market events. iii. Increase and support cross-border activities in a full range of areas direct investment, alliances and partnerships, trade flows etc - taking full advantage of the Bank s direct presence in different regions. iv. Strengthen the capacity to originate and coordinate value-added business proposals. Despite the recessionary climate of, the Bank was able to mantain the levels of efficiency and effectiveness of its teams, reflected in the quality of the results achieved. Client Origination Portugal Spain Brazil UK Poland USA Angola Cluster 1 Infrastructure (excl. road concessions) Water & Waste Management Municipalities Transports Services Equipment Mining Pharmaceutical Biotechnology Cluster 2 Food Retail Beverages Packaging Textile Ceramics Cluster 3 Energy Oil & Derivatives Pulp & Paper Wood Cork Automotive Cluster 4 Media Telecoms Chemical Glass Sports Cluster 5 Construction Cement Building Materials Road Concessions Banking Insurance Cluster 6 Real Estate Tourism/Hotels Mid-cap Espírito Santo Investment 28

29 Client Relationships - Portugal In Portugal, the results achieved exceeded expectations and reflected the Bank s leadership position in the market. The Bank succeeded in benefiting from the capital markets recovery, both in terms of debt and equity, while identifying and concluding a number of important multi-product transactions in a range of business sectors, which will undoubtedly have a positive impact on Portugal s business development in the future. These successes emphasised the soundness of our business principles, and reflect: ii. The confidence of our clients in the Bank s capacity to deliver reflected in its one-stop shop proposal, that involves, whenever required, teams from the Bank s different product areas (corporate finance, project finance, fixed income, equity, acquisition finance, etc) in the transactions. iii. The strong potential of the Bank s international platform for originating and executing cross-border operations in support of the growing internationalisation of Portuguese companies seeking to expand into new markets. i. The merits of commercial pro-activeness, achieved through the continuous accompaniment of our clients and market coverage that is as exhaustive as possible. This not only strengthens our skills in different sectors, but also enhances our capacity to identify business opportunities for the Bank s full range of services and products. iv. The importance of coordination between the Banco Espírito Santo Group s ( BES Gooup ) different business areas for identifying opportunities and arranging transactions. v. The value of the Bank s franchise as a recognised market leader in investment banking in Portugal. Pedro Toscano Rico Afonso Rocha Danielle Van Der Grinten Luís Valadas Miguel Borges 29 Annual Report

30 Client Relationships Spain In, commercial activities in Spain continued to grow systematically, with particular emphasis on increased cross-selling between the Bank s different product areas. The Client Origination team deepened its knowledge of the Spanish corporate sector, while maintaining the same pace of growth in its client portfolio as in previous years. The Bank s commercial activities will focus next year on identifying these opportunities, building on the Bank s key competitive advantages: i. International presence with a particular emphasis on Portugal Spain Brazil Angola the United States; Uncertainties will continue to mark However, the less favourable global climate may, as it did in, produce a number of business opportunities that might not have arisen in a more benign economic environment. ii. High quality service and close attention to each Clients needs; and iii. Coordination with the different teams operating within ( BES Group ). Carolina Ibañez Enrique Bofill Morientes Jacobo García-Loygorri Carlos Paramés Espírito Santo Investment 30

31 Client Relationships Brazil In, the Bank faced great challenges and achieved great successes in Brazil. The economic and financial crisis that began in 2008 turned into an opportunity. As a consequence of an intense commercial effort (more than 700 visits in a year), the Bank succeeded in enlarging its client base by 30%, expanding the cross-selling of products (an effort which was extended to other geographical regions and units within the BES Group) and increasing the amount of revenue generated. In, the Bank led a number of major transactions with a high market profile in a range of business areas (project finance, fixed income - risk management, capital markets and corporate finance), developed its international business through a cooperation agreement with Banco Espírito Santo that resulted in the completion of a number of important structured trade finance and trade finance transactions with local clients; and concluded, in cooperation with Banco Espírito Santo s International Premium Unit (UIP), a range of local transactions to assist clients in their internationalisation processes. In 2010, the Bank will face more and bigger challenges in Brazil. Market stability and strong economic growth will make competition between banks more intense, resulting in narrower spreads and lower fees from client operations. As part of the development of its commercial strategy, the Bank plans to continue to expand its client base, to extend its knowledge of the different business sectors and to develop teamwork with all the BES Group s product and support areas. The main performance goals for 2010 are the same as in, with a special emphasis on: (i) increasing fee business revenue and (ii) enlarging the client base and product crossselling. The Bank will continue to improve its integration with the BES Group s other international units, focusing on originating cross-border deals, and to increase its share of mind in the market and among clients (greater media exposure, organisation of corporate events and maintenance of a focused and disciplined programme of visits). Cesar Ciavolih Miguel Lins Geraldo Rinaldi Silvan Suassuna, Jr. 31 Annual Report

32 Client Relationships United Kingdom In, the client origination team in London continued to work closely with the Bank s other product areas, promoting initiatives aimed at developing cross-border operations with both existing and new clients. It engaged in multidisciplinary iniciatives, with the objective of originating business opportunities and establishing relations with corporate and private equity clients. The London team made important progress in expanding Espírito Santo Investment s relations with international bodies operating in the City of London in order to facilitate potential development initiatives for the Bank. Greg Eggen Espírito Santo Investment 32

33 Client Relationships Angola In recent years, investment banking operations in Angola, developed through the Investment Banking Office created at Banco Espírito Santo Angola (BESA), have been mainly geared to assisting BESA in structuring financing operations for public entities involved in Angola s national reconstruction programme and for private investment projects, particularly in the real estate sector. The Bank plans to expand its operations in the Angolan market in 2010 by creating a local investment bank and through a brokerage house. The brokerage house will enable the Bank to develop capital markets operations in the Angolan market, which will strongly benefit from the scheduled opening of the Angolan securities and derivatives market, the Bolsa de Valores and Derivados de Angola (BVDA). This important initiative by the Angolan authorities will encourage the development of domestic capital markets (primary and secondary markets) and stimulate greater activity in the banking sector, by increasing differentiation between the development strategies of the different operators. Creating an Angolan investment bank will enable the Bank to: (i) increase support for public and private sector development projects in the energy, mining, road and rail transport infrastructure sectors, among others, by putting together structured finance operations, and (ii) offer merger and acquisition (M&A) and pure financial advisory services. Manuel Reis 33 Annual Report

34 Client Relationships Poland At the end of, two structural decisions were made for developing the business operations of the Bank s branch in Poland: i. Creating a fixed-income unit to originate and distribute structured and fixed income products for institutional end clients and risk coverage products for corporate clients. ii. Creating a resident team of senior bankers, who will be responsible for: (i) originating fixed-income operations; and (ii) developing credit operations for corporate clients. Bartlomiej Dmitruk Espírito Santo Investment 34

35 Client Relationships United States In its first year of activity, the client origination team in the United States focused on: i. Providing support for the Bank s clients from other geographical regions with operations or interests in the Americas, particularly in North America; ii. Strengthening relations with existing North American clients with a view to increase cross-selling between different products; iii. Positioning the Bank with Portuguese companies based in the US as the go to bank for all their investment banking needs; iv. Positioning the Bank as a reference investment banking institution in the strategic triangle: Iberia, Angola, Brazil. Events in which the Bank participated and supported in included: Portuguese Day at the New York Stock Exchange (NYSE), which was held in October, placed the Portuguese capital markets and the Portuguese economy at the centre stage, and was attended by Portugal s ambassador to the United States, the NYSE Euronext CEO and the Chairman of Euronext Lisbon; The first meeting of American Politicians of Portuguese Ascendancy, held in Washington and hosted by the Portuguese Embassy in the United States, brought together more than 30 US politicians of Portuguese origin and several Portuguese companies that operate in the US. The branch also established contacts with the chambers of commerce and diplomatic representations in the United States of Portugal, Spain, Brazil and Angola. Nuno Cardoso 35 Annual Report

36 LEE FRIEDLANDER b. 1934, USA Glennwood Springs, Colorado, 1981 from the series, Letters from the people, Gelatin silver print 40,6 x 50,8 cm Lee Friedlander, courtesy Fraenkel Gallery, San Francisco and Galerie Thomas Zander Cologne Espírito Santo Investment 36

37 PRIVATE BANKING Value creation. Sophisticated clients require a tailor made service. Together with Banco Espírito Santo Private Banking Division, we created 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. 37 Annual Report

38 Private Banking The year of was a period of consolidation for the Private Banking Division after a year 2008 in which the financial climate was particularly difficult. The growing proximity between the Bank s different product areas has enabled the Division to create investment opportunities for clients in both the traditional areas of asset management shares, bonds and structured products, that in recovered or more than recovered from the losses suffered in 2008 as well as in other product areas, specifically corporate finance and private equity. An origination and structuring unit for alternative classes of assets was created in response to growing demand for distinctive, non-traditional products. The results achieved by the Division, specifically a 34% increase in assets under management, demonstrated the correctness of its decision to invest in creating a focused team specialised in accompanying clients that, because of either their size or their sophistication, require a differentiated service. In 2010, the Bank will focus on broadening the business geographical scope, to the north of Portugal, where the potential for gaining clients with the type of characteristics envisaged for this project is expected to show significant growth. The broadening of the client base, the strong existing pipeline and the in-depth monitoring of business opportunities in cooperation with the Bank s different product areas and Client Origination team enable us to envisage positive year of Lourenço Vieira de Campos Espírito Santo Investment 38

39 39 Annual Report

40 LEE FRIEDLANDER b. 1934, USA Las Vegas, 2002, from the series, America by Car, Gelatin silver print, 50,8 x 40,6 cm Lee Friedlander, courtesy Fraenkel Gallery, San Francisco and Galerie Thomas Zander Cologne Espírito Santo Investment 40

41 EQUITY CAPITAL MARKETS A different perspective. We believe companies can greatly increase their growth s potential by accessing capital markets. In, we maintained our leadership of the Portuguese market and strengthened our position in the Spanish and Brazilian markets. 41 Annual Report

42 Equity Capital Market Equity Primary Market Stock Markets in Iberian Peninsula After a discouraging start of the year, was characterised by a strong market recovery from March 9 onwards (the date on which most markets registered annual lows). Expansionist measures implemented by central banks, which injected large amounts of liquidity into the system, increased investor confidence, as labour and real estate markets began to show signs of stabilisation, continuing improvement of the credit market and better-than-expected company results increased the flow of capital into the equity markets and lifted share price indexes. In terms of annual gains, many share price indexes registered record levels. Portugal s PSI20 recorded its biggest gain for 12 years and European markets achieved their best annual performance of the past decade. The Brazilian market achieved an outstanding performance, with the Bovespa index gaining more than 80% in, making Brazil one of the best performing markets in the world. In Portugal, the equity primary market in was limited to capital increases. Banco Espírito Santo EUR 1.2 billion capital increase was a leading transaction. Espírito Santo Investment acted as Global Coordinator and Bookrunner for this operation, which was concluded with great success. The Bank led the takeover bids that Ongoing Media launched for Media Capital shares and that Companhia Siderúrgica Nacional launched for CIMPOR shares. In Spain, the biggest share offerings were also capital increases. Espírito Santo Investment acted as sole placing agent for a EUR 39.9 million capital increase by Dinamia. (%) Leading stock markets performance in 82,7 Rights Issue Rights Issue 1,199,999,998 39,900,000 43,9 33,5 33,5 29,8 23,8 23,5 22,3 22,1 21,1 19,0 18,8 Joint Global Coordinator & Bookrunner Sole Placing Agent Bovespa Nasdap PSI20 WIG20 IBEX35 DAX S&P500 CAC40 FTSE100 DJ Euro Stoxx50 Nikkei Dow Jones Source: Bloomberg (in local currencies) The total amount of share and equity-linked offerings reached approximately USD 858 billion, an increase of 36% on 2008, in a year dominated by capital increase operations, which accounted for more than two-thirds of total volume and were dominated by financial sector companies. IPOs totalled USD 114 billion worldwide, up 20% on Similarly to the global trend, capital increases in the Europe, Middle East & Africa (EMEA) region reached a total of USD billion, one of the highest levels in living memory. In regard to IPOs, however, the total amount was the lowest since 2003, leading to expectations of a significant increase in this type of operation in Convertible share issues more than doubled in compared with the previous year. Espírito Santo Investment In Brazil, a number of share offerings led to a reopening of the equity market. Some of the offerings were on a very large scale, such as the IPOs of Visanet and Banco Santander (Brasil), two of the biggest offerings in the world in. 42

43 Brazil Secondary Equity Market The year of was characterised by a recovery of the Brazilian economy, which gained strong momentum in the second half of the year, despite the international financial crisis. The recovery had a direct impact on market behaviour with the Bovespa share price index gaining 82.7%, the Brazilian currency stabilising at similar levels to September 2008 and short-term interest rates stabilising at the historically low annualised level of 8.75%. Brazil s primary capital markets recovered strongly with the equity market returning to pre-crisis price levels, reactivating investor interest in new shares. The market absorbed BRL billion in new share issues in a total of 32 IPOs and follow-on operations. Although the total amount of new share issues was 30% higher than in 2008, only five new companies were floated on the market, reflecting a high level of concentration in a small number of large-scale operations, of which the BRL 14.1 billion issue of new shares by Banco Santander (Brasil) was a leading example. Espírito Santo Investment participated as Co-Manager in the IPOs of ordinary and preferential shares by Banco Santander (Brasil) and of ordinary shares by Visanet, (transaction amounting to BRL 8.4 billion). The Bank also acted as Co-Manager in ordinary share follow-on operations for CCR do Brasil (BRL 1.26 billion) and EDP do Brasil (BRL 441 million). The Bank was involved in the leading capital markets deals of the year, which together represented 53% of the total volume of shares issued. Banco Santander Brasil, S.A. Iberian Peninsula Despite the strong market recovery in and the excellent performance of the Portuguese and Spanish share price indexes compared with the rest of Europe, trading volumes in the Iberian market were much lower than in 2008, both on the Lisbon Stock Exchange (Euronext Lisbon) and on the Madrid Stock Exchange. Although the fall in trading volume eased during the year, the total trading volumes in fell 43% in Portugal and 28% in Spain, an average drop of 29% for Iberia as a whole. The volumes traded by Espírito Santo Investment as an intermediary fell much less than the market: 3% in Iberia, 1% in Spain and 22% in Portugal, reflecting an increase in the Bank s market share. The Bank strengthened its leadership position in Portugal, increasing its market share from 11.7% in 2008 to 15.9% in, and reached third position in the ranking of brokerage houses in Spain with a market share of 7.6% (up from 5.6% in 2008). This level of performance is particularly noteworthy considering that the top 10 operators on the Madrid Stock Exchange included the leading Spanish banks and some of the big global banks and that Euronext Lisbon has more than 60 operators, many of which are foreign operators of great international standing. The Bank s focus on providing a high quality and differentiated service and, above all, on the diversification of its client base proved particularly important in a less favourable market environment. In, the Bank continued to invest in improving its sales and research areas, increased its commercial activities directed to private clients and began distributing Iberian equity products in the United States through the New York branch of E.S. Financial Services, Inc. IPO R$ 13,182,457,728 IPO R$ 8,397,208,920 Finally, it is important to note the strong growth in the direct market access (DMA) activities achieved in, an area which has proved to be of great importance in the current market climate. Co-Manager Co-Manager Euronext Lisbon Ranking Ranking Broker Market-share Follow-on Follow-on (Block Trade) 1 Banco Espírito Santo de Investimento 15.9% 2 Banco Português de Investimento 7.9% 3 Banco Millennium BCP 7.8% 4 Credit Suisse Securities 6.1% 5 Caixa - Banco de Investimento 4.5% 6 Morgan Stanley 4.4% 7 UBS Limited 4.2% 8 Goldman Sachs 3.4% 9 Merril Lynch 3.3% 10 Banco Santander Negócios de Portugal 3.1% R$ 1,263,735,000 R$ 441,750,000 Source: Euronext Lisbon Co-Manager Co-Manager 43 Annual Report

44 Madrid Stock Exchange Ranking Ranking Broker Market-share Asset Management 1 Banco Bilbao Vizcaya Argentária 14.9% 2 Santander Investment Bolsa 8.3% 3 Banco Espírito Santo de Investimento 7.6% 4 Societe Générale Suc. España 7.2% 5 Ahorro Corp. Financiera 6.3% 6 Morgan Stanley 4.0% 7 Non Disclosed Broker 3.8% 8 Merril Lynch 3.8% 9 Credit Suisse Securities 3.5% 10 Deutsche Securities 3.5% Source: Sociedad de Bolsas, S.A. Brazil Portugal Espírito Santo Investment s asset management business had an excellent year in. The turnaround came in March as one of the strongest share market recoveries since the 1930s emerged from the pessimistic climate that had been deepening since Having succeeded to a large extent in protecting assets under management in 2008, the Bank was able to take advantage of the market recovery to achieve a highly positive performance at several levels in : Trading volumes on the Brazilian market followed the positive trend in share prices and the flow of foreign investment into the Brazilian equity market totalled BRL 20.6 billion in. Espírito Santo Investment, through its subsidiary BES Securities, moved up 12 places in the Bovespa trading ranking in, reaching the 30th place at the end of the year. The average daily volume intermediated by BES Securities amounted to BRL 100 million, an increase of 400% on 2008, reflecting the development of the new business areas of DMA services and investment clubs set-up in In 2010, the Brazilian equity market should continue to register a positive trend, although at a more moderate level than in. Gains will be supported by a positive evolution in companies results and by a forecasted GDP growth of about 5%. Poland The value of assets under management grew 42% to EUR 260 million at the end of the year. As envisaged, recognition of the Bank s strong relative performance in 2008 was rewarded in the climate of reduced contextual risk that characterised ; Client portfolios return reached 16.7% in real value in. Two aspects of this performance are particularly worthy of note: firstly, this was our best annual performance since we began operating in 2002; secondly, this record performance was sufficient to eliminate all the loses inflicted by the crisis and lift the value of the portfolios we manage to their highest level of profitability to date. Other aspects of the Bank s asset management operations in that merit special note include: Continuing an excellent level of cooperation with the BES Group commercial networks, namely with Banco Espírito Santo s private banking division and with Banco BEST; Espírito Santo Investment s brokerage business enjoyed a year of growth in Poland in, with its intermediated trading volume increasing significantly. The Bank continued to broaden its client base, establishing itself as one of the main local operators for international institutional clients while expanding its business with leading domestic institutional clients. The second half of saw a resurgence of activity in the primary capital markets with the completion of a number of important operations resulting from the Polish government s privatisation programme. This dynamism, which will almost certainly gain further momentum in 2010, reflects the positive outlook for the Polish economy and underlines the importance of Espírito Santo Investment s strategic focus on Poland and on Central and Eastern Europe. ESAF s creation of the ES Trading Fund in August, to which the Bank is an advisor. In, the distribution start-up of this fund helped gain new clients in Spain and Switzerland and EUR 20 million in assets. Having achieved its growth targets for, the Bank has set ambitious goals for this business area in With the internationalisation of asset management activities as its central objective, the Bank will also seek to enhance its presence in the institutional client segment without affecting the excellent relations it has already developed with the BES Group commercial networks in Portugal. Brazil In, Espírito Santo Investment s asset management operations in Brazil, developed by its subsidiary BESAF - BES Activos Financeiros, were characterised by two important features: Espírito Santo Investment 44 A restructuring of the company involving changes to operating processes, methods and technology, in the investment, commercial and middle-office areas, with the purpose of modifying BESAF s business model.

45 A recovery of the business activity based on the new operating parameters with the goal of rebuilding the volumes of assets under management most penalised in As part of this process, BESAF engaged in numerous commercial initiatives targeted at asset distributors, broadened its base of potential distributors, and developed a series of proposals in order to attract corporate, institutional and top private clients. As part of this strategy, BESAF also restructured its portfolio of openended funds and revised its pricing policies for both exclusive and openended funds. BESAF ended with 30 investment funds and BRL million in assets under management, an increase of BRL 378 million (85.1%) on Exclusive funds accounted for 64% of total assets under management, with the remaining 36% in open-ended funds. A total of 18 new funds were constituted or incorporated in : 15 exclusive and three open-ended funds. Four open-ended funds were discontinued after being merged into other funds and one open-ended offshore fund was wound up. In 2010, the production by the Brazilian asset management industry is expected to grow more significantly than estimated growth of less than 10%. A high rate of economic growth and historically low interest rates favour a strong recovery in production, especially of higher valueadded products such as multi-market and share funds. BESAF s strategic goals for 2010 include: Continuing to increase the value of assets under management by a significant amount; Strengthening relationships with the local market distribution base with a view to increasing the number of asset marketers; Increasing the share of BESAF products in the BES Group distribution channels in Brazil by strengthening the relationship with the wealth management unit; Strengthening our goals for marketing Brazilian asset products through the Espírito Santo Group s largest commercial networks, namely in Portugal, Spain and Switzerland. 45 Annual Report

46 LEE FRIEDLANDER b. 1934, USA, New York City, 2002, from the series, America by Car, Gelatin silver print, 50,8 x 40,6 cm Lee Friedlander, courtesy Fraenkel Gallery, San Francisco and Galerie Thomas Zander Cologne Espírito Santo Investment 46

47 FIXED INCOME Diversifying funding sources. Access to tradable debt securities markets is an important source of funding diversification for a company. In, the debt market recovered, with a significant number of issuers taking advantage of the more favourable conditions to return to the market. 47 Annual Report

48 Fixed Income Debt Primary Market Market Background Portugal Telecom International Finance B.V. The year of began in a climate of risk aversion, which started to change from the second quarter onwards in response to fiscal and monetary stimulus measures implemented by governments and monetary authorities. Successive cuts in reference interest rates by the European Central Bank, to a level of 1% in May, and liquidity injections contributed to a progressive normalisation of financial markets. The improved economic fundamentals in different geographic regions grew more expressive during the second quarter, contributing to a strengthening of investors confidence in the economic and financial recovery that was underway % Notes due ,750,000,000 Joint Lead Manager 6.0 % Notes due ,000,000,000 Joint Lead Manager After the highs reached in March, spreads on private debt began a downward trajectory that continued throughout the year, a movement that accompanied the slope of the yield curves for credit and sovereign debt. The return of liquidity to the debt markets led to a significant increase in the volume of corporate debt issues and to exceptional activity in the Eurobonds market. As risk perceptions improved, investors appetite for lower quality credit categories and less defensive sectors grew. EDP Finance B.V. 4.75% Notes due ,000,000,000 Joint Lead Manager 9.625% Notes due ,000,000 Co-Lead Manager Iberian Peninsula Espírito Santo Investment played an important role in the recovery of the primary debt market business in Portugal, acting as Joint Lead Manager for four issues by Banco Espírito Santo totalling EUR 5.25 billion; for two issues by Portugal Telecom International Finance, B.V. totalling EUR 1.75 billion, for an issue by EDP Finance B.V. totalling EUR 1 billion, and for two issues by the Espírito Santo Financial Group totalling EUR 550 million. Public Offering of Bonds FC PORTO SAD Commercial Paper Programme Espírito Santo Investment also acted as Joint Lead Manager for a EUR 700 million bond issue by Galp Energia and for an EUR 18 million public bond offer by Futebol Clube do Porto - Futebol, SAD; and as Co-Lead Manager for a EUR 1.75 billion issue of subordinated bonds by HSBC Holdings, Plc. and for a EUR 1 billion issue by EDP Finance B.V. 18,000,000 Co-Leader 75,000,000 Arranger and Paying Agent Espírito Santo Investment also arranged and led 17 new commercial paper programmes totalling about EUR 435 million, including major programmes organised for Sonae Distribuição (EUR 75 million), Estradas de Portugal (EUR 50 million) and Jerónimo Martins (EUR 50 million). In Spain, Espírito Santo Investment acted as Co-Lead Manager for a EUR 300 million issue by Abengoa, the first transaction by an non-rated issuer to be made in the Spanish market. Commercial Paper Programme 50,000,000 Commercial Paper Programme 50,000,000 Espírito Santo Investment 48 Arranger and Paying Agent Arranger and Paying Agent

49 Brazil In contrast with the restrictions of the first semester, Brazilian companies had the opportunity to issue large amounts of debt instruments on the international markets during the second half of. Total volume of issues reached USD 25.5 billion, almost three times the total amount of funds raised in Espírito Santo Investment was very active in raising funds for Brazilian companies on the international markets, acting as: Lead Manager for a Eurobond issue by BES Investimento do Brasil (USD 150 million), which reopened the markets to mid-sized Brazilian banks in ; Joint Lead Manager for a Eurobond issue by Banco Panamericano (USD 200 million) and a Eurobond tender and exchange offer by Banco Mercantil do Brasil (USD 44 million); Co-Manager for a long-term Eurobond issue by Banco Bradesco (USD 750 million) and for a Eurobond issue by Odebrecht Engenharia e Construção (USD 200 million); Engenharia e Construção 9.625% Notes due 2014 US$ 200,000,000 Co-Manager The recovery of the local primary market was also concentrated in the second half of the year, as a more favourable economic climate led to the almost total replacement of the large volume of promissory notes (securities issued for a shorter-term), totalling about BRL 19 billion, by debentures (securities issued for a longer term). The primary market for local debt reached a total volume of BRL 48 billion, the same level as in Espírito Santo Investment was considerably active in the local debt market, participating in 15 different issues, totalling just over BRL 5.8 billion and corresponding to 13% of the total market. Investment 5.75% Notes due 2012 US$ 150,000,000 Lead Manager 7.0% Notes due 2012 US$ 200,000,000 Joint Lead Manager Leading local market operations in which Espírito Santo Investment participated included: Joint-Lead Manager for a BRL 2.7 billion Promissory Note issue by CEMIG; Joint-Lead Manager for a BRL 1.25 billion medium to long-term Debenture issue by BNDESPAR; Joint-Lead Manager for a BRL 690 million Promissory Note and a BRL 800 million Debenture issues by BRADESPAR; Joint-Lead Manager for a BRL 320 million Promissory Note issue by OHL Brasil Group s nine subsidiaries; and Tender & Exchange Offer Subordinated Notes 6.75% due 2019 Arranger for a BRL 78 million Structured Note issue by the SAG Unidas Group. US$ 44,600,000 US$ 750,000,000 Joint Lead Manager Joint Lead Manager Debênture Debêntures R$ 2,700,000,000 R$ 1,250,000,000 Bookrunner Coordinator Annual Report

50 The financial crisis led to a reduction in the number of operations. However, this was offset by increasing credit spreads, enabling to achieve the same level of income as in Promissory Notes R$ 690,000,000 Bookrunner Debêntures R$ 800,000,000 Bookrunner Risk Management for Institutional Clients The number of risk management/structuring operations for institutional clients decelerated slightly in in comparison with the previous year. This reflected a greater risk aversion among investors and a greater profitability of cash products (deposits, plain vanilla bonds etc), and resulted in a reduction in investment in structured products, mainly in the first half of the year. Promissory Notes Promissory Notes An analysis of investment in financial assets shows a significant increase in demand for products indexed to the credit market or interest rates and a fall in demand for products indexed to the equity market or commodities. Demand for equity products grew over the year as market conditions improved. The trend observed in previous years for the geographical diversification of the client base continued, especially in Spain and in the United States. R$ 200,000,000 Coordinator R$ 120,000,000 Coordinator Profits in largely exceeded expectations, mainly due to the rapid adaptation to the new market conditions and respective business opportunities. Trading & Sales Due to September 2010 Promissory Notes R$ 78,000,000 Loan US$ 28,000,000 Leader In, the strategy for the Bank s trading & sales operations was based on: (i) increasing credit portfolio exposure with a view to narrowing spreads during the year; (ii) betting on interest rates downward trend; (iii) raising funding for the Bank; (iv) focusing on regular business with clients; and (v) pricing primary market issues, taking advantage of opportunities derived from narrowed credit markets spreads. This area was particularly active in distributing issues that were originated and led by the Bank in both Europe and Brazil. The sales area continued to focus on broadening its institutional client base, growing its business in Portugal, Spain, France, Switzerland, Luxemburg, the United Kingdom, Brazil and the United States. Brazil Risk Management and Trading & Sales Risk Management/Structuring Espírito Santo Investment Iberian Peninsula Risk Management for Corporate Clients In the area of risk management/structuring for companies, Espírito Santo Investment took advantage of opportunities for restructuring operations, increased support for clients and tailored products to suit market conditions, focusing on instruments for covering a number of energy commodities (which prices had been driven up by higher oil prices), to offset reduced demand for instruments covering interest-rate risk due to the fall in interest rates. 50 In, the local risk management market was characterised by two distinct periods: The first quarter and part of the second quarter of witnessed a marked reduction in the available limits for counterparty risk in Brazilian banks, with the leading players in the risk management market more concerned to resolve internal problems than to originate new transactions. In this context, Espírito Santo Investment made further advances in consolidating its position as an important player in the local market, keeping most of its counterparty risk limits open, which enabled it to gain important new clients and to differentiate its positioning towards its traditional clients.

51 During the rest of the year, Espírito Santo Investment strengthened its activity by consolidating its presence among clients gained or regained thanks to a proactive approach, offering alternative transactions adapted to their real needs. The number of transactions is expected to increase in 2010, but at lower spreads. Espírito Santo Investment plans to capitalise on existing synergies between the different geographic regions where the Bank operates to structure and sell a larger number of transactions. Trading & Sales The end of the first half of witnessed a recovery of credit to corporates in local markets, which began in the more defensive sectors with stronger guarantees structures. The secondary market remained at an incipient stage, a traditional characteristic of the Brazilian market. The recovery accelerated in the second half of with a reduction in spreads and the return of big issues to the market. The secondary fixed income market also registered a positive movement. In this context, Espírito Santo Investment participated in the distribution of a Promissory Notes issue by Cemig (BRL 2.7 billion), and of a mediumto-long-term Debentures issue by BNDESPAR (BRL 1.25 billion). In the corporate debt market, the Bank was particularly active in the distribution of the Promissory Notes and Debentures issues by Bradespar (BRL 690 million and BRL 800 million respectively), in the distribution of the Promissory Notes issues by nine subsidiaries of the OHL Brasil Group and in the syndication of the Structured Notes issues by the SAG Unidas Group. In the international market, Espírito Santo Investment participated in the distribution of Odebrecht Engenharia e Construção s USD 200 million Notes issue, and in the first BES Investimento do Brasil s public issue under its Short-Term Notes Programme amounting to USD 150 million. The Bank also participated in the distribution of long-term Notes issued by Banco Bradesco (USD 750 million), and in the placing of bonds by Banco Panamericano (USD 200 million), Odebrecht Finance (USD 200 million) and Banco Mercantil do Brasil tender and exchange offer (USD 44 million). Treasury Iberian Peninsula The credit market recovered strongly in as spreads narrowed by an order of magnitude that was almost as significant as the spread widening of the previous year. The gradual recovery in investors confidence revitalised the secondary debt market and led to a reasonable pace of issues in the primary market by both corporations and financial institutions. The latter were able to raise funds in the second half of the year without using Government guarantees. Central banks intervention in normalising interbank monetary markets was of decisive importance. By intervening in terms of price, supply, conditions of access, eligible assets and by extending payment periods, monetary authorities achieved a sharp reduction in liquidity premiums. In this climate, Espírito Santo Investment naturally benefited from the improvement in market conditions, in terms of both debt issuing capacity and the increased value of its assets portfolio. Debt in the form of Medium-Term Notes (MTNs) totalled EUR million in December, an increase of EUR 96 million on 31 December, The MTN Programme remained a fundamental tool to the Bank s funding strategy. The 2010 goals for issuing debt under the MTN programme (and for issuing debt in general) point to a moderate growth. The issuance policy will continue to be based on the objectives of serving the clients while improving the Bank s funding profile. (million euros) MTN Issuing Programme/Total Outstanding (amounts issued) 1,277 1,215 1,119 1,020 The reopening of the debt market is expected to continue at a rapid pace in 2010, especially during the first half. The maintenance of high liquidity levels in the financial system and the downward movement of spreads is forecasted to lead to increased demand for corporate risk assets Other Credits Espírito Santo Investment started this business in Brazil in as a means of potentiating new investment banking opportunities while supporting clients of BES s International Premium Unit that have Brazilian operations. Including both funded and unfunded operations, Espírito Santo Investment completed transactions totalling BRL million in. The Bank expects to increase this credit portfolio in Source: Espírito Santo Investment On 31 December,, the Bank s Treasury portfolio totalled EUR 467 million (market value). It was made up of cash products (EUR 424 million) and equivalent products (EUR 43 million). The Bank s investment strategy remains unchanged, focusing on high quality assets, diversification and low volatility. In 2010, portfolio is expected to grow in line with the overall growth of the Bank s balance sheet. 51 Annual Report

52 Brazil After a first half of the year in which liquidity in the Brazilian financial system recovered strongly, with a significant increase in local funding issues and institutional investors focus on low-risk banks, the second half of was characterised by a sharp fall in funding costs. In this context, BES Investimento do Brasil ended with Bank Certificates of Deposit (CDBs) totalling BRL 1.9 billion (BRL million in December of 2008), with Interfinancial Certificates of Deposit (CDI) totalling BRL million (BRL million in December of 2008), while maintaining subordinated CDBs in the market totalling BRL 91.2 million. Taking advantage of the reopening of the international credit market and with a Baa3 rating (Moody s) for its USD 300 million Short-Term Note Programme, BES Investimento do Brasil broadened its financing sources by raising USD 150 million with a three years tenor in international markets and placing USD 90 million in private placement transactions. In 2010, the amount of funds BES Investimento do Brasil plans to raise in the local market should remain stable in relation to, benefiting from reduced spreads and longer tenors for funding transactions. BES Investimento do Brasil intends to raise an important amount of additional funding by issuing debt in the international capital markets in the first half of 2010, believing there is demand for another issue if international credit markets continue to recover as they did in. Espírito Santo Investment 52

53 53 Annual Report

54 BETTINA POUSTTCHI b Mainz - Germany, Hetley Time 2008, Photography, 180 x 225 cm, Edition: 2/6+2AP Courtesy Buchmann Galerie Espírito Santo Investment 54

55 CORPORATE FINANCE Success built on specialisation Our sectoral specialisation is fundamental to provide high value-added services to our clients. In, we advised on 25 transactions with a global value of approximately 9 billion. 55 Annual Report

56 Corporate Finance Market Background In, global merger and acquisition (M&A) activity, continued the negative trend of the previous year, falling to about the same level of business registered in According to Bloomberg data for transactions announced, global M&A transactions fell 22% in number and 27% in value in. This followed respective falls of 16% and 38% in The reduction is explained by the worsening global economic situation, but also by the crisis in financial markets, which made access to credit more difficult and increased financing costs. However, the falling trend in M&A activity reversed in the last quarter of with both the number and value of transactions announced growing for the first time since the fourth quarter of As a result, announced M&A transactions increased 7% in number and 45% in value in the fourth quarter of compared with the same period of the previous year. In Europe, the M&A market fell by more than the average world decline, with transactions announced falling 38% in number and 47% in value, according to the data published by Bloomberg. European cross-border transactions, which represented about 67% of total transactions announced, fell by 35% in number and 49% in value. Global cross-border transactions fell 27% in number and 36% in value. Management buy-out and private equity fund transactions, which had in the past injected great dynamism into the M&A market, continued to fall in. In Europe, these transactions dropped 77% in number and 74% in value. Iberian Peninsula According to Bloomberg, the M&A market in the Iberian Peninsula also performed negatively in, with transactions announced falling 47% in number and 29% in value. Despite the overall negative trend, crossborder operations in Iberia fell less significantly, by only about 13% in value terms. The Spanish market was particularly affected by the crisis in financial markets and the world recession, causing most players to put growth by acquisition on hold and focus their strategies on restructuring their businesses. The financial crisis, which significantly limited access to credit, also prevented most financial investors from taking advantage of the adjustments that occurred in the valuation of Spanish companies, which approached the valuation of their European peers. The Portuguese market followed the global trend with a 51% decline in the number of M&A transactions announced. However, M&A activity grew by 20% in value, largely as a result of the take-over bid for Cimpor made by the Brazilian group CSN at the end of the year. Brazil Although to a lesser extent, the Brazilian economy was also affected by the global economic and financial crisis, which had a negative impact on M&A activity. After several years of strong growth, M&A activity fell in. According to the data published by Bloomberg, it fell 31% in the number of transactions and 2% in value compared with Despite being negative, Brazil s M&A performance was better than the overall world trend, having benefited from a number of takeovers and mergers among the country s big players (mainly using shares as a means of payment). Most transactions were motivated by vulnerable financial situations resulting from erroneous financial management involving foreign exchange derivatives or by difficulties in financing working capital and/or refinancing existing debt. Global Transactions announced and completed US $ billion number Poland and the United States 1,500 1,300 1, No. of transactions (line) Although Poland achieved the best economic performance in Eastern Europe in and averted a recession, M&A activity decelerated considerably, in line with the global trend According to data published by Bloomberg, announced M&A transactions in Poland decreased by 43% in number and 48% in value compared with Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: Thomson Financial M&A activity in the US also fell sharply, registering a reduction of 30% in the total value of transactions announced compared with 2008 (according to Bloomberg data). Espírito Santo Investment 56

57 Espírito Santo Investment activity In global terms, Espírito Santo Investment acted as an advisor in 25 M&A transactions with a total value of approximately EUR 9 billion. In Portugal and Spain, M&A transactions in which Espírito Santo Investment was involved included: Consortium lead by Iberian Peninsula In, Espírito Santo Investment maintained its leadership of the M&A market in Portugal (in terms of number and value of transactions) and also achieved the leadership position in the Iberian Peninsula (in terms of number of transactions), overtaking the global banks and consolidating its position in the Iberian Peninsula as a reference player in the provision of investment banking services. Financial Advisory in the acquisition of 99.92% of Cintra Aparcamientos 451,000,000 Financial Advisory to PT in the disposal of 32.18% of Méditel 400,000,000 Bloomberg - Ranking by number of transactions completed - 1/1/ - 31/12/ Portuguese Target - Portuguese Acquirer League Tables 1 Espírito Santo Investment 25 1st Place M&A Financial Advisory Portugal Global Financial Multimedia Information and Communication 2 Caixa Banco Investimento 12 3 JP Morgan 5 4 Ernst & Young 4 5 Citi 3 5 BNP Parribas 2 6 Millennium BCP 2 6 Morgan Stanley 2 6 UBS 2 Financial Advisory to EDP Energias de Portugal, S.A. in the acquisition of the Gas distribution and supply assets in Murcia and Cantabria of Gas Natural S.D.G, S.A. 300,000,000 Sale of 24% of Banco Espírito Santo Angola ANGOLA USD 375,000,000 6 Credit Suisse 2 Iberian Target - Iberian Acquirer League Tables 1 Espírito Santo Investment 25 1st Place M&A Financial Advisory Iberia Global Financial Multimedia Information and Communication 2 JP Morgan 21 3 KPMG 19 4 PWH 17 5 Banco Santander 13 6 Morgan Stanley 12 6 BNP Paribas 12 7 Caixa Banco de Investimento 12 8 Deutsche Bank 11 Financial Advisory in the Fairness Opinion for the disposal of 40% of Lisboa TV Madre Group Financial Advisory in the acquisition of 100% of Terra do Nunca 9 BBVA 11 Source: Bloomberg - Note: data as of 19th January, 2010 Espírito Santo Investment s M&A activity was naturally not immune to the climate of economic recession. However, a strategic focus on international players interested in taking advantage of economic uncertainty and valuation adjustments resulted in an increase in the Bank s activities. The Bank reinforced its position as the leader of the Portugal-Spain cross-border segment, strengthen its leadership of the mid-market transactions in Iberia and consolidated its role as a reference player for the Portugal Spain Brazil axis. Acquisition of 100% of Sale of 100% of 57 Annual Report

58 Brazil The paralysation of the capital markets activity, which heightened the competition in the M&A market segment and the freezing of business opportunities/cancellation of transactions (mainly cross-border), as a result of the economic and financial climate, affected Espírito Santo Investment s M&A activity in the first half of. However, the downward trend observed in the first half of the year was reversed in the second half, leading to the signing of a number of mandates, mainly in the last quarter of. According to Bloomberg, Espírito Santo Investment attained the 11th position in the M&A ranking for Brazil (in terms of number of transactions completed). Poland Announced Transaction Valuation Report Mandatory Public Offering Acquisition of Shares Issued by Globex Utilidades S.A. Fairness Opinion Sale of à R$ 94,624,000 Bloomberg - Ranking by number of transactions completed - 1/1/ - 31/12/ Brazilian Target - Brazilian Acquirer Espírito Santo Investment s M&A activity in Poland was strategically focused on sectors where the Bank has accumulated considerable experience and on cross-border transactions involving companies from Portugal, Spain and Brazil. League Tables 11st Place M&A Financial Advisory Brasil Global Financial Multimedia Information and Communication 1 Credit Suisse 26 2 Banco Itau 19 3 Banco Bradesco 18 4 Banco Santander 17 5 JP Morgan 13 6 Morgan Stanley 13 6 Citi 13 7 Estater Ass. Financeira Espírito Santo Investment 3 This strategy enabled Espírito Santo Investment to intervene in a number of M&A transactions in, some of which are expected to be concluded in Espírito Santo Investment s decision to introduce new product areas into the Polish market in 2010 will enable the Bank to further develop the M&A business, strengthening its position as the preferred financial partner for Iberian and Brazilian companies seeking to expand in Poland and validating its strategic focus on this region. Source: Bloomberg - Note: data as of 5th February, 2010 United States The most significant M&A transactions of in which Espírito Santo Investment participated included: In the US market, the M&A team focused on cross-border transactions involving Iberian and Brazilian companies, on sectors with strong growth prospects and where the Bank has competitive advantages. In, the Bank secured M&A advisory mandates in the energy sector, specifically in the areas of renewable energy and energy transmission lines. EA entered into a Joint Venture through the sale of 50% of its shares to Europ Assistance Portugal acquired 40% of Europ Assistance Brasil held by The outlook for the US renewable energy market, specifically wind energy, is very positive. The US is currently the largest wind energy market in the world with about 25,000 MW of installed capacity, which accounts for only 1% of total US energy production. Outlook Financial Advisor Financial Advisor A moderate recovery in M&A activity is expected in 2010, stimulated by an improved economic climate and the continuing upturn in growth that began in the last quarter of. Espírito Santo Investment 58 Espírito Santo Investment has again set ambitious goals for the growth of its M&A activities in 2010, which will focus on the most stable sectors least affected by the crisis, on areas where the Bank has the most competitive advantages (such as renewable energy), and on markets with strong growth prospects (such as Brazil and Poland).

59 59 Annual Report

60 BETTINA POUSTTCHI b Mainz - Germany, Hetley Tree 2008, Photography, 180x 225cm, Edition: 3/6+2AP Courtesy Buchmann Galerie Espírito Santo Investment 60

61 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. 61 Annual Report

62 Mid-Cap Financial Advisory The Mid-Cap Financial Advisory business 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, particularly to clients of Banco Espírito Santo s Corporate Banking Centres. The investment banking services provided to this market segment include financial advisory services for mergers and acquisitions and their financing as well as pure financial consulting including valuations, economic and financial feasibility studies and advisory services for financial and corporate restructuring processes. Business marketing is carried out mainly through Banco Espírito Santo s Corporate Banking Centres, which are the main sources of business for the Mid-Cap Financial Advisory business. When the Corporate Banking Centres identify a business opportunity, potential clients are offered investment banking services through visits that include presentations of the services available, with the purpose of originating financial advisory mandates. Álvaro Gomes Gonçalves Sale of 100% of Sale of 100% of Financial Advisory in the acquisition of 62% of Douro Azul Debt raising and restructuring To increase the number of channels for attracting new clients and broadening its client base, the Mid-Cap Financial Advisory Division entered into a cooperation agreement with the Private Banking Division of Banco Espírito Santo in The aim of the agreement is to provide support to private banking clients in developing their investment projects, which are usually of an individual nature. This may also include the acquisition or disposal of shareholdings or assistance in optimising wealth management. Business and revenues were in line with expectations in. A total of 20 mandates were originated and completed, including: 4,600,000 The Mid-Cap Financial Advisory Division goals for 2010 reflect an ambitious business development strategy, despite the adverse economic climate in Portugal. Building on the foundation laid in previous years, the Mid-Cap Financial Advisory team will continue to work closely with business teams at the BES Corporate Banking Centres to ensure the careful selection and prioritisation of clients and business opportunities with a view to optimising the deployment of human and technical resources. Particular attention will continue to be given to internal cooperation with the Client Origination and Corporate Finance Divisions in order to benefit from potential synergies in marketing services, attracting business and executing mandates. Espírito Santo Investment 62

63 63 Annual Report

64 ROBERT FRANK b. 1924, Switzerland, Yellow Flower Like a Dog, New York City, 1992, Gelatin silver print, Paper, 11 x 14 inches, Signed, titled and dated recto in ink Courtesy the Artist Espírito Santo Investment 64

65 PROJECT FINANCE AND SECURITISATION A permanent search for the best solutions. We are determined and committed to overcome technical and geographical barriers to accomplish our clients goals. In, we completed more than 40 operations in 11 countries, developing innovative and complex transactions that gained international recognition. 65 Annual Report

66 Project Finance and Securitisation In, the activity of the Project Finance and Securitisation Division maintained the positive growth trend of previous years, which was reflected in its main business indicators. In line with its internationalisation process, the Bank continued to expand this activity into other markets and geographical regions, being already present in seven countries, where it operates with local specialised teams. This international expansion has made a significant contribution to increase the Bank s capacity to originate business in new markets, and has resulted in the completion of more than 40 transactions in 11 countries (Angola, Australia, Brazil, Canada, the US, Spain, Israel, Oman, Poland, Portugal and the United Kingdom) in with a total value of about EUR 10 billion. Vias of the Baixo Tejo, S.A. Leadership of a financing transaction with a total value of EUR million for developing the Baixo Tejo highway system sub-concession; Consórcio Consis Loures Financial advisory and leadership of a EUR 117 million transaction to finance the companies incorporated by the consortium, related to the concessions for the construction and operation of the Loures Hospital; Eólica dos Candeeiros, Lda. Leadership of the financing transaction with a total value of EUR 36.9 million for a wind farm investment project in Portugal. Portugal U.S.A. In, activities in this area continued to focus on the infrastructure and renewable energy sectors, both domestically and internationally, enabling Espírito Santo Investment to reach once again a leading position in the Project Finance League Tables. According to the Infrastructure Journal magazine, the Bank: Was considered world leader as financial advisor in the renewable energy sector; Ranked 8th in the world as a financing bank (MLA) for the renewable energy sector; Ranked 10th in Western Europe as a financing bank (MLA); and Ranked 13th in North America as a financing bank (MLA). Portugal Pebble Consultoria e Investimento Wind Farms MW 1,062,100,000 Financial Advisor Mandated Lead Arranger EnergyOn No 1 Asset Backed Securities Portugal Transformers production Plant in the State of Georgia US$ 114,000,000 Mandated Lead Arranger VBT - Vias do Baixo Tejo, S.A. Portugal Financing of the Subordinated Concession of Baixo Tejo In, Espírito Santo Investment consolidated its position as a reference player in Portugal in the Project Finance and Securitization area, playing a leading role in the main transactions concluded in the Portuguese market, in terms of both financial advisory and structuring and coordinating finance transactions. 1,258,600,000 Arranger and Joint Lead Manager 436,100,000 Mandated Lead Arranger Transactions completed in Portugal included: Portugal Portugal Espírito Santo Investment Pebble - Consultoria and Investimento, Sociedade Unipessoal, Lda Financial advisory and leadership of a EUR 1,062.1 million credit facilities refinancing transaction through a bond issue; Efacec Power Transformers, Inc. Leadership of a financing transaction with a total value of USD 114 million for the construction of a transformer factory in Georgia (US); Tagus STC (EnergyOn No. 1) Arranging and joint-leadership of a transaction related to the sale by EDP Serviço Universal, S.A. of the rights to receive positive electricity tariff adjustments for 2007 and 2008, with a total value of EUR 1,258.6 million. 66 Structuring and financing of the Hospital de Loures concession 117,000,000 Financial Advisory Mandated Lead Arranger Éolica dos Candeeiros Lomba do Vale Parque Eólico 21,1 MW 36,900,000 Mandated Lead Arranger

67 The outlook for the project finance market in Portugal remains positive for the near future, with a large number of projects covering a wide range of sectors planned. Spain A number of large-scale projects are to be developed in the transport infrastructure sector, including a new international airport in Lisbon, high-speed railway concessions and two highway concessions currently in the public tender phase. Other sectors where a great deal of activity is expected in 2010 include renewable energy with the implementation of a number of wind and solar projects, for which the contracting processes are already underway or likely to begin in and public-private partnerships (PPPs) in the health sector including new hospital construction projects already in the implementation phase and others due to be launched in the near future. Solar Thermal Plant Renewables Deal of the Year 543 million Mandated Lead Arranger Extresol-2SL Financing of a thermosolar plant in Badajoz (50.0 MW) 281,558,330 Mandated Lead Arranger Spain Spain Despite the particularly adverse economic climate in Spain, the Bank concluded a number of successful transactions and strengthened its relations with the leading players in the transport infrastructure and renewable energy sectors, where the Bank is especially well positioned as a financing institution and financial adviser. This strategy enabled the Bank to originate mandates for transactions both in Spain and internationally, taking advantage of the leading global position of Spanish companies in these two sectors. Advisory of a 65 km shadow toll road - Ele Diagonal - in Spain Financial Advisors 248,760, Transactions completed in included: Grupo Acciona Leadership of a EUR 580 million financing transaction for the development of a 150 MW solar energy plant in Spain. This transaction, which involved a total investment of EUR 810 million, received the Renewables Deal of the Year award from Project Finance International magazine; Grupo ACS Leadership of a financing transaction for the Extresol 2 thermal solar project, including the construction, operation and maintenance of a 50 MW wind farm, in a total investment of EUR 427 million; Iridium (Grupo ACS) financial advisory to the shadow-toll Eixo Diagonal motorway project in Catalonia, representing a total investment of EUR 400 million. A number of features are likely to increase the number of transactions completed in Spain in 2010, including the growth potential of the renewable energy sector and the existing pipeline of transactions in other sectors. United Kingdom In the first half of, the project finance activities of Espírito Santo Investment s London Branch suffered a considerable reduction as a consequence of the adverse financial market conditions. However, there was a significant recovery in the last months of the year, as better quality transactions attracted the scarce financial resources available. Because of the reduced number of opportunities available in the market, promoters focused on the most important, large-scale transactions. Espírito Santo Investment completed a number of transaction in the Middle East, Australia and Poland, in which it acted as: Mandated Lead Arranger on a senior financing transaction for the H2ID consortium for increasing the production capacity of a desalination plant in Hadera (Israel), with a total value of USD 78.5 million; Mandated Lead Arranger on a EUR 387 million senior financing transaction for the Autostrada Wielkopolska II S.A consortium for the design, construction and operation of the 106 kms corresponding to Section II of the A2 Motorway between Nowy Tomy l and Swiecko in Poland. Mandated Lead Arranger on a GBP 1.25 million senior financing transaction for GIP and its co-investors for the acquisition of Ferrovial s shareholding in London s Gatwick Airport and for investments to be made in the airport; 67 Annual Report

68 Mandated Lead Arranger on an AUD million senior financing transaction for Aquasure for developing a desalination plant in Victoria, Australia. This transaction received the Asia/Pacific PPP Deal of the Year award from Project Finance International magazine. Israel Poland Completed transactions included: Financial Advisory: Furnas Centrais Elétricas S.A. - auction of transmission lines 001/003/004 and 006. The company won all the auctions in which it participated; Hadera Desalination Plant Extension Financing of the increase of the desalinisation plant in Hadera US$ 78,500,000 Senior Lead Arranger A2 Motorway Secção II Financing of the design, build and operation of the Section II of the A2 motorway in Poland between Nowy Tomusi and Swiecko 387,000,000 Mandated Lead Bank Citeluz, S.A. public-private partnership promoted by the Federal District Government for the operation and maintenance of public lighting services for the Federal District s local towns; CME S.A. auction of transmission lines 001. The company won one of the auctions in which it participated; Tecneira, S.A. power auction of energy generated from wind farms promoted by the Ministry of Mining and Energy. Long-term financing: Aeroporto de Gatwick UK Rodoanel São Paulo - Mandated Lead Arranger on the B Loan financing totalling USD 500 million for the eastern stretch of the Rodoanel highway project of the city of São Paulo; Financing to Global Infrastructure Partners for the acquisition of Gatwick Airport 1,125,000,000 Mandated Lead Arranger Desalination Plant in Victoria, Australia Asia Pacific PPP Deal of the Year AUD billion Mandated Lead Arranger Odebrecht Oil&Gas Joint Mandated Lead Arranger and Bookrunner on the financing of two deep-water oil exploration vessels, Norbe VIII & IX, with a total value of USD 1.3 billion; Abengoa Brasil Financing totalling BRL 65 million for the Manaus Energia transmission line project in the Northern Region of Brazil; Brazil Espírito Santo Investment completed 17 transactions in as a financial arranger in the energy, public transport, oil & gas and sanitation sectors. The transactions included the financing of the construction of two deep-water oil exploration vessels, NORBE VIII & IX, for Odebrecht Oil&Gas, a transaction that received the Americas Deal of the Year award from Project Finance International magazine, and the financing of an A/B structure loan, for the eastern stretch of Rodoanel highway project for the city of São Paulo, a transaction that also received the Global Americas Transport Deal of the Year award from Project Finance International magazine. The Bank increased its activity as a financial agent for Brazil s Banco Nacional de Desenvolvimento Económico and Social (BNDES); as a structuring agent for resources made available by the Constitutional Funds for the development of the North, North-East and Central-West regions of Brazil; and as an arranger for financing projects in cooperation with the Inter-American Development Bank (IDB) and the Japan Bank for International Cooperation (JBIC). OHL Brasil S.A. Banking guarantee to BNDES on the financing granted to five federal highway concessions in Brazil controlled by OHL with a total value of BRL 400 million. Short-term financing: TER S.A. BRL 80 million financing for a transmission line project in the Midwest region of Brazil, controlled by Furnas Centrais Elétricas S.A., Delta Engenharia and J. Mallucelli Engenharia; OHL Brasil S.A. BRL 250 million Bridge Loan for federal highway concessions through an issue of Promissory Notes; SEFAC S.A. Letter of Credit with a total value of BRL 73 million in favour of BNDES as a guarantee of the long-term financing granted for the construction of a hydroelectric dam; and Concessionária Rodovias do Tietê S.A. - Mandated Lead Arranger on the BRL 340 million a financing transaction for Rodovias do Tietê S.A., a highway concession in the state of São Paulo, in which Ascendi is the leading shareholder. Espírito Santo Investment 68

69 Brazil Brazil Brazil Leilão de Linhas de Transmissão Aneel nº 001/ Lotes G e K R$ 140,000,000 Assessor Financeiro New Transmission Lines Auction nº 001/ Lot B Launched by Aneel R$ 80,000,000 Financial Advisor Bridge Loan for the Road Concession s Project of S. Paulo s State R$ 340,000,000 Financial Advisor Mandated Lead Arranger Rodoanel of São Paulo Global Americas Transport Deal of the Year US$ 940 million Mandated Lead Arranger Odebrecht Drill Ships Americas Deal of the Year US$ billion Mandated Lead Arranger As Brazil has been selected to host the 2014 World Football Championship and Rio de Janeiro to host the 2016 Olympic Games, infrastructure investment, mainly in public transport, airports, highways, hotels and energy, is expected to generate important opportunities for banks that operate in the country s project finance sector from 2010 onwards. Leading projects include the upgrade of football stadiums, which have been allocated specific lines of finance by BNDES, the Belo Monte hydroelectric dam, the south and east stretches of the Rodoanel highway system in São Paulo, and federal highway concessions. United States Brazil Brazil Despite enormous difficulties resulting from the economic and financial crisis, Espírito Santo Investment s New York Branch made a positive start. Bridge Loan for a Transmission Line Project in the North (BR) Auction nº 004/2008 Lot C Launched by Aneel R$ 65,000,000 Financial Advisor Brazil Bridge Loan for the Transmission Lines Project in Goias Auction nº 008/2008 Lot C Launched by ANEEL R$ 80,000,000 Mandated Lead Arranger Brazil In the first half of, the Bank focused on identifying strategic clients and transactions in North America. In the United States, the Bank focused on the renewable energy sector and related government incentive programmes. In Canada, it made social infrastructures the priority sector in light of the country s P3 programme, a government initiative aimed at developing a number of social infrastructure projects through public-private partnerships. In the second half of the year, the Bank widened its focus of activity to include transport and more traditional energy sectors, and enlarged its geographical reach to the Spanish-speaking countries of Latin America. Rodovias Federais Bridge Loan para Projecto de Concessão de 5 Rodovias Federais R$ 400,000,000 Mandated Lead Arranger Performance and Advanced Payment Bonds to guarantee Serra do Facão Energia, S.A. obligation to BNDES R$ 73,000,000 Letter of Credit The following transactions were completed in, where the Bank acted as: Royal Victoria Hospital Phase I Mandated Lead Arranger on a senior facility for financing the expansion and renovation of the Royal Victoria Hospital in Ontario, Canada, with a total value of CAD million; 69 Annual Report

70 Milford Wind Corridor Phase I, LLC Joint Lead Arranger on a financing transaction for the construction of a wind farm in the United States, with an installed capacity of MW, with a total value of USD million; Midland Cogeneration Venture Limited Partnership Joint Lead Arranger of a financing transaction for the acquisition of a combinedcycle cogeneration plant in United States, with an installed capacity of 1,560 MW, with a total value of USD 515 million; Toronto South Detention Center - TSDC Mandated Lead Arranger on a financing transaction for the construction of a maximum security prison in Toronto, Canada, with a total value of CAD 306 million; Milford Wind Corridor Phase I, LLC Financing Phase 1 of the development of a MW wind Farm located in Utah US$ 376,400,000 Syndication Agent, Joint Bookrunner & Joint Lead Arranger U.S.A. Midland Cogeneration Venture Limited Partnership Acquisition financing of a MW combined congeneration power plant located in Michigan US$ 515,000,000 Joint Lead Arranger e Co-documentation U.S.A. Krayn Wind LLC Joint Lead Arranger on a financing transaction for a 62.5MW US wind farm developed by Everpower, in a total investment of USD million; Valley Road Funding, LLC Mandated Lead Arranger on a financing transaction for the acquisition of four US electricity production plants from Dynegy, with a total value of USD 500 million; Carillion Canada Lead arranger on a financing transaction for the construction of a mental health centre in Canada, with a total value of CAD million; Toronto South Detention Center Mandated Lead Arranger Co-documentation Agent Bookrunner Canada Financing the design, construction and maintenance of a detention centre in Toronto C$ 306,000,000 Krayn Wind LLC Financing of a 62.5 MW wind power generation Plant in Pennsylvania US$ 62,800,000 Joint Lead Arranger Joint Bookrunner U.S.A. Atlantic Star Joint Bookrunner on a financing transaction for an oil platform for Queiroz Galvão Óleo e Gás S.A., with a total value of USD 220 million. U.S.A. Canada Valley Road Funding, LLC Centro de Saúde Mental Acquisition of 4 generation assets in Arizona and IIIinois with an agregate net capacity of 1,600MW US$ 500,000,000 Joint Lead Arranger and Co-Dodumentation Financing the design, construction, and maintenance of a new facility for CAMH in Toronto, Ontario C$ 201,500,000 Lead Arranger and Co-Documentation Agent Brazil Star International Drilling Limited Refinancing of the semi-submersible drilling rig Atlantic Star US$ 220,000,000 Joint Bookrunner Espírito Santo Investment 70

71 Angola The activity of Espírito Santo Investment, which operates in Angola through an Investment Banking Office in partnership with Banco Espírito Santo de Angola, has been focused on structuring financing transactions for public entities involved in the country s national reconstruction programme and for private investment projects, particularly in the real estate sector. In, the following transactions were competed through BES Angola: EMIS Leadership of a financing transaction for the construction and equipping of the Multicaixa network s New Safe Information Technology Centre, with a total value of USD 19.5 million; Biocom Participation in a syndicated bank financing transaction for an agro-industrial project involving the cultivation of sugar cane and the construction of a production plant for sugar, alcohol and electricity, with a total value of USD million; Executive Hotéis Arrangement of a bridge loan transaction for developing a chain of 24 hotels throughout Angola, with a total value of USD 7.5 million. The creation of an investment bank in Angola, whose license from local authorities is expected to be granted in the short-term will further develop the structure finance activity that will continue to support projects promoted by public and private entities in the energy, mining, and road and rail transport infrastructure sectors, among others. 71 Annual Report

72 LEE FRIEDLANDER b. 1934, USA, Florida, 1963, from the series, The little Screens, Gelatin silver print, 35,5 x 27,9 cm Lee Friedlander, courtesy Fraenkel Gallery, San Francisco and Galerie Thomas Zander Cologne Espírito Santo Investment 72

73 ACQUISITION FINANCE AND OTHER LENDING Increasing our international presence. We build partnerships with our clients, selectively sharing the risk of transactions. In, we were involved in key transactions in the Iberian market. In 2010, we plan to consolidate our activities in Poland and expand into the Latin American and US markets. 73 Annual Report

74 Acquisition Finance and Other Lending Market Background The European leveraged debt market suffered a sharp contraction in, falling to its lowest level since According to Standard & Poor s, the total volume of European leveraged debt fell to EUR 15.4 billion (36 transactions), down 71.2% on the EUR 53.6 billion (115 transactions) registered in The Spanish market contributed to this contraction with a significant drop in the volume of investment by private equity funds, which in fell to the same level as in Senior Financial Debt Europe Volume Source: Standard & Poor s Espírito Santo Investment activity Investment volume (EUR billion) Number of transactions Number of Transactions Despite the manifestly adverse conditions for developing business in, the Bank s results in this area proved highly positive. In Portugal, where the climate was particularly adverse in terms of risks quality and scarce liquidity, the Bank focused on closing moderately leveraged transactions with a high level of profitability, a strategy that proved extremely successful. In other credit areas, support was provided for BES Group clients in transactions that generated cross-selling business for the Bank, an approach that largely exceeded expectations In the context of a crisis that also had a considerable negative impact on the economies of Central and East Euroope, there were no new acquisition finance transactions in Poland in. Although Poland weathered the crisis without great difficulty in and despite there being a number of asset players in the market, difficulties in raising debt and a mismatch in valuations between buyers and sellers prevented any transactions from going ahead. Some acquisition deals were closed at the end of, although exclusively financed by equity. However, with the progressive stabilisation of markets and the emergence of new transactions, sponsors expect to raise some debt in Transactions completed by Espírito Santo Investment in included: Emparque - Espírito Santo Investment acted as Joint Mandated Lead Arranger on a financing transaction for the acquisition of Cintra Aparcamientos (Spanish market leader) by Emparque (Portuguese market leader). This transaction, with a total value of EUR million, created a leader in the Iberian car parking sector. ARCUS - Espírito Santo Investment acted as Mandated Lead Arranger on the MBO of the Babcock & Brown European Infrastructure Fund management company. JVG Capital, MVGB Investimentos, KVR, Gestinpar - Espírito Santo Investment acted as Mandated Lead Arranger on a spin-off process. Four financing transactions with a total value of EUR 72.9 million were completed. Gas distribution assets in the Madrid region - Espírito Santo Investment acted as Mandated Lead Arranger on a financing transaction for the purchase by Morgan Stanley Infrastructure Fund of distribution assets (in the Madrid region) sold by Gás Natural. The operation was due to be closed in the first quarter of 2010 (pending approval by the competition authority). Argaman - Espírito Santo Investment acted as Joint Mandated Lead Arranger on the CHF 102 million financing transaction for the acquisition of part of the capital of SICPA by Argaman. Generis: Espírito Santo Investment acted as Joint Mandated Lead Arranger on a financing transaction for the acquisition of Generis by the Magnum Industrial Partners private equity fund. The transaction involved a total amount of EUR 74.5 million senior debt. In Spain, the economic and financial climate seriously worsened in, a deterioration that was reflected in a significant reduction in the number of transactions completed by the Bank. Espírito Santo Investment In the United Kingdom, the Bank also decided to stay out of the market in. 74

75 Acquisition of Outlook for 2010 by and refinancing of Cintra Aparcamientos, S.A. 400,342,692 Senior Debt Joint Mandated Lead Arranger Partial partner buy-out MBO of the general partner of the Babcock & Brown European Infrastructure Fund, together with it s associated participations in the Fund Mandated Lead Arranger The outlook for the market in 2010 is conditioned by the pace at which the economies most affected by the crisis will be able to recover. In Portugal, the development of this activity will be subject to two important conditioning factors: (i) an economy where growth has almost stagnated and (ii) the possibility of a significant number of companies suffering from excessive indebtedness in relation to current levels of business activity. This could lead to a deterioration of risk, making it difficult to envisage any domestic transactions. However, some companies not impaired by these limitations could, on the contrary, take advantage of lower company valuations and seek to internationalise their businesses by making acquisitions in target markets. by Argaman Holding, S.A. LBO of Generis by Magnum Industrial Partners No significant improvements are envisaged for the Spanish economy in 2010, limiting the potential for business in the country, with the exception of cross-border transactions, as previously described. CHF 102,000,000 Senior Debt Mandated Lead Arranger 74,500,000 Senior Debt Joint Mandated Lead Arranger The Polish market for acquisition finance is expected to improve substantially in 2010, taking into account forecasts of a rapid economic recovery and the stabilisation/improvement of country risk, together with the presence of financial sponsors (especially foreign sponsors recently established in Poland) that have kept their capacity for equity investment intact. Finally, the Bank wil take the necessary measures to reactivate this business area in the United Kingdom and to develop it in the Brazilian and North American markets. 75 Annual Report

76 ROBERT ADAMS b. 1937, New Jersey, USA, Golden Colorado, , Vintage silver print, 33 x 28 cm Robert Adams Espírito Santo Investment 76

77 PRIVATE EQUITY We keep an open mind. In, we took advantage of market conditions and accelerated our investments to the highest level to date in Portugal, Spain and France. We also promoted future initiatives in the Brazilian and Polish markets. At the same time, we strongly defended our portfolio of investments, ensuring value creation for our investors and shareholders. 77 Annual Report

78 Private Equity Activity in In, Espírito Santo Capital s activity was marked by the increase of funds raised by the Espírito Santo Infrastructure Fund I (ESIF), the high level of investment and the signing of a partnership agreement with Banco Bradesco for developing private equity business in the Brazilian market (through the incorporation of the 2bCapital subsidiary). Production and Distribution of products and equipments for the electricity transmission 13% Development and Replacement Capital Production and Distribution of merchant ships engine spare parts 37.5% MBO Following on placement initiatives that started in 2007, it was possible to increase the amounts raised by the ESIF Fund to an amount close to EUR 96 million. Total investments amounted to EUR 40 million, a record level for this activity. The investments were geographically split between Portugal, Spain and France. The buyouts business accounted for 40% of total investments while the infrastructure business was responsible for the remaining 60%. The investments were made mainly during the second half of the year, through the acquisition of shareholding stakes in six new companies and the follow-on investments in three other companies. It is also important to highlight the 50%-50% partnership agreement between Espírito Santo Investment and Banco Bradesco to create a private equity fund management company for the Brazilian market (2bCapital). The immediate objective of the new fund management company is to create a first BRL 500 million fund focused on buyout transactions. Total funds under management remained at the level of approximately EUR 200 million, despite the reimbursement of the IMIT/BES Fund in. Investment Portfolio and Financial Highlights (on an individual basis) In the difficult economic climate that persisted throughout, Espirito Santo Capital focused on protecting the value of its investment portfolio while developing its investment and fund raising activities. The shareholdings portfolio was supervised very closely and, in accordance with current legislation, revalued at the end of June and December. At the end of the year, the market value of the total portfolio had reached about EUR 106 million, an increase of 52% on the previous year. Car Parking Renewable Energy Net income for the year reached approximately EUR 3.7 million and was strongly affected by the recovery in the value of the shareholdings portfolio. 8.3% Equity Investment ESIF 40% Start-Up At the end of the year, Espírito Santo Capital s equity totalled EUR 39 million, against net assets of EUR 49 million, indicating that investments continued to be financed mainly by equity. Market trends After a year marked by uncertainty and extremely adverse economic conditions, which strongly affected this business, the private equity market is expected to stabilise in 2010, leading to a recovery in the Special Steel Structures Conception, production and instalation of shops and show rooms investment and divestment activity (a trend that was already beginning to emerge in the last quarter of ). Espírito Santo Investment 78 30% Buyout 49.5% LBO In 2010, the fund raising activity will continue to be restricted by a low institutional investors fund allocation, with the banking sector, in particular, remaining out of the market. Emerging markets are expected to continue to increase their market share, creating a positive outlook for fund raising by the 2bCapital Fund.

79 03 Human Resources Staff Evolution In line with Espírito Santo Investment s international expansion strategy, the number of staff employed by the Bank increased by 15% in, mainly as a result of growth outside Portugal. At the end of, the percentage of total employees working outside Portugal had reached about 61%. The number of employees increased by 82 in, mainly due to the start-up of the New York branch, the growth of business in Brazil and the reinforcement of teams at the Warsaw Branch. Social Responsibility Initiatives Blood donation by Bank employees for the blood services of the Fernando da Fonseca Hospital. Participation in the Passa a Palavra Campaign run by the Portuguese Anti-Cancer League. Participation in an initiative to collect and donate books for libraries in Mozambique run by the HELPO Association (a non-governmental development association). A collection of goods for the 6th Humanitarian Mission of AMI (International Medical Assistance) in Guinea-Bissau. Dec. 08 Dec. 09 Change CONSOLIDATED PORTUGAL Espírito Santo Investment Espírito Santo Capital SPAIN Branch BRAZIL BES Investimento do Brasil BES Securities do Brasil BESAF Espírito Santo Capital do Brasil BES Refran Invest BES Refran Consultoria Financeira UNITED KINGDOM Branch IRELAND Espírito Santo Investment, plc POLAND Branch Espírito Santo Investment Sp, z.o.o US Branch A collection of goods for the social solidarity association Ponto de Ajuda. Donation of furniture to social and non-profit making organisations. 79 Annual Report

80 04 Integrated risk management Risk Management within the BES Group The Risk Management Function identifies, assesses and monitors all materially significant risks to which each institution of the BES Group is subject, both internally and externally, ensuring that they are properly controlled and do not affect the financial situation of the BES Group. Moreover, it contributes towards the achievement of BES Group s value creation objectives, by fine-tuning tools to support the structuring, pricing, and decision-taking process of credit operations, and by developing internal techniques for performance assessment and for optimising the capital position. The powers and duties of the Risk management function are exercised independently of the other operational areas of the BES Group. 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. Risk control and supervision is carried out by the Executive Committee of Espírito Santo Investment, which delegates the setting of rules and regulations to the Risk Policies Committee, the approval of transactions to the Credit and Risk Management Committee, and the definition and supervision of balance sheet management and liquidity policies to the Assets and Liabilities Committee (ALCO). Basel II The BES Group has again positioned itself in a leadership position as it became the first and only Portuguese group to be authorised by the Bank of Portugal to use the Internal Ratings Based approach (the IRB Foundation approach) to calculate regulatory capital requirements to cover credit risk. Furthermore, and in so far as it was granted in a context of economic depression, this authorisation confirms the reasonableness and prudence of the criteria used by the Group. In, the BES Group also received Bank of Portugal authorisation to use the Standardised Approach (TSA) method to calculate regulatory capital requirements for operational risk. These certifications were granted in April and date from 31 March,, inclusive. The risk profile is determined by the BES Group and it is the responsibility of the Executive Committee of Espírito Santo Investment to ensure and supervise compliance with this profile, guaranteeing that the Bank possesses the necessary skills and resources to meet the established objectives. At an operational level, Espírito Santo Investment s risk analysis and control teams work closely with the BES Global Risk Department (GRD), which manages risk for the BES Group as a whole in Portugal and internationally, covering every category of risk: credit, market, liquidity, interest rate, balance sheet and operational. BES Group has in place risk management tools allowing it to apply the best international practices in this area, this being supported by a business culture of great sensitivity to risk that is well rooted in the entire organisation. The authorisations now granted culminate a phase of significant investment made by BES Group in its risk models, processes and systems. Within this relationship, the investment banking risk management function is guided on the following principles: Continuous and constant risk assessment; Pre-established tolerance limits which take into account solvency levels and maximize risk/return balance; 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 leading international rating agencies, Value at Risk (VaR) and sensitivity and position analyses; Espírito Santo Investment Analysis of specific factors for each market where the Bank operates, in addition to the assessment of each portfolio (trading, investment or positions held to maturity). 80

81 March BASEL II PROJECT Authorisation from the Bank of Portugal: Creation of an independent risk management unit (DRG) Implementation of the first risk management models Main activities Risk Management methodology improvement Main achievements Development of internal models for risk assessment Creation of the operational risk unit Improvement of capital calculation process IRB method for Credit Risk TSA method for Operational Risk First implementation of the RAROC model Data Management and IT Introduction of risk measures in credit decisions IT infrastructures changes Changes in the credit process, including origination, pricing and monitoring Roll-Out Plan The authorisation to use the IRB Foundation method was granted to BES s head office, to BES s London Branch and to Espirito Santo investment. The utilisation of this method will be extended to other entities and portfolios in the BES Group during the coming years through a Roll-out Plan that has been underway since June in order to ensure: i) high levels (>95%) of ratings coverage in IRB portfolios, both for entities that have already received certification and entities that have applied for certification (included in the Roll-out Plan), ii) the realisation of user-tests to ensure that risk tools are used in all origination, monitoring, pricing, provisioning, reporting and strategic management practices; and iii) the permanent validation and updating of risk models. settlement - 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. 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. Date of Application June December May December 2010 June 2011 Candidate Entities: ES PIc SFE BES NY BES Cayman ES Bank Leasing BAC BES Espanha Factoring BES Vénétie BES Oriente ICAAP Internal Capital Adequacy Assessment Process Economic capital requirements to cover the last three risks are calculated through stress tests. In addition to the regulatory perspective, BES Group and Espírito Santo Investment, in particular, also considers its 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 perspective of business continuity - where Espírito Santo Investment wants to have the financial capacity to absorb losses without having to change its business strategy -, and the perspective of 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. As a complement to the capital adequacy analysis carried out at the end of each year, BES Group, and Espírito Santo Investment in particular, makes 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. 81 Annual Report

82 Solvency On December 31,, the Bank s Tier I Ratio reached 9% (above the Bank of Portugal s minimum requirements), reflecting the reinforcement of Espírito Santo Investment solvency levels as a consequence of a EUR 110 million capital increase completed at the end of June. Risk-weighted Assets and Eligible Capital (Bank of Portugal) Variables Risk-weighted A 3,944,710 4,840,081 Banking Book 3,115,841 3,564,310 Trading Book 499, ,790 Liquidity risk Operational risk 329, ,777 Total Own Funds B 325, ,543 Basic Own Funds C 255, ,716 Complementary Own Funds and Deductions 69,900 91,827 Tier I Ratio C/A 6.5% 9.0% Solvency Ratio B/A 8.3% 10.9% Source: Espírito Santo Investment Own Funds 2008 Basileia II (Standard) (thousand euros) Basileia II (IRB) Risk-weighted Assets (by categories of risk) Source: Espírito Santo Investment In terms of the breakdown of risk-weighted assets by categories of risk, the corporate segment accounted for 75% of total risk-weighted assets, witch is in line with its predominant role in the Espírito Santo Investment and BES Group s activities. Market Risk Risk-weighted Assets (thousand euros) Risk weighting Institutions 401,552 22% Corporates 2,705,508 75% Retail portfolio 2,039 73% Shares 165,438 7% Others 289,773 62% Total 3,564,310 41% Capital requirements for market risk are calculated using the standardized method. As of 31 December,, the capital requirements for risk-weighted assets amounted to EUR million, with interest rate/debt instruments risk (general and specific risks) and foreign exchange risk being the main contributors. Basic Own Funds grew by EUR 180 million to EUR million on 31 December,, representing an increase of about 70%. The Bank s EUR 110 million capital increase was particularly important in this regard as well as the policy of retaining profits and the recovery of the revaluation reserves. Annual change in risk-weighted assets (thousand euros) 2008 Change Debt instruments Specific Risk 42, , ,269 General Risk 325, , ,000 Complementary Own Funds increased by about EUR 21.9 million, mainly due to a reduction in deductions from this capital component (Tier II) following the sale of the Bank s shareholding in a financial entity based overseas. Equity Instruments Specific Risk 9,864 33,813 23,949 General Risk 23,025 25,800 2,775 FX Risk 98, ,984 71,577 Total 499, , ,570 Risk-weighted Assets Source: Espírito Santo Investment As of 31 December,, risk-weighted assets totalled EUR 4,840.1 million, of which EUR 3,564.3 million (74% of the total) corresponded to credit and counterparty risk, EUR million to market risk and EUR million to operational risk. The annual increase in requirements was mainly due to the increase of the Debt Instrument and more specifically from an increase in the bond and derivatives portfolios. Credit and Counterparty Risk Credit, Market, Liquidity and Operational Risk As previously noted, Espírito Santo Investment uses the Internal Ratings Based approach for exposures subject to credit risk in accordance with the rules set out in Annex IV to Bank of Portugal s Notifice no. 5/2007. Risk Management Practices Risk management policy involves the permanent management of credit portfolios, ensuring close interaction between the different teams involved in risk management over the successive stages of the credit process. The approach is based on: Espírito Santo Investment 82 Continuous development of credit risk models to reduce the weight of subjective appraisals;

83 Constant improvements in decision-making processes and channels, ensuring the above-mentioned independence of risk management, the delegation of powers whenever applicable in accordance with rating levels, and a systematic adequacy of the pricing, maturities and guarantees to the client ratings; and Internal Risk Rating Systems In line with the specific characteristics of the various client segments, different internal risk rating systems and risk parameters were developed for both corporate and individual clients. The information systems that produce the various elements required for credit risk assessment by making this data available to all the intervenients in the credit process. As a result of the vast set of initiatives taken over the previous years, namely within the scope of the global project of revising 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 Bank has also expanded the use of rating classifications for purposes of establishing portfolio ceilings that limit credit granting by both product and segment, and in particular restrict the amounts lent when higher risks are involved, is now a broadbased practice. In summary, the BES Group, and Espirito Santo Investment in particular, has in place a strict lending policy that significantly contains exposure to its clients. In view of the recessive economic environment and the crisis lived in the financial markets, BES Group s credit risk management policy in was particularly conservative, leading to an intensification of actions at the level of credit origination, monitoring and recovery. 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 are validated on a regular basis by the Independent Validation Unit. In the internal validation exercise conducted of the various rating models for the main credit portfolios confirmed that these models were robust and well calibrated for assessing credit risk. Internal Ratings Models for Corporate Portfolio Corporate portfolios are approached differently, according to client size and industry sector. The models applied to Espírito Santo Investment are called Internal Rating Models for Corporate Portfolios, which are approached differently, according to client size, industry sector, and type of transaction, using different models specifically adapted to project finance, leveraged finance and real estate financing. Origination Monitoring Recovery More strict limits on new credit; More demanding credit guarantee requirements; Improved price to risk adjustment; Increased in coverage with ratings; Improved support information for credit decisions. Closer monitoring of the process with the full involvement of top management; Access to credit risk information provided to commercial areas; Reinforcement of follow-up steps in credit process (prior to default); Improvement in guarantee management processes and control. Antecipating the recovery steps; Monitoring borrowers and assets received as guarantees; Fine tuning the process of business specific credit recovery with divestment areas. 83 Annual Report

84 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 Template Ratings attibuted by teams of analysts, using sector specific models (templates) as well as financial and qualitative information. Mid-sized Companies: Turnover (EUR 1.25m - EUR 50m) Semi-automatic Ratings model based on financial and qualitative information validated by analysts. Small Businesses: Turnover up to EUR 1.25m Ratings model based on financial, qualitative and behavioural information. Statistics Start-Up s and entrepreneurs Automatic Ratings model based on, qualitative and behavioural information. Espírito Santo Investment Risk ratings are assigned by the Ratings Desk, formed by specialised technical analysts organised into multi-sectoral teams. The Ratings Desk is also the central structure that validates the ratings submitted by the credit risk analysts geographically spread throughout the Espírito Santo Investment various units. To assign internal risk ratings to these risk segments, classified as Low Default Portfolios, these teams uses expert-based 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, taking into consideration the importance of each subsidiary within the respective economic group. Market Risk Assessment The main measures used for assessing market risk are Value at Risk (VaR), Basis Point Value (BPV) and the Stress Test. As no single measure of risk covers every facet of market risk, additional risk assessment tools are used, including stop losses and 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. 84 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 Limit Approval All transactions involving credit or market risk, as well as the risk control limits for each of Espírito Santo Investment s business units (in Portugal, Spain, Brazil, Ireland, Poland and the United States), are approved by the Credit and Risk Management Committee. A Risk Policies Committee has also been created and was scheduled to begin operations at the end of. However, due to the need to adapt to the Bank s new organisational structure, it will, in fact, only start operating in The main functions of the Risk Policies Committee are to: Approve and review the Global Risk Policy covering all geographical regions in which the Bank operates; Set global and regional exposure and tolerance limits, based on solvency and the best possible balance between return and risk; Monitor all the relevant risk parameters for the Bank s activities; Delegate powers of approval, whenever necessary, to business units within pre-established risk profiles, taking into account ratings as well

85 as total and partial amounts for each ratings bucket by maturity, sector, country and other criteria. The functions of the Risk Policies Committee have been performed by the Executive Committee and the Credit and Risk Management Committee whenever necessary, ensuring that the top of the organisation exercises effective control and supervision over risk matters. The main functions of the Credit and Risk Management Committee are to: Analyse and approve or disapprove transactions proposed by 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 modifications to individual and aggregate limits in accordance with the business areas and products. Market (interest rate, equities and other categories) P/L by instrument, foreign exchange positions, Vo1 for the different portfolios, Vega, DEaR etc.. Preparation of support material for external and internal credit reporting on credit, counterparty, liquidity and market risk. To strengthen monitoring and control of the loan portfolio, a commission was created in for the specific purpose of assessing loan impairment, in both individual and portfolio basis, and clients with overdue loans. The commission uses credit risk models information together with the analysis, among other criteria, of: 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 the debt in the future; This ensures the attribution of minimum (or, as appropriate, maximum) levels for ratings, VaR, BPV, stop losses and profit taking, open positions, concentration of positions, turnover ratios and Greeks proposed and approved, taking into account specific factors relating to markets, products, currencies and maturities. the existence of privileged creditors; the existence, nature and estimated value of collaterals; the client s indebtedness in the financial sector; and Before limits are defined, a careful analysis of the markets, particularly regarding market liquidity, is conducted to ensure that the Bank s strategic objectives can be reached, both at individual and consolidated levels. Risk limits are reviewed annually or whenever it is justified by significant changes in markets or in the strategic positioning of business units. 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 that could lead to increased risk and to guarantee overall management of the Bank s different portfolios. Teams in each of Espírito Santo Investment s business units work closely with the risk management team in Portugal and with BES Global Risk Department to ensure risk monitoring and control operations are properly implemented and involve the following processes: Daily collection, preparation, control and distribution to the different business areas of loan positions, bond portfolios, derivatives and the use of approved limits. the estimated amount and timeframe for recovery. A loan made to a client or a loan portfolio is considered to be impaired: (i) when there is objective evidence of impairment resulting from one or more events occurring after its initial recognition and (ii) when the event or events have an impact on the recoverable value of the future cash flow of the loan or loan portfolio, as far as this can be reasonably estimated. Credit Risk Client Loan Portfolio (i) Loan Portfolio Composition On 31 December,, the gross client loan portfolio (excluding credit lines and guarantees provided) of Espírito Santo Investment totalled EUR billion, an increase of approximately 21% on the previous year. Both the ratings profile and the sector distribution of the loan portfolio reflected the growth on credit activities developed by the Bank in recent years, particularly in Project Finance in the transport infrastructure and energy sectors, in the different regions where the Bank or the BES Group operates. 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, sector, maturity, P/L, capital requirements, approvals by the Credit and Risk Management Committee, limits exceeded and notice of defaults, etc; About 25.5% of the total loan portfolio with internal credit ratings was investment grade. Non-investment grade loans with bb+ and bb- ratings accounted for about 41% of the portfolio, most of them representing highly complex credit transactions, usually guaranteed by real assets not reflected in the internal ratings assigned, but which constitute important risk mitigating factors, especially in the calculation of expected losses. 85 Annual Report

86 Internal Ratings Profile Loan Portfolio (thousand euros) Undrawn Credit Lines by Sector 350,000 5% 12% 300, ,000 32% 12% 200, ,000 18% Utilities Health Real Estate (commercial) 100,000 50, % Other Transport Infrastructure Energy a+ a a- bbb+ bbb bbb- bb+ bb bb- b+ b b- ccc+ ccc N/R Source: Espírito Santo Investment Source: Espírito Santo Investment Loan Portfolio by Sector At the end of, guarantees and advances provided by the Bank totalled about EUR million. 3% 5% 24% 6% 7% 8% 24% 23% Tourism and Hotels Food, drinks and tobacco Real Estate (commercial) Financial Groups Commercial Supplies and Services Transport Infrastructure Energy Other About 63.6% of these guarantees and advances were investment grade. Financial sector represented 45% of the total. (thousands euros) Internal Ratings Profile Guarantees and Advances Provided 300, , ,000 Source: Espírito Santo Investment 150,000 At the end of, undrawn credit lines totalled approximately EUR million, mainly related to undrawn funds regarding project finance transactions. This explains both the ratings profile and sector concentration shown below: 100,000 50,000 0 a a- bbb- bb+ bb bb- b+ b b- N/R Source: Espírito Santo Investment (thousands euros) Internal Ratings Profile Undrawn Credit Lines 90,000 Guarantees and Advances Provided by Sector 80,000 70,000 2% 4% 60,000 50,000 40,000 9% 10% Real Estate (commercial) Construction 30,000 20,000 10,000 0 bbb+ bbb- bb+ bb bb- b+ b ccc+ N/R 45% 12% 18% Food, drinks and tobacco Transport Infrastructure Energy Other Financial Source: Espírito Santo Investment Source: Espírito Santo Investment Espírito Santo Investment 86

87 The loan portfolio including credit, undrawn credit lines, guarantees and advances provided was concentrated mainly in Portugal (38%), Spain (35%), Brazil (9%) and the United States (7%). The remaining exposure was divided between entities with their operations in Switzerland, Poland, the United Kingdom and Canada. This reflects the Bank s internationalisation strategy. ii) Overdue Loan Portfolio Despite the trend for a global economic recovery, which began in mid- and is expected to continue during 2010, and in spite the Bank s slight improvement in overdue loans, which fell 18 basis points on the previous year to 0.53% of total lending, the Bank strengthened its provisions, aware of the possibility of some deterioration in its loan portfolio and in line with the policy of previous years. This had a positive impact on the coverage of overdue loans and interest by provisions, and cover ratio rose to 430% in, up from 206% in the previous year. Interest Rate, Exchange Rate and Equity Derivatives Portfolio Credit risk relating to the Bank s portfolio of interest rate, exchange rate and equity derivatives (calculated in accordance with the rules set out in Bank of Portugal Ruling no. 5/2007, based on the sum of replacement costs and potential future credit risk) remained at approximately the same level as in 2008, totalling EUR million in December. About 60% of the Bank s risk profile exposure derived from these instruments is composed of counterparties with investment grade ratings. About 51% of the total exposure is to the financial sector, namely to financial institutions based in Continental Europe, Brazil and the United Kingdom. (thousands euros) Internal Ratings Profile Interest Rate, FX and Equity Derivatives 250, ,000 (thousands euros) ,000 Clients loans (gross) 2,121,217 1,749,854 Overdue loans and interest 11,247 12,488 Provisions for client loans 48,358 25,726 Overdue loans and interest/client loans 0.53% 0.71% Provisions for Client loans/overdue loans and interest 430% 206% Non-performing loans ratio (*) 0.53% 0.71% 100,000 50,000 0 aa aa- a+ a a- bbb+ bbb bbb- bb+ bb bb- b+ b b- ccc N/R * calculated according to Bank of Portugal Guideline no. 99/2003/DSB. Source: Espírito Santo Investment Source: Espírito Santo Investment The increase in provisions had a negative impact on the provisioning cost which rose by about 90 basis points in, to 1.55%, as shown in the following chart: Provisioning Cost 1,55% 0,76% 0,65% Interest Rate, FX and Equity Derivatives Portfolio by Sector 2% 2% 4% 51% 4% 7% 13% 17% Utilities Tourism, Hotels and Restaurants Energy Financial Groups Telecommunications Transport Infrastructure Other Financial Source: Espírito Santo Investment Credit Derivatives Portfolio Source: Espírito Santo Investment Following the trend of the previous year, the Bank substantially reduced the risk exposure to credit derivatives portfolio in. The risk is calculated using a notional value of the underlying contracts and the risk of the underlying reference issuer, should Espírito Santo Investment be selling protection, and of the counterparty, in the case the Bank is buying protection (from financial institutions). At the end of, the risk of this portfolio was residual, totalling about EUR 41.7 million, a reduction of 63% on the previous year. 87 Annual Report

88 In terms of the ratings profile and sector distribution of this portfolio, about 40% of the ratings were equal or higher than BBB- (investment grade) and exposure was largely to European companies in the financial or financial groups sectors. (thousands euros) Internal Ratings Profile Credit Derivatives 25,000 20,000 15,000 (thousands euros) External Ratings Profile - Bonds 1,000, , , , , , , , , ,000 0 aaa aa+ a+ a a- bbb+ bbb bbb- bb+ bb bb- b+ b ccc+ N/R 10,000 Source: Espírito Santo Investment 5,000 Bonds Portfolio by Sector 0 Source: Espírito Santo Investment aa- a b+ N/R 2% 3% Credit Derivatives Portfolio by Sector 64% 15% Constrution 12% 37% 17% 16% Energy Financial Other Central and State Administration Source: Espírito Santo Investment Source: Espírito Santo Investment Bonds Portfolio 34% Chemicals Other Financial Groups Financial Exposure to Emerging Markets On 31 December,, exposure in foreign currency to emerging markets (as determined by Bank of Portugal criteria for the calculation of counterparty risk aggregate exposure by geographic area) totalled EUR billion, representing 25.4% of total consolidated net assets, of which 94.3% was funded in local currencies. Espírito Santo Investment At the end of, the bonds portfolio totalled EUR billion, an increase of approximately 28.4% on the previous year. Taking into account the full consolidation of the portfolio of BES Investimento do Brasil, which is mainly composed of Brazilian Treasury Notes and Brazilian Central Bank Notes (issued and funded in local currency), the risk profile of the bonds portfolio in remained virtually the same as in 2008, reflecting the fact that there was no change in the rating of the Republic of Brazil. At the end of about 85% of the bonds portfolio was comprised ratings equal or higher than to BBB- (investment grade). In terms of distribution by sector, about 79% of the bonds portfolio was comprised of securities issued by state/central administration entities or by financial institutions, with good quality risk and a high level of liquidity. 88 Country Gross Exposure Dec. 09 Guarantees and Other Provisions Deductions Net Exposure Net Exposure Latin America Mexico 1,400-1,248 13,883-11, Venezuela 5, ,198-2, Brazil 1,527, ,061 1,502, , ,198 Bahamas Europe Turkey ,000 5,492 Africa Angola 2, ,572 2,315 1,528 Total Emerging Markets Exposure 1,537,586-1,815 48,142 1,491, , ,218 Total Exposure/ Total Consolidated Net Assets 26.18% -0.03% 0.82% 25.39% 16.85% 17.56% Amount Funded in Local Currency 1,405, ,405, , ,002 Amount Funded in Local Currency/ Total Exposure 91.44% 0.00% 0.00% 94.28% 98.09% 91.87% Source: Espírito Santo Investment Dec. 08 Net Exposure (thousands euros) Dec. 07

89 Market Risk Market risk is defined as the potential loss in value of portfolios or financial instruments resulting from the fluctuation of market variables such as credit spreads, interest rates, exchange rates, share prices and share price indices, as well as commodity prices. The identification, valuation, monitoring and control of market risk is the responsibility of a specific section of the Risk Department Market Risk Control which operates totally independently from the Bank s business areas. In functional terms, the Market Risk Control section reports directly to an Executive Board Member. Source: Espírito Santo Investment Dec. 09 Maximum Average (million euros) Dec. 08 Exchange rate risk Interest rate risk Equity Commodities Covariance Total Some of the instruments traded by the Bank are not quoted and for those the Bank uses theoretical valuation models. These models are subsequently used to manage and control positions in relation to the set limits. In organisational terms, market risk control functions are distributed geographically among the different business units with appropriate skills for the specific transactions involved and the risks incurred at each company belonging to the Espírito Santo Investment Group. Market Risk Control 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 determination of appropriate limits, 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 Credit and Risks Committee (CRC) of each business unit and subsequently to the Global Credit and Risks Committee in Lisbon. The limits are reviewed at least annually and whenever strategic options or market conditions so require. To give a clear picture of 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 limits, stop losses and concentration measures. Risk assessment measures used include VaR (Value at Risk) and, in terms of sensitivity tests, BPV (Basis Point Value) and Greeks (Vega and Rho). The VaR model is tested using back testing analysis. The Bank s different market risk positions are also fed into simulations of extreme scenarios at the BES Group level. These simulations are based on the 10 most positive and 10 most negative days recorded over the past 20 years. The markets in which each regional business unit operates involve specific factors that require adaptations in the way the risk assessment and control methods described above are implemented. For comparative purposes, the following table shows VaR by business unit, measured on the basis of a 10-day holding period and a confidence level of 99%: The Bank uses a Price Testing method that seeks to ensure: Models accuracy and suitability to the instruments concerned ; the reasonability, independence and consistency of the data used in the models; the reasonability of the algorithms used; and the checking of results against those obtained by other market operators. Liquidity Risk Liquidity risk is the risk that an institution may not be able to meet its financial commitments to a client or market at any time in any place or currency. Public confidence in the financial soundness of an institution is essential for liquidity. This confidence is built on the institution s financial quality, that is, the credit quality, its capacity to access money and capital markets, its results and market perception. It is also affected by the institution s capacity to survive a financial crisis and by the regulatory regime environment in which it operates. Risk Management Practices The aim of liquidity risk management is not to eliminate liquidity risk, which would be expensive and would also mean to lose important opportunities. The aim is to quantify liquidity risk and to determine a tolerance level for it. Maintaining liquidity has a cost for the Bank, which has to be assessed to ensure adequate returns are achieved. Funding liquidity risk involves: Business-as-usual operating risks exposure arising form daily funding and trading activities under normal market conditions. Operating risks arise from: 89 Annual Report

90 funding gaps; Debt: a 45% growth, of about EUR 598 million. funding concentration levels; and off-balance sheet items. Contingency risks exposure arising from external factors over which the institution has no control: market turbulence; political events; and This increase was largely due to growth in this line at BES Investimento do Brazil. Interbank: growth of EUR 480 million. This was the result of increased interbank funding, mainly within the BES Group. On 31 December,, the liquidity gap covered by interbank funding outside the BES Group represented less than 4% of total liabilities. specific market contingencies. Funding Sources (% of balance sheet) The level of risk is determined by the severity and duration of the external events and by the degree of operating exposure. Maximum cumulative outflow (MCO) reports, based on liquidity gaps, are drawn up to assess exposure to liquidity risk. MCO tends to highlight structural imbalances that occur when there is an important mismatch between assets and liabilities. MCO is determined by dividing the balance sheet into inter-group and third-party assets and liabilities. The maturities of each item are analysed in detail and classified according to the respective terms of those maturities with special emphasis on items maturing within six months. 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Espírito Santo Investment Interbank Clients Senior Debt (inc. EMTN) The treatment of each item is based on: past performance; the liquidity of the instruments; and other product specific characteristics. In addition to interbank market credit lines with the resident and nonresident banking community, Espírito Santo Investment has access, through its Espírito Santo Investment p.l.c. subsidiary, to a Euro Medium- Term Notes (EMTN) programme. This provides an extremely important instrument for managing liquidity due to its flexibility and the privileged access it provides to debt markets. Liquidity Risk Analysis The Bank registered growth of about 10% (about EUR 540 million) in its balance sheet in. An analysis of how the structure of liabilities evolved shows important growth of debt securities issued and interbank liabilities, together with a less marked reduction in client liabilities. Note should also be made of the EUR 110 million capital increase completed in the first half of. Operational Risk Operational risk is defined as the risk of occurence of events with a negative impact on results or equity and which arise from the inappropriate or negligent application of internal procedures, the behaviour of individuals, information systems or external causes, including legal risks. Thus operational risk is considered to be the sum of the following risks: operations, information systems, compliance and reputation. At the BES Group level, the management of operational risk is undertaken using a set of procedures aimed at ensuring the uniformity, systematisation and regularity of processes for identifying, monitoring, controlling and mitigating this risk. Management Strategy Collection and information treatment Espírito Santo Investment Liabilities analysis: Clients: a reduction of about EUR 278 million. This change was mainly due to loss of liabilities in the institutional clients in Spain, which, in fact, does not represent an effective loss of liquidity. 90 Mitigation Control Operational Risk Management Identification Monitoring

91 An organisational structure exclusively dedicated to designing, supervising and maintaining operational risk management has representatives in the relevant departments, branches and subsidiaries who are responsible for ensuring that established procedures and the daily management of operational risk are properly applied in their areas. These representatives play a vital role in the effective management of operational risk. For this reason, their training and awareness levels continued to be a priority in, as they had already been in The following also play an important role in this risk management model: Management of the internal control system, producing the necessary documentation for risk management procedures, identifying specific risks and the controls implemented to address them, assessing the effectiveness of the process for devising controls, identifying what actions need to be taken to improve efficiency, and maintaining constant two-way communication in regard to operational risk management; Internal audit, testing the effectiveness of risk management and control as well as identifying and assessing the implementation of improvement measures; Security coordination, ensuring the security and physical safety of people, information, and business operations. In the specific case of Espírito Santo Investment, an operational risk representative is responsible not only for coordinating this area with the Global Risk Department, but also for motivating the implementation of risk management procedures internally and in the Bank s respective branches and subsidiaries. These functions are attributed to the Compliance Department. 91 Annual Report