A Portugal Bank's Angola Problem ; Investment in Subsidiary by Espirito Santo Proves to Be a Crippling Move

By Minder, Raphael | International New York Times, July 31, 2014 | Go to article overview

A Portugal Bank's Angola Problem ; Investment in Subsidiary by Espirito Santo Proves to Be a Crippling Move


Minder, Raphael, International New York Times


For Banco Espirito Santo, loans to its subsidiary have proved to be a crippling investment.

For Portugal, the oil-producing nation Angola provided a lifeline during the euro debt crisis that weakened its economy so much that the country had to negotiate an international bailout in 2011.

For the troubled Portuguese financial institution Banco Espirito Santo, however, Angola has turned out to be a crippling investment, one that could require the government in Lisbon to do damage control with the government in Luanda.

Banco Espirito Santo allowed its subsidiary in Angola, which is a former Portuguese colony, to hand out at least 5.7 billion euros, or about $7.7 billion, in loans. That amount is equivalent to 220 percent of the subsidiary's deposits, whereas banks generally lend less than 100 percent of deposits. The Portuguese parent appears to be in no position to retrieve those loans without the support of the Angolan state.

The bank's problems come as Portugal's most powerful family business empire is crumbling on all sides. Among other issues, regulators and prosecutors are investigating the possibility of accounting fraud and abuse of privileged information in Portugal as well as Luxembourg and other offshore centers used by the family group.

But for Banco Espirito Santo and the Espirito Santo family that owns it, another "big question mark is Angola, because it's really not clear what went wrong there," said Rui Barbara, an asset manager at Banco Carregosa, a private Portuguese bank.

Analysts were expecting Banco Espirito Santo to report a first- half loss on Wednesday that could significantly erode or even wipe out its capital cushion of EUR 2.1 billion, which would then require the bank to find more funds. The bank's shares fell about 8 percent on Tuesday after the publication Expresso said the bank would report a loss of about EUR 3 billion, which would be the largest loss reported by any Portuguese bank.

After the Expresso report, Portugal's central bank issued a statement saying it was confident that private investors, rather than public money, could be used to cover any capital shortfall.

Just how deep a wound the Angola subsidiary, Banco Espirito Santo Angola, or BESA, could inflict should become clearer when the bank reports its results. In December, the Angolan state provided EUR 4.2 billion in guarantees to BESA, which is majority-owned by the Portuguese bank. The guarantees did not raise alarm bells at the time, and Angola has never explained why the guarantees were needed.

This month, Jose de Lima Massano, governor of Angola's central bank, told lawmakers that there were unspecified problems with the Angola subsidiary's loan portfolio, but that they were not sufficient to threaten the country's financial system.

Banco Espirito Santo opened BESA in 2002, under the stewardship of Alvaro Sobrinho, an Angolan businessman. In the process, the Portuguese bank not only got a foothold in fast-growing Angola but also built up ties to the government of Jose Eduardo dos Santos, who has been president of Angola for 35 years.

Two years after BESA was founded, Geni, an investment company founded by officials with ties to the dos Santos government, took a 19 percent stake in the Angolan bank.

In October 2012, however, BESA announced that Mr. Sobrinho would step down as chief executive after a decade at the helm.

Mr. Sobrinho said by email that he left BESA to "devote my attention to areas I have long been passionate about, including African-led investment projects and development programs."

Still, Mr. Sobrinho then became executive chairman of Banco Valor, another Angolan bank. One of his other financial sector investments is Akoya, a Swiss asset management company that has been targeted by prosecutors. That investigation is part of a money laundering case that led to the arrest last week of Ricardo Espirito Santo Silva Salgado, the family patriarch, a week after he stepped down as executive chairman of the Portuguese lender. …

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