Is it too little to late? In an
effort to reassure investors, Banco Espirito Santo SA, revealed it had 1.18
billion euros ($1.6 billion) of loans, securities and other items linked to
Grupo Espirito Santo (its parent) as of June 30. This disclosure follows a
missed payment on short-term debt by a member of the Portuguese group. However,
I ask the question.."is this disclosure too little too late?" In my
view, the answer is very likely.
The nation's second-biggest bank by
market value said it has a buffer of Euro2.1 billion above the regulatory
minimum following a capital increase in June. While this may be enough of a
capital buffer to manage the "direct" exposure, indirect exposure, as
well as fallout from reduced confidence in the institution, its parent, and its
ability to service its debts will likely chip away at the capital buffer.
"With this additional disclosure,
the bank's and the central bank's challenge is to continue to reassure the
markets about the lender's solvency. Nonetheless, the lack of transparency in
the corporate structure has jolted investors. Confidence remains on the
brink."
As illustrated countless times
across the globe, investor and consumer confidence "hold the key to the
future" of this institution, and perhaps, the Portuguese banking system. Indeed,
the concerns and reduced confidence in Banco Espirito Santo has already
impacted the greater markets, especially in Spain, which fortunes are closely
to Portugal's.
While the bank's bonds trimmed
losses today, with its 7.125 percent subordinated notes increasing slightly to
88.28 cents, to yield 8.82 percent, the securities have however dropped to a
record low of 85.89 cents yesterday from 96.06 cents last week. Oh, remember
what can happen to subordinated bonds during a crisis? They can get wiped out,
in a number of fashions. But let's not get ahead of ourselves, just food for
thought, for now.
"Investors continue to have
questions about indirect exposure to the group, pending restructuring plans,
upcoming management changes and the government's ability to support the bank,
if needed."
"The key rule in confidence is
to never allow it to dip below the level in which it may recover, quickly.
Consumers and investors grow impatient and weary if they have doubts about a financial
institution, whether the doubt is real or perceived, it could dramatically
alter the path of a bank."
In my years of being a banking analyst,
sitting on the front lines of the credit crisis as it moved across the globe,
this situation is far too familiar. We should be concerned. Its time to wave
the "caution flag", before it's too late.
Steve Picarillo is a global
financial markets, risk and communications executive with exceptional
experience in risk analysis of global banking systems and financial
institutions. Mr. Picarillo provides analysis and commentary to the financial
community, the media, investors and regulators.
