Espirito Santo Financial Group S.A. (Euronext Lisbon and NYSE: ESF)
announced today its preliminary un-audited consolidated results for
the first half of 2005. -- Consolidated Net Profit reached 48.3
million Euros in June 2005 against 11.9 million Euros in June 2004;
-- Net Interest Income Results grew 5.7%, -- Market Results
increased 31.9%; -- Employees Costs and other Administrative
Expenses decreased 2.6% New Accounting Framework According with
regulation 1606/2002 of the European Council and Parliament,
companies having their securities admitted to trading on a
regulated market of any Member State should prepare their
consolidated accounts for each financial year starting on or after
1st January 2005 in accordance with IFRS. The IAS 32, IAS 39 and
IFRS 4 standards, as applicable, were adopted by Banco Espirito
Santo Group, Tranquilidade, ES Seguros and Tranquilidade Vida on
1st January 2005, as permitted by IFRS 1. The other standards,
which have lesser impact, were adopted on 1st January 2004. The
transition adjustments for the conversion of Generally Accepted
Accounting Principles in Portugal (the local principles) to IFRS
have been accounted for in Shareholders' Funds on 1st January 2005.
However, because the transition adjustments must conform with
accounting standards in force on the 31st December 2005, the
quantification effects of such transition must be considered
provisional and subject to changes which, depending on the actual
standards, could be material. Thus, the comparison between the
first semester results for 2005 and those of the previous year are
difficult. In order to somewhat facilitate this comparison, the
2004 accounts have been reclassified in accordance with IFRS,
although the numbers have been calculated in accordance with the
local principles except for the IFRS standards mentioned in the
above paragraph. For further information please consult the Annex
to this document entitled "Transition to the International
Accounting Standards (IFRS)". General Comments ESFG's consolidated
performance in the first semester of 2005 highlights its resilience
in the face of subdued economic and stock exchange performances in
Portugal in the same period. Indeed, dividend yield compensated the
decline in net interest income leading to an increase in financial
results. Fee and commission income showed some growth in spite of
the more volatile performance of investment banking revenues,
whilst trading results registered a good performance as a
consequence of increased diversification. The decrease in salaries
and administrative costs helped ensure a very positive result in
the circumstances presently prevailing in Portugal. Principal Item
Analysis Consolidated Net Interest Income (including dividend
income) grew 5.7% in the first semester of 2005, against the same
period of 2004, as a 77.9% growth in dividend revenue compensated a
decline in pure net interest income. This decline was a function of
external constraints that have been negatively influencing its
progress for some time, namely pressure on credit products spreads,
particularly in lower risk segments, and the continuing very low
level of euro interest rates, hampering the profitability of funds.
The adoption of IFRS has brought yet another constraint,
introducing more restrictive criteria for hedging policies
definition. This led to the reclassification of part of the
derivatives transactions from the hedging portfolio to the trading
portfolio, which means that the corresponding results were
recognised as results from financial operations instead of net
interest income. Consolidated Commissions and Similar Income posted
a 1.8% increase to reach 248.9 million Euros in June 2005. Again,
this reflects the performance at the banking subsidiaries in
Portugal which, in the first half of 2005 was conditioned by the
volatile nature of investment banking activities and the adverse
effects of fierce competition backed by aggressive promotion of
sharp price reductions and even free services. Furthermore, the
introduction of IFRS has lead to accrual of fees of commissions. In
terms of consolidated market results(1), these have shown a growth
of 31.9% in June 2005 to reach 161.2 million Euros, reflecting
strong gains in assets available for sale and in foreign exchange
revaluation at the banking operations in Portugal. As in the past,
these results were based on the diversification of market risk. In
the second quarter of 2005 there was increased emphasis on emerging
markets trading, with a special focus on Latin American countries.
Both interest rate and exchange rate performance was favourable,
thus compensating the flattening yield curves of European and US
markets as well as the negative performance of the Portuguese
market. Consolidated Insurance Premiums Acquired Net of Reinsurance
posted a 5.6% decrease in June 2005 compared with the same period
of the previous year. This was due mainly to the decline in life
insurance premiums, namely private pension plan premiums, which
have been marketed to a considerable extent on the basis of fiscal
incentives at entrance, that have been abolished by the government.
However, by August 2005, there was significant premium growth in
all non-life products and leadership in private pension plans in
Portugal was re-established. In turn, consolidated Insurance Claims
Net of Reinsurance increased 65.5% in the same period, due mostly
to a very substantial volume of maturities in capitalization
products with profit sharing, initiated some eight years ago,
following a surge in demand for this type of product. Consolidated
Employees Costs and Benefits and other Administrative Expenses(2)
posted a decline of 2.6%, as a consequence of the cost containment
strategy implemented at all levels of the ESFG group of companies.
TRANSITION TO THE INTERNATIONAL FINANCIAL REPORTING STANDARDS
(IFRS) CONVERSION TO THE INTERNATIONAL FINANCIAL REPORTING
STANDARDS According to Regulation no. 1606/2002 of the European
Council and Parliament, companies having securities admitted to
trading on a regulated market of any Member State should have
adopted the International Financial Reporting Standards as from 1
January 2005 in the preparation of their consolidated financial
statements. The adoption of the IFRS implied considerable changes
in the accounting framework inherent in the current Portuguese Plan
of Accounts for the Banking Sector (PABS) and Portuguese Plan of
Accounts for the Insurance Sector (PAIS) used by ESFG until 31
December 2004 in the preparation of its consolidated financial
statements. This information has been prepared in accordance with
the IFRS standards which are applicable at the current date and
does not entail all the financial information that should be
disclosed in the financial statements as at 31 December 2005.
Neither does it consider any accounting impacts that may result
from changes that may occur in the accounting standards by 31
December 2005. Moreover, the figures presented have not been
audited or reviewed by our external auditors. Therefore the figures
presented should be considered provisional and reflect the best
current estimate of the standards that will be in place as at 31
December 2005. Following the significant impact of the IFRS
adjustments introduced as at 1 January 2005, the financial
statements as at 30 June 2005 are not comparable to the published
financial statements as at 30 June 2004 which followed the rules of
PABS and PAIS. On this basis, and following a recommendation of the
CESR, the Group presents as comparatives the 30 June 2004 financial
statements as published and the restated 30 June 2004 financial
statements in accordance with IFRS except for IAS 32, IAS 39 and
IFRS 4 which were not applied to the 2004 comparative figures as
permitted by IFRS 1. Main adjustments required to comply with IFRS
The main purpose of this note is to present a brief summary of the
differences identified between the accounting policies used by ESFG
- which follow the PABS and PAIS - and the IFRS, which impacted the
consolidated financial statements. a) Securities Banking
subsidiaries (PABS) In accordance with the PABS rules, investment
securities available for sale are valued at the lower of cost or
market value. Any unrealized losses are fully provided for and
charged to the statement of income and unrealized gains are not
recognized. In the case of reversals of unrealized losses provided
for, both for shares or fixed-income securities, the provisions are
written-back to the statement of income. Equity holdings that are
not consolidated or accounted for under the equity method, i.e., in
principle, those where the percentage held is less than 20%, were
under PABS recorded at cost and the related unrealized losses
determined at balance sheet date, based on the average market price
of the last 6 months, were provided for over a period of 5 to 10
years, as set forth in Bank of Portugal Regulation no. 4/2002.
Unrealized gains were not recognized. Additionally, under PABS,
unrealized losses resulting from foreign exchange differences on
equity holdings denominated in foreign currencies were recognized
under other assets. Insurance subsidiaries (PAIS) Debt securities
held by insurance subsidiaries were classified as available for
sale and for PAIS purposes were carried at acquisition cost, except
for the investments for the benefit of life assurance policyholders
who bear the investment risk. Interest accrual was made based on
nominal value and on the applicable interest rate for the period.
Premium or discount was accrued over the period to maturity against
the Statement of income using the straight line method. The equity
securities portfolio, also classified as available for sale, under
Portuguese GAAP was valued at the balance sheet date, at market
value. Unrealized gains and losses resulting from the difference
between the book value and market value, at the balance sheet date,
were recorded in shareholders' equity under "Regulatory revaluation
reserve" or as a liability under "fund for future appropriations"
in the case of investment securities covering life insurance
liabilities arising out from insurance contracts with profit
sharing. Any losses not covered by the reserve or by the fund were
charged to the Statement of income. Under IFRS, investment
securities available for sale are marked to market and unrealized
gains or losses including any foreign exchange differences are
recognized under reserves, except if an impairment loss is
determined, in which case they are taken to the statement of
income. Impairment losses are reversed against the statement of
income, except for equity securities, in which case the reversal is
recorded against equity. Other equity holdings are classified as
securities available for sale. IFRS allows for certain securities
to be designated at fair value through the statement of income.
Additionally, under IFRS, the provision for future policyholders
dividends is adjusted for the impact of net unrealized gains and
losses on investment securities to the extent that the policyholder
will participate in such gains and losses on the basis of
contractual or regulatory requirements where they are realized
(shadow accounting adjustment). b) Retirement pensions and other
employee benefits Banking subsidiaries (PABS) Bearing in mind that
the date of transition to the IFRS was 1 January 2004, on 31
December 2003 and 2004, ESFG's Portuguese subsidiaries decided to
change the actuarial assumptions so as to converge with the IAS 19
requirements. Since Regulation no. 12/2001, applicable by the
Portuguese banks in the recognition of their pension liabilities,
already allowed actuarial gains and losses to be deferred under the
corridor method, the largest differences that were found in
retirement pensions concerned early retirements for disability and
health benefits. In accordance with Bank of Portugal rules,
restructuring costs with early retirements were amortized over a
10-year period. Under the IFRS they are fully recognized in the
year when the retirements occur. As regards health benefits granted
to the employees reaching retirement age, it has been the practice
in the market to recognize such benefits in the statement of income
in the year when they were paid. The adoption of IAS 19 implies
that the liabilities incurred with such benefits are recognized
based on actuarial valuations at balance sheet date. Insurance
subsidiaries (PAIS) Insurance subsidiaries accounted for pensions
in accordance with the rules of PAIS which required that any
increase in vested benefits, including actuarial gains and losses
were recognized in the statement of income when incurred. For IFRS,
the corridor method was used. b) Insurance reserves Equalization
Reserve Under PAIS, an equalization reserve was set up for lines of
business that were characterized by greater uncertainty regarding
the evolution of claims. IFRS 4 prohibits provisions for possible
claims that are not in existence at the reporting date. Liability
adequacy test In accordance with IFRS 4, at each reporting date,
the insurance companies shall assess whether their recognized
insurance liabilities are adequate, using current estimates of
future cash flows under its insurance contracts. Under PAIS, the
above mentioned procedure was only applicable to the non-life
business. d) Consolidation of Special Purpose Entities (SPEs)
According to PABS, assets, loans and securities assigned by ESFG's
Portuguese banking subsidiaries under securitization transactions
were derecognized providing that they met the conditions for sales
recognition. Securities purchased within the scope of such
transactions were recognized as investment securities and provided
for in accordance with the rules set forth in Bank of Portugal
Regulation no. 27/2000. Under IAS 39, assets are only derecognized
after ESFG's banking subsidiaries have lost control over the
contractual rights underlying such assets, although IFRS 1
establishes that on transition local rules will apply to the
operations carried out up to 1 January 2004. Moreover, all SPEs
with which the Group establishes relations must be analyzed under
the light of the consolidation rules applicable to such entities
(and expressed in SIC 12), namely those which may have been set up
within the scope of the securitization transactions carried out. e)
Treasury stock and Bonuses According to PABS, shares underlying the
SIBA plan were accounted for by the banking subsidiaries as an
asset. In accordance with IFRS these shares were reclassified, by
these subsidiaries, as treasury shares. Bonuses were accounted for
under PABS and PAIS as a deduction from equity as they were
considered to be a transfer of the rights to the dividends from the
shareholders to the employees. Under IFRS these bonuses are taken
to income in the year to which they relate. f) Preference shares
According to PABS, preference shares were classified under minority
interest and the accrual of the dividends were deducted from the
net income under minority interest. Under IFRS when the option for
redemption is within the control of the issuer and dividends are
only payable if and when declared by the board of directors, the
preference shares are considered permanent equity of the issuer, a
subsidiary of ESFG. Therefore, under IFRS no accrual for the
dividends is made as no dividends were declared at the balance
sheet date. In this case reference shares are still classified as
minority interest as they represent equity of a subsidiary
attributable to third parties. However, when the Group has a
present obligation of paying dividends, preference shares are
considered as liabilities and dividends are classified as interest
expense. g) General banking risk provision Under PABS, the Group
booked a General banking risk provision which aimed to face
non-specific unidentified banking risks inherit to the Group
activity and therefore was determined by cautious criteria defined
by management. This type of provision does not qualify for
recognition under IAS 37, and therefore it was reversed for IFRS on
transition. h) Property and equipment Under PAIS, real estate held
by insurance subsidiaries, for own use and investment purposes, are
valued at their market value which is defined as the value on the
date of the latest valuation of each property, performed at least
in the last 5 years, in accordance with the methods recognized by
the Portuguese Insurance Institute. Real estate held by insurance
subsidiaries is not depreciated. Under IFRS 1, insurance
subsidiaries elected to use the fair value at transition date as
the deemed cost of their real estate. Additionally, in accordance
with IAS 16, real estate for own use is amortized over its
estimated useful life and subject to impairment test i) Intangibles
In accordance with PABS and PAIS, internally developed software is
capitalized and amortized over a 3 year period. In accordance with
IAS 38, internally developed software can only be capitalised if
(i) it generates future economic benefits and (ii) the cost can be
determined reliably. The cost that can be capitalised as part of an
internally generated intangible assets are identified under IAS 38
and excludes expenditure incurred to restore or maintain the level
of future benefits. j) Loan Portfolio Impairment In accordance with
PABS, provisions for loans and advances to customers were set up in
accordance with Bank of Portugal Regulations nos. 3/95, 2/99 and
8/03. The Bank of Portugal rules on the setting up of provisions
had therefore, an essentially regulatory nature. At the same time,
this supervisory authority has established the obligation of banks
to submit, twice a year, a report analyzing economic provisions to
cover the specific risk in the loans portfolio. In the application
of the Bank of Portugal regulations, in the calculation of loan
losses provisions there was an overriding requirement that the
provision should be sufficient on an economic basis. Under IAS 39,
the loans portfolio is valued at amortized cost and subject to
impairment tests (performing and non performing portfolios).
Impairment losses are determined as the difference between the
carrying amount of the loan and the value of future expected cash
flows, discounted at the loan's original effective interest rate.
This method considers two main aspects: i) the recoverable amount
based on an economic analysis of the portfolio; ii) the present
value of expected cash flows at the original effective interest
rate. k) Deferred taxes According to PABS, deferred tax assets
could not be recognized. The IAS 12 permits the recognition of
deferred tax assets, providing it is probable that tax profits will
be available to absorb deductible temporary differences (including
tax losses). According to PAIS, insurance subsidiaries already
recognized deferred tax assets. Therefore, the application of IAS
12 by the banking subsidiaries implied the recognition of the total
deferred tax asset calculated on the differences as at the
transaction date between the tax balance sheet and IFRS balance
sheet. For the insurance subsidiaries, the impact under IAS 12,
reflects mainly the tax effect of the IFRS adjustments. The
Espirito Santo Financial Group provides, through its subsidiaries,
a global and diversified range of financial services to its clients
including Commercial banking, Insurance, Investment banking,
Stock-brokerage and Asset management in Portugal and
internationally. For additional information on Espirito Santo
Financial Group, its subsidiaries, operations and results, please
visit the Company's website on www.esfg.com. (1) Aggregate of Net
Result on Financial Assets at Fair Value, Net Result on Financial
Assets Available for Sale, Net Result on Sale of Other Assets and
Net Foreign Exchange Results (2) Aggregate of Employees Costs and
Benefits and Other Administrative Expenses -0- *T ESPIRITO SANTO
FINANCIAL GROUP SA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
Unaudited Unaudited Unaudited under PG under under GAAP IFRS IFRS
June 30, June 30, June 30, 2004 2004 2005 ---------- ----------
---------- (In millions of Euro) NET ASSET Cash and deposits with
Central Banks 703.7 704.5 719.6 Deposits with other banks 468.3
468.3 642.1 Loans and advances to other banks 4,068.1 4,027.9
3,556.0 Loans and advances to customers 29,294.3 29,462.7 31,637.5
(Provision) (829.4) (829.4) (859.3) Financial assets held for
trading 1,870.6 1,870.6 3,460.7 Financial assets at fair value with
results recognized in the P&L - - 2,133.9 Financial assets
available for sale 9,180.0 7,736.1 8,141.5 Financial assets with
repurchase agreement - - Fair value of hedging derivatives 165.6
165.6 53.5 Financial assets held to maturity 631.0 631.0 561.3
Investments in associated companies 25.4 25.4 50.4 Property and
equipment 125.6 126.9 133.3 Non current assets held for sale 81.7
83.2 123.4 Other tangible assets 431.5 435.5 446.2 Intangible
assets 174.6 117.7 100.3 Current tax assets 8.4 8.4 27.7 Deferred
tax assets 31.2 136.6 243.9 Technical provision on reinsurance
ceded 46.2 46.2 52.7 Other assets 2,571.5 1,329.4 1,930.6
---------- ---------- ---------- TOTAL NET ASSETS 49,048.3 46,546.6
53,155.3 ========== ========== ========== LIABILITIES Owned to
Central Banks 106.9 106.9 464.1 Owned to other banks 6,200.7
6,505.0 7,516.2 Deposits from clients 20,553.8 20,329.1 17,543.9
Debt securities 10,466.4 8,563.4 13,707.6 Other financial
liabilities at fair value with results recognized in the P&L -
- - Fair value of hedging derivatives 123.2 123.2 64.7 Non current
liabilities held for sale 613.7 613.7 1,658.9 Liabilities on
insurance investment contracts 1,168.0 1,168.0 1,620.3 Provisions
567.1 90.7 122.2 Subordinated liabilities 1,634.1 1,932.6 2,324.4
Insurance technical provisions 4,520.8 4,527.2 4,629.6 Current tax
liabilities 21.7 21.7 39.5 Deferred tax liabilities 4.7 36.4 108.6
Other liabilities 578.9 542.9 1,274.6 ---------- ----------
---------- TOTAL LIABILITIES 46,560.0 44,560.8 51,074.6 ----------
---------- ---------- SHAREHOLDERS' EQUITY Share capital 479.1
479.1 479.1 (Treasury stock) (35.2) (33.6) (30.2) Revaluation
reserve 17.5 17.5 86.8 Other reserves and retained earnings (376.3)
(416.6) (459.8) Net income 30.5 11.9 48.3 Minority interests
2,372.7 1,927.5 1,956.5 ---------- ---------- ---------- TOTAL
SHAREHOLDERS' EQUITY 2,488.3 1,985.8 2,080.7 ---------- ----------
---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 49,048.3
46,546.6 53,155.3 *T -0- *T ESPIRITO SANTO FINANCIAL GROUP SA AND
SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Unaudited Unaudited
Unaudited under under under PG GAAP IFRS IFRS June 30, June 30,
June 30, 2004 2004 2005 ---------- ---------- ---------- (In
millions of Euro) Interest and similar income 1,130.3 1,126.0
1,019.4 Interest and similar expenses 715.8 722.4 609.4 Dividends
23.1 23.1 41.1 ---------- ---------- ---------- Net interest income
437.6 426.7 451.1 Commissions and similar income 244.6 244.6 248.9
Commissions and similar expenses 25.3 25.3 35.4 Net result on
financial assets at fair value 7.7 7.7 (44.5) Net result on
financial assets available for sale 105.2 62.2 122.7 Net result on
sale of other assets 35.1 35.1 30.2 Net foreign exchange results
17.2 17.2 52.8 Other net income from banking activity 16.9 40.5
14.6 Insurance premiums acquired, net of reinsurance 378.8 378.8
357.7 Insurance acquisition costs, net of reinsurance 24.9 24.9
28.3 Insurance claims, net of reinsurance 260.5 260.5 431.0 Net
change in insurance technical provisions, net of reinsurance 145.9
146.3 (42.0) Net change in insurance investment contracts 0.2 0.2
0.1 Other net income from non-banking activity (3.1) (3.1) 2.8
---------- ---------- ---------- Income from banking and
non-banking activities 783.3 773.8 783.5 Employees costs and
benefits 201.0 276.8 244.7 Other administrative expenses 148.8
153.0 174.0 Depreciation and amortization 74.2 57.7 47.3 Provisions
net of reversal 27.5 3.5 11.4 Loans' impairement, net of reversal
and recoveries 133.9 133.9 123.6 Other financial assets'
impairement, net of reversal and recoveries 15.8 15.8 9.2 Other
assets' impairement, net of reversal and recoveries 2.5 2.5 (1.7)
Equity in earnings of associated companies (0.2) (0.2) 0.9
---------- ---------- ---------- Income before taxes 179.4 130.4
175.9 Current taxes 27.2 27.2 37.2 Deferred taxes 0.7 2.1 (12.4)
---------- ---------- ---------- Net income before minority
interest 151.4 101.0 151.1 Minority interests 120.9 67.9 102.8
---------- ---------- ---------- Net income for the period 30.5
11.9 48.3 ========== ========== ========== *T
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