Espiritu Santo Bank

Espirito Santo Bank

1. Liquidity

Esprito Santo Bank (BES) has average net loans to average total assets ratios of 71.53% in 2012, 69.79% in 2013, and 67.75% in 2014. The lower trend throughout the years sampled signify that the average total assets are growing a faster rate than the average net loans and leases. For instance in 2012, the average assets grew by 10.86% versus only 8.15% for average net loans and leases.  During the periods of 2011 to 2014 average core deposits grew by an average rate of 1.25%. The largest increase occurred from 2012 to 2013. During this period core deposits grew 12.15%. When comparing 2011 to 2014, core deposits only grew by 2.12%. Assets during the periods of 2011 to 2014 grew at much vigorous rate. From 2011 to 2014 total assets grew by 5.81%, outpacing the growth in core deposits. When comparing 2011 to 2014, assets grew by nearly 17%.  

In comparison to the peer norms for BES core deposits to total assets ratio is much higher. This indicates that BES  holds less core deposits then other banks in their peer group. Looking at the banks mix of funding sources, BES, like most banks in their peer group, rely heavily on core deposits. More than 63% of funding comes from core deposits. It is slightly lower than the peer group. The difference from the peer group is caused by the increased funding from other deposit sources and other borrowings.  The graph below depicts the trend of funding sources for BES[pic 1]

When compared to the peer group, the bank has sizeable advantage in funding sources other than core deposits.  Measured from 2011 to 2014 Esprito Santo’s core deposits have been fluctuating. The bank saw a sizeable increase from 2012 to 2013, however it fell slightly from 2013 to 2014. Overall from 2011 to 2014 core deposits have increased by 2.12%.

1. Sensitivity to Market Risk

Esprito Santo bank, like all banks, shares a certain risk of rising or falling interest rates. The interest rate is set by the Federal Reserve Bank and dictates how much banks will have to pay to borrow. Currently, interest rates have remained low following the recession of the late 2000’s. There has been discussion that interest rates can rise in the near future. The rise in interest rates can adversely affect Esprito Santo. They are many methods to measure sensitivity to risk. The GAP model can be useful to signal to the bank’s managers of what actions to take in the event of rate decline or hike. A positive GAP signifies that the bank is asset-sensitive. A negative GAP displays a liability-sensitive firm. In the case of Esprito Santo, measuring from 2011 to 2014, the Net Gap position is positive. It averages about $222,000 (in millions) for the four years. This indicates that the bank is ssset-sensitive. If interest rates were to rise, the bank would not see their interest margin squeezed as much as a liability-sensitive firm.  In the case of falling rates, the opposite would occur, the bank’s interest margins would likely be squeezed. The lower interest rate set by the fed makes it cheaper to borrow money. As the rate get higher, the more the bank has to pay to borrow money. Most economists agree that interest rates are most likely to rise within the next year. All economic indications point to a rate hike. If Esprito Santo’s management agrees with the indications they can build their earning assets in order to minimize the effects of a rate hike.  It seems that the bank’s management team has taken action for the pending rate hike. Average Earning Assets have grown by an average on 8% from 2012 to 2014.

C- Earnings

BES is known for its universal financial services. The main center is located in Portugal, where it has its primary market. It is presently positioned in four continents encompassing 25 countries and employing more than 9,900 people.

In December 2012, BES was considered the largest bank in the Portuguese market and the second largest private-sector bank in Portugal. The total assets are EUR 83.7 billions, which are equivalent to the 71% of this country total assets.

BES offers a variety of financial services to help the needs of the clients, companies and other institutions.

List of services

• Deposits (companies, institutions and individuals costumers)
• Loans to companies and individuals
• Brokerage and custodian services
• Investment banking services
• Insures of life and non-life insurance.

During 2012, even though BES was a solid and stable bank, it started creating long-term strategy visions to expand its services internationally (Iberia, Brazil and Africa). Their main focus was to acquire new customers and markets, in a challenging environment facing the bad financial situation of Portugal.

One of the main strategic plans after expanding internationally was to reduce the loans-to-deposit in order to reinforce its financial strength. By December 2012 loans to deposit ratios were reduced from 198% in 2010 to 137% by the end of 2012.

Additionally, BES decided to increase its earnings by retaining dividends to shareholders, or giving them a moderate return in order for BES to archive higher solvent radios through retaining earnings.

In 2012, the board of Directors approved the allocation of individual net earnings (EUR 121,961,308.14) to the legal reserve (EUR 12,197,000.00). The difference (EUR 109,764,308.14) was used to cover the loss from 2011.The bank went through a hard economic situation caused by diverse changes including, fluctuations in interest rates, credits spreads, foreign exchange rates, share prices, commodity prices and real state pricing. These factors affected the net income and increased its overhead expenses between 2011 and early 2012.

It is important to note, that any change in interest rates, can enormously affect the net interest margin and the banking books. For example, fluctuations in market interest rates can alter the income and costs related to interest products, including assets, liabilities and off-balance sheet. After all, between 2013 and 2014, BES started having a positive recovery. The bank started growing in European countries. They were able to joint markets and lead transactions in Mexico, Poland and Brazil. As a consequence, the bank increased its overhead expenses due to investments in advisors, who developed new strategies and distribution activities in order to enter new countries and improve its role in new markets.

D- Asset Quality

2013 was a good year for BES due to the significant growth shown in its balance sheet. Subsidiaries in Miami earned in $555,000 in 2014 compared to a previous loss of $383,000.In 2014, the bank focused on financing second homes for foreign investors, trading, financing wealth management and securities brokerage; increasing its loan portfolio by $5.5 million. Additionally, its net interest income increased to 6.2 million, making it asset-quality strong, making able to avoid any charges for bad loans. Furthermore, by the completion of its first quarter, BES had .31 percent of total loans, $7.5 million in reserve for future loans losses, and a total of deposits of $627 millions. By the end of 2014, BES was the 17th largest bank in South Florida with $793 million in assets.  

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