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Banco Espirito Santo Tries to Calm Capital Worries

NEW YORK (The Deal) -- Portugal's Banco Espirito Santo SA late Thursday insisted it would be able to absorb potential losses incurred through exposures to its largest shareholder after its shares plunged 17% and triggered a market rout.

The lender revealed that it has a capital exposure of 1.18 billion euros ($1.61 billion) to 25.1% owner Espirito Santo Financial Group, and a €2.1 billion capital buffer above the minimum regulatory requirement.

"Banco Espirito Santo's executive committee believes that the potential losses resulting from the exposure to Espirito Santo Group do not compromise the compliance with the regulatory requirements," it said late Thursday.

But the lender said it has to wait until Espirito Santo Group releases its restructuring plan before assessing its own potential losses, leaving nervous investors and markets in the dark for a bit longer.

Ruling out increasing its exposure to Espirito Santo Group, it also provided further information about what it has tied up with other Espirito Santo Group entities, as well as about debt securities issued by that family of companies and held by its own clients.

Those debt securities include 255 million euros in commercial paper issued by Espirito Santo International; 342 million euros in commercial securities issued by Rioforte; 44 million euros in commercial paper issued by Rioforte subsidiaries Espirito Santo Saude and Espirito Santo Property, and 212 million euros in commercial paper and bonds issued by Espirito Santo Financial Group and its subsidiaries.

However, it said that funds it manages had no material exposure to Espirito Santo Group companies.

The latest development follows Thursday's market selloff across Europe after Espirito Santo International delayed interest payments on some short-term securities. That sparked concern that the problems may extend to other parts of the group and pushed Lisbon's benchmarket stock index down 4.2%.

Since it was founded nearly a century ago, the bank has been controlled by Portugal's influential Espirito Santo family.

Although Banco Espirito Santo appears to be the only part of the larger conglomerate in good financial shape, one expert noted that there are worries that it may have been used to conceal holes in other non-performing parts of the business.

Banco Espirito Santo is Portugal's second-largest publicly traded lender. Its second-quarter net loss widened to 89.2 million euros in the year ended March 31, 2014, compared with a loss of 62 million euros a year earlier.

Banco Espirito Santo will hold a shareholders' meeting on July 31 to vote on a management reshuffle, including the appointment of Paolo Moto Pinto as board chairman.

Ricardo Espirito Santo Salgado, great-grandson of the bank's founder and executive chairman since 1991, is expected to step down as CEO later this month.

The bank is currently under the loupe of the European Central Bank, which is conducting an asset quality review and stress test of euro-area lender before taking over as single supervisor later this year. Results of the two-part assessment are due out by late October.

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