Banco Espírito Santo e Comercial de Lisboa S.A.

Av. da Liberdade, 195
1250 Lisboa
Portugal
(351) 1 315 8331
Fax: (351) 1 355 5248

Public Company
Incorporated: 1920 as Banco Espírito Santo
Employees: 5.714
Revenues: Esc 17.3 billion (US$23 million) (1994)
Stock Exchanges: New York Oporto Monaco Luxembourg London
SICs: 6021 National Commercial Banks

With total assets of US$15.6 billion, Banco Espírito Santo e Comercial de Lisboa S.A. is one of Portugal’s largest, most profitable commercial banks. The history of this venerable financial institution—whose name means “Holy Spirit”—is closely linked to Portugal’s volatile political and economic past. In 1992, after 16 years under government ownership, the bank was reprivatized by a group of institutional investors led by descendants of the founding Espírito Santo family. By the mid-1990s, the family-held Espírito Santo Financial Holding S.A. owned a controlling interest in Banco Espírito Santo (BESCL). While Luxembourg-based Espírito Santo Financial Holding is technically the parent company, the two entities are often referred to interchangeably. Other significant institutional investors included France’s Caisse Nationale de Credit Agricole and The Chase Manhattan Bank Clients AC. The Portuguese government retained a stake in Espírito Santo through the early 1990s as well.

While BESCL’s activities are concentrated in its home country, it also has offices in twelve other countries around the world. The company’s roster of services includes credit cards, stock brokerage, asset management, and leasing. In addition to its commercial banking operations, BESCL also controls Portugal’s third-largest insurance company, Companhia de Seguros Tranqui-lidade Vida, S.A., and manages six Portuguese mutual funds.

The Espírito Santo family’s banking odyssey began during the late 19th century, when patriarch José Maria de Espírito Santo Silva established Beirao, Pinto, Silva and Co., a bank in the national capital of Lisbon. The family changed the institution’s name to Espírito Santo Silva and Banco Co. in 1918. Although the first two decades of the 20th century were a period of great political upheaval, during which time Portugal haltingly shifted via revolution from a monarchical form of government to a republican regime, the period between the two World Wars was one of dramatic growth in Portugal’s banking industry. José Maria’s eldest son, also named José, led Espírito Santo until 1931, when he was expelled from the Catholic country for getting a divorce.

José’s younger brother Ricardo defied the global depression of the 1930s to build a European banking empire. He found a willing supporter in Antonio de Oliveira Salazar, the prime minister who founded the “Estado Novo” (New State) in 1933. His virtual dictatorship endured over four decades, becoming Europe’s most prolific authoritarian government. Salazar had acted as Portugal’s finance minister in the late 1920s and had played an important role in the stabilization of the country’s finances. The Espírito Santos expanded into insurance with the purchase of Tranquilidade during the early 1930s. In 1937, Banco Espírito Santo merged with the 62-year-old Banco Comercial de Lisboa, renaming the new entity Banco Espírito Santo e Comercial de Lisboa.

Salazar’s strategies fostered Espírito Santo’s growth during and after the Second World War. Portugal’s neutrality during the war made it a haven for the wealthy of Europe, and postwar protectionism precluded foreign competition. Salazar’s tenuous hold on Portugal’s African colonies facilitated the Espírito Santo family’s acquisition of major sugar, coffee, and palm oil plantations in Mozambique and Angola. The 1960s brought a veritable “boom” to what had historically been western Europe’s poorest nation, as economic growth surged at an annual rate between 5 percent and 7 percent. By the early 1970s, the privately held. $2 billion-asset Banco Espírito Santo had become Portugal’s largest bank, and its Tranquilidade subsidiary was the country’s top insurance company. The family fortune was estimated to total $4 billion at its summit.

However, when Salazar suffered a debilitating heart attack in 1968, his successor. Marcelo Caetano, was unable to hold the Estado Novo together. By 1974, the pressure of colonial wars and deep economic recession precipitated a bloodless military coup. Although the new regime, the Movimento das Forças Armadas (Armed Forces Movement, or MFA), instituted what has been characterized as “a moderate form of democracy,” its communist leanings led to the nationalization of Portugal’s biggest companies. Early that year, Chief Executive Officer Manuel Ricardo Espírito Santo was arrested at a meeting of the bank’s board of directors and condemned to a 14-month prison sentence.

Battered but unbowed, the Espírito Santo family fled to Spain, then settled in London. The family took its meager settlement from the government and founded E.S. International Holding S.A. in Luxembourg with $20,000. They purchased a major stake in Florida’s Biscayne Bank (later renamed Espírito Santo Bank of Florida) in 1978 and won a Brazilian banking license late in the decade. They began to reassert the well-recognized family name in 1983 with the creation of Bank Espírito Santo International Ltd. in the Cayman Islands. They also purchased equity in banks in London and Paris, and established a fund management company in Lausanne, Switzerland. By 1990, they had accumulated a $246 million enterprise.

In the meantime, the 1985 election of free-market Social Democrat Aníbal Cavaco Silva heralded an era of reprivatization. When the new regime began to reprivatize financial institutions and insurance companies in 1986, Espírito Santo wasted no time in reentering its home country. That same year, Espírito Santo Financial Holding formed a commercial bank, Banco Internacional de Credito, as a joint venture with France’s Credit Agricole. Espírito Santo used the proceeds of a Eurobond floatation to repurchase Tranquilidade in 1990. The family reacquired Banco Espírito Santo with the help of France’s Caisse Nationale de Credit Agricole and The Chase Manhattan Bank Clients AC.

While nationalization had weakened some of BESCL’s competitors. Espírito Santo was fairly well managed throughout the period of state ownership. In 1993, Espírito Santo official Manuel Villas-Boas told Euromoney that “To a large degree the bank kept to the philosophies of credit and the systems implemented before the period of nationalization. The bank was fortunate in the choice of management it had under nationalization, and the bank had a strong and well provided balance sheet when we took it back.”

That didn’t mean that there was no room for improvement, however. For example, BESCL’s employee roster had grown by 70 percent during the period of nationalization. Led by Chairman Ricardo Espírito Santo Silva Salgado, the family focused on restructuring the group and increasing efficiency. They called upon well-known management consultants McKinsey and Company to assist with the reorganization. The new management team increased productivity dramatically by reducing staffing levels from 6,800 in 1990 to 5,700 by 1994, while simultaneously increasing the number of branches from 177 to 332. The ratio of administrative costs to financial assets decreased by almost 18 percent and the number of employees per branch declined from 27 to 17 in the process. Assets per employee doubled from 1991 to Esc 400 million in 1994. In 1993, BESCL boosted its technological efficiency with a US$12.8 million computer network upgrade from Unisys Corp.

The bank also shifted its strategic focus from corporate clients to the private customers, who had proven loyal patrons during the exile. Espírito Santo’s commercial bank, Banco Internacional de Credito, sought to increase its share of Portugal’s mortgage business to ten percent by the mid-1980s. In 1992, the financial group added a Spanish institution. Banco Industrial del Mediterraneo, to its growing roster of businesses, at an estimated price tag of 5.5 billion pesetas (US$55 million). The company’s increasingly diverse interests—which included leasing, investment banking, and credit cards by the mid-1990s—allowed for cross-selling of products and services.

An unidentified Lisbon banker told Euromoney that “Espírito Santo represents old money in Portugal. Their bank is the last of the old commercial banks that has retained its power.” That name recognition factor helped impart “an image of solidity and conservatism.” BESCL continued to nurture that reputation in the early 1990s, employing a conservative lending policy and maintaining a highly diversified loan portfolio. That caution earned Espírito Santo the highest international credit rating given to a Portuguese bank. These strong appraisals, in turn, enabled BESCL to successfully float $76.9 million of its shares as American Depositary Receipts (ADRs) on the New York Stock Exchange in 1993. James R. Kraus of American Banker defined ADRs as “negotiable receipts that are held in custody overseas and are traded in dollars.”

In 1993, Euromoney noted that “Espírito Santo’s biggest challenge is to adapt the style and organization of a bank which existed when Portugal was a small rural economy into one fit for a growing industrial and international environment.” Merrill Lynch market analyst Sasha Serafimovski agreed, telling Money magazine in 1995 that “Portugal is one of the fastest-growing and most profitable banking markets in Europe.” After BESCL saw a five-year average annual earnings growth of 21.6 percent from 1989 to 1994, Serafimovski predicted that Espírito’s annual earnings growth would slow somewhat, to 15 percent, in the years leading up to the turn of the 21st century, but forecast a 60 percent increase in the financial group’s share price by the end of 1995. Indeed, the challenges facing Banco Espírito Santo e Comercial de Lisboa in the mid-1990s seemed meager at worst, in comparison with the hurdles it had already met and surmounted.

Late in 1995, Kraus reported in American Banker that Espírito Santo had entered negotiations with Chemical Banking Corp. to purchase Banco Chemical (Portugal) S.A. If completed, the transaction would dramatically expand Espírito Santo into a $300 billion (asset), 75,000-employee bank.

Principal Subsidiaries

MULTIGER—Sociedade de Compra, Venda e Administraç a. de Propriedades, S.A. (89.55%); BESS A—Banco Espírito Santo S.A. (Spain); Bescleasing—Sociedade de Locaç ao Financeira Mobiliária S.A. (72.02%); ESAF—Espírito Santo Activos Financeiros SGPS, S.A. (65%); Euroges Factoring S.A. (98.5%); ESER—Sociedade Financeira de Corretagem, S.A. (57%); Crediflash—Sociedade Financeira para Aquisiçóes a Crédito, S.A. (75%); Esger—Empresas de Servicos e Con-sultoria S.A. (81.8%); ESGP—Espírito Santo Gest ao de Patrimonios S.A. (64%); Esegur; BESNAC—Banco Espírito Santo North American Capital Corp.; ESOL—Espírito Santo Overseas Ltd. (Cayman Islands); Krediges—Sociedade de Servicos S.A. (50%); Banco Essi S.A. (34.42%); Europ Assistance—Companhia Portuguesa de Seguros de Assistencia S.A. (23%); Vendal (28.81%); Pextrafil (21.77%); SPGM— Sociedade de Investimentos S.A. (21.77%); Centralcontrol SGPS (25%); Banco Inter-Unido (49.85%); ESAF Espírito Santo Fundo de Pensoes (45.01%).