Espírito Santo Investment p.l.c. Banco Espírito Santo de ... - BES

espect to the previous year. BESI's rating profile and sector distribution reflects its main loan activities with a
remaining focus on project finance, namely in transport infrastructure and energy sectors.
Around 25.5% of the total loan portfolio with internal credit ratings are investment grade. Non-investment grade
loans with bb+ and bb ratings accounted for around 41% of the portfolio and include mostly highly complex credit
transactions, generally guaranteed by real assets, which are not reflected in the level of ratings assigned, but which
constitute important factors in risk diversification and mitigation, namely in the calculation of expected losses. BESI's
guarantees and advances provided amounted to €411.7 million at the end of 2009. About 63.6% of these guarantees and
advances were investment grade. The main sectors were the financial sector, particularly BES and the energy sector,
which together represented 57% of the total guarantees. The industry sectors financed are widely diversified, with
particular emphasis on Transport Infrastructure, Energy, Finance, Construction and Real Estate.
Unused credit lines amounted to approximately €201.7 million at the end of 2009, relating mainly to undrawn
funding relating to project finance transactions. These undrawn amounts were mostly in the Energy, Transport,
Infrastructure, Real Estate, Utilities and Others sectors. Overall loans, non-used credit lines, guarantees and advances
were distributed by country as follows: Portugal (38%), Spain (35%), Brazil (9%) and the United States (7%). The
remaining exposure was divided between entities with their operations in Switzerland, Poland, the United Kingdom and
Canada. This reflects the Bank's internationalisation strategy.
Despite the trend for a global economic recovery, which began in mid-2009 and is expected to continue during
2010 and in spite of the Bank’s slight improvement in overdue loans, which fell 18 basis points on the previous year to
0.53% of total lending, the Bank strengthened its provisions, aware of the possibility of some deterioration in its loan
portfolio and in line with the policy of previous years. This had a positive impact on the coverage of overdue loans and
interest by provisions and the cover ratio rose to 430% in 2009 up from 206% in the previous year. The increase in
provisions had a negative impact on the provisioning cost, which rose by about 90 basis points in 2009 to 1.55%.
Interest Rate, Currency and Equity Derivatives
In a progressively more adverse economic environment, credit risk relating to the Bank's portfolio of interest
rate, exchange rate and equity derivatives (calculated in accordance with the rules set out in Bank of Portugal Ruling no.
5/2007, essentially based on the sum of the replacement cost and potential future credit exposure), remained at
approximately the same level as in 2008, totalling €911.9 million in December 2009.
In terms of risk profile, about 60% of BESI's risk profile derived from these instruments is with counterparties
with investment grade ratings. Around 51% of the total exposure is to the financial sector, namely to financial
institutions based in Continental Europe, Brazil and the United Kingdom.
Credit Derivatives Portfolio
As a result of the global economic crisis BESI substantially reduced its risk relating to its credit derivative
portfolio. Credit derivatives portfolio risk is measured based on the notional value of the underlying contracts and the
risk of the underlying reference issuer, when BESI is selling protection, and of the counterparty, when BESI is buying
protection (from financial institutions). At the end of 2009, the total risk of this portfolio was approximately €41.7
million, representing a reduction of 63% over 2008. In terms of risk profile exposure and sector distribution of this
portfolio, 40% of the ratings were equal or higher than BBB- (investment grade) and exposure was largely to European
companies in the financial or financial groups sectors.
Bonds Portfolio
The bond portfolio totalled €1.546 billion in 2009, an increase of approximately 28.4% over the previous year.
Taking into account the full consolidation of the portfolio of BES Investimento do Brazil, which is mainly composed of
Brazilian Treasury Notes and Brazilian Central Bank Notes (issued and funded in local currency), the risk profile of the
bonds portfolio in 2009 remained virtually the same as in 2008, reflecting the fact that there was no change in the rating
of the Republic of Brazil. At the end of 2009 around 85% of the bond portfolio was comprised of ratings equal or higher
than BBB- (investment grade). About 79% of the bonds portfolio was comprised of securities issued by state/central
administration entities or by financial institutions, with good quality risk and a high level of liquidity.
BESI's policy is to hedge the sovereign risk inherent in securities issued by emerging markets (notably Brazil)
through the issuance of Credit Linked Notes, the acquisition of Credit Default Swaps and also through guarantees
provided by third parties, generally with exposures in Europe and the United States.
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