1st Quarter Results

LUXEMBOURG/PORTUGAL--(BUSINESS WIRE)--

ESPÍRITO SANTO FINANCIAL GROUP S.A. ANNOUNCES ITS UNAUDITED CONSOLIDATED RESULTS FOR THE FIRST QUARTER OF 2011

Luxembourg/Portugal – 24 May 2011 - Espírito Santo Financial Group S.A. (“ESFG” or the “Company”) (NYSE Euronext Lisbon: ESF; Bloomberg: ESF PL; Reuters: ESF LS) today announces its unaudited consolidated results for the first quarter of 2011. The report is compiled under IFRS as implemented by the EU.

HIGHLIGHTS FOR THE REPORTING PERIOD¹

Despite the ongoing challenging environment, ESFG posted positive results for the first quarter of 2011. Key highlights for the reporting period are:

• Consolidated Q111 Net Income decreased 34.9% YoY to EUR 13.7 million (EUR 21.0 million);
• Consolidated Commercial Banking Income at ESFG rose by 6.9% to EUR 478.3 million (EUR 447.3 million);
• Consolidated Net Interest Income increased 10.9% YoY to EUR 281.5 million (EUR 253.7 million);
• Consolidated Net Fees and Commissions rose 1.7% YoY to EUR 196.8 million (EUR 193.5 million) as ESFG continues to support enterprises abroad;
• Consolidated Market Results² decreased by 74.2% to EUR 24.2 million (EUR 93.8 million), with positive results from both interest rate and equity instruments;
• Consolidated Insurance Earned Premiums Net of Reinsurance rose 2.3% YoY to EUR 83.7 million (EUR 81.8 million) despite competitive market pressures;
• Consolidated Claims Incurred Net of Reinsurance rose 30.8% YoY to EUR 73.9 million (EUR 56.5 million), Net claims and net change on the technical reserves fell by 9.0% to EUR 60.2 million (EUR 66.2 million);
• Consolidated Operating Expenses fell by 0.6% to EUR 575.4 million (EUR 578.8 million), however, Staff Costs and General Administrative Expenses increased by 9.8% to EUR 324.0 million (EUR 295.2 million).

¹ A quarter on quarter comparison of the key indicators is provided. Figures in parentheses following the operational and financial results for 2011 refer to the same item in 2010

² Aggregate of Net Gains/Losses from Financial Assets at Fair Value through Profit and Loss, Net Gains on Available for Sale Financial Assets, Net Gains from Foreign Exchange Differences and Net Gains/Losses from the Sale of Other Assets

CONFERENCE CALL

A conference call for investors and analysts will be held today at 3pm (GMT) / 4pm (CET) / 10am (EDT). An instant replay of the call will be available for two weeks. For details, contact Devina Artley at Taylor Rafferty on telephone number [phone].

MACRO ECONOMIC ENVIRONMENT

The EU peripheral sovereign debt crisis continued into the first quarter of 2011. Inflation concerns also increased during the first 3-months of the year on the back of a sharp rise in commodity prices. The rising price of oil (Brent crude), from USD 94 to USD 117 per barrel, was seen as a principal driver to inflation, and leading to a general rise in interest rates. In the Euro Area, the 3-month Euribor rose from 1.006% to 1.239%. The yield on 10-year public debt securities (Bunds) increased from 2.963% to 3.354%, as the market discounted an increase of the key benchmark rate by the ECB, expected in the second quarter 2011 (from 1% to 1.25%). Anticipation of further interest rate hikes by the ECB drove the EUR up against the US Dollar, from EUR/USD 1.337 to EUR/USD 1.419.

The Euro Area GDP is expected to have increased by ca. 0.8% quarter-on-quarter (or 3.2% on an annualised basis). In Brazil, the Central Bank raised the SELIC rate by 100 bps to 11.75%. The Brazilian Bovespa index fell by 1.04% in the quarter. In the United Sates, the DowJones, Nasdaq and S&P500 indices rose by 6.41%, 4.83% and 5.42% respectively despite lower than expected GDP growth, but in line with the country’s expansionary monetary policy. In Europe, the DAX, CAC40 and IBEX fell by 1.84%, 4.85% and 7.28% respectively.

In Portugal, the sovereign risk crisis deepened further as the Portuguese Parliament rejected the proposed Stability and Growth Programme, triggering the resignation of the Prime Minister and his government. Weakened investor sentiment led to the spread between the yields of the 10-year public debt securities and the German benchmark Bunds to rise to 505 bps, a jump of 142 bps. In light of ever increasing funding costs, a formal request was made for external assistance to the European Commission. Exports in Portugal, however, saw further strong growth (nominal increase of close to 22.0% YoY by February 2011). The PSI-20 index gained 2.18% in the quarter.

OVERVIEW OF OPERATIONS

ESFG’s un-audited consolidated net profit for the first quarter of 2011, attributable to equity holders of the Company, reached EUR 13.7 million. The result reflects the challenging sovereign and financial environment which weighed on the activities of the Company during the period. Total consolidated assets declined by 3.6% quarter-on-quarter, from EUR 87.2 billion at year end 2010 to EUR 84.1 billion at the end of the first quarter of 2011.

In the third quarter of 2010, Banco Espírito Santo (‘BES’) announced a broad ranging deleveraging programme. ESFG’s banking subsidiary aims to reach a transformation ratio of 120% by year end 2012. In Q111, the Bank announced it had decreased its net assets by EUR 3.2 billion through the reduction of the AFS portfolio, trading portfolio and customer loans. The deleveraging programme, which will continue through 2011, impacted on the consolidated results at ESFG in the first quarter.

ESFG posted an increase in consolidated Net Interest Income (‘NII’) and Net Fees and Commissions. NII rose during the period to EUR 281.5 million despite the increase in funding costs and the volume reduction caused by the deleveraging process. Deposits at BES grew by 15.2% year-on-year driving the loan to deposits ratio down to 163% from 188% in Q110. Fees and commissions totalled EUR 196.8 million, capital markets, however, fell to EUR 24.2 million in the first quarter of the year. Overall, recurrent income remained healthy and despite a very difficult operating environment, commercial banking income rose by 6.9% year-on-year.

Operating expenses during the period fell by 0.6% year-on-year though staff costs grew by 11.9%, reflecting ESFG’s drive towards business outside of its traditional markets. The consolidation of Execution Noble in the quarter at BES contributed to the increase in costs. Staff costs at BES grew by 9.6%; staff costs outside of Portugal increased by 24.5% whilst staff costs in Portugal rose by 4.4%. The integration of the Bank’s employees (those employed before 3 March 2009) into the General Social Security Scheme in January 2011 led to a rise in the Bank’s domestic costs. ESFG’s banking and insurance operations have both implemented cost control measures.

Retail banking at BES, supported by a network of 728 branches in Portugal and 825 branches globally, includes 46 on-site branches and benefits from the bank’s partnership with insurance agents of Companhia de Seguros Tranquilidade (‘Tranquilidade’) under the assurfinance programme. Cross-selling activities, including the drive to attract customer funds and retain client deposits, have helped mitigate the impact of non-performing loans. As a result, banking income at BES fell by only 1.8% year-on-year.

The growth in international operations continues to contribute positively to consolidated net income, particularly towards NII, which rose by 25.3% year-on-year compared to a fall in domestic NII by 8.8%. Commercial banking income at BES grew by 3.5% year-on-year, with commercial banking income outside Portugal increasing by 26.7% during the same period.

Although the overall asset quality remained resilient, the global crisis has had its effect on the levels of overdue loans both in Portugal and elsewhere. Non Performing Loans (‘NPL’) of over 90 days rose from 1.95% at year end 2010 to 2.17% by the end of the period. The associated provisions charge of 63 bp raised credit provisions to EUR 1.79 billion, a year-on-year rise of 11.3% or 3.47% of the gross customer loans (3.12% in Q110).

International operations continue to drive ESFG’s strategy of diversification, with international banking operations at BES contributing EUR 56.0 million versus a domestic contribution of EUR 40.1 million. In Angola, Banco Espírito Santo Angola (‘BESA’) continues to make substantial contributions to BES’s international growth. Both Spain and Brazil (investment banking operations) also contributed positively to consolidated results. Net income from the strategic triangle of Africa, Brazil and Spain rose to EUR 38.7 million at BES, or 69.1% of the Bank’s international business.

At Banque Espírito Santo et de la Vénétie (‘BESV’), in France, gross individual banking income grew by 11.0% year-on-year to EUR 5.1 million whilst operating costs grew by 21% year-on-year reflecting continued expansion and diversification. Net income during the quarter rose year-on-year to EUR 2.9 million from EUR 1.8 million a year earlier.

Banque Privée Espírito Santo (‘BPES’) in Switzerland, which focus primarily on private banking business continues to make positive contributions to ESFG’s consolidated results, with individual net income reaching CHF 1.4 million in the quarter from CHF 2.8 million in Q110. Assets under Management (AuM) at BPES remained unchanged at CHF 4.8 billion. ES Bankers (Dubai) (‘ESBD’) and ES Bank (Panama) (‘ESBP´) also reported robust activity; net individual income reached USD 1.0 million and USD 3.7 million respectively.

Investment banking activities at ESFG, through the investment banking subsidiaries Espírito Santo Investment Bank (‘BESI’), include advisory services in project finance, mergers and acquisitions, placements of shares and bonds, stock broking and other investment banking services. Pre-tax profit at BESI fell by 19.1% to EUR 15.7 million. Through its recent acquisition of a controlling stake in Execution Noble the investment bank expects to increase its international business further; banking business increased during the period to EUR 64.6 million, a year-on-year rise of 6.6%.

Despite the stagnant non-life market, ESFG’s insurance operations contributed positively to the overall net profit. Tranquilidade's net individual income reached EUR 10.0 million, a 136.6% year-on-year increase. Technical results increased during the period by 46.0% to EUR 16.2 million. Financial results rose 19.0% year-on-year to EUR 19.4 million and operational costs decreased 0.4% to EUR 17.1 million. Tranquilidade's market share rose from 7.5% in Q1 2010 to 7.9% in Q1 2011.

When combining ESFG’s Life and non-Life business the Group’s insurance operations ranked fourth in Portugal, with a combined market share of 6.3%. This reflects the performance of life business and the impact of restricted liquidity due to the on-going sovereign crisis in Portugal. The combined market share in the Life business of T-Vida and BES Vida reached 4.2%. ESFG's market share in the non-Life sector, through Tranquilidade, BES Seguros and Seguros LOGO ('LOGO'), grew strongly during the period reaching 10.0% in the quarter and becoming the second largest non-Life group in Portugal. Tranquilidade's market share in health, motor and workers’ compensation increased from 6.6%, 7.9% and 8.8% to 7.0%, 8.2% and 9.6%, respectively.

Year-on-year operating revenues at ESFG’s healthcare operator Espírito Santo Saúde (‘ESS’) rose by 15.0%. Individual Net income at the healthcare unit for the quarter rose strongly to EUR 2.4 million. Hospital da Luz, the largest private hospital in Portugal and key investment at ESS, saw revenue growth up by 12.0%. The healthcare operator’s positive performance is a key growth driver reported in consolidated Other Operating Income. ESS’ PPP construction at Hospital Beatriz Ângelo will be completed by year end. The hospital is set to be the largest hospital held by the medical care unit with 424 beds, 63,000m² of operating space and 1,200 new employees.

INCOME STATEMENT SUMMARY

(EUR Thousands)	Q110	Q111	YoY
+ Net Interest Income	253 739	281 515	10.9%
+ Net Fees and Commissions	193 542	196 815	1.7%
= Commercial Banking Income	447 281	478 330	6.9%
+ Capital Markets Results	93 760	24 162	(74.2%)
+ Insurance Earned Premiums Net of Reinsurance	81 836	83 746	2.3%
+ Other Results & Dividend Income	107 465	112 107	4.3%
= Operating Income	730 342	698 345	(4.4%)
- Operating Expenses	578 841	575 358	(0.6%)
= Profit before Tax (inc. Gains from Financial Investments & Share of profit of Associates)	159 786	127 485	(20.2%)
- Tax	32 958	28 661	(13.0%)
- Minority Interests	105 837	85 160	(19.5%)
= Net Income	20 991	13 664	(34.9%)

PRINCIPAL ITEM ANALYSIS

Consolidated NII rose by 10.9% year-on-year to EUR 281.5 million (EUR 253.7 million in Q110). The rise in interest rates, the increase of the cost of funding (notably deposits costs) and the adjustment of credit spreads to reflect perceived risk, coupled with the reduction in volume resulting from the deleveraging process at BES, all impacted on results. Despite this, the Net Interest Margin (‘NIM’) rose by 15 basis points. During the period the average 3-month Euribor reached 1.06%, a 43 basis point rise from a year earlier (0.66%).

ESFG noted that international NII business, outside Portugal, at BES increased from 46% to 54% of the Bank’s consolidated NII. The average rate on interest earning assets at BES increased by 91 bp to 4.63%, with the average rate on interest bearing liabilities increasing by 76bp to 3.70%. The rise in the key interest rate and the deterioration in funding conditions were the key drivers. BES also announced that its depositor base benefited from the increase in the deposit rate by 138 bp to 2.87%.

Consolidated Fees and Commissions (Net of Expenses) saw an increase of 1.7% year-on-year to EUR 196.8 million (EUR 193.5 million in Q110). The first quarter of 2011 saw a dynamic growth in fees on guarantees, driven by corporate banking and commercial paper issues. Fees on securities activities also rose strongly, benefiting from the consolidation of Execution Noble and credit card commissions also increasing. Other areas, including documentary credit, bancassurance and asset management also contributed positively, but their contribution fell when compared to a year earlier.

Consolidated Capital Markets and other Results totalled EUR 24.2 million in Q111 from EUR 93.8 million reported in Q110. Lower liquidity in the financial markets and heightened concerns over the public accounts of certain EU member states, including Portugal, led to a widening of credit spreads which led to Portugal requesting assistance from the European Financial Stability Fund (‘EFSF’) and IMF. The ECB’s key rate rose during the period from 1.0% to 1.25%. Despite this BES reported positive results from equity and interest rate trading, although costs relating to the sale of part the Bank’s loan portfolio impacted negatively on Other Results.

Core Tier 1 solvency. ESFG is approved by the Bank of Portugal to use the IRB (Internal Ratings Based) method for calculating the minimum core capital requirements to cover credit risk. The authorisation covers ESFG and its subsidiaries Banco Espírito Santo and Banco Espírito Santo de Investimento and their respective subsidiaries. ESFG’s capital ratios, reported to the Bank of Portugal, under IRB Foundation at year end 2010 are: Core Tier 1 6.9%, 8.2% and 10.6%. ESFG’s principal banking interest, BES, announced on the 28 April 2011 that it had further bolstered its Core and Tier I positions through the sale of a 4.1% stake in Bradesco. Continued improvement in the solvency position of ESFG’s banking investments will improve ESFG’s capital position with the aim of achieving the 9.0% minimum core capital position by year end 2011, a requirement set by the Bank of Portugal.

Credit Rating: On 11 April, DBRS Inc. announced that it had initiated ratings’ coverage of ESFG, assigning a Senior Long-Term Debt rating of BBB (high) and a Short-Term Instruments rating of R-2 (high). The trend on all ratings is Negative. At the same time, DBRS assigned an intrinsic assessment (IA) to the Group of BBB (high). ESFG is also rated by Moody’s at Baa1 (negative outlook) for its Senior Long-Term Debt rating and P-2 for short-term Instruments.

Consolidated Insurance Earned Premiums Net of Reinsurance increased by 2.3% to EUR 83.7 million in the first quarter of 2011 from EUR 81.8 million a year earlier. Consolidated Claims Incurred Net of Reinsurance rose, however, to EUR 73.9 million in Q111, compared to EUR 56.5 million in the first quarter of 2010, on the back of a reduction in mathematical reserves due to the increase in life products. Net claims and net change on the technical reserves fell by 9.0% year-on-year to EUR 60.2 million from EUR 66.2 million a year earlier. Overall, consolidated contribution of all insurance activities rose strongly at ESFG when compared to a year earlier.

The assurfinance programme of cross-selling banking products through its agents accounted for 19.0% of new clients at BES and represents 6.0% of total assets under management. Tranquilidade’s distribution chain is made up of more than 1,700 points of sale, of which 38 are own branches and 77 franchise shops. The combined ratio at Tranquilidade improved to 97.5%. The expense ratio improved from 25.3% to 24.3%, reflecting the ongoing cost reduction programme which included a 0.4% fall in expenses. The Group’s direct insurance business, LOGO, reported that its customer base had reached 118,825 clients and gross written premiums of EUR 5.9 million. LOGO is now the second largest direct insurer in Portugal.

Pastor Vida, the new life operation in Spain posted a EUR 1.7 million net profit which related to an improvement in technical results and to the development of its risk products.

Consolidated Net Other Operating Income & Dividend Income rose 4.3% year-on-year to EUR 112.1 million (EUR 107.5 million). ESS, a key contributor to Other Operating Income, operates 18 hospitals, out-patient clinics, residential hospitals, senior care residencies, as well as participating in the Public-Private Partnership at the Loures Hospital in Portugal. EBITDA rose from 15.2% in Q110 to 18.8% in Q111, net individual income reached EUR 2.4 million in the quarter with operating revenues up by 14.9% to EUR 71.1 million. Dividend income rose to EUR 4.4 million in the first quarter 2011.

Consolidated Staff Costs and General Administrative Expenses increased by 9.8% to EUR 324.0 million from EUR 295.2 million in Q110. The increase in staff costs resulted from ESFG’s subsidiaries continued international expansion. Portuguese staff costs at BES were affected by the integration of the Bank’s pension funds into the General Social Security Scheme which led to a EUR 5.9 million rise in social welfare contributions.

Other Expenses also fell year-on-year by 23.1% to EUR 49.6 million (EUR 64.5 million) costs include the business and running costs at ESS.

DEVELOPMENTS DURING Q111 AND SUBSEQUENT EVENTS

• On 9 May, ESFG, in conjunction with ESFIL, announced the establishment of a EUR 2 billion Euro Medium Term Note programme. On this date DBRS confirmed ESFG’s dated subordinated debt at BBB (Neg).
• On 3 May, ESFG announced the adjusted conversion price of ESF 5.05% November 2025, EUR 500 million convertible (XS0234103546) as EUR 21.24. The adjustment will be in effect as of 3 June 2011.
• A dividend per share of EUR 0.28 was approved at ESFG’s AGM held on 29 April, 2011 in Luxembourg. The figure represents a dividend yield of 2.0% relative to the share price at year end 2010.
• On 11 April, DBRS Inc. announced that it had initiated ratings coverage of ESFG assigning a Senior Long-Term Debt rating of BBB (high) and a Short-Term Instruments rating of R-2 (high). The trend on all ratings is Negative. At the same time, DBRS assigned an intrinsic assessment (IA) to the Group of BBB (high).
• On 21 January, ESFG announced that it had terminated contract with Fitch Ratings. The decision follows a similar action taken by Banco Espírito Santo S.A. announced on the 8th November 2010.

CONTACTS

Espírito Santo Financial Group	Taylor Rafferty
Filipe Worsdell	Faisal Kanth
[phone]	[phone]
[e-mail]	[e-mail]

The Espírito 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, Healthcare services and Asset management in Portugal and internationally. For additional information on Espírito Santo Financial Group, its subsidiaries, operations and results, please visit the Company’s website on www.esfg.com

– Tables to follow –

ESPÍRITO SANTO FINANCIAL GROUP SA
CONSOLIDATED BALANCE SHEET AS AT 31 MARCH 2011 AND 31 DECEMBER 2010
	(in thousands of euro)
	31-03-2011	31-03-2010	31-12-2010
Assets
Cash and deposits at central banks	1 275 315	2 131 697	976 515
Deposits with banks	1 028 777	669 303	879 561
Financial assets held for trading	3 407 892	4 085 844	3 951 786
Other financial assets at fair value through profit or loss	1 370 734	2 966 773	1 325 449
Available-for-sale financial assets	11 521 812	9 955 395	12 474 836
Loans and advances to banks	2 572 898	6 057 980	3 071 674
Loans and advances to customers	52 233 242	51 608 157	53 346 807
Held-to-maturity investments	2 372 250	2 657 899	2 453 465
Derivatives for risk management purposes	295 625	486 262	447 304
Non-current assets held for sale	604 876	440 143	574 550
Property and equipment	1 129 983	1 069 543	1 165 040
Investment properties	341 206	81 113	341 410
Intangible assets	552 319	371 438	557 837
Investments in associates	584 246	495 098	585 240
Technical reserves of reinsurance ceded	68 830	77 687	65 098
Current income tax assets	104 065	26 510	103 074
Deferred income tax assets	328 041	228 875	327 788
Other assets	4 306 574	4 083 266	4 502 837
Total assets	84 098 685	87 492 983	87 150 271
Liabilities
Deposits from central banks	8 922 341	4 222 308	7 964 837
Financial liabilities held for trading	1 909 348	1 746 103	2 121 305
Deposits from banks	7 272 835	7 801 051	6 617 077
Due to customers	30 811 463	26 629 590	31 205 688
Debt securities issued	21 246 976	33 902 622	24 904 746
Derivatives for risk management purposes	217 140	215 323	228 944
Investment contracts	336 506	438 345	324 934
Non-current liabilities held for sale	5 411	25 684	5 411
Provisions	232 955	187 308	233 614
Technical reserves of direct insurance	1 146 612	1 029 196	1 157 019
Current income tax liabilities	62 471	161 104	57 765
Deferred income tax liabilities	114 768	82 427	131 289
Subordinated debt	2 731 249	2 721 834	2 689 697
Other liabilities	1 762 786	1 412 710	2 206 082
Total liabilities	76 772 861	80 575 605	79 848 408
Equity
Share capital	778 549	778 549	778 549
Share premium	253 656	253 656	253 656
Preference shares	394 514	395 514	394 514
Other equity components	115 109	113 947	115 109
Fair value reserve	( 50 308)	72 888	( 39 766)
Other reserves and retained earnings	18 511	( 43 762)	( 82 818)
Profit for the period attributable to equity holders of the Company	13 664	20 991	122 165
Total equity attributable to equity holders of the Company	1 523 695	1 591 783	1 541 409
Non-controlling interest	5 802 129	5 325 595	5 760 454
Total equity	7 325 824	6 917 378	7 301 863
Total equity and liabilities	84 098 685	87 492 983	87 150 271

ESPÍRITO SANTO FINANCIAL GROUP SA
CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTH PERIODS ENDED 31 MARCH 2011 AND 2010
	(in thousands of euro)
	31-03-2011	31-03-2010
Interest and similar income	989 524	912 830
Interest expense and similar charges	708 009	659 091
Net interest income	281 515	253 739
Dividend income	4 395	4 115
Fee and commission income	232 244	223 417
Fee and commission expenses	( 35 429)	( 29 875)
Net(losses) / gains from financial assets and financial liabilities at fair value through profit or loss	( 16 134)	16 349
Net gains from available-for-sale financial assets	37 090	68 180
Net gains from foreign exchange differences	41 792	9 827
Net (losses) from the sale of other assets	( 38 586)	( 596)
Insurance earned premiums net of reinsurance	83 746	81 836
Other operating income	107 712	103 350
Operating profit	698 345	730 342
Staff costs	203 175	181 634
General and administrative expenses	120 869	113 608
Claims incurred net of reinsurance	73 922	56 502
Change on the technical reserves net of reinsurance	( 13 707)	9 692
Insurance commissions	6 775	7 323
Depreciation and amortisation	35 650	32 567
Provisions net of reversals	2 990	11 871
Loans impairment net of reversals and recoveries	73 618	74 101
Impairment on other financial assets net of reversals	1 158	16 272
Impairment on other assets net of reversals	21 287	10 728
Other operating expenses	49 621	64 543
Operating expenses	575 358	578 841
Gains on disposal of investments in subsidiaries and associates	-	-
Share of profit of associates	4 498	8 285
Profit before income tax	127 485	159 786
Income tax
Current tax	17 786	38 407
Deferred tax	10 875	( 5 449)
	28 661	32 958
Profit for the period	98 824	126 828
Attributable to equity holders of the Company	13 664	20 991
Attributable to non-controlling interest	85 160	105 837
	98 824	126 828