Banco Espírito Santo has posted a first-half net loss of €3.58 billion ($4.8 billion) that exposes the full extent of the Portuguese lender's exposure to the financial woes engulfing its main shareholder, the Espírito Santo family group.
BES, Portugal's largest listed lender by assets, said "extraordinary events" had resulted in impairment and contingency costs totaling €4.25 billion and had cut its capital strength to below the regulatory minimum.
The record loss wipes out BES's existing capital buffer of €2.1 billion and implies that it will have to raise fresh capital. The result marks a vertiginous fall from a loss of €237.4 million in the first half of 2013.
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BES said it would do everything within its power "to recover the maximum amount of the credits now provisioned" and to ensure that the bank was reimbursed for losses caused by any "potential illegal behavior".
Amid fears of record losses, BES shares fell 10.6 per cent on Wednesday to close at an all-time low of €0.347. The bank's stock has lost almost 70 per cent of its value since a €1.04 billion capital increase in June.
BES said contingencies included a provision of €1.2 billion for its exposure to the distressed Espírito Santo group as well as the writing off of "irrecoverable interest" on loans granted by its Angolan unit.
Fears over the exposure of BES to the woes of Espírito Santo group sparked a sell-off in European markets this month.
The "exceptional occurrences" had halved BES's common equity tier one capital ratio – a vital measure of a bank's strength – to 5 per cent, below the regulatory minimum of 7 per cent, BES said.
This implies the bank will have to raise capital to shore up its solvency ratios. The Bank of Portugal has said private investors are prepared to inject fresh capital into the bank.
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Alternatively, as a last resort, the central bank has indicated that BES could draw on a remaining €6.4 billion from €12 billion in funds set aside to help banks during Portugal's three-year international bailout, which ended in May.
In a separate statement on Wednesday night, Vítor Bento, BES's new chief executive, said the bank would immediately advance with a "comprehensive capitalization plan" that would include a capital buffer as well as meeting minimum regulatory requirements.
Mr Bento, who took over on July 14 at the insistence of the central bank, said that in recent weeks existing and potential shareholders had expressed an interest in contributing fresh capital, adding that some were willing to acquire significant stakes in the bank.
He said this information had come from Deutsche Bank, recently appointed to advise BES on improving its balance sheet.
The new management team, which replaced members of the Espírito Santo family, was also preparing a "strategic restructuring plan" that would include an analysis of potential disinvestments, focusing on "non-strategic international assets," Mr Bento said.
Any potential breaches of legal rules, which the first-half results "seem to indicate", would be duly investigated, he said.
Excluding one-off exceptional items, BES would have posted a net loss of only €255.4 million, Mr Bento said, adding that "this has been a difficult time for all stakeholders".
He said: "We are now focused on taking the necessary steps to place the bank on a sustainable financial footing for the future."
The three main companies in the Espírito Santo group, which owns about 20 per cent of BES, have been placed under controlled management by the Luxembourg courts after applying for protection from their creditors.
BES has cancelled an extraordinary shareholders meeting scheduled for Thursday because of the creditor protection granted to Espírito Santo Financial Group, which directly holds the family group's stake in the bank.
BES said on Tuesday that the creditor protection process rendered all proposals made by ESFG ahead of the meeting null and void. These had included creating a non-executive strategic board.
However, the postponement of the shareholders meeting will not affect the appointment of Vítor Bento, who took over at the head of a new management team on July 14, when all members of the Espírito Santo family stepped down from the executive board.