Banco Espirito Santo - Case Study

Executive Summary

Banco Espirito Santo serves as an example of how personal interests can play a major role in the failure of a corporation. This case shows how the Espirito Santo family, led by Ricardo Salgado took advantage of their favorable situation within Portugal’s political society covering all the fraudulent activities that were done by Espirito Santo International (the holding umbrella for the family’s non-financial activities) and how they utilized the good reputation of Banco Espirito Santo (who had other shareholders)  to leverage their other activities that were not  as profitable. In the end, when the European crisis struck, the financial collapse of ESI extended to the bank causing its collapse.

Furthermore, the Espirito Santo family had a high level of participation in some of the bank’s international subsidiaries and that allowed them to manipulate its information in order to cover their reckless decisions and fraudulent activities.

The purpose of this paper is to expose the wrong doing of the Espirito Santo Group in order to understand the extent of their decision and how the collapse of the bank could have been easily avoided.

Introduction

Banco Espirito Santo was founded in 1869 by the Espiritu Santo Familiy and with time grew to become Portugal’s second biggest bank with a market share of about 25.5% and the leading Private Bank at its highest. The bank was controlled by the Espirito Santo family hence the name. The family had strong ties to Portugal’s right wing politicians, therefore during the military coup of the 1970’s the bank was nationalized, some members of the family were imprisoned and the rest fled to exile.

During that time, Ricardo Salgado, the great grandson of the founder of BSE, ceased the opportunity to become the head of the family, and he did so by making the family’s wealth grow while they were living in exile. During the 1980’s, Portugal’s new government was trying to re-privatize the banks, and the Espirito Santo family was able to buy back the majority of BSE with the help of Credit Agricole, a French investment firm.

Banco Espirito Santo had a complex corporate structure, their main stock holders were Credit Agricole, Bespar, Bradesco, PT, Capital Research, BlackRock and Silchester. Bespar was a joint holding between Espirito Santo Financial Group and Credit Agricole that controlled approximately 25% of the bank; furthermore, Credit Agricole had another 10% stake in the company.

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Banco Espirito Santo expanded its operations internationally to Brasil, Spain and Angola before expanding to 24 new countries. The main problem behind Banco Espirito Santo was the complicated shareholder structure. The Spirito Santo family (Espirito Santo Group) owned approximately 26% (indirectly through Bespar) of the participations in the bank, and even though they were not the biggest shareholders (Credit Agricole was the biggest) they were the most influential. The head of the Espirito Santo family, Ricardo Salgado, soon became known as “o dono disto tudo” (owner of everything in Portuguese) since he had absolute control over the decisions made across the Espirito Santo Group including the bank for which he served as the chairman for the board of shareholders.