LONDON/LISBON Laws may have been broken at Portugal's Banco Espirito Santo during a catastrophic six months that saw it lose 3.6 billion euros (£2.85 billion), the bank's new management said on Wednesday, as they vowed to investigate the losses and raise cash to bolster finances.
The massive loss for the first half of the year - which prompted the bank to say it would immediately begin a process to raise more capital - came as BES's new management team sought to draw a line under fears about the bank's exposure to the troubled business empire of the Espirito Santo family.
The bank's new management, which were only appointed on July 14, instead had to give fresh details of irregularities they had discovered in the way the bank dealt with family companies in the recent past.
The revelations included the fact 120 million euros was loaned to a family company in June without passing through the bank's related party lending controls that are in place to approve such transactions.
The bank also said it had to take 856 million euros of provisions after it discovered two letters issued by the bank in favour of creditors' of a family holding company, ESI, which were not registered in the bank's accounting records at the end of June.
In total, 2.1 billion euros of provisions were taken because of the bank's exposure to the Espirito Santo Group, which lost control of the bank in June but remains its largest shareholder with a 20 percent stake.
Another 590 million euros hit was taken to cover repayment of debt issued by Espirito Santo Group companies to BES clients.
The bank's new chief executive, economist Vitor Bento, said that, to the extent that the circumstances around some of the losses "seems to indicate the existence of possible breach of legal rules, such indication will be duly investigated".
The bank will also pass on information to legal authorities if appropriate, he added.
In its results statement, the bank said it would do all it could to ensure that it was reimbursed for any losses caused as a result of any potential illegal behaviour. The bank's former chief executive, Ricardo Espirito Santo Salgado, could not immediately be reached for comment.
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The bank also vowed to swiftly raise capital and call a general meeting to approve the move "within a reasonable timeframe". "Over the course of the past few weeks, both shareholders and potential investors have shown interest in participating in a capitalisation plan, some of them willing to take relevant stakes in the Bank,” Bento said.
The bank said it would raise enough to have a cushion above regulatory minimums, but did not say how much that would be. BES last raised capital on June 10, selling 1 billion euros of shares to existing investors.
A month later, as fears mounted about its exposure to the ailing Espirito Santo empire, BES said it had enough capital to withstand any losses on its 1.2 billion euros of lending to family companies.
Bigger than expected losses on those loans meant BES' capital ratio fell to just 5 percent at the end of June, below the minimum 7 percent level required by regulators.
The bank is also preparing a strategic restructuring plan that Bento said could lead to the sale of some of its international offshoots.
(Reporting By Laura Noonan and Andrei Khalip; editing by Andrew Hay)