Peter Wise and Brian Caplen talk to chief executive Ricardo Espírito Santo Salgado about Banco Espírito Santo’s plans to expand further its well-established banking network in Portuguese-speaking countries.

Banco Espírito Santo’s (BES) overseas operations, which last year accounted for just under a quarter of the Portuguese bank’s net earnings, are based on what chief executive Ricardo Espírito Santo Salgado calls a “virtuous triangle”.

“Our international business is focused on the Iberian peninsula, Brazil and Angola, all areas where Portuguese is spoken” he says. “These are regions where our experience and know-how come to the fore. It would make no sense for us to seek growth in areas that we don’t know or where we have no special advantage to offer.”

Growing income

This focus on international markets with strong historical and cultural ties with Portugal has proved a highly successful strategy. No other bank in Portugal or Spanish peers of a comparable size, such as Banco Popular and Banco Sabadell, have achieved such a strong contribution from overseas earnings, says Mr Salgado. BES is already close to achieving the target of 25% of total income that the group set for its international operations only two years ago.

Earnings from overseas operations soared 51.9% in 2007 to €141.5m, accounting for 23% of the group’s total net income of €607.1m. The performance of BES’s international businesses outstripped its domestic operations, with net interest income growing 53.1%, commercial banking income up 32% and credit increasing 38%, compared with 9.4%, 9% and 13.5% respectively for domestic operations. Operating costs for the international business rose 13.4% and net provisions were up 16.3% compared with 5.4% and 7.8% respectively for Portuguese operations.

In Angola, a former Portuguese colony and one of the world’s fastest growing economies, Banco Espírito Santo Angola, which has 20 branches, increased customer funds by 141% to $1.7bn last year and lifted lending by 178% to $842m. “We are developing our corporate business and moving prudently into the Angolan retail sector,” says Mr Salgado. “The country has great oil and mineral riches, and the interest of Portuguese entrepreneurs in Angola is phenomenal.”

Brazil potential

Mr Salgado also sees great potential in Brazil, where BES operates an investment bank, having pulled out of an earlier venture into Brazilian retail banking. “I lived in Brazil for eight years during the 1980s and I remember inflation reaching 1000%,” he says. “The picture is very different today. The outlook for the Brazilian economy and financial markets is extremely strong.” Brazil contributed €32.2m to BES’s bottom line last year, up from €5.8m in 2006 (see Brazil story).

“The Brazilians are moving very fast and I believe we will see strong growth in business and trade between Brazil, Angola and even South Africa,” he adds. “People tend to focus on China, India and the Middle East as the fastest developing regions. But I believe the south Atlantic will also develop as a tremendous growth area.”

India and afar

BES is itself considering a move in India, says Mr Salgado, but without abandoning its focus on the Portuguese-speaking world. Portugal ruled the Indian state of Goa for 450 years until it won independence in 1961.

“It may seem a little strange that a small regional bank like ours would be attracted to India. But this also goes back to our history,” he says.

“There is a huge Indian-Portuguese community, based mainly in India, Portugal, Mozambique, south Africa and the Middle East. The Indian diaspora sends about $35bn to India every year and we believe that there is potential there for strong growth in handling remittances and local business.”

BES has already established contacts with the Indian authorities and is expected to apply for a banking licence in the near future, aiming to set up a small network of branches in the major cities and Goa.

BES, one of Portugal’s top five banks, would like to expand further in Spain, where it will soon be operating 26 branches. But Mr Salgado describes the prices that the group has been asked to pay for the goodwill of Spanish assets, about five or six times equity, as “ridiculous”.

Mr Salgado also expects BES to move into Mozambique, another former Portuguese colony, “at some point”. “European expertise is needed in Africa,” he says. “We can help African countries a great deal and also benefit from their development. Mozambique is particularly rich in water resources, which are in great demand in neighbouring South Africa. But, for the time being, our ‘virtuous triangle’ of Iberia, Brazil and Angola will remain our top priority.”

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