Final Results

LUXEMBOURG/PORTUGAL--(BUSINESS WIRE)--

ESPÍRITO SANTO FINANCIAL GROUP S.A. ANNOUNCES ITS UNAUDITED CONSOLIDATED RESULTS FOR THE FULL YEAR 2012

Luxembourg/Portugal – 18 March 2013 - 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 full year 2012. The report is compiled under IFRS as implemented by the EU.

ESFG’s key highlights for the reporting period are:

• Consolidated Net Income for the full year 2012 reached EUR 313.6 million (EUR 121.4 million¹ in 2011). Positive results from banking and insurance operations were reinforced by the consolidation of BES Vida and the positive impact of the deconsolidation of ES Saúde (ESS) on a line-by-line basis.
• Consolidated Commercial Banking Income at the Company rose by 3.0% to EUR 2.11 billion, (EUR 2.05 billion in 2011);
• Consolidated Net Interest Income increased to EUR 1.27 billion, (EUR 1.24 billion in 2011), a 1.7% rise year-on-year;
• Consolidated Net Fees and Commissions rose 4.9% YoY to EUR 849.6 million, (EUR 809.7 million in 2011). ESFG’s focus is on continued support of Portuguese enterprises abroad;
• Consolidated Market Results² and Other Operating Income rose by 66.8% to EUR 940.1 million, (EUR 563.5 million in 2011);
• Consolidated Insurance Earned Premiums Net of Reinsurance increased by 15.8% year-on-year to EUR 407.6 million, (EUR 352.1 million in 2011);
• Consolidated Claims Incurred and Changes on Technical Reserves (Net of Reinsurance) and Commissions rose by 21.7% to EUR 334.5 million (EUR 274.8 million in 2011) but includes the full consolidation of BES Vida through BES;
• Consolidated Operating Expenses rose by 11.3% to EUR 3.22 billion, (EUR 2.89 billion¹ in 2011), on the back of prudent provisioning;
• Consolidated Staff Costs and General Administrative Expenses increased by 3.0% to EUR 1.28 billion, (EUR 1.24 billion¹ in 2011);
• As of 30 December 2012 ESFG’s Core Tier 1 ratio reached 10.2%, exceeding the Bank of Portugal’s requirement of 10.0% by year-end. ESFG’s Core Tier 1 under the EBA criteria (minimum of 9.0%) rose to 9.6%.

¹ In December 2011 ESFG changed the accounting policy related to actuarial deviations determined in post-employment benefits. Accordingly, the financial information presented for the period (2011) has been restated for comparison purposes. For details on these accounting policies please refer to the Annual Report 2011 at www.esfg.com .
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) / 11am (EDT). An instant replay of the call will be available for two weeks.

For details, contact Miles Chapman at King Worldwide on [phone].

INDEX

1. Income Statement Summary…………………………………….…………………………….4

2. Economic Environment……………………………………………………….………………..5

3. Overview of Operations………………………..……………………………….………………6

4. Operating Structure……………………………………………………………….…………...11

5. Line Item Analysis

5.1 Banking…………………………………………………………….13

5.2 Insurance…………………………………………………………..15

5.3 Other Subsidiaries………………………………………………...16

5.4 Operating Costs…………………………………………………...17

6. Solvency and Financial strength……………………………………………………………..18

7. Developments in 2012 and subsequent Events……………………………………………21

8. Consolidated Financial Statements…………………………………………………………23

1. INCOME STATEMENT SUMMARY

FIG. I

(EUR Thousands)	FY11	FY12	% ∆
+ Net Interest Income	1 224 286	1 265 221	1.7%
+ Net Fees and Commissions	809 747	849 614	4.9%
= Commercial Banking Income	2 054 033	2 114 835	3.0%
+ Capital Markets Results + Other Operating Income	563 465	940 117	66.8%
+ Insurance Earned Premiums*	352 112	407 632	15.8%
+ Dividend Income	169 208	73 167	(56.8%)
= Operating Income	3 138 818	3 535 751	12.6%
- Staff Costs and General Expenses^1	1 244 052	1 281 032	3.0%
- Depreciation, Provisioning and Impairments	993 618	1 327 128	33.6%
- Claims*, Technical Reserves & Commissions	274 849	334 539	21.7%
- Other Expenses	380 161	276 990	(27.1%)
- Operating Expenses	2 892 680	3 219 124	11.3%
= Profit before Tax (Inc. Gains from Financial Investments & Share of profit of Associates)	208 804	482 706	131.2%
- Direct Taxes	90 900	152 159	67.4%
- Deferred Taxes	(142 509)	(41 157)	(71.1%)
- Minority Interests	139 061	58 071	(58.2%)
= Net Income	121 352	313 633	158.4%
* Net of Reinsurance

¹ In December 2011 ESFG changed the accounting policy related to actuarial deviations determined in post-employment benefits. Accordingly, the financial information presented for the period (2011) has been restated for comparison purposes. For details on these accounting policies please refer to the 2011 Annual Report 2011 at www.esfg.com .

2. ECONOMIC ENVIRONMENT

The first half of 2012 was marked by the deceleration of global economic activity and by the contraction of GDP in the Euro area. This resulted from restrictive fiscal policies and deleveraging in the private sector of the most mature economies; reduced demand and fears of a hard landing in China; and the uncertainty caused by the continued debt crisis in the Euro area which was most acute in this period due to political and fiscal instability in Greece and growing fears of contagion to other southern European economies.

The second half of the year however saw the stabilisation of the financial markets as fears over the fragmentation of the Euro area receded. Spreads versus the German Bund benchmark contracted as the yields of peripheral economies’ public debt securities fell. In addition to some progress made towards greater financial and fiscal integration, this improvement in sentiment mainly resulted from the ECB’s launch of the Outright Monetary Transactions (OMT) programme, which opened the possibility for unlimited purchases of European area public debt securities, as a complement to a possible formal financial assistance programme under the European Stability Mechanism (ESM).

The impact of expansionary monetary policies, for example quantitative easing by the US Federal Reserve encouraged a greater propensity for risk at a global level. In the US the S&P500 index advanced by 13.4%, while in Europe the DAX and CAC40 posted annual gains of 29.1% and 15.2%, respectively. The PSI-20 and IBEX, which saw less positive returns of +2.9% and -4.7%, respectively, registered sharp increases in the last quarter of the year of +8.7% and +5.95%, respectively. After a cut of 25bps in July, the ECB maintained the key benchmark rate unchanged for the remainder of the year, at 0.75%. The 3-month Euribor slid from 1.356% to 0.187% during the period. The EUR rose by 1.8% against the USD to 1.32.

In Portugal, GDP contracted by 3.2% in 2012 as consumption and investment declined sharply and the annual rate of unemployment rose by close to 16.0% of the labour force. Exports, though decelerating, grew by just over 4.0% in real terms. The deleveraging and growing saving levels amongst the institutional sectors led to a steep reduction in the external deficit, which nearly flattened by the end of the year.

Positive reviews of the implementation of the Adjustment Programme contributed, together with the stabilising course of action undertaken by the ECB, to the gradual stabilisation of financial conditions in the Portuguese economy, as seen in the reduction of public debt yields and credit spreads and the re-opening of wholesale debt markets to some businesses and banks.

3. OVERVIEW OF OPERATIONS

ESFG’s unaudited consolidated net profit for the full year 2012, attributable to equity holders of the Company rose to EUR 313.6 million. The strong results reflect:

• Results of ESFG’s core operations remain positive, but were constrained by the challenges of the Eurozone crisis and the impact of the Financial Adjustments’ Programme adopted by Portugal, as well as demands for stronger capital ratios from the EBA and the Bank of Portugal.
• The acquisition by BES on 11 May 2012 of the remaining 50.0% stake of BES Vida from Crédit Agricole, as reported in ESFG’s half year results, led to the recognition of previously unrecognised gains as reported in the Profit and Loss table, (see appendix), under “Gains arising on business combinations achieved in stages”. The consolidated, positive impact on results reached EUR 208.0 million.
• On 23 November 2012 ESFG announced that it had ceded its management control of Espírito Santo Saúde (ESS) to Rio Forte. For accounting purposes ESFG ceased to consolidate ESS on a line by line basis from the 30 September 2012. The de-consolidation had a positive impact on results.

Total consolidated net assets at ESFG, as at the end of 2012, rose by 4.2% to EUR 87.61 billion from EUR 84.02 billion a year earlier. Total equity attributable to equity holders of the Company rose to EUR 2.3 billion by year-end 2012 from EUR 1.27 billion in 2011.

On Tuesday 5 February 2013, Banco Espírito Santo, (BES or the Bank), ESFG’s principal banking subsidiary, reported on its positive net income for the full year 2012 at EUR 96.1 million. The Bank’s results include a negative adjustment of EUR 54.1 million resulting from the acquisition, and full consolidation, of BES Vida. The Bank continues to take steps to mitigate the negative domestic operating environment, the provisioning charge for loans and advances too customers rose from the 1.17% in 2011 to 1.62% which corresponds a 35.5%, increase or EUR 814.8 million. The balance of provisions reserve rose from EUR 2.17 billion at year-end 2011 to EUR 2.69 billion in 2012, a rise of 24.0%.

Gross loans at the Bank were reduced by 1.6% to EUR 50.4 billion by the end of 2012 from EUR 51.21 billion in 2011. The BES loans’ book focuses primarily on Exporting SME’s and the corporate segment in Portugal. The deleveraging programme and provisioning for impairments weighed on the consolidated results at ESFG in 2012.

The deleveraging programme at BES, which began in 2010 and pre-empted the Portuguese government’s request for assistance, continued into the last quarter of 2012. The aim of ESFG’s banking subsidiary is to reach an LDR of below 120.0% by the end of 2014; at the end of 2012 BES achieved an LDR of 137.0%, which fell from 141.0% in FY11.

Deposits increased by EUR 334.2 million, despite the Bank of Portugal’s restrictions on pricing policies which began in April 2012. Credit provided by the Bank fell by EUR 812.1 million during the year. However a marked improvement in liquidity at the Bank, namely due to the issuance of two unsecured bond issuances in 2012, which was followed by a further unsecured deal in the first quarter of 2013, allowed it to reduce net loans from the ECB to EUR 6.9 billion from EUR 13.7 billion in H112. The Bank repaid a further EUR 1.0 billion to the ECB LTRO facility.

Although overall asset quality remained resilient, the worsening economic situation affected the levels of overdue loans both in Portugal and internationally. Non-Performing Loans (NPL), at BES’ domestic operations, of over 90 days, rose to 3.90% by the end of the reporting period from 2.74% a year earlier. NPL’s of over 90 days rose to 3.9%, the figure remains well below the Portuguese market average.

ESFG posted an increase in Net Fees and Commissions whilst consolidated Net Interest Income (NII) remained stable. During the period, NII rose to EUR 1.27 billion, despite the increase in funding costs and the volume reduction caused by the deleveraging process. Fees and commissions totalled EUR 849.8 million. Capital Market results rose significantly to EUR 465.7 million, on the back of AFS gains at BES, following their prudent decision to invest in Portuguese sovereign debt early in the market recovery cycle seen in the latter half of 2012. Overall, recurrent income remained healthy and, despite a very difficult operating environment, commercial banking income, which excludes non-recurrent trading gains, rose 3.0% year-on-year to EUR 2.12 billion.

Consolidated operating expenses during the period grew by 11.3% year-on-year on the back of Group ESFG’s prudent provisioning policy. Staff costs rose by 3.3% to EUR 778.3 million, reflecting ESFG’s continued organic drive towards business outside of its traditional markets whilst containing Staff Costs in its established markets. Staff Costs in 2011 were adjusted downwards to reflect a decrease in pension liabilities at BES.

Staff costs at BES remain stable on a year-on-year basis; staff costs outside of Portugal, however, increased by 8.8% driven by the opening of new branches namely in Luxembourg and Venezuela, non-domestic admission of new employees rose to 141. Staff costs in Portugal declined by 1.4% which includes the full consolidation of its Life insurance business, BES Vida. The domestic workforce at the Bank was reduced by 136 employees. There has been a decrease in variable remunerations and in the burden of pension liabilities on staff in Portugal. ESFG continues to focus on streamlining its business costs whilst maintaining its drive for further international business. Overall operating costs at the Bank rose by 1.8% year-on-year to EUR 1.15 billion.

Retail banking at BES, supported by a domestic branch network of 666 branches and a net reduction of 35 branches over the past twelve months, benefits from the Bank’s partnership with ESFG’s insurance agents at Companhia de Seguros Tranquilidade (Tranquilidade) under the assurfinance programme. Cross-selling activities, including the drive to attract and or retain customer funds, have helped mitigate the impact of non-performing loans.

International operations at BES continue to contribute positively to consolidated net income, but to a lesser degree than previous quarters. International fees and commissions however rose by 55.1% to EUR 295.4 million. International banking income fell by 2.0% to EUR 723.5 million as international NII, namely from BES Africa, decreased in the period. Domestic commercial banking income rose by 8.9% to EUR 1.36 billion as domestic NII increased; fees and commissions declined by 11.2%. Domestic NII grew by 27.5% year-on-year to EUR 823.4 million from EUR 645.7 million a year earlier. Overall banking income rose sharply due to a significant performance in capital market results, which reached EUR 498.5 million by year-end versus a loss of EUR 34.0 million at year-end 2011.

International operations, through BES and through ESFG’s other banking operations, will continue to play a key role in ESFG’s strategy of diversification.

In France, individual net income at Banque Espírito Santo et de la Vénétie (BESV) grew to EUR 9.6 million, a rise of 3.2% year-on-year, from EUR 9.3 million a year earlier. However gross operating income declined by 24.0% to EUR 15.7 million. The negative impact of low interest rates combined with increasingly high refinancing costs was countered by the improved performance in commercial banking and by the increase in credit spreads, coupled with increased fee revenues. Commercial banking rose by 14.0% during the period. Individual banking income, however, declined by 9.0% year-on-year to EUR 31.7 million. Operating Costs fell by 3.0% year-on-year. Provisions rose by 15.7%. Recurrent banking income fell by 9.0% year-on-year to EUR 42.2 million.

Banque Privée Espírito Santo S.A. (BPES), which focuses on wealth management, continues to support ESFG’s consolidated full year results, with individual income rising by 8.7% to CHF 4.9 million, net of provisioning, from CHF 4.6 million a year earlier. BPES Portuguese operations were robust during the reporting period with profits doubling year-on-year. Assets under management (AuM) grew by 3.0% to CHF 4.8 billion. The increase was driven by positive net inflows of new money and market performance which compensated for the continued strength of the Swiss Franc versus the Euro (EUR/CHF).

Net Interest Income at BPES rose by 2.2% year-on-year to CHF 5.9 million from CHF 5.6 million. This positive result comes at a time of historically low interest rates, most notable in the second half of 2012. Banking Income fell to CHF 45.1 million, a decrease of 6.1% year-on-year as risk aversion by clients reduced fee related income. Operating expenses were kept under strict control at CHF 46.0 million, a reduction of 3.3% against the same period in 2011.

In October 2012, the Luxembourg authorities granted an investment advisory and asset management licence to Espírito Santo Wealth Management (Europe) S.A. (ES Wealth Management). ESFG’s new subsidiary, which will be controlled through BPES, will help broaden the Group’s pan-European wealth management business. ES Wealth Management, located in the Grand Duchy, began operations in January 2013.

Individual net income at ES Bankers (Dubai) Limited (ESBD) rose by 14.1% year-on-year to USD 7.3 million from USD 6.4 million in 2012. Net Fee Income rose to USD 10.1 million from USD 8.7 million a year earlier. (Asset Management, Custodian Fees and other commissions remain key to the increase in banking income. Banking income rose 18.4% to USD 16.4 million from USD 13.7 million in 2011. Total administrative expenses reached USD 8.4 million, up from USD 6.7 million in 2011, as the Company expands its operations. AuM rose sharply during the year to USD 1.48 billion, a rise of 38.5% year-on-year, from USD 1.07 billion. The rise reflects a 31.4% rise in the number of high net worth accounts to 627. ROE remains strong at 21.9%, rising from 21.3% in 2011.

Business activity at the fully owned subsidiary of Espírito Santo Bank (Panama) S.A. (ESBP) remains strong. Individual net income rose by 9.0% year-on-year to USD 21.3 million from USD 19.3 million a year earlier. The positive results reflect an 11.6% increase in NII to USD 18.9 million. Net Fee Income also rose to USD 1.3 million from USD -0.9 million a year earlier. Net individual banking income rose by 27.3% year-on-year to USD 20.7 million.

Investment banking activities at ESFG, primarily through investment banking subsidiary 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. Banking Income at BESI rose by 9.7% year-on-year to EUR 261.3 million with capital markets and other results rising sharply to EUR 64.9 million from EUR 26.3 million a year earlier. Pre-tax profits, reported by BES for its global investment banking activities for the period, rose strongly to EUR 40.8 million from EUR 17.0 million in 2011. Net individual income at BESI reached EUR 22.0 million for the period up from EUR 9.1 million in 2011.

The investment bank’s participation in the Troika-inspired Portuguese privatisations programme, the support of Portuguese companies in accessing international debt markets, both in the debt and equity markets, and trading gains compensated for lower growth in commercial banking operations. Operating costs were reduced by 1.4% year-on-year despite continued expansion into new markets.

Banco BEST reported an individual net income of EUR 8.5 million in 2012. The internet banking operation, principally owned by BES and ESFG, focuses on the provision of online trading and investment services. At year-end 2012, BEST reported EUR 2.0 billion of assets under custody, with trading volumes reaching EUR 268.0 million.

Income generated from the Group’s insurance operations were consolidated from both ESFG’s fully owned Tranquilidade operations and through BES’ recent, fully acquired, consolidation of its life business, BES Vida, Companhia de Seguros (BES Vida).

When combining both Life and Non-Life business, ESFG is now ranked as the second largest insurance group in Portugal with a combined market share of 18.0%. The combined market share in the Life business of T-Vida and Vida totalled 22.2% by year-end; ESFG is the second largest Life insurance group in Portugal. ESFG’s market share in the Non-Life sector, through Tranquilidade, BES Seguros and Logo, increased to 10.7% by the end of 2012 from 10.5% a year earlier and is also the second largest operator in the Portuguese Non-Life sector.

Tranquilidade acts as a holding company for ESFG’s interests in T Vida, LOGO, BES Seguros and others. Tranquilidade’s reported continued geographical growth as operations began in Mozambique and Angola in 2012.

Tranquilidade’s net individual income reached EUR 18.5 million which declined from 2011 on the back of lower non-recurrent gains and the recognition in 2011 of deferred tax assets not previously recognised. Technical results, net of reinsurance, increased by 5.9% to EUR 63.8 million in 2012 from EUR 60.3 million a year earlier. Financial results in 2012 stood at EUR 34.3 million. Operating costs fell by 0.2% year-on-year to EUR 67.3 million as individual claims fell by 2.7%. Tranquilidade’s individual market share rose to 8.4% from 8.1% in 2011. During 2012 Tranquilidade’s market share in Workers’ compensation, fire and other damages and motor increased to 10.4%, 8.3% and 8.8% from 9.9%, 8.0% and 8.6% in 2011 respectively.

The assurfinance programme of cross-selling banking products through Tranquilidade’s agents accounted for 20.6% of new clients at BES during the reporting period and represented 8.9% of the increase in total retail AuM. Tranquilidade’s distribution chain is made up of more than 1,700 points of sale, of which 38 are own branches and 183 tied agents’ stores.

BES’ life business, BES Vida, provides both traditional and unit linked insurance products as well as pension plans. BES Vida is fully consolidated by BES as of May 2012. In 2012 BES Vida’s net individual recurrent income reached EUR 122.7 million but was weighed against the accounting impact under consolidation and when recognising the negative impact of the acquisition by BES.

The private healthcare sector proved resilient in 2012 in contrast to the public healthcare sector in Portugal, which continues to suffer from ongoing budgetary constraints. The private healthcare sector, in which ESFG’s healthcare subsidiary Espírito Santo Saúde (ESS) is a market leader, saw an increase in top-line growth as demand shifts towards private healthcare services. On 23 November 2012, ESFG (42.9% consolidated stake) ceded management control of ESS to Rio Forte (44.5% stake).

4. Operating Structure 31 December 2012

ESFG provides a wide range of banking services with a broad geographical distribution:

Fig. II

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ESFG provides Life and Non-Life insurances services through Tranquilidade and through its bancassurance operations at BES:

Fig. III

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5. LINE ITEM ANALYSIS

ESFG is a financial holding company, with its shares quoted on the Luxembourg, London and NYSE Euronext Lisbon exchanges. It consolidates the financial results from its broad range of banking and insurance activities.

5.1 Banking

Consolidated Net Interest Income (NII) rose by 1.7% year-on-year to EUR 1.27 billion from EUR 1.22 billion in 2011.

Interest income from BES is the single most important contributor to ESFG’s consolidated NII; in 2012 NII at BES remained unchanged at EUR 1.18 billion. NII in Portugal rose, however, by 27.5% year-on-year; the adjustment of credit spreads to reflect perceived risk compensating for the reduction in volume resulting from the deleveraging process. NIM rose by 2bps to 1.68% from 1.70% in 2011. The average rate on interest earning assets at BES increased by 4bps, underpinned by an increase of 60bps in the average rate received on securities and other investments to 5.45% associated with the Bank’s Portuguese public debt portfolio. The average rate of interest-bearing liabilities increased by 2bps in 2011, to 3.96% from 3.62%.

Funding from the ECB by BES, net of deposits, was reduced by EUR 3.9 billion, a fall of 28.0% in the quarter, to EUR 6.9 billion. This sharp decrease was achieved by the sale of assets totalling EUR 1.8 billion to EUR 6.9 billion. The Bank noted that it has reduced its ECB funding by EUR 6.8 billion from highs of EUR 13.7 billion in June 2012.

BES also reimbursed a further EUR 1.0 billion from the ECB’s LTRO facility. In the fourth quarter BES successfully placed EUR 750 million of unsecured 3-year senior debt with a broad range of principally international institutional investors. The wholesale placement is the first of its kind by a Portuguese bank in over 2 ½ years. The Bank went on to issue a EUR 450 million convertible before year-end.

Consolidated Fees and Commissions (Net of Expenses) saw an increase of 4.9% year-on-year to EUR 849.6 million, (EUR 809.7 million in 2011). The year saw a 6.9% growth in fees on documentary credit driven by corporate banking and trade finance business, guarantees saw an 11.3% increase in results and bancassurance business which rose by 36.3% to EUR 47.6 million on the back of commissions on savings and insurance products. Fees on cards also grew during the period. Other areas, including securities and asset management also contributed positively, but their contribution fell compared to a year earlier.

Consolidated Capital Markets and Other Operating Income totalled EUR 940.1 million in 2012 from EUR 563.5 million reported in the full year 2011, a year-on-year rise of 66.8%. BES reported that it had taken steps to sell part of its Portuguese government bond portfolio, following the extraordinary recovery in bond yields in the period.

As of 31 December 2012 BES’ exposure to public debt from peripheral Eurozone countries decreased to EUR 3.88 billion or 4.9% of net assets at the Bank. BES reported gains of EUR 781.3 million from interest rate instruments. Consolidated capital market results at BES, when taking into account the negative results of equity trading, namely the Bank’s strategic holdings in Portugal Telecom and EDP, rose to EUR 569.5 million. At the BES level a loss of EUR 54.1 million was recognised in relation to the Bank’s acquisition of the controlling stake in BES Vida.

During the first nine months of 2012 Espírito Santo Saúde contributed to Other Operating Income at ESFG³.

Consolidated Dividend Income at ESFG decreased by 56.8% year-on-year to EUR 73.2 million from EUR 169.2 million a year as market conditions and requirements by banking authorities to restrict the payment of dividend.

³ On 23 November 2012 ESFG announced that it had ceded its management control of Espírito Santo Saúde (ESS) to Rio Forte. For accounting purposes ESFG ceased to consolidate ESS on a line by line basis from the 31 September 2012. During the Q4 2012 ESS was accounted through ‘Result of Associated’.

5.2 Insurance

Consolidated Insurance Earned Premiums Net of Reinsurance rose by 15.8% to EUR 407.6 million in 2012 from EUR 352.1 million a year earlier.

Claims Incurred and Changes on Technical Reserves (Net of Reinsurance) and Commissions reached EUR 334.5 million in 2012, compared to EUR 274.8 million in 2011, a rise of 21.7%. The full year results for 2012 reflect the full consolidation of BES Vida by BES.

The combined ratio at Tranquilidade decreased from 101.8% to 101.3%. The expense ratio increased marginally by 0.8% to 29.8% despite the ongoing cost reduction programme allowing for a 0.2% fall in expenses.

Tranquilidade's direct insurance business, LOGO, reported that its customer base had reached 113,309 clients and gross written premiums of EUR 21.3 million. LOGO is currently the third largest direct insurer in Portugal. The motor claims ratio at LOGO decreased by 22 p.p. since 2010.

T-Vida reported an individual net income of EUR 4.5 million, a year-on-year increase of 50.3%. Premiums and deposits of investment contracts increased by 88.9%. Risk products continue to be the main focus for ESFG’s insurance operations in Life, but the largest growth was in capitalisation products due to the new product “T-Vida Aforro 2012”. The technical margin decreased by 21.7%, (from EUR 7.5 million to EUR 5.9 million), which was mainly due to the increase in claims on risk products, group risk and on mortgages. Operating costs fell by 1.1% year-on-year to EUR 5.9 million.

Pastor Vida posted individual net profits of EUR 7.1 million⁴, which represents a 27.1% year-on-year increase. This performance was mainly related to an improvement in technical results and to the development of risk products. In the second quarter of 2012, following the announcement by Banco Popular of its intention to fully acquire Banco Pastor, and the resulting change of control at the banking level, Tranquilidade took the decision, as permitted within the agreement between the two parties, to exercise its option to withdraw from the joint Life business operation. The sale of Tranquilidade’s stake is now concluded. The sale took place in the fourth reporting quarter and was sold back to Banco Pastor, (now acquired by Banco Popular).

BES Vida, which contributed EUR 122.7 million to BES’ net income, noting the additional negative accounting impact of the Bank’s reacquiring of the remaining 50.0% stake from Crédit Agricole in May 2012, reported strong growth in its insurance production in 2012, reaching EUR 1.45 billion, a rise of 380.6% year-on-year. Claims fell sharply as financial product redemptions declined.

⁴ Following the decision by Tranquilidade to sell its participation in Pastor Vida ESFG ceased to consolidate contributions from the Spanish Life Insurance company from the end of September 2012. Any comparisons made versus ESFG’s consolidated insurance results in 2011 should be considered under these conditions.

5.3 Other Subsidiaries

AdvanceCare, ESFG’s managed care platform for healthcare insurers, that provides the link between the Company’s insurance operations and healthcare providers. AdvanceCare continues to provide positive results, but in the period, net individual income climbed by 20.7% to EUR 2.3 million from EUR 1.9 million a year earlier. In 2012 the managed care company is estimated to have handled one third of healthcare claims made through all insurance companies in Portugal. AdvanceCare is a joint venture between Tranquilidade and United Health Group where Tranquilidade maintains management control.

Tranquilidade’s assistance service provider, Europ-Assistance Portugal, reported a 63.1% increase in individual results to EUR 2.8 million in 2012.

Espírito Santo Saúde (ESS), which contributes to Other Operating Income, operates 18 hospitals, (of which it owns 17), out-patient clinics, residential hospitals, senior care residencies, as well as participating in the Public-Private Partnership at the Loures Hospital in Portugal.

ESFG holds a 32.0% economic interest in ESS, or 42.9% voting rights when consolidating participations held by ESFG’s subsidiaries. The remaining principal stake is held by Rioforte which, as of 23 November 2012, holds a 44.5% economic interest in ESS, (44.5% voting rights). As Rioforte now holds the majority stake, ESFG cedes management control. ESFG maintains its investment in ESS but will now include the health business within its consolidated accounts as an equity investment only.

5.4 Operating Costs

Consolidated Staff costs and General Administrative Expenses rose by 3.0% to EUR 1.28 billion from EUR 1.24¹ billion in 2011. Staff Costs for the same reporting period in 2011 were restated to reflect the reduction in Pension Liabilities at BES. ESFG’s subsidiaries continue to exercise strict control over variable salaries, both in Portugal and throughout the 27 countries in which ESFG operates. Staff costs rose as international operations continue to expand, namely in Luxembourg and Venezuela, during the period.

Total Consolidated Operating Expenses during the period rose by 11.3% to EUR 3.22 billion from EUR 2.89 billion in 2011. Prudential measures to further strengthen provisioning, principally at BES, saw provisioning costs, including depreciation and amortisation, provisions net of reversal and impairments on financial assets and other assets, rise from EUR 993.6 million in 2011 to EUR 1.33 billion by the end of 2012. The balance of provisions for credit increased by 24.2% to EUR 2.69 billion thus raising the credit provisions/gross customer loans ratio to 5.34% from 4.23% in 2011.

Other Expenses, by year-end 2012, fell by 26.1% to EUR 281.1 million from EUR 380.2 million in 2011. Costs include the business and running costs at ESS³, as well as other expenses consolidated from the BES banking operations.

¹ In December 2011 ESFG changed the accounting policy related to actuarial deviations determined in post-employment benefits. Accordingly, the financial information presented for the period (2011) has been restated for comparison purposes. For details on this accounting policies please refer to the 2011 Annual Report 2011 at www.esfg.com .
³ On 23 November 2012 ESFG announced that it had ceded its management control of Espírito Santo Saúde (ESS) to Rio Forte. For accounting purposes ESFG ceased to consolidate ESS on a line by line basis from the 31 September 2012. During the Q4 2012 ESS was accounted through ‘Result of Associated’.

6.0 Solvency and Capital Increase:

The ESFG Group, (including its subsidiaries BES and BESI), is authorised by the Bank of Portugal to use the Internal Ratings Based (IRB) approach for credit risk and the Standardised Approach (TSA) for operational risk. ESFG provides the Bank of Portugal with relevant information on the Group’s consolidated Risk Weighted Assets, regulatory capital and solvency ratios. As of the end of September 2012, ESFG had further improved its solvency position to a Core Tier 1 of 10.2%, (see Fig. IV), by the continued reduction of risk weighted assets and therefore exceeds the year-end requirement set by the Bank of Portugal.

On the 3 October 2012, the European Banking Authority (EBA) and the Bank of Portugal announced the conclusion of the capital assessment exercise and ESFG’s fulfilment of the EBA December 2011 recommendation, which required a 9.0% Core Tier 1 level by June 2012. As at 31 December 2012, ESFG’s Core Tier 1 capital ratio, under the EBA guidelines, which includes the sovereign buffer, reached 9.6%.

ESFG’s consolidated core capital position was significantly improved by a EUR 500 million capital increase and a rights issue of EUR 1.01 billion at its fully consolidated banking subsidiary BES. In its full year report, published on the 5 February 2013, BES confirmed its CET1 had improved to 10.5% under the Bank of Portugal methodology, from 9.2% a year earlier and 9.9% under the EBA criteria.

Whilst it improved the total equity of the Company, the revaluation to market of the 50.0% of BES Vida previously held did not increase the solvency position of ESFG. Alternatively, the purchase of the additional 50.0% generated goodwill, but consequently reduced Core Tier I by EUR 158 million.

Fig. IV

Solvency (Basel II IRB Foundation)	FY11	H112	FY12	BoP Dec 2012
Core Tier I	8.3%	9.9%	10.2%	10.0%
Tier I	8.6%	9.8%	10.2%
Total	9.4%	10.5%	11.5%
RWA (EUR million)	66,967	66,743	65,044

ESFG Group results of the On-Site Inspections Programme (OIP)

The OIP, which was concluded on the 29 November 2012, involved the evaluation of exposure to the Portuguese and Spanish construction and real estate sectors as of the 30 June 2012. The OIP involved 8 of the largest banking groups in Portugal, including ESFG, and had involved the evaluation of the adequacy for impairments on such exposures. It was concluded that there was a need to further strengthen provisions for impairments in the sum of EUR 205.5 million or 1.9% of total exposure. By 30 September ESFG Group had succeeded in reducing the additional provisioning requirement to EUR 98.0 million. As of the 31 December 2012 ESFG Group had successfully provisioned for all the OIP requirements and did not affect ESFG’s ability to exceed the minimum regulatory requirement, set by the Bank of Portugal, of 10.0% by year-end 2012.

External Debt

As part of ESFG’s ongoing efforts to improve its capital position, a further EUR 16.5 million of ESFG’s debt was repurchased and extinguished, reducing overall, standalone, external debt to EUR 720.7 million. ESFG currently supports an EMTN and ECP programme. Through these programmes ESFG supports the provision of liquidity to its fully owned subsidiary Espírito Santo Financière (ESFIL).

Fig. V

[Object omitted]

Credit Rating

ESFG is rated by two international rating agencies; DBRS and Moody’s:

DBRS

On the 5 December 2012, DBRS informed that it had maintained its rating of ESFG at BBB (low); ESFG’s short term credit rating also remained stable at R-2 (middle). ESFG’s DBRS rating, both in the long and short term, remains investment grade.

Moody’s

On the 29 March 2012, Moody’s announced the downgrade of ESFG’s long-term debt rating to B2 from B1. The downgrade followed Moody’s rating action on all of Portugal’s Banks, including that of BES, as well as Portugal’s sovereign rating. On 25 February 2013 Moody’s confirmed ESFG’s long term debt rating to B2 (Neg).

6. Developments during 2012 and subsequent events

• On 1 February 2012, ESFG announced that on 31 January 2012, DBRS had, in the wake of its downgrade on Portugal, downgraded ESFG to BBB (low); ESFG’s short term credit rating was moved to R-2 (middle).
• On 1 March 2012, NYSE Euronext Lisbon announced that ESFG would enter the Portuguese PSI20 index on 19 March 2012. On 22 February 2013 the NYSE Euronext Lisbon informed that on 18 March 2013 ESFG would exit the PSI20.
• On 1 March 2012, the Bank of Portugal announced the completion of the third stage of the Special Inspections Programme (SIP). ESFG’s evaluation was confirmed as ‘clearly adequate’; the highest classification in the scale.
• On 23 March 2012, DBRS informed that it would maintain its rating of ESFG at BBB (low); ESFG’s short term credit rating also remained stable at R-2 (middle).
• On 29 March 2012, Moody’s announced the downgrade of ESFG’s long term debt rating to B2 from B1. The downgrade followed Moody’s rating action on all Portuguese Banks, including that of BES.
• On 12 April 2012, ESFG announced its intention to raise up to EUR 400 million of new equity through a capital raise and issuance of new shares.
• On 26 April 2012, ESFG announced that it had raised EUR 500 million through the issuance of 102,040,816 new shares. The issuance amount was increased from EUR 400 million on the back of an increase in demand to EUR 500 million. The price of the new shares was set at EUR 4.90 per share.
• On 16 August 2012, ESFG announced its first half 2012 results.
• On 3 October 2012, EBA and the Bank of Portugal announced that ESFG had fulfilled the EBA December 2011 recommendation by exceeding the 9.0% Core Tier 1 ratio which included the sovereign buffer.
• On 23 November 2012, ESFG, (42.9% consolidated stake), ceded management control of ESS to Rio Forte (44.5% stake).
• On 3 December 2012 ESFG announced the results of the on-site inspections programme on exposures to the construction and real estate sectors.
• On 5 December 2012, DBRS confirmed ESFG’s long and short term ratings as BBBL and R-2 (Middle) respectively.
• On 25 February 2013 Moody’s confirmed ESFG’s long term debt rating to B2 (Neg).

CONTACTS

Espírito Santo Financial Group	King Worldwide
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, Asset and Wealth Management in over 27 countries globally. 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 DECEMBER 2012 AND 2011
	12/31/2012	12/31/2011
	(in thousands of euro)
Assets
Cash and deposits at central banks	1 444 831	1 130 515
Deposits with banks	1 126 853	998 345
Financial assets held for trading	3 981 845	3 466 900
Other financial assets at fair value through profit or loss	2 635 941	1 714 092
Available-for-sale financial assets	11 041 235	12 024 435
Loans and advances to banks	4 548 247	2 020 113
Loans and advances to customers	50 692 878	51 881 875
Held-to-maturity investments	1 119 047	1 751 193
Derivatives for risk management purposes	516 520	510 090
Non-current assets held for sale	3 280 185	1 646 683
Property and equipment	982 617	1 175 546
Investment properties	797 323	318 038
Intangible assets	703 210	549 196
Investments in associates	640 614	578 327
Technical reserves of reinsurance ceded	70 773	65 520
Current income tax assets	28 811	34 060
Deferred income tax assets	769 672	769 672
Other assets	3 225 936	3 384 904
Total assets	87 606 538	84 019 504
Liabilities
Deposits from central banks	10 941 325	10 013 719
Financial liabilities held for trading	2 124 225	2 176 258
Deposits from banks	5 065 980	6 216 006
Due to customers	35 625 474	34 951 984
Debt securities issued	15 952 870	19 509 623
Derivatives for risk management purposes	125 199	238 633
Investment contracts	3 844 020	148 764
Non-current liabilities held for sale	175 945	140 950
Provisions	255 601	212 796
Technical reserves of direct insurance	2 488 328	1 089 915
Current income tax liabilities	255 678	80 761
Deferred income tax liabilities	163 455	120 891
Subordinated debt	1 176 482	1 322 579
Other liabilities	1 257 451	1 556 802
Total liabilities	79 452 033	77 779 681
Equity
Share capital	207 075	105 035
Share premium	885 231	492 912
Treasury shares	( 3 487)	-
Preference shares	55 978	72 428
Other equity components	58 100	58 574
Fair value reserve	25 771	( 165 624)
Capital reserves non distributable	700 970	700 970
Other reserves and retained earnings	( 11 057)	( 118 847)
Profit for the year attributable to equity holders of the Company	313 633	121 352
Total equity attributable to equity holders of the Company	2 232 214	1 266 800
Non-controlling interest	5 922 291	4 973 023
Total equity	8 154 505	6 239 823
Total equity and liabilities	87 606 538	84 019 504

ESPÍRITO SANTO FINANCIAL GROUP SA
CONSOLIDATED INCOME STATEMENT
FOR THE YEARS ENDED 31 DECEMBER 2012 AND 2011
	12/31/2012	12/31/2011
	(in thousands of euro)
Interest and similar income	4 097 681	4 247 075
Interest expense and similar charges	2 832 460	3 002 789
Net interest income	1 265 221	1 244 286
Dividend income	73 167	169 208
Fee and commission income	1 035 146	943 904
Fee and commission expenses	( 185 532)	( 134 157)
Net gains / (losses) from financial assets and financial liabilities at fair value through profit or loss	( 54 762)	( 193 322)
Net gains from available-for-sale financial assets	605 568	( 64 476)
Net gains from foreign exchange differences	( 18 369)	( 27 714)
Net gains / (losses) from the sale of other assets	( 42 573)	( 91 896)
Insurance earned premiums net of reinsurance	407 632	352 112
Other operating income	450 253	940 873
Operating income	3 535 751	3 138 818
Staff costs	777 707	753 410
General and administrative expenses	502 760	490 642
Claims incurred net of reinsurance	631 943	289 273
Change on the technical reserves net of reinsurance	( 336 660)	( 53 531)
Insurance commissions	39 256	39 107
Depreciation and amortisation	145 779	151 540
Provisions net of reversals	57 251	10 668
Loans impairment net of reversals and recoveries	794 291	578 383
Impairment on other financial assets net of reversals	106 737	85 423
Impairment on other assets net of reversals	223 070	167 604
Other operating expenses	276 990	380 161
Operating expenses	3 219 124	2 892 680
Gains on disposal of investments in subsidiaries and associates	13 718	1 305
Gains arising on business combinations achieved in stages	147 605
Share of profit of associates	4 756	( 38 639)
Profit before income tax	482 706	208 804
Income tax
Current tax	152 159	90 900
Deferred tax	( 41 157)	( 142 509)
	111 002	( 51 609)
Profit for the year	371 704	260 413
Attributable to equity holders of the company	313 633	121 352
Attributable to non-controlling interest	58 071	139 061
	371 704	260 413

Category Code: FR

Sequence Number: 367209

Time of Receipt (offset from UTC): 20130315T205712+0000