“If they report that kind of a loss, then they have to report some kind of a solution at the same time,” Raymond said in a telephone interview. “Unless they can find a fully private-sector solution, then the subordinated debt is in trouble.”

The lender’s stock has slumped 40 percent this month, after three companies in the Espirito Santo group requested protection from creditors following missed short-term note payments at two of the units. Portuguese Central Bank Governor Carlos Costa has sought to reassure depositors and investors that Banco Espirito Santo can withstand losses stemming from the group’s difficulties, saying yesterday that new investors will be found.
Capital Raising

Paulo Tome, a Lisbon-based spokesman for Banco Espirito Santo, declined to comment on the Expresso report. The bank is scheduled to report first-half earnings tomorrow after the close of trading in Lisbon.

Several entities have expressed an interest in taking a stake in the bank, which indicates it can raise capital, the Bank of Portugal said in an e-mailed statement yesterday. If that isn’t possible, then the government has funds left over for bank recapitalization left over from its international bailout in 2011, it said in the statement.

?Even after losing about 60 percent of its value since the beginning of June, Banco Espirito Santo is the nation’s second- largest lender by market value after Banco Comercial Portugues SA.

Eoin Treacy's view

Banco Espirito Santo’s capacity to shock investors has declined over the last couple of weeks as more detail about the company’s balance sheet difficulties have emerged. The share has unwound its short-term bounce and has returned to test the mid-July lows near 35¢. It will need to hold the current area if potential for an additional bounce is to be given the benefit of the doubt. The company’s ability to do this will likely be linked to its success in finding an outside investor capable of bridging the funding gap. 

The Euro Stoxx Banks Index is rebounding from the region of the 200-day MA following a steep decline and a clear downward dynamic would be required to question medium-term scope for additional upside. 

I compiled this spreadsheet of the Euro Stoxx Banks Index constituents including Price/Book, Free Cash Flow yield, Dividend Yield, P/E and market cap. Deutsche Bank with a Price to Book of 0.54 and yield of 2.88% drew my attention. The company has been tasked with beefing up its compliance department following criticism of its controls from the Federal Reserve but this is probably already in the price.
 
The share fell from $38 to $25 this year; a decline of 34%. It has stabilised over the last couple of weeks and capacity for a reversionary rally has increased.