The global credit crisis could reshuffle the rankings of banks in energy and commodity markets, with J.P. Morgan and Barclays tipped to take market share from rivals.
Some players have already folded their hands. Lehman Brothers filed for bankruptcy and Swiss bank UBS is closing its commodities business. Others banks may pull out or scale back as they are forced to reduce risk and rebuild capital.
“The removal of actual or potential competitors and increased opportunity to hire people more cheaply creates a market share opportunity,” said Ian Gordon, analyst at Exane BNP Paribas. “What we’ve seen at Barclays is a very significant growth position in energy and commodities,” he said. “They are well-placed to take market share due to others disappearing or having less capital to commit to that area.”
Barclays, which has been building its business for a decade, has bought the North American investment banking and capital markets business of Lehman Brothers, which included commodities. The UK bank has benefited as a well-established player. “We are firmly in the top tier of this market,” said Benoit de Vitry, Barclays head of commodities, emerging markets and head of global markets - trading, Europe. “Our funding costs are cheaper than for some of our competitors.” J.P. Morgan Chase & Co is pressing ahead with growth plans. “We’ve benefited from a flight to quality and are seeing market share gains,” Blythe Masters, head of the firm’s global commodities business told Reuters.
A lot of banks jumped on the commodities bandwagon during a 6-year price boom, which led to a surge in oil to $147 a barrel this year and record prices for some base metals and gold. Banks sought to capitalize on proprietary trading opportunities, increased demand from corporate clients to hedge volatile prices and from investors attracted to commodities for portfolio diversification.
But the credit crisis has changed all this. Bank capital is scarce, corporates are battling an economic downturn and investors want safety more than yield. Banks are having to deleverage, which means reducing the amount of money committed to high risk ventures. “Every bank is backing off from committing capital right now,” said Douglas Hepworth, director of Research at Gresham Investment Management. “The goal now is to operate with less bank capital at risk,” he said. “The aim is to do profitable proprietary and client trading that does not require large outlays of capital.” The trading divisions of the major international oil companies such as Shell also see an opportunity. “Oil companies’ trading businesses will benefit a little bit,” said one banking industry executive.
Morgan Stanley and Goldman Sachs, the market leaders, have said they will stick with commodities and energy businesses which they have dominated for two decades. But they will be more constrained in terms of capital and risk appetite. Goldman and Morgan will face a different regulatory regime after their conversion in September to bank holding companies following the credit crisis.
Their new regulator - the US Federal Reserve - has previously allowed other bank holding companies such as J.P. Morgan to engage in a wide range of commodities activities. And they will have a grace period of about 2-5 years that will exempt them from certain restrictions in this area. Morgan Stanley is cutting jobs in a shake-up of its businesses because of the credit crisis, but it plans to keep or expand certain businesses, including commodities.
Goldman Sachs is to cut around 10% of its staff because of the financial market downturn. Some commodities jobs have gone, according to sources familiar with the situation. But the promotion of two key executives from Goldman’s commodities and energy business is seen as a sign of commitment to this area, one fund manager said. Jeffrey Currie, global head of commodities research at Goldman and Heather Shemilt, head of commodity investor marketing, have been made partner managing directors. Goldman Sachs declined to comment. (Reuters)