February 05, 2013

LONDON, Feb 5 Commodities revenue at top U.S. banks tumbled by a third in the fourth quarter as tougher regulation curbed activity amid lacklustre markets and sluggish demand for hedging, consultancy Tricumen said on Tuesday.

The trend is also likely to have hit European banks, such as Deutsche Bank and Barclays, which are now in the midst of reporting results, said Tricumen's Seb Walker.

Banks do not break out commodities revenue when reporting results, but the British consultancy estimated that the figure for U.S. banks in the last three months of 2012 was down 32 percent year on year, at between $800 million and $900 million.

David Silbert, who recently departed as head of commodities at Deutsche Bank, told Reuters in November that he expected 2012 global bank revenue from commodities to be halved to $7 billion.

U.S. banks have had to shrink operations to comply with tighter bank regulation since the 2008 financial crisis. This includes the Volcker rule banning banks from proprietary trading - when deals are done by banks for themselves rather than on behalf of clients.

"In terms of the way the market performed, there were fewer opportunities, which compounded the fact that you've got some of the banks looking ahead to Volcker and saying we can't do some of the business that we've done in the past," Walker told Reuters.

Many commodity markets traded in tight ranges last year as investors shunned the sector after suffering losses. The lack of volatility in markets contributed to weaker hedging activity by companies, Walker added.

"What's driven this overall has been a lack of the bigger structural trades, especially as the year progressed. A lot of the corporates are sitting there saying, 'We've got a pretty good view of the direction the market's going and it doesn't make sense for us to do these big hedges'."

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Tricumen looked at five leading U.S. banks when making its estimates: Bank of America Merrill Lynch, Citigroup , Goldman Sachs, Morgan Stanley and JPMorgan Chase. The latter three are the world's biggest commodities banks.

When Morgan Stanley reported last month, it said that its fourth-quarter commodities results were the worst since 1995. In the same week Goldman Sachs said its commodity results were "significantly lower".

"Of the big three, Morgan Stanley was at the bottom and our sense is that JPMorgan outperformed Goldman," Walker said.

Morgan Stanley CFO Ruth Porat told a conference call last month that the bank had minimal commodities revenue in the fourth quarter, partly because of the impact of superstorm Sandy on its oil and power business.

JPMorgan, along with Barclays and Deutsche Bank, emerged as a leading player in the commodities arena with acquisitions and aggressive growth over the past decade to challenge established veterans Goldman and Morgan Stanley.

Deutsche Bank last week posted its worst quarterly loss in four years after taking nearly $4 billion in charges, but it did not give details on the performance of its commodities business.

Last Wednesday Deutsche appointed two internal executives to head its global commodities business after the departure of Silbert and other commodity executives as it restructured and cut jobs, a source close to the bank said.

Walker doesn't expect commodities revenue at European banks to make any significant addition to the global figure. "Deutsche's commodities team is in some upheaval," he said, adding that Barclays had a better year.

Barclays reports results on Feb. 12

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