Exclusive: Morgan Stanley rebuilds in commodities trading
NEW YORK (Reuters) - After more than a year of scaling back in commodities, Morgan Stanley is ready to expand.
The Wall Street bank plans to hire about a dozen traders, sales staff and other professionals in the United States. It's building up commodities trading and financing businesses that can profit despite tougher regulations, people familiar with the matter told Reuters.
"The moves that we've made are in large part because we looked at these businesses through a new capital lens," said one executive involved in the business's strategy who spoke on the condition of anonymity. "That's just the reality of life on Wall Street these days."
For example, Morgan Stanley is looking at making more loans to energy producers and sell more commodity-linked products to retail investors, the sources told Reuters.
Commodities trading was big for Morgan Stanley before the financial crisis. Revenue from the business rose from $580 million in 2000 to $1.9 billion in 2007, according to estimates by Bernstein analyst Brad Hintz. Since then, commodities trading has come under pressure at big banks as funding costs have risen and regulators have clamped on their ability to make bets with their own money.
Right now, Morgan Stanley has about 310 sales, trading and other "front office" professionals in its commodities business. The dozen or so people it is hiring will only partially offset the 100 employees it will lose when and if it sells its physical oil merchanting business to the Russian oil giant Rosneft. After the deal, Morgan Stanley will still act as an intermediary between clients and physical oil markets, but will be rid of its own network of storage and transportation assets.
Morgan Stanley is selling its physical oil assets as the Federal Reserve is conducting a review of banks' involvement in commodities markets. To some regulators, physical commodities represent a big risk: an operational problem, like an oil spill on an offshore rig, could lead to huge reputational damage and crater the bank's stock, potentially destabilizing it and the broader financial system.
It is not clear how much pressure the Fed will apply to banks like Morgan Stanley and Goldman Sachs Group Inc,. But Morgan Stanley decided that these units would not earn enough anyway, relative to the amount of capital the bank would have to put toward maintaining them under new rules, Chief Financial Officer Ruth Porat said on a conference call with analysts on Thursday.
"We're not looking at revenue for revenue's sake, we're looking at what's the most vibrant...business unto itself," Porat said.
Other commodities businesses look more attractive now. Structured products, for example, which typically use derivatives to allow clients to bet on market movements or reduce their risk, are expected to be a growth area, the sources said. Renewable energy startups have also been using structured products to exchange tax incentives for financing.
Morgan Stanley also sees opportunities to use the clients and deposits it has in its massive brokerage business to boost commodities revenue. Executives plan to sell more commodity-linked derivatives to wealthy investor clients, and also plan to use deposits at Morgan Stanley's bank to fund energy deals and loans to energy companies.
Managing directors in charge of different commodities businesses recently sent strategic business plans to Simon Greenshields in New York and Colin Bryce in London, who jointly run Morgan Stanley's commodity business globally, as well as Colm Kelleher, who runs the broader institutional securities business, two people familiar with the matter said.
In those plans, the executives had to forecast revenue growth down to products and individual clients, and explain how each division planned to get there, the second source said. They also made hiring requests, most of which were approved.
Morgan Stanley has expanded its Houston office -- which previously housed investment bankers -- to accommodate the growing staff in other businesses.
After coming close to failing during the financial crisis, Morgan Stanley is now focused on cutting its risk. The bank said on Thursday that less than half of its revenue came from businesses like bond trading and stock underwriting, a far cry from the pre-crisis era, when the institutional securities unit could account for 70 percent of the bank's revenue in a quarter.
Morgan Stanley's review of its commodities business comes as rivals including Deutsche Bank AG and Barclays PLC have pulled back from the sector.
But the post-crisis changes have been starkest for Morgan Stanley and Goldman Sachs, the top two commodities players on Wall Street since at least the 1990s. The physical businesses and the proprietary trading that went along with them contributed a substantial part of their earnings when markets were more robust.
Lately, markets have not moved enough for customers to have much interest in using commodities derivatives to cut their risk-- light trading volumes have made trading businesses hard to sustain.
Instead, the focus has been on making more loans to energy companies and building stronger relationships with clients so that when volumes pick up, more of the activity will go to Morgan Stanley, the sources said.
(Reporting by Lauren Tara LaCapra; editing by Dan Wilchins and John Pickering)