LONDON Feb 23 Vintage champagne flowed at
bank parties during the oil market's annual party season in
London this week, but behind the smiles European banks are
struggling in oil and commodities.
Despite healthy profits in the sector, the region's banks
are cutting back or even pulling out of commodities financing
and proprietary trading as they strengthen their balance sheets.
All three of France's top banks, once very strong in
commodities, have tightened their belts, focusing on what they
see as core business as the euro zone debt crisis sweeps through
markets. German, Italian and even Swiss banks are scaling back
"We think some of the French and German banks have sliced
maybe a third off their books, some more," said a senior trader
at a large European commodities trading house.
There was little sign of austerity at the annual
International Petroleum Week in London.
At the Societe Generale party in Mayfair's elegant
Claridges Hotel, 500 traders, fund managers and bankers wandered
between magnums of Laurent Perrier and trays of seafood as they
chatted of growth.
In recent months, SocGen has shut its U.S. gas and power
trading desk, shed a third of its U.S. commodities staff and,
traders say, closed many linked operations elsewhere.
Many SocGen staff have left the bank in what its personnel
officers have chosen to call "painful adjustments".
"Growth?," said one Societe Generale manager, on condition
of anonymity. "If that was the impression it gave, the party was
European banks are steadily pulling out of any activity
deemed peripheral or too risky at a time when they are under
increasing pressure in credit markets.
For some banks the retreat has been in commodities trading
activities, but others have been forced to include the more
reliably lucrative commodities trade financing operations as
French investment bank Natixis said it would
reduce its commodities market activities but would keep its
commodities financing business, which its CEO deemed "extremely
profitable and successful".
Traders say BNP Paribas has pulled back but is
still lending to the "right names, like the trading houses".
The irony for oil and commodities traders in a market always
thought to be risky is that many types of commodity trade
financing are safe as well as highly lucrative, yielding quick
profits for the banks that stump up credit for traders.
If, for example, a bank provides a line of credit for an oil
tanker, it has hard and very valuable collateral to back its
loan. After a three-week voyage, the loan has earned its return.
"If the loan goes wrong, you end up with a very valuable and
saleable asset - oil," said a senior U.S. banker.
But as the euro zone crisis works its way through European
banks, they have no choice but to cut their exposure across the
board, reducing capital-heavy operations, even if they are
lucrative, and especially if they are in a sector deemed risky.
"Somewhere a manager has a lower limit for exposure to every
client, which cannot be breached. Balance sheets have to be
strengthened," said another senior banker. "We have no choice"
U.S. banks are moving into European commodity and oil trade
financing, with more activity seen by Goldman Sachs,
Morgan Stanley and JP Morgan, traders and bankers say.
Julian Mylchreest, global co-head of energy at Merrill Lynch
said banks needed to have "a decent-sized base business
to have enough liquidity and flow" to serve their clients.
Merrill Lynch was spending "more time than ever before" on
some types of commodities business. "We have lost some people,
but we have subsequently filled the positions again and expanded
our client-facing sales effort," Mylchreest said.
Citigroup is also expanding its energy trade finance
business as its competitors cut back, Stephen Trauber, global
head of energy at Citigroup, said last month: "We are
aggressively picking up clients and filling the holes."
One of the holes has been left by French bank Credit
Agricole, which has been a major lender to a commodity
business it built from its base in agriculture.
Credit Agricole said in December it would stop trading
physical commodities altogether and slash its financing of the
Credit Agricole's party was low key. In a dimly lit section
of the Dorchester Hotel's ballroom, 150 staff and guests mingled
in a venue booked before December's announcement. Name badges
remained unclaimed and headhunters mingled among the guests.
"Business is good," said one senior manager from a Swiss
placement agency. "I can't complain."