UBS exit concentrates commodities in fewer hands
LONDON (Reuters) - UBS (UBSN.VX) axed most of its global commodities business on Friday in a retreat from a high-risk/high-return sector that many investment banks had piled into during the credit boom.
Fallout from the credit crisis, including the collapse of Lehman Brothers and Bank of America's (BAC.N) proposed takeover of Merrill Lynch, is likely to cause a concentration of commodities trade among fewer more well established players.
"Banks are being forced to de-leverage and scale back risk, so unless they have built adequate infrastructure (in commodities) they don't feel they can afford it," said David Williams, head of European banks research at Fox-Pitt, Kelton.
Williams said UBS would not be the only one to take this view, but he added that banks with sizeable commodities businesses and a competitive advantage would stick with it.
UBS will shut its global commodities business, including in power and gas, agriculturals and base metals, as part of a wider shake-up of its investment bank, which will cut 2,000 jobs in total.
The Swiss bank will keep its precious metals business, where it has had a presence for nearly a century, as it is integral to the firm's wealth management activities, a UBS spokesman said.
The Swiss bank is the world's largest wealth manager.
UBS has so-called category two membership at the London Metal Exchange, which gives it the right to use the exchange's electronic trading system as well as trade by telephone but does not give access to open outcry on the trading floor.
The bank will also keep its exchange traded derivatives (ETD) commodities business and commodity indexing business, which are in the bank's equities division, the spokesman said.
In equities, ETD commodities are part of UBS's prime services division, aimed at hedge funds, which the bank said it remains committed to keep.
The bank will continue to be active in futures markets to serve its ETD commodities business, the spokesman said.
UBS would not give a breakdown of how many jobs will go in commodities, but the spokesman said the bulk of the businesses affected were in London and New York.
2002 ENTRY
UBS's recent push into commodities began in 2002, when the bank bought the North American power and gas business of collapsed energy company Enron.
It entered base metals in 2004 and began building up power and gas in Europe in 2005 as part of an expansion in commodities that included oil and agricultural commodities.
As a relative newcomer, UBS ranks some distance below the market leaders in commodities -- Morgan Stanley (MS.N) Goldman Sachs (GS.N) and Barclays (BARC.L).
Earlier in the year, UBS exited some continental European power and gas markets but maintained power and gas operations elsewhere in northwestern Europe, the United Kingdom and North America. It continued to trade in crude and refined products.
Other investment banks, such as Lehman Brothers, Citi (C.N), Credit Suisse (CSGN.VX), Merrill Lynch, J.P. Morgan (JPM.N) and Deutsche Bank (DBKGn.DE), have expanded their activities in commodities in the past few years.
In the credit crisis shake-out, Barclays agreed to buy Lehman Brothers's North American investment banking and capital markets businesses, which includes some commodities activities.
J.P. Morgan earlier in the year bought Bear Stearns, which had a sizeable energy business in North America.
Morgan Stanley and Goldman Sachs, which have been active in energy and commodities for two decades, could have less freedom in these businesses in the future following their conversion to commercial banks, regulated by the U.S. Federal Reserve.
Both have said they remain committed to their commodities businesses.
(Additional reporting by Anna Stablum in London; editing by Karen Foster)
