10 Min Read
By Cezary Podkul
NEW YORK, July 19 (Reuters) - An Australian bank is quietly beating Wall Street's powerhouses in a game they have long dominated: trading in the staples of the world economy.
Sydney-based Macquarie Group earned about $720 million trading commodities in the financial year to March, for the first time exceeding onetime standard-bearer Goldman Sachs Group Inc, which reported $575 million in revenue in 2012, the firms' filings show.
While direct comparisons are difficult because banks report their earnings differently, the contrast in their trajectories is stark: Macquarie's commodity earnings have more than doubled since 2007. Goldman's have slumped almost 90 percent since hitting $4.6 billion in 2009, battered by rising regulation and tougher competition. At Morgan Stanley, earnings tumbled two-thirds in four years, to around $1 billion in 2012. Citigroup and Wells Fargo earn much less than Macquarie, filings show.
Nearly 60 percent of Macquarie's trading income now comes from gas, oil, power, metals and the like - more than double that of most rivals with much bigger balance sheets, and a level some analysts say may be risky.
A lighter U.S. regulatory burden may be helping the bank leapfrog larger rivals hobbled by increasing restrictions on their business. Macquarie executives also credit their growth to a strong balance sheet and a readiness to get their hands dirty trading vast amounts of oil and gas from the U.S. energy boom.
"We are a commodity company within a bank," said Walter Pye, who heads up Macquarie's fixed-income, currency and commodities division for the Americas.
Pye said Macquarie is willing to do "unconventional things that may be more akin to a physical commodity company than a bank," like moving large shipments of commodities across pipelines, seaways and railroads.
The Australian bank, best known for financing infrastructure deals, boasts a 220-strong energy trading division that moves 50,000 barrels per day (bpd) of oil across North America. It is opening new trading routes, such as shipping Texas crude to Canada, and sells nearly twice as much natural gas as No. 2 producer Chesapeake Energy. Its commodities arm owns $1 billion of loans and private equity investments in the U.S. oil and gas sector.
Envious rivals say Macquarie is unencumbered by the many new regulations being imposed on its bigger rivals, ranging from a ban on trading for their own profit to salary caps and investment restrictions. That's because Macquarie hasn't set up a traditional commercial bank subject to U.S. banking regulations.
As the impact of the 2008 financial crisis continues to reverberate - just last week, U.S. regulators proposed a plan to force the country's largest banks to hold twice as much equity capital as is required under global capital standards - banks like Macquarie may be gaining an unexpected advantage.
Thirty years ago, Goldman and Morgan Stanley built large physical trading desks for their commodity operations, allowing them to dominate the space for decades. But amid the financial crisis in 2008, both converted to bank holding companies.
The conversion gave them access to the Fed's discount lending window - at a cost.
They've been forced to strip out proprietary trading; trader bonuses have been cut sharply, prompting some notable staff departures; Morgan Stanley may be forced to sell its prize oil terminal and transport unit, TransMontaigne - all of which has cut deep into commodity earnings.
Macquarie doesn't have to worry about any of that: It has opted not to operate as a commercial bank in the United States, remaining outside the remit of the Federal Reserve and other U.S. banking regulators.
"You can be much deeper into the commodities business if you're not regulated as a bank or bank holding company," said Scott Cammarn, an expert on foreign banking law at Cadwalader, Wickersham & Taft in Charlotte, North Carolina, whose firm has done work on behalf of Macquarie.
That doesn't mean Macquarie is entirely exempt from new rules. In December, for example, the bank voluntarily submitted its energy trading arm to greater reporting requirements under the 2010 Dodd-Frank financial reforms.
But it does allow the bank latitude that irks rivals.
"It's the guys with access to cheap capital and fewer restrictions" like Macquarie that are becoming a competitive threat, said one senior commodities executive at a global bank.
Some analysts warn Macquarie may be getting too comfortable with its exposure to the volatile commodities sector.
At JPMorgan Chase & Co., now the biggest commodity trader on Wall Street, the segment accounted for about 50 percent of its total trading revenue in 2012, but only because more than $5.8 billion in trading losses took a big bite out of the bank's earnings. Even at that inflated level, Macquarie's nearly 60 percent share is higher.
None of the global banks tracked by consultants Coalition had a higher share than Macquarie over the past four years.
"If it's 60 percent of your (trading) revenue, it does present quite a significant risk," said George Kuznetsov, head of research and analytics at Coalition.
Senior Macquarie executives cite the bank's balance sheet, rather than any regulatory advantage, as the key to its success. As of the end of March, Macquarie had $2.9 billion more than the $9 billion Australian regulators require it to keep on its books, according to an investor presentation.
They also say that while the bank's financing is an advantage, Macquarie is not reviving Wall Street's wilder side.
"We just don't have this notion of people just having the right to punt the bank's balance sheet," Pye said. Proprietary trading, he said, is not in the firm's "DNA." Position limits are small, risk management is tight and oversight is intense even for small transactions, he said.
Former employees interviewed by Reuters did not dispute Pye.
"A lot of their business is much less risky than speculative trading. It's really just connecting producers and consumers," said one former Macquarie gas trader.
Some shareholders say the bank's U.S. growth resembles its roots in Australia, a resource-rich country where Macquarie got its start in commodities by trading bullion in 1978.
Investment manager Oliver Ansted recalls competing against Macquarie for loans in the mining sector in Australia during the 1990s. He said he would often see Macquarie bankroll "bite-size" deals of A$15 million to A$20 million to small-scale miners.
"We'd scratch our heads and ask, 'How can these guys get excited about these deals?'" said Ansted, who today manages a position in Macquarie and other stocks for First State Investments in Sydney.
"To me, it sounds like a pretty similar example to what they're doing in energy in the U.S.," he said.
In North Dakota, Macquarie lent $18 million to oil prospector American Eagle Energy Corp. last year, when regional banks offered no more than $10 million.
"They're comfortable with that risk, for whatever reason," said Steve Dille, land manager for American Eagle.
The push into U.S. energy markets has been led by Nicholas O'Kane, a 40-year-old Melbourne native who cut his teeth trading currencies for Macquarie amid the 1997 Asian financial crisis.
He launched Macquarie's energy trading desk in London six years later and took over managing energy markets globally in 2007. Two years later, Macquarie bought the natural gas trading operations of utility Constellation Energy, nearly trebling its small West Coast gas trading team.
O'Kane argues Macquarie is not too exposed to commodity risk because his business revolves around trading physical goods - not betting on paper profits.
"The physical businesses give us that access to the customer. ... They need to buy gas, they need to buy oil or they need to sell gas, oil or power," O'Kane said in an interview at his 160-strong trading floor in Houston.
The Everglades oil tanker is one example of how the business works.
On a muggy Friday in late April, the tanker makes a call at the Sunoco Logistics terminal on the Sabine-Neches waterway in Nederland, Texas. Macquarie chartered the Marshall Islands-flagged tanker to deliver 500,000 barrels of crude oil to Canada.
"It's our second loading at this terminal," says Anton Vorobev, captain of the vessel's 28-person Russian crew.
Hauling a mix of domestic crudes, the Everglades makes its way some 5,664 nautical miles to a Newfoundland refinery called Come-By-Chance. The shipment helps fulfill a supply contract Macquarie won for the 115,000 bpd refinery in 2011, shortly after the bank began U.S. physical oil trading.
Some three weeks later, another tanker - the Mt. Rainier - calls in Boston Harbor, dropping off 210,000 barrels of Come-By-Chance gasoline.
At least four other banks, including Goldman and Morgan Stanley, have similar arrangements in place with refineries. See FACTBOX
None, however, are believed to be exporting U.S. crude, as Macquarie does.
"They're doing trades that date back to the heyday of commodities at a Morgan or a Goldman Sachs," said Brad Hintz, Wall Street analyst at Sanford Bernstein & Co in New York and a former treasurer of Morgan Stanley.
"It's almost a throwback to the days of a much more creative Wall Street."