NEW YORK Morgan Stanley (MS.N) said on Thursday its commodities business recovered in the three months to June from two previous dismal quarters, helped by higher client activity in power and gas and swings in precious metals prices.
But revenue from the oil liquids market, once the biggest driver for commodities at the Wall Street investment bank, remained weak, Chief Financial Officer Ruth Porat told a conference call on the firm's quarterly results.
Like other major U.S. investment banks, Morgan Stanley groups its commodities revenue under the fixed income category and does not break out profit and losses there.
Net sales and trading revenue from fixed income and commodities totaled $1.2 billion, versus $771 million in the second quarter of 2012, Morgan Stanley said in the results issued on Thursday.
Higher receipts from commodities and foreign exchange fueled the growth, it said.
In more detailed filings with the SEC earlier this year, Morgan Stanley said net revenues from commodities dropped 77 percent in the first quarter from a year ago, and 20 percent through 2012. Chief Executive James Gorman had also singled out the fourth quarter of 2012 as the worst for commodities in 18 years, without giving details.
Until the financial crisis that reached its peak in 2008, Morgan Stanley and Goldman Sachs (GS.N), another Wall Street titan, were the biggest commodities players among U.S. investment banks, trading billions of dollars of their own cash as well as clients' money on energy, metals and agricultural derivatives.
But the 2010 Dodd-Frank financial reform law contained restrictions on financial institutions trading for their own accounts, leading Morgan Stanley, Goldman and other Wall Street firms to shutter their proprietary trading desks ahead of final implementation of the so-called Volcker rule.
CHALLENGING OIL LIQUIDS MARKET
Morgan Stanley and Goldman are also being pressured by U.S. regulators to disown long-held physical commodity assets like oil transport and storage facilities. The companies became bank holding firms in 2008 to help weather the financial crisis but became subject to greater oversight. Giving up those physical assets could further hurt their bottom line, analysts said.
"The oil liquids market which over time has been the most important driver of our commodities business continues to operate at historically low levels," Porat told the conference call.
Even so, commodity revenues were "up meaningfully" in the second quarter due to more client trading in North American power and gas, and volatility in precious metals markets, she said.
U.S. natural gas futures fell more than 11 percent in the second quarter after a 20 percent gain over the earlier three months. Gold saw a 23 percent price drop for the quarter after declines of just about 5 percent in two previous quarters.
In line with the better results, Morgan Stanley raised its commodities trading risk, bucking the second quarter trend at Goldman Sachs and JPMorgan Chase (JPM.N), another commodities rival on Wall Street.
Morgan Stanley said its Value-at-Risk (VaR) in commodities averaged $24 million per day for the second quarter, versus $20 million in the first. VaR is a measure of the maximum amount of money a bank is prepared to lose in a day from trading a particular asset class.
Wall Street banks' average commodities VaR by quarter (millions of dollars per day):
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
2013 2012 2011
* JPMorgan (JPM.N) 13 15 14 13 13 21 20 15 16 * Goldman Sachs (GS.N) 19 21 20 22 20 26 26 25 39 * Morgan Stanley (MS.N) 24 20 22 22 ***27 27 28 32 29 * Bank of America (BAC.N) n/a 13 15 12.5 11.9 13.1 12.1 15.7 23.7 ** Citigroup (C.N) n/a 34 13 15 18 14 18 21 25
* Value-at-Risk based on a 95 percent confidence level
** Value-at-Risk based on a 99 percent confidence level
*** Revised from $34 million previously
Note: Bank of America and Citigroup report VaR data separately in later 10-Q filings with the Securities & Exchange Commission.
(Reporting by Barani Krishnan; Editing by Jeffrey Benkoe and Tim Dobbyn)