* Regulations, capital requirements weigh on banks
* No shortage of takers as some unwind financing deals
* Warehouse rents offer good return in lean times
By Susan Thomas and Maytaal Angel
LONDON, Feb 12 Several big banks are unwinding
the lucrative financing deals that tie up millions of tonnes of
aluminium as collateral in warehouses, but the activity is
flourishing as eager rivals enter it or expand.
For years a handful of banks have been buying up aluminium
and simultaneously selling it forward for instant profit to
futures market speculators, then taking advantage of cheap
funding to store it at low cost in warehouses.
Deutsche Bank and Standard Chartered Bank
have been the two biggest participants with millions of
tonnes of the metal under financing, metals and banking sources
said. Credit Suisse had a sizeable holding too.
Aluminium financing deals can earn an investor an assured
yield of at least 5 percent, not bad with interest rates around
historic lows and with returns on equities and debt uncertain.
But banks across the world are cutting costs and selling
off, or writing down, assets in a bid to meet tougher
regulations aimed at preventing a repeat of the 2008 crisis.
Balance sheets across the sector have come under scrutiny
after warnings from regulators that capital may need bolstering.
While Credit Suisse, which had 3 million tonnes of aluminium
in financing deals, and Deutsche Bank, with around 4 million
tonnes two years ago, are unwinding or have unwound their
positions, Standard Chartered has been expanding, bank and
industry sources said.
Credit Suisse is no longer involved in the deals,
the sources said. The bank itself declined to comment. Deutsche
Bank did not immediately respond to a request for comment.
British bank Barclays, which on Tuesday announced a
major overhaul partly to burnish its reputation, said its
business in commodities including metals would continue.
Some French banks, including Societe Generale and
Credit Agricole, pulled out of such deals in the past
two years when they scaled back their commodities presence,
sources in the sector said.
These banks' withdrawal is not going to bring relief to
industrial users of metal, frustrated that so much is tied up
this way, as there is no shortage of willing candidates to
continue the financing business.
"Instead of three or four big banks, it'll be 10 or so
smaller players," said a source at a bank that has had millions
of tonnes in financing deals. "We had no problem off-loading it,
there's still big interest in financing deals."
Standard Chartered had been one of the takers.
A spokesman for the London-listed bank said commodities
trading "is a decent part of our business and aluminium
financing is something that is part of that. It's something
we're very much committed to".
He declined to say how big the bank's position was, but
acknowledged that Standard Chartered was a "sizeable player".
Newer entrants include Royal Bank of Canada, and
possibly Chinese banks, the sources said. One or two French
banks are now returning.
MILLIONS OF TONNES LOCKED DOWN
Financing deals are believed by industry sources to have
locked down around 90 percent of the roughly 5 million tonnes of
aluminium stored in London Metal Exchange (LME)-registered
warehouses - worth more than $9 billion at current prices. There
is believed to be another 5 million tonnes held off exchange.
But there will be a limit to the size of any single bank's
holdings. A second banking source said banks had to calibrate
their financing holdings, mindful of reputational risk and
appearing too dominant in one market.
"We want to make sure we are not accused of manipulating the
market in any way, so we're quite careful about that," the
source said. "We monitor quite carefully how we stand in the
market relative to the whole industry size, we don't want to get
accused of maniupulation."
In any event, banks have had to limit physical holdings
under regulations introduced after the 2008 crisis.
"Under new regulations, you can only have a certain
percentage of physical (metal) on your books, and I would think
most of those banks are just about there," said a third source
at a major bank, who asked not to be identified.
Another restraint on the size of the deals is the amount of
working capital tied up in them. When the price of aluminium
rises, the banks' internal credit limits for a particular
investment kick in at a lower tonnage of metal.
The price of LME benchmark three-month aluminium futures
rose around 10 percent in January.
"Even if the ownership structure of the financing deals
changes, the overall business case remains sound as long as U.S.
interest rates remain low," the third source at a big bank said.
The deals rest on banks or traders buying metal from
producers, using money borrowed at a low interest rate, and
selling it forward, making use of a 'contango' market structure
in which futures prices are higher than for immediate delivery.
They then negotiate a discounted rent deal to store it in a
"There's bags of appetite for it," Standard Chartered Bank
analyst Dan Smith said. "As long as you get a decent contango
then there's lots of appetite for this."
Smith did not comment on the status of Standard Chartered's
But the best way to profit from the trade, and get the
cheapest storage deals, is to own a warehouse registered by the
LME, the world's biggest marketplace for industrial metals.
"If you can't earn rent and you're also having to pay rent
then the differential in the interest rate is not beneficial,"
the second source said.
Banks Goldman Sachs and JPMorgan and trading
houses Trafigura, Glencore and Noble have
bought LME-registered warehouse firms in the last three years.
Barclays bought a stake in one in 2011, and a source said
the bank is committed to developing the investment.