European banks slash commodities risk, revenues drop
LONDON (Reuters) - European banks are shrinking commodities trading operations much faster than their U.S. rivals and reducing risk-taking to insignificant levels to relieve the burden on their capital levels.
European banks face calls to boost capital to increase their resilience in the face of sovereign debt turmoil. Second-quarter results from some major players showed they increasingly have chosen capital-intensive commodities trading as a major area to cut back.
The results showed that Barclays, Credit Suisse and UBS all cut their exposure to commodities trading risks.
Deutsche Bank has so far been the only big European bank to increase its exposure, even though it reported a fall in revenue from commodities trading.
The developments mirror reports by major U.S. banks this month, when only Morgan Stanley reported an increase in risk during the second quarter.
Rival Goldman Sachs and JP Morgan slashed risks when trading tough oil, metals and grains markets.
Oil, metals and gold prices fell sharply during the second quarter, despite starting it on a bullish note.
"Concerns regarding the global economic slowdown, a stronger U.S. dollar and the ongoing euro zone sovereign debt issues triggered pronounced selling pressure across most commodities markets," Credit Suisse said in its quarterly results.
Credit Suisse probably saw the most significant drop in the business. Its commodities and energy revenue fell to 17 million Swiss francs ($17.4 million) in the second quarter from 71 million in the last quarter and 232 million in the second quarter last year.
Commodities now represent less than 2 percent of Credit Suisse's total trading revenues versus a fifth a year ago.
The measure of its risk appetite in trading commodities - known as average daily value at risk (VaR) - fell to 3 million Swiss francs from 4 million in the first quarter and 12 million a year ago, outpacing the fall in its VaR for trading overall to 60 million francs from 71 million a year ago.
Credit Suisse is now selling property and illiquid private equity investments as well as cutting costs and jobs.
Industry newsletter Commodity Appointment reported this month that Darius Tabatabai, previously head of precious metals trading with Credit Suisse, has left for Merrill Lynch.
Rival Barclays also reported a steep plunge in average daily VaR levels in commodities to 6 million pounds ($9.4 million) in the first half of 2012 from 14 million a year ago, while its average VaR for all trading was down only a tenth.
Barclays does not break down its commodity revenue, and therefore the VaR figure is often seen as the best guide to its exposure in that area.
Like Goldman, JP Morgan and Morgan, Barclays' VaR readings are based on a 95 percent confidence level of the potential loss it could make in trading over a one-day time horizon. Credit Suisse is using a 98 percent confidence level.
In May, Barclays lost its commodities trading chief, Roger Jones, to Mercuria in one of the biggest in a series of moves by traders from banks to less-regulated trading firms.
Barclays' trading activity in commodities may pick up from July, however, after it signed a deal to supply oil to the UK Stanlow refinery, its first such major deal in Europe.
Deutsche Bank and UBS also did not disclose commodity trading revenue figures but said they declined "due to lower client activity".
Client activity refers to trading and hedging on behalf of customers. Since 2010, most investment banks have said they do not trade for their own account. New rules restrict proprietary trading, which once brought them huge profits and was blamed for the excessive risk-taking that led to the 2008 financial crisis.
Deutsche, which has expanded aggressively in commodities trading in recent years, was the only bank in Europe to show a higher appetite for risk-taking.
It said its VaR in commodities rose to 18.6 million euros at the end of the second quarter from 14.2 in the whole of 2011, putting it on par with top U.S. banks. (Editing by Jane Baird)
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