Barclays joins retreat from commodities as new rules bite

London | Reuters — Barclays will quit most of its commodities trading businesses, joining a broader retreat by banks as profits tumble in the face of tougher regulation.

The British bank’s exit means three of the top five banks in commodities have significantly reduced or shuttered their natural resource trading arms since last summer, with profits hit by regulatory demands for lenders to hold more capital to shield them against any problems.

Barclays said it would exit most of its base metals, energy and agricultural trading but will continue in precious metals, some oil and gas derivatives products and index products. The smaller business will be based on electronic execution, it said.

The bank did not say how many jobs would be lost from its team of 160 commodities staff across trading, sales and research.

Barclays’ commodities arm was built up when Bob Diamond was growing his investment bank to challenge the big U.S. banks, especially Goldman Sachs and Morgan Stanley, who pioneered commodity trading on Wall Street 30 years ago.

Goldman and Morgan Stanley remain the two largest banks in commodities and several banks have given up the chase.

JPMorgan Chase and Co. is selling its vast physical commodities business to Swiss-based independent trader Mercuria for $3.5 billion, while Deutsche Bank announced late last year it was closing its oil, grains and industrial metals business (all figures US$).

Commodities trading revenue for 10 of the world’s biggest banks fell to $4.5 billion last year, down from more than $14 billion in 2008, according to estimates from analytics firm Coalition.

The Barclays business now ranges from providing hedging for wheat farmers or steel producers to allowing speculation on Brazil’s coffee crop.

The bank also runs a vault in London to store gold and other precious metals like rhodium, which Barclays will continue to operate, a person familiar with the matter said.

Barclays declined to comment on what businesses would be shut or potentially sold.

Barclays CEO Antony Jenkins plans to unveil a wider reduction in the size of his investment bank on May 8 as he attempts to cut costs and improve profitability by axing areas that have been hit hardest hit by tougher regulation. It could see thousands of jobs go.

Rocky AGM?

Jenkins faces a potentially rough ride at Barclays’ annual shareholder meeting on Thursday. The bank has been criticized at past annual meetings for some of its commodities activities and Jenkins is expected to be criticized for last year increasing bonuses for investment bankers despite a drop in profit.

A significant number of shareholders are expected to vote against the bank’s remuneration report in protest. But that vote is non-binding, and Barclays is expected to win approval for a plan to pay up to twice the level of employees’ salaries as bonuses under new European Union rules that cap pay for staff.

Barclays had already cut some of its metal, U.S. power and agricultural trading business, but in the past two years had also branched into new areas to bolster profits hampered by restrictions on trading with the bank’s own money and rising capital requirements.

The bank signed several supply and sales agreements with major oil refineries since summer 2012, including Essar Oil’s 296,000 barrel per day (bpd) Stanlow plant in Britain, Par Petroleum’s 94,000 bpd refinery in Hawaii, and Klesch’s 100,000 bpd Heide plant in northern Germany.

Mike Bagguley, head of commodities at Barclays, said in November the bank was starting to get “critical mass” as refiners became aware of their financing capabilities, including for crude deliveries and the sale of products like gasoline and diesel.

But commodities have also attracted increased regulatory scrutiny, and the U.S. Federal Energy Regulatory Commission (FERC) filed a lawsuit in a California federal court last year to recover some $435 million from Barclays for alleged power market manipulation. The bank disputes the charge.

Barclays said its retreat would have no material impact on its financial results.

In addition to Goldman and Morgan Stanley, Bank of America-Merrill Lynch also remains a big firm in the U.S. energy industry and Citi has expanded its commodity trading over the past year, sources said, while Commonwealth Bank of Australia has expanded its commodities financing.

Asian-Pacific and South American banks, including Australia’s Macquarie Bank and Sao Paulo-based BTG Pactual Banking, are also growing their commodities businesses.

— Steve Slater and David Sheppard are Reuters correspondents covering European banking and commodities respectively from London, England. Additional reporting for Reuters by Jonathan Leff and Jan Harvey.


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