Commodities revenue at the 10 largest investment banks fell 25% in the first half, putting those units on pace for the worst annual performance in more than five years, according to analytics company Coalition Ltd.
Revenue fell to about $2.7 billion in the first six months from $3.6 billion in the same period of 2012, Coalition said today in an e-mail. Last year’s total of $6 billion was down 24% from 2011 and was less than half that of 2008, when oil prices (NYMEX:CLU13) climbed to a record.
“This was mainly due to lower client activity and lack of volatility,” Coalition said. “On a relative basis, investor products and power and gas had the largest decline.”
Regulatory scrutiny and lower revenue have banks considering whether to exit parts of commodities trading. U.S. lawmakers have questioned whether banks should be allowed to own physical commodities businesses and the Federal Reserve said it’s reviewing a decision it made a decade ago that allowed commercial banks to enter the industry.
JPMorgan Chase & Co. said last month that it’s considering exiting the business of owning and trading physical commodities ranging from metals to oil. That marks a reversal of its push into the practice of owning raw materials with its 2010 purchase of parts of RBS Sempra, a joint venture between Royal Bank of Scotland Group Plc and Sempra Energy.
Morgan Stanley Chief Executive Officer James Gorman said in an interview last month that he’s open to different structures in his bank’s commodities unit. The firm held talks last year with Qatar’s sovereign-wealth fund about selling a stake in the business.
Morgan Stanley said last week that its holdings of physical commodities fell to $4.93 billion at June 30, the lowest level in more than three years. The bank has cut jobs and shut businesses including agricultural products after commodities trading posted a return on equity of less than 5% in 2012, the lowest among the company’s fixed-income trading units.
Goldman Sachs Group Inc., which has faced criticism of its aluminum warehousing unit Metro International Trade Services LLC, said it is staying in its physical commodities businesses. The New York-based firm said last week that it isn’t involved in the daily management of Metro and owns the company as an investment, which means it must sell the stake within the next seven years.
Goldman Sachs and the London Metal Exchange face a lawsuit claiming they are restraining aluminum supplies and driving up the metal’s price in violation of federal antitrust law. The suit was filed Aug. 1 in federal court in Detroit with aluminum products company Superior Extrusion seeking class-action status.
Long wait times at Metro’s aluminum warehouses are caused by a large number of investors storing metal as they anticipate prices will rise and requests to move that aluminum to non-LME warehouses, where rates are lower, Goldman Sachs said last week. The bank said Metro doesn’t own the metal it holds and only moves it on the instruction of customers.