Trade finance: Citi grows global commodities as rivals exit

By:
Duncan Kerr
Published on:

Buys trading portfolios from Credit Suisse, Deutsche; integration of commodities and banking paying off.

Citi has been on a buying spree in commodities. In December the US bank bought Credit Suisse’s base and precious metals, coal, iron ore, freight, crude oil, oil products and US and European natural gas trading books – its second such deal in 12 months after buying Deutsche Bank’s metals, oils and power books in the second half of last year.

No details on the size, terms and number of positions each book contains have been disclosed. But Citi is understood to have beaten off competition from a number of other banks to secure them, strengthening its physical and financial trading operations in the commodities markets just as others are pulling back.

Stuart Staley, Citi

We haven’t been smarter than anyone else. We’ve had our share of good and bad luck along the way, but we have probably had them in the right order

Stuart Staley

Harried by regulators and short of capital, banks such as Barclays, Morgan Stanley and JPMorgan have been scaling down or exiting parts of their physical commodities businesses, which included such assets as warehouses and oil tankers. Last year, JPMorgan, for instance, sold parts of its physical commodities business in North America to commodity trader Mercuria.

Swimming

Citi is swimming against the tide by building up its commodities business now and seeking to benefit as others retreat. It’s a move that also marks something of an about-turn for Citi, which was compelled to sell its energy-trading unit, Phibro, five years ago.

The furore in 2009 over the $100-million bonus Phibro’s chief executive was to be paid so soon after Citi’s 2008 bailout put such public pressure on the bank that it became impossible for it to keep the business.

Getting rid of it in 2010 has enabled Citi to gain a headstart in re-aligning the commodities business with its conventional banking coverage. Citi hadn’t piled into the physical side as much as other banks before the financial crisis, so is not under pressure now from regulators, which have two main concerns. The first is that owning such assets potentially opens banks up to large liabilities from environmental disasters that might risk individual banks and by extension the stability of the financial system. The second is the potential for market manipulation by banks controlling parts of the supply chain in physical commodities while also being big traders in commodity derivatives.

Investors have a third concern over earnings volatility. Last month, Morgan Stanley blamed weak fourth quarter 2014 trading earnings in part on the sinking oil price.

There is also reputation risk.

"Senior management here had a number of meetings with NGOs before making the decision to quit base metals, energy and agricultural trading," a source at Barclays tells Euromoney. "And that wasn’t an easy decision to take. These had been quite profitable businesses for us."

Today Citi has about 245 staff globally in it commodities business – down from 300 in 2010. But overall, it’s a growth story.

Clean shot

For Stuart Staley, global head of commodities at Citi, the bank’s position of relative strength is a result of taking some tough decisions early to better integrate the commodities business with its banking franchise.

"The sale of Phibro gave us a clean shot at building a full-service commodities platform that was completely integrated with the global banking business," he says. "We haven’t been smarter than anyone else. We’ve had our share of good and bad luck along the way, but we have probably had them in the right order."

He adds: "We’ve completed the significant structural changes to our business. Now we have the right business model, but our work is far from done. It’s a pretty relentless drum-beat to continue to drive the efficiencies that enable us to hit the threshold returns on capital that we need to show".

That model is focused on deepening the overlap between the bank’s commodity-sector borrower and investor clients and its banking franchise, from cash management, treasury and trade finance right through to loans, capital markets, M&A and derivative risk management.

For oil and gas producers, for instance, this means Citi may provide some reserve-based loans together with a hedge, overlay some cash management products, underwrite a bond or equity issue and, in time, advise on asset consolidation or acquisitions.

Citi is far from unique here. BNP Paribas, for example, runs a similar model, and has done for years. But what’s distinct about Citi’s franchise is the bank’s strong presence in emerging markets. And as Staley says, "there is commodity risk everywhere in those markets.

"These are countries that are either digging natural resources out of the ground and selling them into international markets, or they are importing those commodities as raw materials and creating finished products out of them. Certainly the dominant trade flows in all of those economies involve commodities."

Capture

To capture more of those flows, Citi is planning on doubling its commodities trade-finance team to around 30.

Citi is one of the largest trade-finance banks in the world, but has been relatively underinvested in commodities. Since 2012 however, it has been expanding this team, first in energy, then metals and minerals, and now agricultural commodities.