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Best Commodities House: Deutsche Bank |
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Also nominated: Barclays, JPMorgan and Morgan Stanley |
Barclays and JPMorgan most recently may have led the way in taking the fight to Goldman Sachs and Morgan Stanley in the global commodities market, but a new contender has emerged and is taking on the ruling hierarchy.
In the past year, Deutsche Bank has broken into the commodities firmament and is now showing the type of momentum that suggests it can continue to take market share from the once dominant quartet.
Faced with heightened competition between banks for deal flow, low prices and slim trading volumes, Deutsche’s commodities business still attracted a healthy number of new clients and revenues hit a record.
Although the bank does not break out earnings for commodities, analysts estimate revenues hit about $1 billion in 2011 on the back of successful trades in aluminium, precious metals and gas and power.
With Goldman Sachs and Morgan Stanley generating revenues estimated to be between $1.5 billion and $2 billion from commodities trading, Deutsche can claim to be a top-tier house by revenues.
Its market share in the lucrative over-the-counter energy and commodity derivatives markets has surged too.
According to a Greenwich Associates survey this year of over 250 of the main companies globally that hedge energy price exposure using OTC derivatives, Deutsche works with a third of them. By comparison, Deutsche has 40% market share among 70 of the top global commodities investors – up 7% on the year before and the highest percentage gain of all the top banks.
Combined, that’s an impressive achievement for an investment bank that five years ago had nothing of the full-scale capabilities it has today across both financial and physical products in the global commodities market.
Since the acquisition of Bankers Trust in 1998, Deutsche has been particularly active on the financial or derivative side of commodities, but without meaningful penetration in physical products it trailed its rivals.
The catalyst for change came in 2007 when Deutsche hired David Silbert from Merrill Lynch, where he was the European head of commodities, to run the global commodities business and ultimately build a more powerful and profitable franchise.
Today, Silbert says that “having built a diverse platform from the ground up across the entire commodities space, whether physical or financial,” Deutsche has achieved its goal of creating a “top rated global commodities house”.
Core to achieving that was bringing in the right people to help realize a clear, methodical and aggressive growth strategy.
Louise Kitchen, global head of commodities structuring and sales, says: “We started with a base of precious metals and investor products, and expanded out from there, enhancing our offering across the physical and financial markets of European natural gas and power, crude and refined products, carbon, US gas and power and base metals. More recently, we added agricultural products and bulks.”
She adds that once these building blocks were in place, Deutsche then “layered in the commodity client offering with the wider banking franchise products” such as its corporate finance franchise, credit and finance capabilities, as well as structuring and the institutional client coverage groups.
This has undoubtedly proven a compelling proposition to clients, whether corporates or hedge funds, and one of the main reasons Deutsche has made strong gains.
“By combining our financing, structuring and physical capabilities, this has enabled us to get straight to the heart of the problem a client faces,” says Richard Jefferson, head of commodities sales.
Supplementing this capability has been Deutsche’s ability to link hedge funds and corporates directly, which, in turn, has meant that it hasn’t had to load large amounts of risk onto its balance sheet, enabling it to execute some big trades.
On the physical side, Deutsche has significantly expanded this business by offering clients the type of sophisticated financial solutions it has long been known for in other markets. And it was critical for Deutsche to do so.
“It’s only by being involved in the physical side of the business that enables you to get closer to what clients need,” says Bill Gebhardt, head of European power and gas trading.
Being in tune with investor appetite is just as important, and here Deutsche’s commodity investment products business excels.
Assets under management increased to over €22 billion for non-benchmark products alone year on year, and its client base grew to over 1,000 institutions in more than 30 countries. The proliferation of new products such as the physical metal exchange-traded commodities has been a key driver of growth.
Looking ahead, Jefferson believes clearing could be one area where future growth in the commodities business could come.
“Given the new regulations, clients are going to demand a seamless provision of service between OTC, cleared swaps and futures,” he says, adding: “When you look at our competitors they tend to either compete on the physical side, or the derivative side, or the listed side, and so one of the elements in which we are trying to serve clients better in the future regulatory environment is to combine all of those capabilities. If you can get that right then clients will reward that efficiency and service.”
