Deutsche Bank’s decision to ditch commodities portends just how commoditized the business may be. The German lender is quitting energy, agriculture, base metals and dry bulk trading. That should free up capital without hurting results. And while it ought to ease the pain from a deep swoon in commodities, profits remain elusive for almost all banks involved.
The end of a boom, as China and other emerging markets reduce consumption, has had serious consequences. In 2007, the top 10 banks took in about $15 billion of revenue, the consultant Ethan Ravage estimated at the time. Last year, according to the research firm Coalition, the top line for all players was just $7 billion.
Banks also have to set aside additional capital these days. New Basel III rules will require even more of a buffer for certain commodities assets. That makes it harder to spin straw - not to mention aluminum, coal, sugar and other goods - into gold. Morgan Stanley has one of the biggest businesses on Wall Street, yet the unit’s return on equity is below 5 percent, according to its chief executive, James Gorman.
Few have found a suitable answer. Morgan Stanley has been investigating selling all or parts of its business to nonbanks. JPMorgan has put its physical commodities business up for sale. Judging by one metric, though, costs have not come down anywhere near as much as revenue. Headcount is pretty much the same as in 2007, Coalition says, and down just 18 percent from its peak in mid-2010.
About 200 jobs are expected to go at Deutsche Bank. It is also finally quitting businesses that even its bigger rivals can’t seem to make worthwhile. Metals trading, for example, accounts for average revenue of just $75 million a quarter at JPMorgan. That requires 140,000 trades, a reminder that only the largest middlemen can compete in some markets.
Other banks struggling in certain areas of commodities, like Barclays and BNP Paribas, may want to follow suit. Selective withdrawals, though, won’t necessarily help the bottom line much.
Deutsche Bank, for example, is keeping commodity derivatives, yet the notional value of over-the-counter contracts plummeted to $2.5 trillion in June from $9 trillion in 2007, according to the Bank for International Settlements. That essentially means that while Deutsche Bank’s move is a good start, it’s far from the end of the contraction in commodities.
Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
