As US banks downscale in commodities, emerging market competitors are stepping in, including the Russians.
Sberbank and VTB, Russia’s two biggest banks (both state-owned), want to grab market share in commodities trading and financing, in and outside Russia. It’s partly in line with their growing sophistication and internationalization as banks. But the fallout from political and regulatory pressures on US banks’ commodities arms appears to have hardened their resolve.
“Although there’s not a mass exodus, we’re seeing a reshuffling and a movement [in commodities] towards banks in resource-rich regions,” says Thierry Groell, global head of commodities at VTB Capital.
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Groell, who worked at Morgan Stanley’s commodities arm for more than 10 years, says VTB’s investment bank has expanded in commodity derivatives in such areas as precious metals, oil and coal, since its launch in 2008. “VTB’s commodities trading business has grown substantially,” he says. “We’ve increased the number of people in Moscow and London. But we’re only at the beginning of our development.” So far VTB’s commodities rollout has mostly been in the paper market. Nevertheless, Groell says physical trading – the area US banks such as JPMorgan are particularly eager to scale down – is “a development area for us”.
He says VTB Capital already offers offtake, storage and transport in precious metals, and might offer similar services in such commodities as oil and coal, where it finds there is sufficient demand from clients.
Early stage
Compared with VTB, Sberbank seems to be at an earlier stage in commodities trading: perhaps partly because of its later push in investment banking, which began after its acquisition of local investment bank Troika Dialog in 2011.
Compared with several hundreds at some of the bigger US investment banks, Sberbank’s commodities trading team consists of only a handful of people; Groell’s team is slightly bigger. But Sberbank’s team is growing. In June, Sberbank’s corporate and investment banking division announced that Francois Mantion, formerly global head of energy market risk at JPMorgan, would be its head of commodities trading.
Mantion says: “Sberbank CIB already has an established precious metals franchise. We intend to increase and grow that business and build up in other commodities, like crude and refined oil, industrial metals, coal and agriculture.”
Sberbank is also launching a dedicated commodities trade finance business in Zurich, targeting Switzerland-based traders of Russian commodities: a market rarely served by Russian lenders. Sberbank’s commodity trade finance team (all in Zurich) now numbers around 10, many having joined over the past two years from western banks.
Andrei Ivanov, Sberbank’s Moscow-based global head of trade finance and correspondent banking, says staff numbers will continue to grow, and with them the commodity trade finance portfolio.
Ivanov says this portfolio will be around $300 million this year, likely around $1 billion next year: still a tiny proportion of the hundreds of billions of dollars of commodities Russia exports annually, indicating the opportunity.
He says: “First we must take risk, not just on the producer and exporter in Russia, but also on foreign entities and traders outside Russia. This a new area for us in terms of risk assessment, and we needed to staff a team in Zurich accordingly.”
Although VTB Capital analysts said at a presentation last month they expected global prices of metals such as copper and steel to rebound, Groell admits the past year has been a relatively poor one for global banks’ commodities trading.
He says Russian banks are right to expand in commodities now nevertheless, as (unlike some global banks) their staff numbers and market shares in the area are relatively low.
“Being a Russian bank, our client base is naturally very natural resources-heavy, but previously our clients relied on western banks in areas like the commodities derivatives market. Now we’re offering the same type of service,” says Groell.
Russian banks’ entry into commodities, as US banks withdraw, is mirrored in other emerging regions. International commodities businesses have been important for banks in mineral-rich Australia and South Africa for many decades.
But emerging market names have emerged most frequently in discussions on sales of US banks’ commodities arms now. Gas-rich Qatar said last year it was considering buying Morgan Stanley’s commodities arm, for example.
Since JPMorgan announced this summer it was selling its physical commodities trading business, Brazilian investment bank BTG Pactual and China International United Petroleum & Chemicals are rumoured to have expressed an interest.
BTG Pactual, which last year signed a cooperation agreement with VTB Capital for deals between Latin America and Russia, said this summer it was “an appropriate moment” to enter commodities.
“Some global banks will be reducing capacity in commodities trading,” says Groell. “That may present opportunities to hire experienced staff, as we’re under capacity, and there is still room for us to grow.”
VTB’s international commodities business might change further because of the expansion of state control of the local oil industry under Rosneft, which has increased ties with CNPC (China National Petroleum Corporation). In October VTB Capital said CNPC had signed a deal for VTB to provide it with any oil and gas-related banking service in Russia – which might include assisting with physical oil and gas deliveries.
