Universal and commercial banks with established derivatives franchises were able to significantly expand their commodities businesses last year by using credit relationships as points of entry to companies that were consolidating their increasingly important hedging operations in their treasury departments, according to Greenwich Associates.
While capital-starved financial institutions slashed costs and reduced headcount across their major business lines last year, most firms walled off their commodities operations from these reductions. The simple reason: over-the-counter (OTC) energy derivatives trading was generating significant revenues and represented a rare opportunity for continued profits and growth.
The results of Greenwich Associates’ 2009 Global Commodities Research Study reveal that the energy derivatives business was hardly immune from the effects of the worldwide financial crisis, however. With the deepening of the global credit crunch in the fourth quarter of 2008 and its continuation into the early months of 2009, companies’ choice of commodities dealers was influenced more often than before by their lending relationships. At the same time, companies concerned about counterparty risk among struggling financial institutions were more than willing to form new trading relationships in order to reduce the amount of their business concentrated with any one dealer.
Universal and commercial banks were the main beneficiaries of these trends. The most prominent examples were JP Morgan and BNP Paribas, the two banks that added the most new corporate clients in OTC energy derivatives trading last year.
While Goldman Sachs and Morgan Stanley remain the industry leaders in terms of market penetration or ‘share’ of OTC derivatives client trading relationships, J.P. Morgan and Barclays Capital have emerged as a new tier of tough competitors, and a group of banks including BNP Paribas, Citigroup, Deutsche Bank and Société Générale have positioned themselves as a third tier of up-and-coming dealers.
“These competitive results reveal two things,” says Greenwich Associates consultant Frank Feenstra. “First, banks with lending relationships have been able to use these ties as a point of entry point to achieve significant gains and improve their competitive positioning in other highly lucrative businesses like OTC energy derivatives trading. But second, in an area as critical as hedging commodities exposure, capabilities and credibility count, and firms like Goldman Sachs benefit from the fact that companies want to know they are working with a market leader.”
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