Major banks earned more in metals than oil last year

[LONDON] Banks' metals-related revenues exceeded their earnings from the oil sector last year for the first time since 2014 as low and relatively stable crude prices discouraged hedging activity, but this is unlikely to be the start of a new trend.

Banks' commodity revenue has been on a steady downward path in recent years as they have exited or slimmed down their commodity businesses due to heightened government regulation and a poor performance from the sector.

The world's 50 biggest investment banks made revenue of US$1.6 billion from trading, selling derivatives and other activities in metals last year, compared to US$1.4 billion in oil, according to Coalition, a financial industry analytics firm.

That is the lowest for both in at least a decade and down from US$3.9 billion for metals and US$5.6 billion for oil in 2008 when the commodity supercycle peaked.

Oil-related revenue has dwindled since 2015 as a period of low prices reduced interest from producers and consumers in financial instruments that offer protection against price volatility, said Amrit Shahani, research director at Coalition.

"It's much more oil declining (than metals gaining)," he said. "We've seen reduced client activity (in oil), reduced hedging from the corporates as well as low prices at the start of last year and low volumes."

Metals income held up better thanks to stable revenues from storing gold and silver and a surge in industrial metals prices since early 2016, and because fewer banks have left the precious metals business than have quit oil markets, Mr Shahani said.

"Pretty much every bank maintains a precious metals business. It's a much more stable revenue pool." Banks' revenue from both metals and oil is expected to increase this year as prices and volatility increase, Mr Shahani said, with overall commodities-related revenue seen rising by around 10 per cent.

Part of this is likely to come from Goldman Sachs, traditionally one of the top three commodities banks, which is trying to turn around its commodities unit after revenues collapsed last year.

Oil-related earnings will likely rebound faster than metals over the next few years as banks focus on building revenues in the oil derivatives market, which is historically a much bigger business than metals derivatives, Mr Shahani said.

REUTERS