Energy Risk Commodity Rankings 2016: Rise of the non-banks

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The shake-out appears to be over. After a period of several years in which one major financial institution after another announced it was pulling out of commodities - or sharply scaling back its business – 2015 seems to have been the year when things stabilised. There were no new surprise exits by prominent dealers, and some of those banks that remain in the business even began to grow again.

This year's Energy Risk Commodity Rankings shed some light on the new landscape of banks and commodities trading. Only those banks that have remained committed to providing their clients with commodity risk management products – usually as part of a broader array of financial services – earned top spots in the rankings. In a parallel development, non-bank energy companies with a strong presence in physical markets performed extremely well in some categories, particularly natural gas and electricity, where the retreat of banks has been especially pronounced.

Societe Generale (SG) won the coveted ‘best overall institution' spot for the fourth year in a row, gathering the largest share of votes from the more than 1,500 market participants who took part in the survey (see How the poll was conducted). The French bank fared particularly well in oil, base metals and soft commodities.

Jonathan Whitehead, London-based global head of commodities at SG, links his firm's success in the rankings to its broader business of providing financing solutions to oil producers and other commodities-oriented companies. "If you wind the clock back two years, when the commodities business within banks was clearly very challenged, the benefit we had at the time was that we had a very strong natural resources financing business and we had done a lot of work to integrate it with our commodities business," he says. "We do a tremendous number of deals in common and have many clients in common. So our strengths as a finance house definitely helped us weather that storm."

Additionally, Whitehead notes SG got a boost from its April 2015 deal to take over many of the client accounts of Bache, the futures commission merchant being wound down by New York-based investment bank Jefferies. "The Jefferies transaction brought us a substantial number of clients," Whitehead says, estimating that it increased the size of SG's commodities franchise by 10%. "It was like the equivalent of a massive, three-year marketing campaign that all happened within three weeks."

Taking second place in ‘best overall institution' was Bank of America Merrill Lynch (BAML). The US bank also came in second among oil dealers and base metals dealers, while capturing the top spot in a handful of niche categories such as freight and commodity index products.

Rupen Tanna, London-based global co-head of commodities at BAML, says his business's focus on client activities have helped it fare well in the survey in recent years. "The shift in landscape has played to our core underlying strategy within commodities, which is around financing and risk management," he says.

Tanna adds that 2015 was an interesting year for the oil side of BAML's commodities business. With crude prices tumbling and old hedges rolling off, the bank's oil derivatives traders had plenty to keep them busy last year. "Whenever we see volatility or significant price shifts in any market, we assess the impact on clients, which leads to discussions around structured deals, such as financings or hedge restructuring," Tanna says. "Given the large moves we've seen in oil, there has been a healthy amount of dialogue and solutions being generated for clients."

Another notable result in this year's survey was UBS's win in precious metals. While the Swiss bank has largely exited commodities, it has kept a precious metals trading unit as part of its foreign exchange unit. The unit serves clients ranging from miners and metals processors to hedge funds and central banks, says Edel Tully, UBS's London-based global head of precious metals sales.

"Our client business is very broad and, unlike other players, we have a reason to be in precious metals, because precious metals are entrenched in our wealth management business," she says. "That gives us a key reason to remain in this business. We also have very deep linkages with the precious metals refiners in Switzerland."

Non-banks power up

The rise of non-bank firms in the energy risk management space has been a major theme in recent years, and this year's rankings offer further evidence that such physical players are becoming more entrenched.

Axpo Trading, a unit of Swiss utility Axpo that has scaled up its activities across Europe in recent years – and even launched operations in the US on January 1 – was voted the number one overall power dealer for the second year in a row, largely on the back of its strength in markets such as Italy, Germany, the Nordic countries and Spain. Axpo Trading has about 200 front-office employees around Europe, and it offers structured risk management products for counterparties as well as trading physical power and gas.

"The competition has changed," says Domenico De Luca, chief executive of Axpo Trading. "Parts of this market were completely dominated by banks in the past, especially in structured products and origination. When the banks significantly reduced their presence for regulatory and other reasons, it created opportunities for utilities, merchants and commodity traders to expand in this area."

On the other side of the Atlantic, another non-bank – BP – surged to the top of the US natural gas tables this year, winning the top dealer spot in Henry Hub, among other categories. Besides being a huge physical player in North American gas, BP's trading arm in Houston has registered as a swap dealer under the US Dodd-Frank Act, making it effectively a peer of the big Wall Street banks when it comes to offering financial risk management products to counterparties.

"We are one of the few physical, non-bank swap dealers, which draws a lot of interest from customers," says Ryan McGeachie, Houston-based chief commercial officer for BP's North American structured products business. "They like the fact that we have a physical presence, but they also want to have the assurance that we are a swap dealer and can handle transaction reporting and all the other responsibilities that being a swap dealer under Dodd-Frank requires."

Not all the news is bad for banks in power and gas. Citi, another financial institution that has held its ground in commodities, clinched the number one spot among US power dealers in this year's rankings. Naveen Arora, a Houston-based managing director with Citi, says a major factor in the bank's success in US electricity has been its ability to distribute risk throughout its client base - a must in today's markets, given the withdrawal of many fellow banks that had previously offered places to lay off risk.

"The biggest challenge that we, as market-makers, face every day is how to hedge the forward exposure and risk that we incur," Arora says. "That ability to hedge has gone down tremendously with other dealers having pulled out of the market, so we've found ways to hedge those exposures within our client base."

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