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 Bank of Montreal, Canadian Imperial Bank of Commerce and Bank of
Nova Scotia, long-time niche players in energy trading, hedging and
dealmaking, are expanding their operations both north and south of
the U.S. border, executives told Reuters.
In total, commodity trading revenues at the three banks rose by 30
percent last year, according to a Reuters review of their annual
reports. Executives say it has been a struggle to match that
performance this year, but that they are still gaining ground.
"We have been able to pick up market share not only in our home
market but able to rapidly grow our business in the U.S. and
overseas in places like the North Sea," said Adam Waterous, a
veteran oil banker who heads Scotiabank's global investment banking
team, which is based in Calgary, Canada's oil capital.
With their reputation for caution, Canadian banks say they are
unlikely to copy their U.S. counterparts and start amassing physical
assets such as metal warehouses or oil storage terminals. Big Wall
Street banks including JPMorgan Chase & Co. and Morgan Stanley are
looking to sell their physical trading desks as regulatory scrutiny
increases and returns diminish.
"This is the fourth time in my career I have seen Americans come and
go," Waterous said.
Scotiabank is by far the biggest commodity trader in Canada, due in
large part to its long-held ScotiaMocatta precious metals venture.
Scotia reported a 26 percent rise in commodity trading revenues to
C$425 million ($397 million) last year.
Of the other "Big Five" Canadian banks, Toronto-Dominion Bank does
not break out commodity trading revenue figures, but Royal Bank of
Canada's trading revenues for foreign exchange and commodities
climbed by 11 percent last year.
OIL VETERANS
Canadian banks have a long history in the energy sector as a result
of their involvement in the expansion of Alberta's oil sands and the
country's status as the world's sixth-largest producer of crude.
That opportunity is now expanding as more producers look to hedge
output in Canada, which is expected to more than double to 6.7
million barrels per day by 2030. New products, such as CME Group's
Edmonton Sweet oil futures, which was launched this week, open new
avenues for trading.
Thanks to a culture of conservative and cautious lending, Canadian
banks emerged from the global financial crisis with reputations
intact and some of the strongest credit ratings in the world.
"There's a coming of age. In Canada there is the oil sands and in
North America there's the shale revolution that provides a great
opportunity for our skill set and our history," said Shane Fildes,
head of global energy at Bank of Montreal, whose commodity
trading-related revenues surged 65 percent to C$66 million in 2012.
Fildes said BMO's energy trading desk expanded recently to five
people from three, and its energy business as a whole employed 65
people in Calgary and 45 in Houston. The bank recently hired Paul
Dunsmore from Barclays to beef up its commodities derivatives team.
"The counterparty credit of being a Canadian bank is a very smart
calling card in this environment," he said.
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At CIBC, commodity trading income rose 20 percent to C$52 last year
and headcount has also increased across sales, trading, research and
analytics, said Arden Majewski, who joined the bank two years ago to
run its global commodities business after working for Swiss-based
merchant Mercuria and for Merrill Lynch.
Scotiabank, whose commodity business is the largest and most
established, has a history of stepping in when foreign banks pull
back. Three years ago it bought much of UBS's Canadian commodities
trading platform technology, when the Swiss bank exited Canadian
energy trading. It bought U.S. energy investment boutique Howard
Weale last year.
In September, RBC hired Kathy Kriskey from CIBC as head of commodity
investor sales in New York to develop the bank's commodity index
products.
But in the scramble to pick up Wall Street business Canadian banks
face competition from foreign banks such as Australia's Macquarie
and Brazil's Grupo BTG Pactual SA as well as from private
equity-backed merchants such as TrailStone and national giants such
as Russia's Rosneft.
TRADING OPPORTUNITIES
While many Wall Street banks embraced physical energy trading,
Canadian banks have so far shied away.
CIBC, Scotiabank, TD, and RBC do trade physical natural gas, a
homogenous product that is easy to value. As well, BMO is in the
middle of an approval process to trade physical natural gas, and the
bank expects the process to be completed early in 2014.
None of the banks are involved in physical crude trading, however,
which would entail greater investment in logistics and storage,
Calgary market players said.
That makes them unlikely bidders for businesses such as JPMorgan's
physical commodities desk, which is in the second stage of a sale,
or the asset-rich oil and power operations at Morgan Stanley, which
has tried in vain for more than a year to find a buyer for that
desk.
Instead, the Canadians concentrate on trading financials — crude
derivatives contracts, usually based on the U.S. West Texas
Intermediate benchmark — that enable clients to hedge their exposure
to price swings in oil markets.
Client hedging activity tends to increase sharply in relation to oil
market volatility. Bank traders in Calgary said they expect hedging
demand to stay strong because of booming North American production
and supply bottlenecks that exacerbate the discount on Canadian
crude.
"With the U.S. investment banks that have pulled out of Canada,
there would be more opportunity for these guys to fill that void,"
said Brian Klock, equity analyst at KBW Inc.
($1=$1.07 Canadian)
(Editing by Jonathan Leff; and Peter
Galloway)
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