- Bank paring $20 billion commodity trader exposure after losses
- Swiss city is global center of oil, gas, agriculture trading
Standard Chartered Plc is closing its office in Geneva, the global center of the commodity-trading industry, in Chief Executive Officer Bill Winters’s latest move to slash the lender’s exposure to the oil, gas and agricultural industries.
While the bank says commodities trading and agribusiness, or CTA, will continue to be a “core activity,” it will be transferred to London as “a consequence of our decision to reduce our overall exposure to commodity-related clients,” the bank said in a statement in response to questions. Closing the Geneva office, which opened in 2007, “marks the end of Standard Chartered’s client coverage from Switzerland,” it said.
The move leaves Standard Chartered without a physical presence in a city home to the world’s largest oil traders, including Vitol Group and Mercuria Energy Group Ltd. Traders accounted for $20 billion of Standard Chartered’s $40 billion commodity exposure last year, down from $33 billion during 2014, according to its annual report.
Winters is undertaking a root-and-branch overhaul of the struggling firm, which made its first annual loss in more than a quarter of a century last year. The CEO had to raise $5.1 billion of capital to shore up its balance sheet amid spiraling losses from loans made during the commodity boom, and has also replaced its entire senior management team while pledging to cut 15,000 jobs and restructure or ditch about $100 billion of assets.
Since mid-2014, the lender has reduced its exposure to commodities by about a third, company filings show, as the price of oil plunged by more than 50 percent from more than $100 a barrel to less than $40. It had $20.4 billion of total exposure to traders at the end of last year, about 8 percent of its $261 billion of loans.
“The key risk for traders, which are less directly affected by price changes, is lack of liquidity and their risk-management practices,” the bank said in its annual report. Loan impairments almost doubled to $4 billion in 2015, the highest ever.
While oil and gas accounts for the lion’s share of Standard Chartered’s natural resource exposure, Winters’s review has drilled down as far as its tiny $2 billion diamond portfolio, where he’s demanding that borrowers find insurance, provide collateral or repay their debts.
Standard Chartered said it employs 15 people in its CTA business in Geneva and will invite them to re-apply for the new roles in London, or try to find them other jobs within the bank. The decision to shut the office was made earlier this year, following the closure of its Swiss private bank in the city in 2014.
The majority of the world’s largest independent commodity traders -- including the top oil trader Vitol, metals and oil trader Trafigura Group Pte., Gunvor Group Ltd. and Mercuria -- are either headquartered or have major trading hubs in Geneva or the surrounding Lake Leman region.
One-third of the world’s crude oil and oil products are traded in the Geneva area, according to the Swiss Trading and Shipping Association, an industry lobby group that represents commodity traders, bankers and shipping companies in Switzerland. The area is number one worldwide in the finance of commodity trading, the STSA says.
Commodity trade finance is the lifeblood of the sector as traders require access to massive amounts of short-term capital to fund buying, selling and moving physical commodities around the world. Commodity lending generated 1.5 trillion Swiss francs ($1.6 trillion) of financing in Switzerland in 2011, the Swiss Bankers Association said in a March 2013 report.
In addition to being a hub for metals and oil, the Lake Geneva area is the largest center for grain and oilseed trading in the world and the largest for sugar trading in Europe. In shipping, the region accounts for 22 percent of the global movement of commodities, according to the STSA. Agricultural commodity giants Louis Dreyfus Co., Cargill Inc., Bunge Ltd. and Archer-Daniels-Midland Co. have major trading operations in or around the city.
Standard Chartered isn’t the only bank in retreat. The once dominant BNP Paribas SA has cut staff at its Swiss unit and reduced lending to commodity traders after paying out $9 billion in a 2014 settlement for breaking U.S. sanctions by processing banned transactions involving Sudan, Iran and Cuba.
A lot has changed at Standard Chartered in the last two years. Former Deputy CEO Mike Rees, who was stripped of his powers by Winters and then retired in January, said in November 2014 that “it is not an option to ask if we are in commodities or not,” calling it “integral” and “part of the DNA of the bank: we are a trade-finance bank.”
Standard Chartered has had a diminishing role on Trafigura’s flagship European credit line. The bank held the top roles of "bookrunner" or "mandated lead arranger" on facilities arranged in 2014 and 2015, past statements from the commodity trader show. Last week the firm wasn’t mentioned in a release announcing its latest $5.1 billion loan deal.