JPMorgan Chase & Co (NYSE:JPM) has initiated a process to sell its physical commodity business for $3.3 billion by circulating offering documents, according to several media reports.
Increasing regulatory scrutiny
In July, the Federal Reserve indicated that it is reviewing its landmark 2003 ruling that allowed regulated banks to trade in physical commodity markets. This move would affect the top global investment banks including JPMorgan Chase & Co (NYSE:JPM), Goldman Sachs Group Inc (NYSE:GS), and Morgan Stanley (NYSE:MS) as they derive substantial revenue from commodity trading.
Besides, the U.S. Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection, led by Ohio Democrat Sherrod Brown, questioned whether commercial banks should control oil pipelines, power plants and metals warehouses.
JPMorgan whole or part sale
JPMorgan Chase & Co (NYSE:JPM)’s offering documents solicit offers for the group as a whole entity titled ‘Newco,’ or for individual divisions within the group. The individual divisions comprise global crude, North American power, North American natural gas, European power and gas, base metals, coal and the Henry Bath metals warehousing network.
JPMorgan Chase & Co (NYSE:JPM)’s crude trading operations has the largest part that the bank values at $1.7 billion, while its North American natural gas assets are valued at $800 million. The bank’s base metals, including the Henry Bath warehouse company, are valued at $500 million.
The bank’s offering documents also highlight that it generates $750 million in annual income before the cost of compensation staff who run it. Normally, banks spend about 50 percent of revenue on compensation.
Exit From Non-Core Business
The nation’s largest bank last month announced it is leaving the private student loan business. Earlier it announced it will no longer trade in ‘physical commodities’ or warehousing raw materials.
Earlier, Morgan Stanley (NYSE:MS) also explored sale of its commodity franchise, while Goldman Sachs Group Inc (NYSE:GS) explored the sale of its Metro International Trade services metal-warehousing unit. However, both the investment banks have put their proposals on hold.