Barclays PLC (NYSE:BCS) (LON:BARC) is expected to announce plans to pull out of the commodities market tomorrow as it sheds businesses with returns below its cost of capital and continues to adapt to regulatory pressures, reports Jenny Anderson for The New York Times. The British bank will sell or shut down most of its metals, energy, and agricultural business, though precious metals will be combined with the forex trading unit.
Barclays has closed already closed similar businesses
This decision would fall in line with previous decisions that Barclays PLC (NYSE:BCS) (LON:BARC) has made since the end of the global financial crisis. Last year the bank stopped trading agricultural products with hedge funds, and it closed its power trading desks in New York and London earlier this year.
Barclays was fined $488 million last year for allegedly manipulating energy markets in the US (it is fighting the decision), but its exit had more to do with difficult market conditions than a single unresolved lawsuit. The decision to pull out of commodities (there is probably too much demand for gold and other precious metals from the bank’s clients to halt trading them entirely) was likely made along similar lines – trying to streamline Barclays business operations and allocate more capital businesses with higher returns.
Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:DB), Morgan Stanley (NYSE:MS), and Bank of America Corp (NYSE:BAC) are already out of commodities business, and JPMorgan Chase & Co. (NYSE:JPM) isn’t far behind. Considering that revenues from FICC (fixed income, currencies, and commodities) are at their lowest point since the crisis it’s no surprise that banks want to put their money somewhere else.
Commodities unattractive to many investors right now
While you can always find someone extolling the value of owning gold, many financial analysts find it hard to justify allocating much of your portfolio to commodities when you can get similar inflation-tracking benefits from real-estate investment trusts (REITs) and individual Treasury inflation-protected bonds (TIPS). Since Chinese demand is one of the main supports for commodity prices, concerns that the Chinese economy could slow down more than the government is guiding for mean that investors are becoming even more wary. It doesn’t help that much of the Chinese demand appears to be just another way of getting funding and which will need to be unwound as the shadow banking system gets rid of bad debt.
Even if the Chinese bull case works out and demand for commodities remains strong, the combination of tighter capital requirements and regulations, pressure on margins, and the risks facing the commodities market means that most large banks what stick around to find out.