(To set an alert for Corporate Brazil: SALT BZCORP)
Dec. 26 (Bloomberg) -- Grupo BTG Pactual plans to expand in commodities as Wall Street’s biggest banks, having generated $6 billion in revenue from the business last year, retreat amid pressure from regulators, a person with knowledge of the decision said.
BTG, the Sao Paulo-based investment bank founded by billionaire Andre Esteves, will offer hedging, credit and trading services while limiting its holdings of physical commodities, according to the person, who asked not to be identified because the plan is private.
The world’s 10 largest banks reduced their commodities staff this year to the lowest level since at least 2009 amid shrinking revenue and regulators’ concern that the business could inflict losses, according to analytics firm Coalition Ltd. Investors pulled a record $34.1 billion from commodity funds since last December as prices tracked by Standard & Poor’s headed for the first annual drop since 2008. JPMorgan Chase & Co., the biggest U.S. lender, is seeking to sell its physical commodity unit and Deutsche Bank AG announced cutbacks.
“We welcome the initiative as BTG is expanding into an area at a time big global players are retreating,” said Carlos Daltozo, an analyst at Banco do Brasil SA. The expansion may help BTG offset falling revenue from other businesses, including principal investments, Daltozo said in a telephone interview earlier this month. “The division may start having positive results next year.”
Principal investments, which includes private equity and proprietary trading, generated 292 million reais ($124 million) for BTG in the third quarter, down 48 percent from a year earlier. Sales and trading dropped 37 percent to 258 million reais.
BTG’s revenue has been hurt by economic growth that was slower than analysts estimated and the Federal Reserve’s plan to begin reducing its U.S. economic stimulus, which increased clients’ aversion to risk, the company said in its third-quarter earnings statement released on Nov. 5.
A BTG official, who asked not to be identified in keeping with company policy, declined to comment on the initiative. The commodities expansion strategy is designed to be contrarian, allowing BTG to hire specialized employees while prices are falling and competitors are scaling back, the person familiar with its plan said.
Last week, Morgan Stanley agreed to sell its commodities division’s global oil merchanting unit to a subsidiary of Russia’s OAO Rosneft, according to a Morgan Stanley’s statement. The terms of the deal weren’t disclosed.
The Fed is pressuring banks to reduce risks linked to raw materials as it assesses whether it’s appropriate for lenders to be exposed to physical-commodities businesses such as shipping oil or storing metals. The Fed is examining legal and regulatory exemptions that let banks participate in the commodities markets, a person briefed on the process said in October.
Among top banks bucking the trend is Citigroup Inc., which said earlier this month it’s planning to hire commodities salespeople. The New York-based company’s plan may help it gain a bigger slice of an industry that Coalition, a financial- industry research firm, estimated at $6 billion at the 10 largest Wall Street banks last year.
Commodity revenue will drop to $4.7 billion this year at the biggest banks -- Goldman Sachs Group Inc., JPMorgan, Morgan Stanley, Bank of America Corp., Citigroup, BNP Paribas SA, Barclays Plc, Credit Suisse Group AG, Deutsche Bank and UBS AG - - according to Coalition. Officials from all 10 banks tracked by Coalition declined to comment.
Citigroup will increase the commodities unit’s staff about 15 percent during the next year from the 80 people it has now, according to Jose Cogolludo, global head of sales. ABN Amro Group NV, the state-owned Dutch bank that’s expanding overseas, also is planning to add commodity staff next year in Asia, Jan- Maarten Mulder, the global head of the division, said earlier this month.
BTG applied last month to operate warehouses in the Detroit area, according to a filing with the Delaware Department of State. The bank is considering starting commodity trading in Singapore in 2014, according to three people with direct knowledge of the matter.
BTG expects its commodities team to have about 200 people next year, up from 120 now, Chief Financial Officer Marcelo Kalim said on a conference call on Nov. 6. The bank may have to set up a storage structure for its raw-materials activities through an acquisition or build the facility itself, Kalim said.
In October, BTG was working on a possible bid for JPMorgan’s physical-commodities business, according to a person with direct knowledge of the matter said at the time. BTG and JPMorgan declined to comment on the bid.
BTG plans to double its London staff by end of 2014, adding 100 people amid the commodities push, the Financial Times reported Dec. 23, citing unidentified people close to the situation. BTG will rent an additional floor of its building in the city’s Mayfair district to run the unit, the newspaper said.
BTG slid 14 percent this year through Dec. 23, compared with a 3.7 percent gain for Sao Paulo-based Itau Unibanco Holding SA, Latin America’s largest bank by market value.
The Standard & Poor’s GSCI gauge of 24 commodities fell 1.5 percent this year through Dec. 23.
Commodities may make BTG shares a riskier investment. The bank’s existing ties to the business was one of the reasons Sao Paulo-based brokerage Magliano SA withdrew its buy recommendation for BTG from its high-risk portfolio, said Henrique Kleine, head analyst at the Sao Paulo-based company.
BTG is taking on more risk to boost profitability, Kleine said in a telephone interview. He said he also withdrew his recommendation because of a “less favorable outlook” in coming quarters and profits that have dropped below his estimates.
“Commodities is a business with great potential to generate cash, but it’s a very risky business,” Kleine said. “There isn’t anything on the horizon showing commodities will have the wind in its sails in the next year.”
The commodities platform is already contributing to the bank’s results and will be one of the sales and trading pillars in the next year, BTG CFO Kalim told analysts last month.
BTG is seeking to gain market share from other banks that are reducing their presence in the industry, Rodolfo Amstalden, an analyst at Empiricus Research in Sao Paulo, wrote in an e- mailed statement.
“Commodities is the only natural obligation global investors have toward Brazil,” Amstalden wrote. “When we talk about commodities, you can’t not consider Brazil.”
--With assistance from Agnieszka Troszkiewicz in London and Dakin Campbell in New York. Editors: Steve Dickson, David Scheer