Credit Agricole will stop trading commodities and slash its financing of the multi-billion-dollar commodities trade as the eurozone crisis forces a reassessment of risk.
The French bank, with roots in finance for farming, warned on Wednesday of losses and write-downs this year as it struggles to cope with the pan-European credit crunch. Trade sources said others could follow it out of commodities.
The deepening eurozone debt crisis has hit French banks hard as traditional sources of dollar funding have evaporated and as they face pressure to meet tougher capital requirements.
"What is happening with Credit Agricole is certainly a major trend across banking where the entire commodities trading business is shrinking," said a senior commodities trader who recently left a major bank for an independent trading house.
"It is happening because of regulations, as proprietary trading is not allowed any more and because people have overspeculated in the past years and got badly burnt."
Credit Agricole's commodities trading employs around 100 staff globally, including traders, analysts, marketing teams and technical staff, sources close to Credit Agricole said.
A source in the bank said many employees had only learned of the closure of the commodities trading unit on Wednesday: "It has all happened very quickly. It is a shock."
Credit Agricole Chief Executive Jean-Paul Chifflet said on Wednesday the bank was pulling out of commodities because it had less expertise in the field than other core areas:
"We preferred to stop it completely and devote our energy to other activities," he said.
But Chifflet told Les Echos newspaper the bank would not sell its holding in Newedge, a commodities futures and clearing brokerage it co-owns with Societe Generale.
The head of Credit Agricole's commodities trading division, Martin Fraenkel, told Reuters last year energy was a key growth area because "clients of the bank have ever more need for hedging services in these markets."
But nearly two years on, European banks are under enormous pressure in credit markets and only very large banks have scope to expand. Credit Agricole may be the first of several banks to drop commodities trading, said the senior commodities trader:
"The major players — Goldman Sachs, Morgan Stanley, Merrill Lynch, Deutsche Bank — are still hiring to replace people who leave to funds and trading houses. But small and medium-sized banks are just shutting everything down."
A senior oil trader at a major European bank said only very large players could now survive in commodities: "They (Credit Agricole) wanted to have a commodities arm but the appetite for risk was so small it was impossible to do big deals."
Credit Agricole, which has in recent years abandoned its humble agricultural origins in favor of international growth, said on Wednesday it would cut 2,350 jobs and exit 21 of the 55 countries where it operates and shutter entire businesses including equity derivatives.
"VERY, VERY STRONG REDUCTION"
Many details of the changes only emerged on Thursday.
The bank's commodities derivatives business, trading oil, gas, metals and softs, is based in London and Hong Kong. It also has market representatives in Tokyo, Singapore and New York.
Credit Agricole has been active in oil hedging, traders said, and does not have a reputation for taking on major risk.
"It was very flow based, rather than proprietary," said a London-based trader with a bank. He said the bank hedged oil positions for airlines, taking positions on over-the-counter jet fuel derivatives and gas oil on the IntercontinentalExchange.
Sources close to Credit Agricole say the bank also plans to cut dramatically its commodities trade financing, which involve commitments of tens of billions of euros, but the exact scale of the retrenchment was unclear.
"In terms of commodities financing, they plan a very, very strong reduction in their activities," a source close to Credit Agricole said, adding the full array of short-term and longer-term letters of credit and export credit would be affected.
The bank's Geneva-based trade finance activities have around 120 people spread around the world, according to a former head of a commodities unit at Credit Agricole Corporate and Investment Banking who left the company just months ago.
Credit Agricole's commodities financing activities concern around 600 people, of which at least half are in France, and involve commitments of tens of billions of euros.
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