UPDATE 4-France's Credit Agricole quits commodities trading

will stop trading commodities and slash its financing

of the multi-billion-dollar commodities trade as the euro zone

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 euro zone 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 PRESSURE

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 favour 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.

Authors: Commodities - Yahoo! News Search Results

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