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One black box to another

19 March 2014 By Kevin Allison, Antony Currie

JPMorgan’s $3.5 billion sale of its physical commodities business is a perfect example of just how opaque trading is. The bank is selling what is probably a low-return business with regulatory headaches to Mercuria, a privately held firm that does not have to make its financials public. The dearth of details does make it hard to judge, but applying some statistics from both the industry and some rivals suggests Mercuria may be paying top whack.

Investment bank consultants Coalition recently reported commodity revenue at the top 10 investment banks of $4.5 billion in 2013, down from $5.5 billion in 2012. Assume JPMorgan’s share of that revenue pool is around $1.2 billion and that its net margin runs at around 20 percent, which may be generous. That means the bank run by Jamie Dimon could have made around $240 million of net income on the business last year.

Trading physical commodities accounts for the lion’s share of the business, but is also less profitable than trading derivatives, for example. So assume the unit for sale brought in $140 million. That would mean Mercuria is paying a hefty 25 times last year’s earnings for JPMorgan’s unwanted traders.

That’s a boon for the bank. Commodities is one of the worst-performing businesses on Wall Street at present. In June last year Morgan Stanley Chief Executive James Gorman admitted his firm’s unit was only managing a 5 percent return on equity. That’s probably as good as it gets for banks, considering Morgan Stanley has what is considered one of the best operations.

But it’s expensive by the standard of Mercuria’s publicly traded rivals. Glencore and Noble Group trade at 14 and 16 times trailing earnings respectively, for example. Mercuria bosses Marco Dunand and Daniel Jaeggi should be able to squeeze more out of the business than JPMorgan. Along with other banks, it is facing increased regulatory scrutiny and higher capital requirements for the business.

Nonetheless, Dunand and Jaeggi are still handing over a big premium. And they and the fellow standalone commodity trading giants are being themselves challenged by new competitors and a broad shift of the business onto exchanges which is likely to dent revenue per trade. That makes their acquisition look like a bold move. JPMorgan’s Dimon, meanwhile, must be breathing a sigh of relief.


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