European banks seek to claw back share of commodity lending

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* European banks say keen to increase lending* Private investors, Asian banks steal market shareBy Emma FargeGENEVA, June 6 European banks trying to make a comeback in commodity trade finance may struggle to regain their dominance from the Asian banks and new types of lenders that have stepped in to replace them. Many European banks in the $1.5 trillion a year business of lending to traders to finance commodity transactions ceded ground to competitors as new regulations aimed at preventing a repeat of the 2008 crisis forced them to cut lending. Official data is hard to come by, but pan-African lender Ecobank estimates that European banks' share of the global commodities trade finance business has shrunk to 50 percent from around 75 percent over the past few years as giants like French lenders BNP Paribas and Credit Agricole retrenched. Now bankers say they want to come back."The European banks had no choice but to shrink their balance sheets and sell assets. People are now saying we are done, let's make some money again," said a senior source at a European bank at Euromoney's Global Commodities Finance Conference in Geneva this week.

A second senior source in a European bank said: "The French banks have come back and are in a much better position than they were in a few years ago. They are recapitalised and now operating up and down the foodchain."But industry participants are sceptical that they will be able to control the market as before."I can't see them becoming dominant again," said Jean-Francois Lambert, global head of commodity and structured trade finance at HSBC.

He said it would be particularly difficult for euro zone banks to step up lending should commodity prices recover after a steep sell-off in April. A return to contango in commodity markets, where future prices are above current prices, could also make it difficult for banks to compete since it would increase future financing costs, he said. NEW INVESTORS European banks will have a lot of catching up to do in important commodity markets such as Asia. The share of European and U.S. banks there fell 10 percentage points to 21 percent in the first quarter of 2013 compared with 2010, according to Thomson Reuters data. The data excludes Japan.

As banks cut lending, private investors and hedge funds have stepped in to offer short-term liquidity to fill the gap. In an indication of the trend, Jacques Begle, a former BNP Paribas banker who set up trade finance specialist Commodity Trade Invest, told Reuters his firm is talking to a hedge fund to launch at a $500 million fund for oil and petrochemicals later this year. Industry sources said that large trading houses have also stepped up lending and are loaning some of their working capital, worth hundreds of millions of dollars. Switzerland-based Trafigura, the world's third- biggest trader in raw materials, is also expanding its fund arm Galena which has a specific fund devoted to commodity trade finance. Edward George, head of soft commodities research at Ecobank which is active in commodities lending in Africa, said that the growth of so-called supertraders like Vitol and Glencore, who have their own sources of finance meant more competition for the banks."I expect a shift towards a 50/50 partnership model between banks and commodity traders, with both parties splitting the risk," he said.