Bank of America Corp. (BAC) is all set to wrap up its European power and gas sales and trading desk. However, as per a Bloomberg report, BofA will continue with carbon trading in the European market, albeit on a smaller scale. Moreover, power and gas trading in the U.S. market will remain unaffected due to its large client base and scope for growth.
BofA’s intraday share price movement reflected negative investor sentiment, with the price falling following the announcement of the news on Jan 7. The stock closed at $16.50, which was lower than $16.66 on the previous day.
Generally the stock prices of banking behemoths such as BofA do not immediately get impacted by such news, so the price movement could be due to general market dynamics. However, how the market is expected to react to this in the near future?
The closure of the European power and gas sales and trading desk is part of BofA’s efforts to improve efficiency by disposing unproductive units and thereby focusing on its core business. As per the banking giant’s internal commodity activities review, the demand of energy hedging has been declining in the European economy, which has dampened growth in the given sector.
Moreover, although the financial woes in the European economy have somewhat abated, the debt crisis continues to linger. The unpredictable market reaction to the various policies adopted by the government to support the economy can adversely impact the profitability of various business units in the continent. In such a scenario, BofA’s latest move should guard it from being hit hard.
The revenue figure generated by BofA’s European power and natural gas trading desk in the last quarter was not available. Nevertheless, overall, we observe that the bank’s global trading account profits fell 2.9% to $1.2 billion.
Commodity trading, once the darling of major banks, has been witnessing a downturn in the recent past due to stringent regulatory checks and unfavorable market conditions. Major banks like BofA now have to maintain a higher level of reserves to cushion possible losses in the commodity market. Moreover, the amount of raw material/energy resources that can be held by these banks is under the Federal Reserve’s scrutiny.
Additionally, the energy and power sector seems to be worst hit primarily due to the growing demand of renewable energy sources in the market. As per Standard & Poor’s, the prices of commodities have fallen sharply in 2013 – marking the first annual slump since 2008. Moreover, electricity price in Germany declined 16%.
BofA is not the only bank to have distanced itself from commodity trading. In Dec 2013, Deutsche Bank AG (DB) announced plans to cut down its commodity business across the globe. In the same month, Morgan Stanley (MS) signed a deal with Russia-based Rosneft Oil Company’s wholly owned subsidiary to vend its Global Oil Merchanting unit. Earlier in July, JPMorgan Chase & Co. (JPM) declared its intention to exit the physical commodity business, including stakes of commodities assets and physical trading operations.
Currently, BofA carries a Zacks Rank #2 (Buy).
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