U.S. regional banks tip-toe into commodities as Wall Street faces shake-out
NEW YORK (Reuters) - Two years ago, Denver-based oil and gas driller Bonanza Creek Energy wanted to spread its credit risk and hedge its production - and it called on some regional Main Street banks to help do it.
It ended up with a group of banks, including several names little-known in commodity circles until recently. Ohio-based KeyCorp led the lenders and was also among the banks providing hedging.
Traditionally, Wall Street's big banks were the go-to providers of such services, but since the financial crisis and the introduction of tougher regulations, they have been pulling back.
At the same time, regional banks, more used to serving consumers and small and medium-sized businesses in the communities they serve, have been growing their energy and commodity lending and hedging businesses. Soaring U.S. oil and gas production resulting from the use of fracking technology in states such as North Dakota has encouraged the regional banks.
"In the past, you didn't have those banks in there and they are definitely beginning to fill the void left by some of the big guys that are beginning to pull in some of their tentacles," said Bill Cassidy, Bonanza Creek's chief financial officer. "The more competition you have, the better it is for someone like myself," he added.
The measured expansion of these regional banks, which has not been previously reported, highlights the emergence of new competition in the commodities markets. Other new rivals offering to lend and hedge include Australian bank Macquarie to the risk management arms of agribusiness giant Cargill and oil major BP .
Last year, the top ten regional banks active in the space together held an average of $23 billion in commodity derivatives contracts on their books, up nearly 50 percent from their holdings in 2009, according to a Reuters analysis of quarterly regulatory data from Thomson Reuters Bank Insight.
This is still miniscule relative to the $3.9 trillion in commodity derivatives that the top six Wall Street banks still controlled, according to the data, though that sum has barely risen over four years.
Bonanza Creek, which drills for oil and gas in Colorado and Arkansas, has a credit line with the KeyCorp-led group of 10 banks, which also include Wall Street giants JPMorgan Chase & Co and Wells Fargo , as well as other regional institutions such as IBERIABANK Corp. and Cadence Bank . It has hedging arrangements with five banks.
Even modest inroads can be meaningful for regional banks expanding in the sector, as it allows them to "pop out and create some incremental revenue growth," said Marty Mosby, banking analyst at Guggenheim Partners.
Indeed, the proportion of KeyCorp's new derivatives business that is commodities-related is now about 25 percent, up from nothing in 2006 when the business started, said Matthew Milcetich, its head of derivatives
"It is a meaningful percentage of our new business volumes," he said.