In consistence with its initiatives to streamline business, JPMorgan Chase & Co. (JPM - Free Report) recently entered into a definitive agreement with Mercuria Energy Group Limited to vend its physical commodity trading business for $3.5 billion. The deal is expected to close in third-quarter 2014.
Wall Street biggies like JPMorgan often seek avenues, apart from the traditional lending business, to reap profit. Commodity trading was one such channel that was popularized in the pre-crisis days.
However, tightened regulations following the financial meltdown hampered the flourishing business. Major banks like JPMorgan are now required to maintain higher level of reserves to cushion possible losses in the commodity market. Moreover, the amount of raw material/energy resources held by these banks is subject to the Federal Reserve’s scrutiny.
Amid such a scenario, JPMorgan has been grappling with litigation issues as well. The banking behemoth paid hefty settlement fines that significantly weighed on its profitability. Therefore, the company’s latest move to dispose the units that could have incurred legal as well as regulatory expenses in the future seems justified.
The market conditions have also been unfavorable with commodity prices witnessing a persistent downtrend. Moreover, with the rising demand for renewable energy resources, non-renewable energy assets are fast losing value. JPMorgan’s commodity trading revenues declined at a CAGR of 9.8% over the last 3 years (2010–2013).
Apart from JPMorgan, Bank of America Corporation (BAC - Free Report) , Morgan Stanley (MS - Free Report) and Deutsche Bank AG (DB - Free Report) have plans of exiting their commodity trading business.
At present, JPMorgan has a Zacks Rank #3 (Hold).