European Banks Boost Support of “Top-Tier” Commodity Traders

Research conducted by Fitch Ratings suggests that European banks appear to be increasing lending to commodity trading firms facing extraordinary liquidity needs due to fierce commodity price volatility.

“We expect the banks to continue to fund the firms’ margin calls because the liquidity pressure, although serious, should be temporary, and commodity traders are a good source of profit for the banks in normal times”, said Fitch Ratings in a 29 March 2022 release. “Much of the lending is to top- tier firms that have sound business models and operate with large liquidity buffers and diverse financing pools, which mitigates the risks to the banks.”

As pointed out by Fitch Ratings, banks are typically exposed to commodity traders through syndicated credit facilities, project finance lending, letters of credit and derivatives. In recent years, some banks have exited the commodity financing business entirely while others have significantly reduced their trade and commodity financing offerings. Most of the big European banks active have shifted their focus to large, top-tier commodity traders.

Bloomberg data cited by Fitch Ratings identified ING, Societe Generale, Rabobank, Credit Agricole, Groupe BPCE, and UBS as the main European banks appearing most frequently as lenders in syndicated facilities to large trading firms Trafigura, Glencore, Gunvor, Vitol, and Mercuria Energy in mid-March 2022. “This does not necessarily reflect the size of the banks’ exposures, but it indicates their involvement in commodity trading.”, said Fitch Ratings.