Banks unwind aluminium financing deals

Several big banks are unwinding the lucrative financing deals that tie up millions of tonnes of aluminium as collateral in warehouses, but the activity is flourishing as eager rivals enter it or expand.

For years a handful of banks have been buying up aluminium and simultaneously selling it forward for instant profit to futures market speculators, then taking advantage of cheap funding to store it at low cost in warehouses.

Deutsche Bank and Standard Chartered Bank have been the two biggest participants with millions of tonnes of the metal under financing, metals and banking sources said. Credit Suisse had a sizeable holding too.

Aluminium financing deals can earn an investor an assured yield of at least 5 percent, not bad with interest rates around historic lows and with returns on equities and debt uncertain.

But banks across the world are cutting costs and selling off, or writing down, assets in a bid to meet tougher regulations aimed at preventing a repeat of the 2008 crisis.

Balance sheets across the sector have come under scrutiny after warnings from regulators that capital may need bolstering.

While Credit Suisse, which had 3 million tonnes of aluminium in financing deals, and Deutsche Bank, with around 4 million tonnes two years ago, are unwinding or have unwound their positions, Standard Chartered has been expanding, bank and industry sources said.

Credit Suisse is no longer involved in the deals, the sources said. The bank itself declined to comment. Deutsche Bank did not immediately respond to a request for comment.

British bank Barclays, which on Tuesday announced a major overhaul partly to burnish its reputation, said its business in commodities including metals would continue.

Some French banks, including Societe Generale and Credit Agricole, pulled out of such deals in the past two years when they scaled back their commodities presence, sources in the sector said.

These banks' withdrawal is not going to bring relief to industrial users of metal, frustrated that so much is tied up this way, as there is no shortage of willing candidates to continue the financing business.

Standard Chartered had been one of the takers.

A spokesman for the London-listed bank said commodities trading "is a decent part of our business and aluminium financing is something that is part of that. It's something we're very much committed to".

Newer entrants include Royal Bank of Canada, and possibly Chinese banks, the sources said. One or two French banks are now returning.