Bloomberg

(Bloomberg) -- The largest Dutch banks are grabbing a bigger share of lending to commodity traders, undeterred by turbulent markets as competitors retreat.

ING Groep NV has grown into the leading trade-finance bank in Geneva, the global center of commodities dealing, after once-dominant BNP Paribas SA scaled back. ABN Amro Group NV and Rabobank Groep are taking on greater roles in arranging the largest loans, including energy-trader Vitol Group’s record $8 billion credit line.

Lending to commodity producers got riskier in the past 18 months as prices for oil, metals and grains fell. Providing loans to traders, however, is less risky because the financing is often secured against the materials themselves. And most commodity traders -- unlike miners, farmers and drillers -- are thriving amid the turbulence.

“Our clients have done very well in these markets and consequently so have we,” Anthony van Vliet, the global head of trade commodity finance at ING, the biggest Dutch bank, said in an interview in Amsterdam.

ING tripled the size of its commodity-trade-finance unit in the past decade, increasing annual revenue to almost 300 million euros, said a person familiar with the matter who requested anonymity because the figure is private. Geneva, home to industry giants Trafigura Group Pte., Louis Dreyfus Co. and Gunvor Group Ltd., now accounts for about half of ING’s trade-finance revenue. The bank has increased staff in the Swiss city to about 170 from 130 in 2010.

‘Critical Size’

Rabobank, the second-largest Dutch lender, increased its profit from commodity-trade finance eight-fold from 2006 through last year. ABN Amro boosted average annual revenue at its energy, commodities and transportation client division -- which includes lending to traders and producers -- by between 10 percent and 20 percent in the seven years through 2015.

“We’re of a critical size, so we don’t need to grow fast,” Jan-Maarten Mulder, global head of commodities at ABN Amro, said in an interview.

Any growth has been hard to come by at Europe’s largest banks as regulators tightened capital requirements and record-low interest rates squeezed income from lending. Europe’s top 25 banks saw first-quarter net revenue drop 13 percent to $125.3 billion, data compiled by Bloomberg Intelligence show.

Beating Retreat

The Dutch firms are expanding even as France’s BNP and the U.K.’s Standard Chartered Plc -- traditionally two of the biggest lenders to commodity traders -- pull back. BNP shrank its Geneva office and curbed such lending after paying a record $9 billion fine in 2014 for breaching U.S. trade sanctions on Iran, Cuba and Sudan. Standard Chartered is shutting its Geneva office and seeking to reduce exposure to commodity-related clients. Credit Agricole SA, another French lender, said Thursday it made a “sharp one-off reduction” in risks tied to commodity traders in the first quarter.

Traders, who depend on banks to provide financing needed to buy, sell and transport physical commodities, often benefit from price swings like those that have bedeviled energy and metals producers, said Craig Pirrong, a finance professor at the University of Houston. 

The Bloomberg Commodity Index tumbled to its lowest level since at least 1991 in January, before rebounding by more than 15 percent.

Spice Trade

“That’s what these companies make their money off of,” Pirrong said. “They are taking stuff from where it is in excess supply to where it is in excess demand. Those opportunities tend to be greater in more volatile environments.”

The Netherlands has been engaged in commodities trade at least since the Dutch East India Company began bringing spices from Indonesia to the canals of Amsterdam more than four centuries ago. ABN Amro and ING trace their roots to merchant banks, while Rabobank was formed as a cooperative lender in 1898 to serve Dutch farmers.

ING and ABN Amro, long among Europe’s biggest financial firms, were humbled over the past decade. ABN Amro, bought and broken up in the world’s biggest-ever banking takeover, subsequently had its Dutch businesses rescued by the state during the global financial crisis. ING was bailed out and later forced to sell operations from Thailand to Brazil to the U.S. Rabobank sold assets including its Robeco fund-management arm to bolster capital.

Global Footprint

Now, financing trade in raw materials helps the lenders maintain a global corporate-banking footprint. All three were among the lead arrangers on Vitol’s $8 billion revolving credit line in October. ING and Rabobank were lead arrangers and bookrunners on a $5.1 billion European revolving credit facility for Trafigura, which closed in March.

Lending to commodity traders isn’t without risk, especially as the firms’ counterparties -- which include producers -- come under pressure from depressed prices.

ING, ABN Amro and Rabobank each said they have increased their risk and compliance systems for commodity trade finance in response to U.S. penalties for sanctions violations. ING had to pay $619 million in 2012 to settle charges it falsified financial records to bypass U.S. sanctions on countries including Cuba and Iran.

‘More Paranoid’

In the past two years, as the price of oil fell from more than $100 a barrel in mid-2014 to below $40, the firms also raised country risk ratings and limited lending for deals involving nations such as Nigeria, Venezuela and Ecuador where the commodity rout has hurt most. “Counterparty risk is always an integral element of any structure we look at,” said ING’s van Vliet.

Trafigura, an oil and metals trader, is “being more paranoid than usual to manage our credit risk in a distressed environment,” Chief Financial Officer Christophe Salmon said at a conference in Switzerland last month. 

Even so, Trafigura’s gross profit from trading oil jumped 50 percent to $1.7 billion in the fiscal year that ended in September, the company’s best result ever.

“Most of our clients are going through a very good time,” Jasper van Schaik, the global head of trade commodity finance at Rabobank, said in an interview. “There’s volatility and financing costs are actually lower than they used to be. For a trader, that’s good business.”

To contact the reporters on this story: David de Jong in Amsterdam at ddejong3@bloomberg.net, Andy Hoffman in Geneva at ahoffman31@bloomberg.net. To contact the editors responsible for this story: Simone Meier at smeier@bloomberg.net, James Herron at jherron9@bloomberg.net, Frank Connelly, James Hertling

©2016 Bloomberg L.P.

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