SG CIB closes US power business - rivals point to dollar funding constraints

Former RBS Sempra Commodities business closed just 11 months after acquisition

Société Générale Corporate and Investment Banking (SG CIB) is closing its North American physical power and natural gas business less than 11 months after acquiring the franchise – a decision other market participants chalk up to the increasing scarcity of US dollar funding. The bank will remain active in the energy and commodity derivatives markets.

In a statement provided to Risk yesterday confirming the closure of the gas and power business bought from RBS Sempra Commodities in January, SG CIB announced it will "exit its North American physical gas and power trading business", as part of an ongoing strategy to "adapt its portfolio of activities internationally that are adversely affected by regulation or do not meet competitive positioning, synergies potential or profitability criteria".

But commodities dealers say the decision is primarily a reflection of the mounting difficulty European banks face in accessing US dollars. Many European banks are seeing dollar funding restricted as a result of the intensification of the eurozone debt crisis.

"They are looking to dump assets that eat up dollars with little return, so I would think we will see SG CIB pulling back from trade finance, corporate lending and the commodities business in general," says one New York-based commodities trader.

The SG CIB statement does not mention dollar funding constraints. A source close to the bank confirms it played a part in the decision – but insists it was not the main factor.

They are looking to dump assets that eat up dollars with little return, so I would think we will see SG CIB pulling back from trade finance, corporate lending and the commodities business in general

Three-month US dollar Libor reached 0.54% yesterday according to the British Bankers' Association – its highest level since July 9, 2009 – reflecting mounting reluctance among banks to lend dollars to each other. Dealers claim the situation has become so serious for some banks that the European Central Bank (ECB) is now their only sizeable source of US dollar liquidity.

Data from the ECB released on December 7 revealed 34 eurozone banks have requested $50.7 billion in three-month dollar loans since the central bank cut the borrowing rate by 50 basis points to 0.59% on November 30.

"Simply put, there is no dollar funding for some European banks right now. It's not even a matter of cost – there is just no availability. Private financing has been turned off altogether and the only source of dollar funding in some cases is through the ECB," says the New York-based trader.

SG CIB said in its statement it "will remain committed to its North American energy derivatives activities as well as to its other existing commodities franchises" such as metals, agricultural, commodities indexes, and seek to "capitalise on its well-established natural resources financing franchise in the Americas, in particular in the reserve-based lending and mining project finance sectors".

The bank has been selling off other commodity assets in recent weeks. On November 25, the company announced it was selling its 50% share in carbon credit trading unit Orbeo to Paris-based chemicals producer Rhodia. And competitors speculate the bank's core project financing commodities-related activities will also contract.

"Lack of dollar funding is probably the primary cause of SG CIB's withdrawal from North American physical gas and power. The SG commodities model globally has been an extension of its lending practice, and its only significant commodities activity has been in mine finance, and upstream financing in energy in Africa and in parts of Latin America. I think now even those franchises will be in question," says one bank's London-based global head of commodities.

SG CIB's acquisition of RBS Sempra's 130 US staff and IT platform came six months after JP Morgan bought the firm's global oil, metals and coal franchises, as well as its European power, gas and non-US emissions assets for $1.6 billion in July 2010.