Bank of America Corp.
) is all set to wrap up its European power and gas sales and
trading desk. However, as per a Bloomberg report, BofA will
continue with carbon trading in the European market, albeit on a
smaller scale. Moreover, power and gas trading in the U.S. market
will remain unaffected due to its large client base and scope for
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BofA's intraday share price movement reflected negative investor
sentiment, with the price falling following the announcement of
the news on Jan 7. The stock closed at $16.50, which was lower
than $16.66 on the previous day.
Generally the stock prices of banking behemoths such as BofA do
not immediately get impacted by such news, so the price movement
could be due to general market dynamics. However, how the market
is expected to react to this in the near future?
The closure of the European power and gas sales and trading desk
is part of BofA's efforts to improve efficiency by disposing
unproductive units and thereby focusing on its core business. As
per the banking giant's internal commodity activities review, the
demand of energy hedging has been declining in the European
economy, which has dampened growth in the given sector.
Moreover, although the financial woes in the European economy
have somewhat abated, the debt crisis continues to linger. The
unpredictable market reaction to the various policies adopted by
the government to support the economy can adversely impact the
profitability of various business units in the continent. In such
a scenario, BofA's latest move should guard it from being hit
The revenue figure generated by BofA's European power and natural
gas trading desk in the last quarter was not available.
Nevertheless, overall, we observe that the bank's global trading
account profits fell 2.9% to $1.2 billion.
Commodity trading, once the darling of major banks, has been
witnessing a downturn in the recent past due to stringent
regulatory checks and unfavorable market conditions. Major banks
like BofA now have to maintain a higher level of reserves to
cushion possible losses in the commodity market. Moreover, the
amount of raw material/energy resources that can be held by these
banks is under the Federal Reserve's scrutiny.
Additionally, the energy and power sector seems to be worst hit
primarily due to the growing demand of renewable energy sources
in the market. As per Standard & Poor's, the prices of
commodities have fallen sharply in 2013 - marking the first
annual slump since 2008. Moreover, electricity price in Germany
BofA is not the only bank to have distanced itself from commodity
trading. In Dec 2013,
Deutsche Bank AG
) announced plans to cut down its commodity business across the
globe. In the same month,
) signed a deal with Russia-based Rosneft Oil Company's wholly
owned subsidiary to vend its Global Oil Merchanting unit. Earlier
JPMorgan Chase & Co.
) declared its intention to exit the physical commodity business,
including stakes of commodities assets and physical trading
Currently, BofA carries a Zacks Rank #2 (Buy).