JPMorgan Finalizes Sale Of Physical Commodities Unit For $3.5 Billion

JPMorgan (NYSE:JPM) inked a deal with Swiss commodity trading house Mercuria earlier this week to sell its physical commodities business for $3.5 billion. ^[1] The all-cash transaction comes roughly seven months after the bank announced its decision to explore strategic alternatives for the business unit, following up with its decision to sell the unit a few months later (see Why JPMorgan Might Sell Its Physical Commodities Unit). ((J.P. Morgan to Explore Strategic Alternatives for its Physical Commodities Business, JPMorgan Press Releases, Jul 26 2013)) The deal is expected to close in the third quarter of the year and will not materially impact the banking group’s earnings.

The bank’s quick exit from the physical commodities business comes on the heel of a debate sparked off last year in the Senate of whether banks that accept deposits should be allowed to trade in physical commodities. JPMorgan and Goldman Sachs (NYSE:GS) have also been under fire from regulators for allegedly manipulating prices of energy and commodities by leveraging their sizable presence in the market.

The development does not impact our $62 price estimate for JPMorgan’s stock, which is more than 5% ahead of its current market price.

See our complete analysis of JPMorgan Chase here

JPMorgan’s physical commodities business forms a small part of its sales & trading operations – a division that accounts for almost 20% of the bank’s total share value as shown in the chart above. The relative importance of the physical commodities business to the bank is demonstrated by the fact that the bank reported nearly $375 billion in trading assets at the end of 2013, of which commodities contributed just $10.2 billion (2.7%).

The bank is not selling off its entire commodities operations, as it will offer derivative products to clients and will also continue to vault and trade precious metals. In fact, the value of the deal ($3.5 billion) compared to the size of commodities held ($10.2 billion), as well as JPMorgan’s claims that the unit being sold generates roughly $750 million in revenues compared to the average annual commodities revenues of $2 billion over the last three years, would imply that the physical commodities unit being sold is about one-third the size of the bank’s total commodities business. ^[2] As JPMorgan valued the assets being sold as a part of this deal at $3.3 billion, you can see that the move does not significantly impact the bank’s total share value by reducing the size of its trading assets by that amount in the chart below. After all, this is less than 1% of all of JPMorgan’s trading assets and the commodities trading business hasn’t been particularly profitable for global banking giants over the last couple of years.

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1. J.P. Morgan Announces Sale of its Physical Commodities Business to Mercuria Energy Group Limited, JPMorgan Press Releases, Mar 19 2014 [↩]
2. JPMorgan sells physical commodities unit to Mercuria for $3.5 billion, Reuters, March 19 2014 [↩]