Insight: For nuns and analysts alike, bank commodity earnings are a mystery

When the Reverend Seamus Finn got an email from Goldman Sachs last week, the giant Wall Street bank was addressing an issue that was already on his mind.

"We were getting ready to go back to them and talk to them about commodities anyway," said Finn, who heads up faith-consistent investing for the Missionary Oblates, a Washington DC-based Catholic group that owns Goldman shares.

Driven by a determination to invest in a socially conscious way, Finn's group has been concerned about banks' commodities activities since 2008, when a spike in energy and agricultural products caused food riots in Africa. The issue is whether banks' trading activities artificially drive up food prices.

The pre-emptive message from Goldman, sent ahead of last week's Senate hearing on banks' commodity activities, asserted that the firm's investments in physical assets such as aluminum warehouses do not drive up prices. But it left unanswered many of Finn's questions about what the bank is doing in the sector.

(Goldman moved on Wednesday to address criticism of its Metro International metals business, announcing it would offer customers immediate access to stored aluminum.

The statement sent to Finn and later released widely did not address one of his broader concerns: that no one outside the banks themselves knows for sure how big their commodity trading arms are, how much they trade, or how much money they make.

"We would like more disclosure on that," Finn said.

He is unlikely to get his wish. While the country's largest banks are required to disclose their activities in some consumer-facing businesses such as mortgages, there is no similar requirement for them to do so on the commodities side.

Commodity "revenue" figures reported to securities and banking regulators can differ wildly - and may not provide an accurate reflection of the size of the business.

Most banks report some numbers, but one of the biggest - Morgan Stanley - hasn't put a dollar figure on its commodities revenues in more than a decade, reporting only the year-on-year percentage change in its securities filings. None provide cost, salary or bonus figures, making it impossible to guess at relative profitability.

"I don't think you have any banks that are properly disclosing commodities revenue," said George Kuznetsov, head of research and analytics at Coalition, a British consulting firm that employs more than 100 researchers to scrutinize public disclosures and conduct interviews to estimate trading revenues for investment banks.

The issue is becoming increasingly important as politicians press the banks for more insight into the risks they are taking by owning metals warehouses or chartering oil tankers, and as some seek buyers for their physical commodities holdings. On Friday, JPMorgan said it was selling out.

"Their physical commodities activities are not comprehensively or understandably reported...they're often buried in arcane regulatory filings," Senator Sherrod Brown, Democrat for Ohio, said at last week's hearing.

AS INSTRUCTED

The lack of clarity over trading operations has long been a vexing issue across other desks as well, such as foreign exchange and equities. But the current debate over whether banks should be allowed to continue trading so actively in raw material markets has only sharpened focus on this area.

In sum, it's big money: the top ten global banks collectively made about $6 billion trading commodities last year, down 24 percent from in 2011, according to Coalition.

The banks say that they are providing regulators and investors with all the information they are required to give.

"Our disclosures are in line with all relevant reporting requirements and provide investors with all material information," said a spokesman for Morgan Stanley. He said the bank provides data on the main drivers of results across its three core business lines but does not break down earnings to a "product" level like commodities.

Critics say the disclosures still leave much to be desired.

"They really don't tell us much," said Robert McCullough, an energy economist who spent six years litigating an electricity market manipulation case against Morgan Stanley.

"If you wanted an estimate of what their position was in electricity in 2001, six years of litigation was not sufficient to get it," he said.

In terms of financial system risks, the Federal Reserve, which regulates banks, has the power to make on-staff visits and request data sets from the banks on their commodities activities. The agency also keeps on-site staff at the banks who are dedicated to monitoring commodities.

But that is not enough, according to some former examiners.

"There's a sophistication gap between the regulator and the bank that they regulate," said Mark Williams, a former Federal Reserve bank examiner and energy executive who now teaches finance at Boston University.

"The commodities are where the more sophisticated transactions take place," he said.

Y-9C? BECAUSE THEY HAVE TO

One bank filing collected by the Fed is called "FR Y-9C." The detailed questionnaire requires banks to tell the Federal Reserve everything from how much money they spend on postage to how much money they make trading commodities.

But because regulatory accounting rules may vary from the way banks report their earnings to investors, the Fed's questionnaire can often bear little resemblance to banks' Securities and Exchange Commission filings.

Goldman Sachs, for instance, reported only $100 million in "commodity and other" trading revenues to the Fed in 2012. In a separate filing with the SEC, the bank said it made $575 million trading commodities. Industry sources actually pegged Goldman's commodity revenues closer to $1.25 billion for the year.

Asked about the different figures, a spokesman for Goldman Sachs said: "We disclose figures in the way we are required. That may not correspond to the way we actually measure the performance of certain trading businesses." He declined to provide a figure for the bank's commodity trading revenues.

JPMorgan Chase and Citigroup Inc provide similar commodity trading figures to the Fed and the SEC. But like Goldman, both banks warn investors in their SEC filings that the figures don't fully represent their performance because they exclude earnings on interest, an "integral" part of trading revenue.

JPMorgan reported nearly $2.4 billion in commodities trading revenues for 2012, which on paper was more than Goldman and Morgan Stanley combined. But several analysts say actual revenues are likely closer to this year's $1.5 billion target.

Spokesmen for JPMorgan and Citi declined comment.

With so much uncertainty around the headline numbers, attempting to separate banks' paper bets on commodities from physical trading - the segment most at risk from regulators - is all but impossible. Analysts at Deutsche Bank estimated in a report last week that JPMorgan's physical book accounted for somewhere between a third and two-thirds of its overall commodities trading operation.

Some other banks have taken the view that their commodity businesses are too small to merit much attention.

At Deutsche Bank and Barclays Bank, commodities revenues may show up in an occasional earnings transcript or investor presentation, but neither bank discloses in filings how much money it makes trading in the sector. In its 2012 annual report, Deutsche Bank simply notes commodities "revenues were lower" compared to 2011. Barclays makes no mention of the segment's performance in its annual report.

Spokespeople for Deutsche and Barclays declined to comment.

ANALYSTS VS. NUNS

The lack of detail on banks' commodity trading revenues does not seem to worry some on Wall Street. It's just one part of a mosaic of items analysts look at in evaluating the firms.

"It's just not been a significant issue for me," said David Hilder, who covers banks for brokerage Drexel Hamilton.

And some experts say even the limited disclosure by banks is better than the alternative. Many of the big global commodity traders, such as Vitol and Trafigura, are privately held and therefore subject to no disclosure at all.

"The (trading) activity will not go away," said Randall Guynn, a banking lawyer at Davis Polk, who testified at last week's hearing. "You're better off having it in regulated companies where there is some disclosure."

That hasn't stopped some influential groups from calling on banks to step up their reporting.

Last year, the CFA Institute - which confers the Chartered Financial Analyst credential to investment professionals worldwide - endorsed a report calling for banks to improve their risk disclosures to investors. Banks' trading books, in particular, remain "very opaque" to investors, said Vincent Papa, the institute's director of financial reporting policy.

"In many cases, they give you a figure which they deem to be meaningless from an internal management standpoint," Papa said. "They just give it for compliance reasons. That's not beneficial to investors. It's about giving relevant information, rather than just ticking the boxes."

For some of the banks' investors, commodity trading data is very relevant indeed. The Interfaith Center on Corporate Responsibility (ICCR) represents $100 billion worth of institutional investors like Finn, the DC reverend. The group openly calls for corporations to avoid speculating on food commodities.

But with disclosures being so lacking, ICCR members like Sister Nora Nash of the Sisters of St. Francis of Philadelphia have little idea whether their investments in big banks like Goldman Sachs comply with this philosophy.

"I would absolutely hope that they would disclose what is happening to those of us who are shareholders," Nash said.

(Additional reporting by Douwe Miedema in Washington D.C.; Editing by Claudia Parsons)