CALGARY, Alberta, Dec 19 (Reuters) - As Wall Street's giants pull back from the energy business, Canadian banks are stepping forward, aided by booming domestic oil production and a reputation for prudence.
Bank of Montreal, Canadian Imperial Bank of Commerce and Bank of Nova Scotia, long-time niche players in energy trading, hedging and dealmaking, are expanding their operations both north and south of the U.S. border, executives told Reuters.
In total, commodity trading revenues at the three banks rose by 30 percent last year, according to a Reuters review of their annual reports. Executives say it has been a struggle to match that performance this year, but that they are still gaining ground.
"We have been able to pick up market share not only in our home market but able to rapidly grow our business in the U.S. and overseas in places like the North Sea," said Adam Waterous, a veteran oil banker who heads Scotiabank's global investment banking team, which is based in Calgary, Canada's oil capital.
With their reputation for caution, Canadian banks say they are unlikely to copy their U.S. counterparts and start amassing physical assets such as metal warehouses or oil storage terminals. Big Wall Street banks including JPMorgan Chase & Co. and Morgan Stanley are looking to sell their physical trading desks as regulatory scrutiny increases and returns diminish.
"This is the fourth time in my career I have seen Americans come and go," Waterous said.
Scotiabank is by far the biggest commodity trader in Canada, due in large part to its long-held ScotiaMocatta precious metals venture. Scotia reported a 26 percent rise in commodity trading revenues to C$425 million ($397 million) last year.
Of the other "Big Five" Canadian banks, Toronto-Dominion Bank does not break out commodity trading revenue figures, but Royal Bank of Canada's trading revenues for foreign exchange and commodities climbed by 11 percent last year.
Canadian banks have a long history in the energy sector as a result of their involvement in the expansion of Alberta's oil sands and the country's status as the world's sixth-largest producer of crude.
That opportunity is now expanding as more producers look to hedge output in Canada, which is expected to more than double to 6.7 million barrels per day by 2030. New products, such as CME Group's Edmonton Sweet oil futures, which was launched this week, open new avenues for trading.
Thanks to a culture of conservative and cautious lending, Canadian banks emerged from the global financial crisis with reputations intact and some of the strongest credit ratings in the world.
"There's a coming of age. In Canada there is the oil sands and in North America there's the shale revolution that provides a great opportunity for our skill set and our history," said Shane Fildes, head of global energy at Bank of Montreal, whose commodity trading-related revenues surged 65 percent to C$66 million in 2012.
Fildes said BMO's energy trading desk expanded recently to five people from three, and its energy business as a whole employed 65 people in Calgary and 45 in Houston. The bank recently hired Paul Dunsmore from Barclays to beef up its commodities derivatives team.
"The counterparty credit of being a Canadian bank is a very smart calling card in this environment," he said.
At CIBC, commodity trading income rose 20 percent to C$52 last year and headcount has also increased across sales, trading, research and analytics, said Arden Majewski, who joined the bank two years ago to run its global commodities business after working for Swiss-based merchant Mercuria and for Merrill Lynch.
Scotiabank, whose commodity business is the largest and most established, has a history of stepping in when foreign banks pull back. Three years ago it bought much of UBS's Canadian commodities trading platform technology, when the Swiss bank exited Canadian energy trading. It bought U.S. energy investment boutique Howard Weale last year.
In September, RBC hired Kathy Kriskey from CIBC as head of commodity investor sales in New York to develop the bank's commodity index products.
But in the scramble to pick up Wall Street business Canadian banks face competition from foreign banks such as Australia's Macquarie and Brazil's Grupo BTG Pactual SA as well as from private equity-backed merchants such as TrailStone and national giants such as Russia's Rosneft .
While many Wall Street banks embraced physical energy trading, Canadian banks have so far shied away.
CIBC, Scotiabank, TD, and RBC do trade physical natural gas, a homogenous product that is easy to value. As well, BMO is in the middle of an approval process to trade physical natural gas, and the bank expects the process to be completed early in 2014.
None of the banks are involved in physical crude trading, however, which would entail greater investment in logistics and storage, Calgary market players said.
That makes them unlikely bidders for businesses such as JPMorgan's physical commodities desk, which is in the second stage of a sale, or the asset-rich oil and power operations at Morgan Stanley, which has tried in vain for more than a year to find a buyer for that desk.
Instead, the Canadians concentrate on trading financials - crude derivatives contracts, usually based on the U.S. West Texas Intermediate benchmark - that enable clients to hedge their exposure to price swings in oil markets.
Client hedging activity tends to increase sharply in relation to oil market volatility. Bank traders in Calgary said they expect hedging demand to stay strong because of booming North American production and supply bottlenecks that exacerbate the discount on Canadian crude.
"With the U.S. investment banks that have pulled out of Canada, there would be more opportunity for these guys to fill that void," said Brian Klock, equity analyst at KBW Inc.
(Editing by Jonathan Leff; and Peter Galloway)