TOKYO – Japanese lenders like Mitsubishi UFJ Financial Group are aggressively pursuing project financing deals around the world, intensifying competition with traditional French rivals as well as local players in hot new markets like India.
The push by Japanese banks, which are scrambling to put trillions of yen in deposits to work outside their sluggish home market, comes as loan demand rebounds from the global financial crisis and as infrastructure projects in developing economies surge. MUFG, Japan’s top lender, grabbed headlines in November when it agreed to buy project finance loans worth some $ 5.0 billion from the Royal Bank of Scotland and it has told Reuters it is open to taking over more portfolios.
Rivals Mizuho Financial Group and Sumitomo Mitsui Financial Group have also positioned project finance as a key driver of overseas growth, along with investment banking, and retail banking and corporate lending in Asia. “We want to arrange twice as many projects in 2011. Given strong growth in our pipeline, it is not an unrealistic expectation,” said Takeshi Kurita, general manager of global structured finance at Mizuho’s corporate banking unit. The banks argue their combined 270 trillion yen ($3.3 trillion) in deposits give them access to long-term cheap funding and an edge over western rivals less able to sink large sums in projects such as roads and power stations that may take years to produce a return. The red-hot Indian market sent Indian banks such as State Bank of India to the top of the league table of mandated arrangers in 2010, in which Mitsubishi UFJ ranked NO 8, SMFG No 10 and Mizuho No 20.
Luring the three banks is a better potential return than offered in deflationary Japan, where interest rates are near zero and loan demand has shrunk for 13 straight months, a reflection of the economy’s weak growth prospects and a corporate sector already flush with cash. Typically project finance loans are non-recourse, meaning they are secured by the project’s assets. This lessens the risk for the developers, who in return pay higher rates. Those returns may not be enough to attract a lot of western lenders, but they are appealing to yield-hungry Japanese lenders. The risk, analysts warn, is that they settle for margins that are too slim in their quest to win more business.
“We need to wait and see whether they will be able to secure enough profit margin,” said Takehito Yamanaka, senior financial analyst at MF Global FXA Securities. While project finance is a small part of overall bank lending, it has rebounded back to be worth around $207 billion globally in 2010, not too far from pre-crisis levels in 2008 and growth is expected to be rapid. Developing nations are rushing to build infrastructure, projects that were put on hold during the financial crisis are getting the greenlight, and debt-ridden industrialised countries are now seeking loans for schemes that once would have been government financed. “The market is getting bigger as projects that were not previously seen as targets are now being covered by project finance,” said Masato Miyachi, global head of structured finance at the Bank of Tokyo-Mitsubishi UFJ, the core commercial banking unit of MUFG. One such project was the widening of a 30-kilometre stretch of a motorway in the Netherlands, worth some 250 million euro with BTMU the mandated lead arranger.
MUFG’s project finance assets stood at about 1.4 trillion yen against 79 trillion yen for its total loan book as at the end of September. Japan’s top three banks already dominate cross-border project financing in Asia and the region will continue to be a big focus. Fumiaki Kurahara, general manager of structured finance at SMFG’s core banking unit, wants to double its team of project finance bankers in the region, including Australia, to around 140 over the next couple of years. He is also interested in South American nations such as Brazil and keen on North Africa. “We are very busy now, got our hands full. We want to actively expand,” Kurahara said.
But the Japanese banks also note that some markets are proving tough to crack with local players in markets like India, China and Thailand dominating the action. Providing funding in local currencies like the rupee can also be problematic. India is the biggest project finance market in Asia and the most attractive new market for Japanese banks. In addition to its big growth potential, India is seen as more open to international banks than China, which has more political and legal risks.
“Local currency funding is a challenge in our efforts to expand project finance business,” said Mizuho’s Kurita, adding that India was a key focus market and Mizuho was working to participate in more deals despite the currency challenge. He noted the bank was able to recently join in an Indian power transmission line project arranged by International Finance Corp, providing $30 million in the rupee-denominated loan without any need to fund in the local currency.
