According to a senior executive at the top Japanese lender, the U.S. factory development boom, which is being supported by tax incentives under the Inflation Reduction Act (IRA), is assisting Mitsubishi UFJ Financial Group (MUFG) in maintaining its leadership in project finance.
For 13 years running, MUFG has held the top spot in U.S. project financing lending, capitalising on the 2008 global financial crisis to close the gap left when competitors in the U.S. and Europe were obliged to reduce risk-weighted assets on their balance sheets.
According to Fumitaka Nakahama, the head of MUFG’s global corporate and investment banking, the bank is well-positioned to profit from a recent uptick in project finance projects because of its experience in challenging times and retained expertise.
In addition to energy, power, and infrastructure, tax credits from the IRA “have helped expand the scope of project finance to new asset classes like batteries and data centres,” he claimed. He continued, “High-margin financing deals frequently result from the new assets.”
Large infrastructure and industrial projects can be long-term financed via project finance, with repayment primarily depending on cash flows produced by the project. According to LSEG, the total amount of project finance loan transactions in North America increased by over 70% in 2017.
Jon Lindenberg, a senior Citigroup banker who was hired by MUFG in 2009, helped the company grow by luring numerous former members of his staff. Its global presence was bolstered by the 2011 acquisition of $5 billion in project finance loans from the Royal Bank of Scotland.
Due to their extensive global reach and $6 trillion in assets, Japan’s top three banks have dominated the global project finance credit market for more than ten years. But more stringent capital adequacy standards have put more strain on capital-intensive industries like project finance.
The $120 billion in outstanding project financing loans at major banks abroad have been brought to the attention of Japan’s banking regulator. In its policy outlook for this year, the Financial Services Agency stated that long-term exposure necessitates effective risk management.
In its most recent midterm plan, the No. 2 player in the globe, Sumitomo Mitsui Financial Group, reviewed project financing as it “boldly reduces inefficient labor-intensive businesses, low growth, low profitability assets.”
Nakahama confirmed that the company has previously experienced internal pressure.
However, MUFG improved the so-called originate-to-distribute technique of selling debt to investors to shorten the duration of loan portfolios and lessen balance sheet pressures rather than cutting back on the company.
According to Nakahama, the bank is currently seeking to increase its investor base in the United States, Japan, and the rest of Asia in order to improve its distribution capabilities. According to him, it is also concentrated on situations where it may act as a mandated lead arranger or financial advisor in exchange for larger fees.
The company’s profitability has significantly increased, he claimed.
According to Morningstar analyst Michael Makdad, since MUFG departed some unprofitable companies including MUFG Union Bank, its cost-to-income ratio has improved.
Another illustration of how beneficial improvements are “not just exiting underperforming businesses, but also increasing efficiency in the existing businesses,” he noted, is a strong U.S. business profile.