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Japan's negative rates prod megabanks to offshore wind loans

Monday, October 31, 2016 - 18:36

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Two of Japan's biggest banks are redoubling their efforts to lend to the renewable energy industry as negative interest rates at home prompt them to search for stronger yields abroad.

[TOKYO] Two of Japan's biggest banks are redoubling their efforts to lend to the renewable energy industry as negative interest rates at home prompt them to search for stronger yields abroad.

Mitsubishi UFJ Financial Group Inc and Sumitomo Mitsui Financial Group Inc have pushed past European competitors such as Banco Santander SA in writing project finance loans to clean-energy developers during the first 10 months of the year, according to data compiled by Bloomberg New Energy Finance for its conference starting Tuesday in Shanghai.

The institutions have been enticed by steady yields from offshore-wind projects in the North Sea, backed by government subsidies and Europe's quest to reduce greenhouse gas pollution.

Those projects have helped make up for a slowdown in the domestic market, where banks are finding it tougher to make money on loans. Interest rates at Japan's domestic banks fell to an average 0.703 per cent in August, the lowest since at least 1993, according to the Bank of Japan. Meanwhile, Japan's solar boom has lost pace amid cuts in the tariffs that solar power producers receive and the growing difficulty in finding suitable locations for large-scale projects.

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"Lending for overseas projects will continue so long as there's no weakening of policies" to support clean energy, said Megumu Murakami, who studies climate change finance for the Japan Research Institute, a unit of Sumitomo Mitsui. "The banks have a strong motivation to strengthen lending in renewables" with many governments in developed countries aiming to reduce greenhouse gas emissions by 80 percent by 2050, she said.

MUFG, Japan's largest lender, is in the top position as lead arranger of clean energy asset financing so far this year with US$1.88 billion, followed by Sumitomo Mitsui at US$1.52 billion, pushing Banco Santander of Spain, last year's top provider, to third, according to BNEF, which will host the "Future of Energy" summit in Shanghai on Nov 1 and 2.

"We have long been leading the renewable energy market especially in Europe and North America," Yoko Yanagida, head of the bank's power and infrastructure department, said in an interview. "In Japan, we take pride in our renewable financing which began about 15 years ago, even before the feed-in tariffs started. That allows us to attract developers and there is demand for financing." Santander officials declined to comment.

The Bank of Japan slashed its benchmark policy rate below zero earlier this year after some central banks in Europe started experimenting with negative rates in 2014. The idea is to deliver a jolt to the economy by discouraging saving. It's also prompted banks and investors to search more widely for assets that pay a yield.

MUFG and its Japanese megabank peers Sumitomo Mitsui and Mizuho Financial Group Inc have traditionally been active in financing renewable projects in Europe and the US, according to BNEF.

"We have been a pioneer in providing project finance for renewables and for other environmentally-conscious infrastructure projects," Masako Shiono, a Mizuho spokeswoman, said by e-mail. "We will continue working on projects where we can apply our expertise." Low returns in Japan and relatively higher returns offered by renewable projects benefiting from incentive programs called feed-in tariffs or similar guaranteed power purchase agreements continue to make those markets appealing, said Ali Izadi-Najafabadi, a Tokyo-based analyst with BNEF.

"The megabanks have naturally become ever more hungry for yield globally" after the Bank of Japan's adoption of its negative-rate policy earlier this year, he said. "This has resulted in MUFG, Sumitomo Mitsui and Mizuho all being among the top 10 lead arrangers for asset financing of renewables projects in 2016 year-to-date."

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