TOKYO -- Japan's top banks are rethinking their expansion of lending for power, transportation and other infrastructure projects as stricter international banking regulations loom.
As European banks pulled back from lending after the 2008 global financial crisis, Japanese groups, which emerged less damaged from the crash, took up the slack in project finance.
Global project financing grew 23% on the year in 2018 to $282.6 billion, according to financial data provider Refinitiv, reaching the highest level in data going back to 1994. Of this amount, Japanese banks including Mitsubishi UFJ Financial Group and Mizuho Financial Group accounted for 15%.
Overseas infrastructure has provided an avenue of growth for Japanese banks facing limited prospects for increasing lending at home. But the new Basel III bank regulations to be phased in starting in 2022 will demand stricter assessments of credit risk than before.
This change means that banks "cannot simply compete on the amount of their lending," says a loan officer at Sumitomo Mitsui Banking Corp., part of Sumitomo Mitsui Financial Group.
Under Basel III, the method of calculating risk-weighted assets, which affect how much capital banks need to hold, will change. The highest-rated debt will have a risk weight of about 58% or more, up from the current average of 23%. Higher amounts of risk-weighted assets translate into lower capital adequacy ratios.
U.S. and European banks, which will feel the Basel III more given their international scale, are also showing reluctance to ramp up project financing further. By contrast, Chinese banks, which have racked up Asian deals related the Belt and Road Initiative, face less of a need to adapt to the regulations.
The impact of Basel III is likely to accelerate growth in project bonds, an alternative to bank loans for financing infrastructure. Backed by future income-streams, these bonds increased in issuance to $45 billion in 2018, up nearly a third from three years earlier.
Japanese banks seeking a bigger piece of project bond underwriting will run up against Citigroup, JPMorgan Chase, HSBC and other Western banks that top the league table. MUFG and its peers have been on a hiring spree in the U.S. and Europe to build up their underwriting teams, but catching up to bigger rivals will take time.
Infrastructure projects remain on the rise in Asia and in Europe, where big offshore wind farms are increasing.
"There is little reason to worry about a collapse in demand for financing, particularly around renewable energy," said a loan officer at MUFG Bank.