MUFG gears up for Latin America expansion

MUFG gears up for Latin America expansion

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Mitsubishi UFJ Financial Group (MUFG) has stuck it out in Latin America in both good times and bad. The bank first followed Japanese immigrants to Latin America a century ago, opening a branch in Buenos Aires in 1918 and another in Rio de Janeiro in 1919. Now it stands as the largest Japanese lender in the region but it has set its sights on continued expansion, not just in the traditionally stronger markets of Brazil, Argentina and Peru, but also in Mexico, Chile and Colombia.

“Latin America has been very important for a tiny island like Japan,” says John Koike, the regional head for Latin America at MUFG. “We carried the mission to support anything that had to do with financings or banking services for Japanese.”

Over time, MUFG took on more corporate clients from Latin America. Those blue-chip customers now account for roughly three-fourths of the bank’s business in the region, but MUFG is drafting a three-year plan to expand its presence in the region, lend to more non-Japanese multinationals in Latin America and retain the top spot in the project finance market, Koike says.

“We have intentionally leveraged our balance sheet to expand our territory in the past five years or so, but we're moving more into diversifying product sets,” he says. “The banking industry as a whole is under pressure to use less capital to earn more. We’re trying to do it by developing new products.”

LatinFinance recently spoke to Koike about MUFG’s business plans for Latin America over the next few years.

LatinFinance: MUFG has a long history in Argentina and Brazil. The bank recently hired new general managers for Mexico, Argentina, Chile and the Andes [Colombia and Peru]. What are the banks plans for those markets?

John Koike: We are present in six countries today — Brazil, Mexico, Colombia, Peru, Chile and Argentina. Half of our business comes from Brazil, and, of course, Mexico is the next largest. Brazil is always going to be the anchor, but Mexico is next.

Just to let you know the importance of Mexico, three-quarters of our business in Latin America is LatAm corporates, but in Mexico, the portfolio is half Japanese, due to the growth of Japanese businesses in Mexico. Toyota is opening a new factory in Mexico in 2020, a massive Japanese investment, and as the only Japanese bank that has a long history in Mexico, we support almost all the Japanese investments in Mexico.

LF: After 100 years in the region, how do you view the potential for political changes this year, with presidential elections in Brazil and Mexico, among others?

JK: We have a positive outlook for the entire region. In the countries where we operate, GDP growth averaged just 0.2% per year for the past three years. For the next three years, however, GDP growth is expected to average 2.5% to 2.6% per year. In general, interest rates are coming down, inflation is coming down. There are better prospects for the overall economy, but there is always political risk.

We think the midterm elections in Argentina had a positive outcome. Moody's upgraded Argentina in late November, S&P upgraded it in late October, so we have better views towards Argentina. Chile’s presidential election was mostly as expected, but we are more concerned with Mexico and Brazil.

Brazil is still difficult to gauge, to be honest. We don't know who the candidates are. We read new information everyday about who may run or who may not run. We are hopeful that the economic reforms will continue in Brazil, but it may be a struggle to get them through Congress.

After people come back from Carnival in February, they will talk more about the presidential election than pension reform. We're concerned because it poses a risk to Brazil’s sovereign ratings. S&P has not been shy about discussing its concerns. We have the same concerns about the sovereign ratings, which indirectly impact how we do business.

We're also keeping a close eye on the elections in Mexico. It's going to be an important election. And how about the dynamic between the United States and Mexico? [US President Donald] Trump is changing the topic every day. Trump is unpredictable, but we are keeping a closer eye on Mexico’s presidential election more than the NAFTA renegotiations.

LF: You say your business in Mexico is half Mexican and half Japanese. What could the NAFTA renegotiations mean for Japanese investments in Mexico?

JK: Just to put some figures into perspective, I think the number of Japanese companies in Mexico has doubled in the past four years, from roughly 500 to more than 1,000. Mexico has been the fastest growing destination for Japanese investments in recent years. In 2016 alone, 150 new Japanese companies entered the Mexican market. But the trend is slowing. Companies that had not made a formal decision to go to Mexico are now saying, “Maybe we should wait and see.”

Toyota itself changed strategy. It had always said it would start building Corollas in Mexico in 2020. Now, due to the circumstances, it has changed its mind. It’s going to build Corollas in the United States, rather than Mexico, but it has decided to build the Tacoma pickup truck in Mexico. As Toyota changes its strategy, all the suppliers surrounding Toyota, which had a plan to go to Mexico, are changing their strategies.

LF: You often hear in the market that Japanese banks have an advantage because they can lend money with lower rates and longer tenors than other commercial banks. How do you respond to these claims?

JK: MUFG has strong fundamentals and abundant liquidity, but when we want to do business outside Japan, using Japanese yen outside Japan is becoming a little bit of a challenge for us. Other Japanese banks follow our strategy, using yen and converting it to foreign currency. Yes, we do have abundant resources, but the costs are starting to become a challenge. That’s another reason why we want to diversify our revenue sources.

MUFG consists of several different arms. Bank of Tokyo-Mitsubishi UFJ is a commercial bank. Mitsubishi UFJ Trust and Banking is a trust bank. We also have a securities arm and a credit-card company. We have operated each entity separately. We all belong to the same holding company, but certain regulations have not allowed us to truly combine everything together. But now the Japanese government is gradually allowing us to operate as one group, just like Citi and BBVA, so that we can better compete. It’s the same in Latin America. We’re looking into fully integrating our services. Not just the commercial bank, but also the securities division and potentially the trust bank.

LF: Will you focus on Japanese corporate clients in Latin America?

JK: We are also becoming a gateway to Asia. We’ve been working with Japanese companies for years and years. Now we know how to connect the dots. We’re applying that expertise for Latin American companies that want to do business in Asia.

We’re becoming not just a gateway to Asia for Latin American companies but also a gateway to Latin America for other Asian companies. One of our recent successes was a transaction with China Three Gorges [GTG] in Brazil, a Japanese helping a Chinese company do business in Brazil.

LF: CTG has also received financing from Brazil’s national development bank BNDES. How do you view the role of development banks in the project finance market? Do you see them as partners or competitors?

JK: We have historically viewed them as our partners. It’s not always the case that we can take on an entire, and we need to bring in other partners. But in Brazil, BNDES has grown so large that it weighs on the national debt, and the government is trying to limit the role of BNDES. We think it represents opportunities for banks like us. Brazilian companies are starting discussions with us and, I assume, other banks as well, over how to refinance BNDES loans with commercial bank loans. BNDES is shrinking its loan volumes, and its interest rates are not as attractive as they used to be, when the market rate was 14% or 15%.

But when it comes to project finance in Brazil, the challenge for us is the currency. Many infrastructure developers in Brazil earn income in Brazilian reais, so they want to repay their loans in reais. We can provide long-term financing in reais, but our rates are not as competitive as what Bradesco, or Itaú may provide. From time to time, we have discussed with the Brazilian government ways to open opportunities for banks like us — not just Japanese banks, but US banks as well — how we can deploy dollars for project finance deals in Brazil and how the government can provide a framework for that. We have dollars, or yen, but the developers want reais. How to bridge the gap remains a challenge.

LF: The Colombian government makes a portion of availability payments for toll road concessions in dollars. Could the Brazilian government do something similar?

JK: Brazil has started to do the same thing for airport concessions. The airlines that use the airports pay rent in dollars, so why not link the dollar cashflow to dollar-denominated financing? Brazil is opening its doors to dollar players.

LF: Will that work for toll roads and other infrastructure projects?

JK: Like I said, it remains a challenge.

LF: As part of MUFG’s three-year plan, what are your projections for how much the business will grow in Latin America? The region accounts for less than 10% of MUFG’s global revenues today, but how much will it contribute in 2020?

JK: In general, Latin America is going to grow much faster than the United States. Everybody knows that. But you have to be in the market to enjoy that growth. By 2050, Brazil or Mexico will be among the top seven economies in the world, and the United States is going to be behind China and India. Things are going to change, and of course certain Latin American markets are going to grow faster than others.

We will continue to grow but I don't think it’ll change all that much in terms of total share of revenues. We want to grow but we want to make sure that we build a fundamental solid foundation under the name of MUFG in Latin America. We've been here for 100 years and we want to stay for another 100 years. LF