RBS in project book talks with Japan’s MUFG: sources

By Denny Thomas and Victoria Howley

HONG KONG/LONDON (BestGrowthStock) – Royal Bank of Scotland (RBS.L: ) is in talks to sell a $6.4 billion project finance book, sources said, including loans for London’s orbital motorway and a gas pipeline between Russia and Germany.

The sale of assets to Japan’s Mitsubishi UFJ Financial (MUFG) (8306.T: ) would help the state-backed British lender to shrink its balance sheet, said the sources, who are familiar with the process, declining to be named.

Project finance books are typically sold at a discount or premium to the value of the assets, depending on the quality.

RBS declined to comment on whether it was in talks with MUFG or on the value of the potential deal. The Japanese bank also declined to comment.

The bank, 84-percent owned by the British government, is being forced to shed assets by European Union competition authorities and is streamlining its business after receiving billions in state aid at the height of the credit crisis.

The portfolio includes a loan RBS extended last year for the widening of London’s M25 orbital motorway and financing for a pipeline that will ship 55 billion cubic meters of Russian gas to Germany and the European Union in 2011 and 2012.

The British bank does not plan to exit project finance if a deal goes ahead and plans to retain its UK origination staff, a source close to RBS told Reuters, though lending has been slimmed down dramatically as it is non-core.

“The UK government expects RBS to carry on lending to infrastructure investment,” the person added.

RBS has raised over 4 billion pounds ($6.42 billion) from the sale of a network of over 300 UK branches, most of its holding in the RBS Sempra commodities joint venture, and an 80 percent stake in the WorldPay payment processing business.

Mitsubishi UFJ, Japan’s largest lender, took a one-fifth stake in U.S. investment bank Morgan Stanley (MS.N: ) (Read more about the money market today. ) at the height of the financial crisis and bought assets from two U.S. banks this year.

MUFG has looked to grow overseas given sluggish growth prospects in Japan, a factor which similarly prompted Spain’s BBVA (BBVA.MC: ) to pay $5.8 billion for a stake in Turkey’s Garanti Bank (GARAN.IS: ) this week. (ID;nLDE6A10AP: )

“Japanese banks are happy to look at any assets global banks are selling, given poor growth in Japan,” said Daniel Tabbush, a bank analyst at CLSA in Hong Kong.

A deal with RBS would give MUFG a strong foothold in lending for energy and other infrastructure projects in Europe, the Middle East and Africa.

Project finance, where banks arrange a mix of debt and equity to fund large industrial developments, can be a big earner for banks through the advising fees they charge.

RBS ranks No.5 in global project financing so far this year, advising on a total $9.64 billion worth of projects, according to Thomson Reuters data. MUFG ranked No. 24.

Japanese markets were closed on Wednesday for a national holiday. Shares of MUFG closed flat on Tuesday at 367 yen.

At 1520 GMT, RBS shares were flat at 45 pence.

MUFG, which has raised 1.4 trillion yen ($17.4 billion) in capital in the past two years, is the best capitalized among Japan’s top three lenders.

Analysts expect MUFG to be able to meet Basel III capital requirements by the full implementation in 2019.

MUFG bought out UnionBanCal Corp, a holding company of California-based Union Bank, in 2008 and spent $9 billion for a stake in Morgan Stanley in 2008.

(Additional reporting by Taro Fuse in Singapore, Taiga Uranaka and Nathan Layne in Tokyo, Abhinav Sharma in Bangalore, Greg Roumeliotis in Amsterdam and Karolina Tagaris and Alisdair Reilly in London; Editing by Jason Neely and Jon Loades-Carter)

RBS in project book talks with Japan’s MUFG: sources