Why Fifth Third is raising its bet on alternative power

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Fifth Third Bancorp is building out its renewable energy banking business, highlighting how the alternative power niche isn’t just for the biggest banks.

The $169 billion-asset Fifth Third recently added three new managing directors to its renewable energy investment banking group. With the additions of Timothy Beach, Ari Citrin and Oliver Janssen, the bank intends to offer more specialized capital markets and M&A advisory services to renewable energy firms, most of which are in solar.

The addition of a renewable energy investment banking group is also part of a larger strategic push into the San Francisco market, where Fifth Third recently hired Joseph Yurosek as California market president.

“We like the risk appetite, a lot of headwinds are behind the industry, it’s becoming more commonplace and generally accepted, and that led to the bank saying, ‘We want to devote more resources to growing this sector,’ ” said Eric Cohen, head of Fifth Third’s renewable energy group.

Fifth Third began financing renewable energy in 2012, Cohen said. The bank started working with solar energy firms in North Carolina and throughout the Southeast and has since taken that business nationwide.

In that time, Cohen estimates that Fifth Third has lent more than $2 billion to the sector, ultimately financing over 2.5 gigawatts’ worth of solar projects. Its renewable energy practice has 25 bankers, including 12 focused exclusively on investment banking capabilities.

Fifth Third’s recent expansion reflects a growing interest by banks in the renewable energy sector, particularly solar energy, observers say. According to the U.S. Energy Information Administration, in 2017, solar surpassed biomass to become the third most prevalent form of renewable energy behind hydroelectricity and wind. The agency also anticipates that nonhydroelectric renewable energy such as wind and solar will be the fastest growing source of electricity in the U.S. for the next two years.

Big banks have often touted their sustainable financing bona fides — JPMorgan Chase in 2017 pledged $200 billion in financing for wind farms and other renewables over eight years, and Wells Fargo made a similar promise last year.

But renewable energy has also become more appealing and accessible to regional and community banks. For example, the $4.3 billion-asset Live Oak Bancshares in Wilmington, N.C., formed a renewable energy lending division in 2016. And last year, the $88.2 billion-asset Bank of the West committed to financing another $500 million over the next five years in clean and renewable energy, part of a broader sustainability pledge.

There are a number of reasons why renewables are making a lot more sense to banks, including state policies, demand for more types and sizes of financing, and growth in the industry. Banks are also becoming more familiar with the sector more generally; they know what kind of risk profile and default rates they can expect when lending to certain types of renewable energy firms.

“I think that what’s happened here is that as the asset class has become better understood,” said Audrey Louison, chair of the project development and finance practice at the law firm Mintz. “It’s now become boring, and that’s a good thing in banking.”

Of course, the sector is not entirely without risk. Earlier this year, five banks warned investors of potential financial exposure arising from tax credits they had received that were tied to a solar energy firm that later declared bankruptcy.

State policies have played a role in the growth of the renewable energy sector — and in making it more bankable. For instance, more than half of all states also now have established renewable portfolio standards requiring a percentage of electricity sold by utilities be generated from renewable sources.

And some states — including Connecticut, New York and California — have created green banks, public or quasi-public institutions that typically work by using public funds to stimulate private sector investment in renewable energy production.

Those green banks and other state policies have helped to stimulate demand for small-scale solar projects, like community solar projects and rooftop solar arrays for homes and businesses.

Often those projects call for much smaller loans and lines of capital. Larger banks sometimes aggregate smaller solar projects to reach a critical mass that meets their lending criteria, but smaller projects are also appealing to regional and community banks, Louison said. Additionally, some banks are getting more comfortable lending for working capital at earlier stages of a solar development project.

“There’s a place for everybody in this very quickly growing market of solar projects,” she said.

Other types of renewable energy, like offshore wind or biomass, show promise, but banks appear to be the most comfortable with solar right now. It is familiar to many banks at this point, and the sector is providing plenty of smaller financing opportunities for regional and community banks.

“If you’ve got a limited amount of capital to put into the energy sector, it’s an easier play to invest in solar where the learning curve is a little bit shorter,” said Eric Macaux, a member at Mintz specializing in renewable energy deals.

Fifth Third sometimes works in other areas of the renewable energy sector — typically when it Is something an existing client is interested in — but right now is most comfortable having “the vast majority” of its business in solar, said Rob Schipper, its head of investment banking.

Fifth Third already sees ample opportunity within solar alone and basically wants to be a one-stop shop for renewable energy clients, offering loans, deposit products, treasury management and investment banking services. Having M&A advisory services, for example, should position Fifth Third fairly well as new participants enter the solar energy market, Schipper said.

“In an early-stage project, we can provide financing. When that project gets up and running we can help the developer sell those assets, and as the projects get bigger we can help them evaluate syndicated financing,” Schipper said.

Cohen said having the renewable energy specialty has also proved to be a drawing card with nonenergy clients, especially as more companies take an interest in investing in renewable energy or generating it for themselves.

“We can add value to them in another way that maybe some of our peer banks can’t,” he said. “We offer traditional banking services, and then also have an expertise in an area where they’re leaning.”

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Commercial lending Energy industry Regional banks Community banking Fifth Third Bancorp