Why Regional Banks Should Become Alternative Energy Banks

Includes: KRE, RKH
by: James Eckler

The large banks will not be allowed to grow in the future, so it will be the smaller banks and the regional banks that will see rapid growth. (Although we have lost 300 banks per year for the past decade, and the decreasing number is probably going to accelerate.)

Regionals will have to look for ways to be more flexible than the big banks. This means that they will need to find new markets as the consumer side of credit slows to a halt; with an aging population, a country with declining wealth and as the country turns to creating jobs building products for export. The focus of this article then is on how the banks can add a new division that supports the transition to a less-imported-oil-dependent country while supporting export expansion and job growth.

The Business Problem – Growing Energy Demand, Decreasing Imported Oil

The U.S. needs to do both at once, decrease imported oil for power (the RPS standards) and for transportation (the new RFS standards). While we are decreasing imported energy, we need to handle domestic demand increases and also provide additional alternative energy to support the expansion of exports. The U.S. is trying to raise employment growth over the next five years.

We have two options. We can do like we did with the telecommunications industry and take a capital intensive industry and fund it with high cost debt arranged privately, or we can allow banks to arrange for the financing of the debt and the equity for the projects from bank sources. There appear to be enough openings in the Bank Holding Company laws to permit pulling the “non-operating side” of the new alternative energy plants together by banks in conjunction with project developers.

U.S. energy rates are far too low to allow for significant industry growth in alternative energy without support from low cost financing sources. We are stalling the industry by relying on very complex laws and rules for alternative energy production, combined with very overwhelming and complex financing, tax credit, as well as disproportionate partnership rules. Establishing these small scale alternative energy options will require a financing base – and that base should be the regional bank.

The Solution – Banks Own the Energy Toolkit

While banks own all of the tools to help put these small, regional alternative energy production companies together, they are not doing it today. They have the toolkit, but they are still working on organizing it. They have the ability to:

  • Do private placements for equity

  • Own 5% of the companies in voting stock

  • Serve as a consultant to these companies on financial organization

  • Work with the local communities to develop jobs and carry out job creating activities and funding community development (including being a Community Development Entity)

  • Arrange for municipal debt

  • Provide “gap” financing, and financing or purchase of tax related benefits

  • Lease plants to customers (non-operating leases)

The problem with regional banks is they often lack the “centralization” of these tasks and services so that it is easy for a customer to tap into all of the pieces at once.

The regional banks have fantastic opportunities to help their local communities, to grow their loan volume in a very capital intensive area, help with the job creation process, and offer “one-stop service” for energy project developers. They should do it, but today they haven't really started yet. It is coming.

The Benefit to Bank Shareholders

There is a lot of discussion about the lack of loan growth and value creation in the banking industry by the public. This is an opportunity for the banks and their regulators to get together and create specialized areas within a bank that are capable of putting these deals together. They can draw in the right resources without creating losses and all the while build their local alternative energy communities and the related jobs. Many of these alternative energy plants have replicable elements and a bank is the logical place to store this collective knowledge base. Through this these banks can add the most basic resource that the country needs to build its base of exports.

After this starting point, the logical extension is to help develop the uses of the energy and attract additional energy related demand, especially in the export area. It is a winning new business area for the banks, and a way of avoiding the mistakes that were made during the telecommunications era. It is our choice. The banking industry can add loan volume to provide the energy to create products, and the energy to create both exports and jobs.

This could be a new leg of growth on the asset side for banks that also serves a public purpose. Banks may be able to return to their previous role of looking for the triple bottom line – a profitable, an environmental, and a social purpose.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.