Japan's banking titans are hiring Spanish-speaking bankers to win new business in Latin America and handing out loans to junk-grade borrowers in the United States as they probe deeper overseas to fight meager returns at home.

Lenders such as Sumitomo Mitsui Financial Group Inc (SMFG) <8316.T> have ramped up overseas lending since the euro zone debt crisis sent European rivals packing. The move abroad was given a new impetus this month after the central bank unveiled a stimulus plan that will plunge Japan into an ultra-low monetary environment, further eroding razor-thin loan margins and cutting returns on Japanese government bonds.

Banks including Mizuho Financial Group Inc <8411.T> are pushing ahead to identify new overseas borrowers, including corporates with little Japanese connections and natural resources developers seeking copious funding. Their ventures abroad, while still modest versus their domestic operations, point to their growing risk-tolerance in emerging markets, and it remains to be seen whether their efforts will pay off.

"We now arrange deals that are very different from what we used to do in the past, that is, those with very strong local flavor with no involvement of Japanese companies," said Takayuki Sakai, chief manager of project finance at Bank of Tokyo-Mitsubishi UFJ, a core unit of Mitsubishi UFJ Financial Group Inc (MUFG) <8306.T>.

The bank is looking to increase local currency-denominated lending, such as those in the real, as opposed to the usual dollar-dominated loans, he said.

Bank of Tokyo-Mitsubishi UFJ has been beefing up its project finance business in Latin America, hiring specialist bankers who speak Spanish and Portuguese to gain better access to projects involving exclusively local parties.

Last summer, the bank hired Ralph Scholtz, BNP Paribas' Latin America project finance managing director, as its region's project finance team head, as well as a Portuguese-speaking banker from HSBC Holdings Plc .

The bank said Latin America is a promising market for project finance, highlighting plans in Mexico to build gas pipelines, and development of copper mines and auxiliary facilities such as power plants in Chile.

MUFG does not disclose dollar-based overseas loan data.

Domestic rivals SMFG and Mizuho's outstanding overseas loans totaled $277 billion as of December, a hefty 66 percent increase from March 2010.

NON-INVESTMENT GRADE

Sumitomo Mitsui Banking Corp (SMBC), a core unit of SMFG, said a team of its U.S. bankers are targeting small and medium-sized local businesses, including those with credit ratings of BB or lower.

The bank declined to disclose interest margins for those non-investment grade borrowers. Industry sources say loans to BB-rated borrowers have spreads of 170-180 basis points over A-rated ones.

There is a limit to what banks can earn from loans to clients with a top-notch credit status, said Hideo Kawafune, senior vice president at SMBC's international banking unit.

"Our current loan portfolio is a bit weighted on high credit rating borrowers, and we would like to expand lending to customers in the BB+ to BB- class," Kawafune told Reuters.

The bank is increasing loans to U.S. municipalities after poaching a public finance team from a U.S. bank in 2008. Recent transactions include a $209 million loan to New York City Water Financing Authority.

Kawafune said loans to non-investment grade corporates and municipalities in the United States still represent a small portion, roughly 10 to 20 percent of the overall loans

But their growth is outpacing the rest of the bank's overseas lending, he said.

M&A FINANCING

Mizuho Corporate Bank, a unit of Mizuho Financial, said acquisition financing for non-Japanese companies is likely to drive its overseas loan growth this year.

The bank is working on financing for two multi-billion-dollar M&A deals involving corporate clients based in North America and Europe, Mizuho bankers said, without elaborating, citing bank-client confidentiality agreements.

Mizuho Corporate Bank said previously it is targeting big companies such as BP PLC , Prada SpA <1913.HK> and IBM in the Americas, Europe, East Asia and Oceania.

Kazuya Nakagawa, senior vice president at Mizuho's international coordination division, said M&A finance is relatively profitable compared to loans to blue-chip companies.

M&A finance is attractive in that it provides short-term loans to borrowers, and so does not tie up the bank's capital for long.

It could also lead to additional businesses when the borrower switches to a more permanent mode of financing upon the completion of the acquisition, such as issuing bonds, according to Mizuho bankers.

(Reporting by Taiga Uranaka; Editing by Ryan Woo)