Home loan price war takes toll on Tamweel

Widely viewed as a bellwether of the residential housing market, Tamweel reported its second-straight quarter of decreased profit this year. Reuters

A price war over home loans sapped second-quarter profits at Tamweel, as its mortgage book generated less income and fewer property deals materialised.

The Dubai-based provider of Sharia-compliant mortgage loans reported net profit of Dh18.5 million (US$5m) for the quarter, a drop of 33 per cent on the second quarter last year.

Widely viewed as a bellwether of the residential housing market, Tamweel reported its second-straight quarter of decreased profit this year. The company did not provide any commentary alongside its financial results.

Tamweel's lending margins have been eroded amid fierce competition among mortgage lenders this year as banks attempt to rekindle the UAE's property market.

The pricing war has drawn criticism from politicians and bank customers because of high settlement fees charged by some lenders to existing customers seeking to exit their mortgages and get better rates elsewhere. Banks say such fees are necessary to retain their customer base.

The dip in quarterly earnings reflected Tamweel's declining profit on its mortgages with no equivalent decrease in the company's cost of funding its operations, said Shabbir Malik, a financial analyst at EFG Hermes.

"They've experienced a decline in spreads and their fee income is down," he said. "The decline in spreads is mainly because of competition from commercial banks, which are offering lower rates on mortgages."

Tamweel reported a 3.3 per cent drop in income from Islamic financing and investing assets compared with a year earlier to Dh136.8m during the quarter. Charges for bad debts held steady from a year ago at Dh13.5m.

The company's loan book has increased by 1 per cent to Dh9.3 billion so far this year.

United Arab Bank, Standard Chartered and HSBC Middle East have all further reduced teaser rates on mortgages during the past year.

Tamweel's shares fell 3.1 per cent in trading yesterday, against the background of a 0.5 per cent decline on the Dubai Financial Market General Index.

Last week, Tamweel said it had shelved a planned sale of a sukuk backed by residential mortgages "based on market feedback". The sukuk sale, said to be about $235m, would have been the company's second foray into credit markets this year.

Tamweel had traditionally funded itself through wholesale credit, but the onset of the global financial crisis revealed the weaknesses of this business model after it was shut out of capital markets.

The company's funding difficulties were thought to have been resolved by a Dh374.7m deal in which Dubai Islamic Bank increased its holdings in Tamweel from 21 per cent to 58.3 per cent, taking control of the company.

"They're certainly trying to bring down their cost of funds, but they're not under any pressure to do a bond sale," Mr Malik added. "They'll be looking towards a lower cost of funds, but if the market isn't giving them that, then they'll wait."

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