Mortgage giants slim down

The two largest home lenders are trimming their loan portfolios as they have stopped taking on new customers while their funding problems persist, but their long-expected merger is looking less likely.

The Tamweel office in Al Barsha.
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Amlak and Tamweel, the country's two largest mortgage providers, are beginning to scale back. Mortgage brokers and industry insiders say the companies, which have been in stalled merger talks since the end of 2008, have begun to pare down their loan portfolios as they ponder their return to financial health.

While neither of the publicly listed companies has released quarterly financial information this year, both saw the value of mortgages decline last year. Amlak had Dh10.06 billion (US$2.73bn) of loans and mortgages on its books at the end of 2008, but had only Dh9.49bn by the middle of last year, a drop of Dh568 million. Tamweel has seen a less pronounced decline in the value of its loans - from Dh10.48bn at the end of 2008 to Dh10.43bn at the end of last year - but sources inside the company say the portfolio would be shrinking by about Dh500m a year if it were not for pre-agreed payments on property projects boosting asset levels.

The reason for the tapering off in the companies' loan values is simple: customers are repaying their mortgages - coupled with neither company making new loans. Brokers also say customers are also beginning to refinance and move their mortgages to other banks. Kimberly Warren, the regional head of the mortgage advisory John Charcol, says the move was welcome in a mortgage market that had been largely frozen for the past 18 months.

"Amlak and Tamweel had 60 per cent of the mortgage market," she says. "When they stopped lending there was a big halt in the lending market ? Now you are starting to see lenders come back in, especially in the beginning of this year. It's a good sign." What the trend will mean for Amlak and Tamweel's futures is less clear. But it may presage a work-out for the companies that skirts a merger and offloads loans on to the balance sheets of established banks.

Tamweel is already considering strengthening ties with Dubai Islamic Bank (DIB), which founded the company in 2003 in a partnership with Dubai World. The bank said earlier this month it was thinking about upping its stake in Tamweel from the current 20 per cent, a move sources inside the company say could be a first step towards a takeover. Analysts say DIB's solid deposit base and diverse sources of financing would put Tamweel's mortgages on a more solid footing than if it remained an independent entity, suggesting that moving Tamweel's loans on to DIB's balance sheet might be cheered by investors.

"To have them absorbed into somebody else makes sense, because they could raise money overseas through an [Islamic bond] in Malaysia or get financing in other ways," says Deepak Tolani, an analyst at Al Mal Capital in Dubai. "They then have multiple sources of financing." While DIB is a natural suitor for Tamweel given its shareholding in the company, finding a white knight for Amlak may prove more difficult. It is unclear whether Amlak, which was founded by Emaar Properties in 2000, is in talks with banks about absorbing assets. Officials at the company declined to discuss the matter and representatives of a committee set up to oversee the planned Amlak-Tamweel merger could not be reached for comment.

Whatever the ultimate resolution, the situation now for Amlak and Tamweel could hardly be more different than in the good times, when the companies rode Dubai's housing bubble to large profits and built mortgage portfolios together worth more than Dh20bn in a few short years. Emaar, the Middle East's biggest developer by market capitalisation, started Amlak to help investors secure financing for apartments, villas and commercial space in its large projects at the beginning of Dubai's property boom. Tamweel's formation in 2003 was in large part a response to Amlak. Nakheel, the Dubai World-owned developer behind the emirate's Palm islands, wanted a lender of its own to finance investments in its massive projects. Istithmar, a Dubai World financial arm, formed a partnership with DIB to make it happen.

In retrospect, analysts say the business models of both companies were problematic. To fund their Islamic mortgages, they relied primarily on borrowing from the interbank market for terms of less than a year. Their home loans, in contrast, typically had terms of 15 years. Some customers would refinance their loans or sell their properties before their loans matured, of course, but executives say the average life of a mortgage in the UAE is still six or seven years.

With short-term funding, Amlak and Tamweel had to rely on the willingness of their banks to roll over loans. If the banks were not ready to do so, the mortgage providers would be stuck. They could not call on customers to pay off their long-term mortgages, and raising money in short order from other sources would be difficult. When the global financial crisis spread to the Gulf in late 2008, the newfound reluctance of banks to continue extending short-term loans caused major problems for Amlak and Tamweel. The companies had made efforts to secure alternative sources of financing - Amlak raised a $200m Islamic bond in 2005, while Tamweel issued a $300m sukuk in 2008 and securitised $210m worth of mortgages in 2007. That, however, was not enough to stave off a halt in lending.

During the merger discussions that followed, suggestions were made to allow the companies to accept customer deposits to diversify their sources of funding. However, few customers would have been willing to put their money with what would have been perceived as struggling companies, Mr Tolani says. "The business model for any pure mortgage provider needs to be they have long-term assets and long-term liabilities as well, which wouldn't work for Amlak and Tamweel even if they were given a banking licence [that allowed them to accept customer deposits]," he says.

At least fouroptions for the Amlak-Tamweel case were considered with the help of a committee set up to oversee the merger in 2008. They included intervention by the Investment Corporation of Dubai, a government-owned conglomerate, followed by a combination with a pair of lenders owned by the Federal Government and the creation of an entity that would buy up mortgages from Amlak and Tamweel. All those plans were scrapped because the costs of implementing them would have ranged in the billions of dirhams.

Insiders now say that after 18 months of discussions, a merger between Amlak and Tamweel is unlikely. Trading in their shares is still suspended on the Dubai Financial Market. But there have been a few bright spots: default rates on mortgages are not worryingly high. "From a core business perspective, Amlak is still being able to generate reasonable margins on its existing loan book even though we are seeing more pressure in terms of quality," Ghida Obeid, an analyst at Shuaa Capital, said last month.

It remains to be seen how long it will take Amlak and Tamweel to return to full health.