Fitch upgrades Tamweel to ‘BBB+’

Fitch Ratings has upgraded UAE-based Tamweel's (Tamweel) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'BBB-' with a Stable Outlook.

Tamweel's IDRs are solely driven by support from its majority shareholder Dubai Islamic Bank ( 'A'/Stable/'F1'), which acquired a controlling interest in the previously troubled UAE mortgage lender in November 2010.

Fitch considers there is an extremely high probability of support from the UAE authorities for DIB and that this support would also extend to Tamweel, reflecting the high degree of business integration within the DIB group.

Tamweel's IDR has been upgraded to two notches below the parent's IDR to reflect the company's strong operational and strategic ties with DIB and the bank's 58.25 per cent ownership in Tamweel. Fitch believed that DIB support is integral to Tamweel's operations and growth.

While Fitch considers there is a high probability of institutional support from DIB and a high degree of business integration, Tamweel's IDR has not been equalised with the bank's IDR as DIB does not fully own Tamweel and there is uncertainty whether all future funding will continue to be provided/guaranteed by DIB. Tamweel's ratings are sensitive to continued integration into DIB and any changes in Fitch's view of potential support available from the Dubai and UAE Federal authorities. Any signs of the two entities delinking their strategic focus would be negative for the ratings, while increased ownership by DIB could be positive for the ratings.

Tamweel now operates exclusively as the group's residential home financing arm. Evidence of strong parent and subsidiary linkages include DIB approving Tamweel's new strategy, providing high level management oversight and being the main source of contingency funding. In addition, DIB has transferred its existing residential freehold mortgage portfolio and originating staff to Tamweel, while the company plans to originate new business through DIB's extensive network and distribution channels.

In Fitch's view, Tamweel could not operate without the ownership of the parent and the funding/access to the markets which DIB provides. Fitch has therefore not assigned Tamweel a Viability Rating (VR) due to its close integration with the parent/group.

The upgrade also reflects ongoing funding and liquidity support from the parent bank since the acquisition. Although DIB is not contractually obliged to extend funding to Tamweel, Fitch nevertheless believes that DIB, due to its majority ownership, will continue to provide short-term funding support in the near term as required by the company.

In early 2012, Tamweel (via a special purpose vehicle, Tamweel Funding III Ltd) issued $300 million of five-year fixed rate Sukuk with a DIB guarantee. As a result, the issue's 'A' rating was solely driven by DIB's Long-term IDR, reflecting Fitch's view that DIB would stand by its guarantee as set out in the transaction documents.

Although DIB has not provided capital support, Fitch believes the parent would capitalise Tamweel in extremis, most likely with back-up from the Dubai and UAE Federal authorities.

Tamweel reported higher profitability in 2011 owing mainly to lower impairment charges. Whilst earnings are historically low, mainly due to the elimination of real estate investment related income, Fitch believes that current earnings trends are broadly stable reflecting its return to lending (in Q111), stronger funding profile and the benefit of cost rationalising initiatives over the past two years.

Given the depressed UAE real estate sector, Fitch expects further asset quality deterioration, due to a sizeable part of the mortgage book being in negative equity at current prices, combined with its large exposure to property under construction. However, the latter is declining, and Tamweel estimates that this exposure will shrink significantly by 2013 as more major projects in the UAE head towards completion after delays of up to three years.

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