Fitch Ratings has placed UAE-based Tamweel PJSC’s (Tamweel) ratings on Rating Watch Positive (RWP). At the same time, Fitch has affirmed Dubai Islamic Bank’s (DIB) Long-term Issuer Default Rating (IDR) at ‘A’ and Viability Rating (VR) at ‘bb’.
The placement of Tamweel’s IDRs and Support Rating on RWP follows the announcement in Q113 by Tamweel’s majority shareholder (DIB – 58.25% stake) of its intention to fully acquire Tamweel in a share swap deal. The bid is based on an offer of 10 new DIB shares for 18 existing Tamweel shares held. The offer has been approved by the UAE regulatory authorities and DIB shareholders, and is now subject to approval of Tamweel’s minority shareholders (deadline is 31 March 2013). Fitch will resolve the RWP in the coming weeks, once it has assessed the outcome of the DIB share swap offer.
As Tamweel is already fully consolidated in DIB’s financial statements, the acquisition will have very little impact on DIB’s risk profile, and full ownership should allow better operational integration of Tamweel into its DIB’s franchise, in Fitch’s view.
DIB’s long- and short-term IDRs, support rating and support rating floor reflect Fitch’s view that there would be an extremely high probability of support from the UAE authorities, if required. This is based on the bank’s high systemic importance as the UAE’s largest Islamic bank, the strong history of support for local banks from the UAE authorities and the Dubai government’s 30% stake.
Tamweel’s IDRs and Support Rating are driven by expected support from DIB, which acquired a controlling stake in Tamweel in November 2010. The takeover was arranged by the UAE federal and Dubai authorities to provide support for Tamweel. Fitch also considers that the extremely high probability of support from the UAE authorities for DIB would extend to Tamweel, if needed.
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 Tamweel plans to originate new business through DIB’s extensive network and distribution channels.
In early 2012, Tamweel (via a special purpose vehicle, Tamweel Funding III Ltd) issued $300million of five-year fixed rate Sukuk with a DIB guarantee. The issue’s ‘A’ rating is 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.
In Fitch’s view, Tamweel could not operate without the strong support of its parent and the funding/access to the markets which DIB provides. Fitch has therefore not assigned Tamweel a VR due to its close integration with its parent.
DIB’s VR reflects its strong domestic franchise, satisfactory funding and liquidity, and stable profitability. It also considers DIB’s weak asset quality, high exposure to real estate, high loan concentrations, and, in this context, its relatively tight capitalisation.
DIB’s ratings would be sensitive to a change in Fitch’s view of the ability or willingness of the UAE authorities’ to support the bank. Senior unsecured issuance, through DIB Sukuk Company Ltd, has the same Long-term rating as DIB. This has been affirmed and is broadly sensitive to the same considerations.
Tamweel’s ratings are sensitive to the outcome of the recent acquisition offer by DIB. The full acquisition of Tamweel as well as closer operational integration of Tamweel into DIB’s franchise could be positive for its ratings and resolve the RWP. The ratings are also highly sensitive to any changes in Fitch’s view of potential support available from the Dubai and UAE federal authorities to DIB.
The rating on the guaranteed sukuk issued by Tamweel Funding III Limited is equalised with DIB’s Long-term IDR, and is therefore highly sensitive to any rating action on DIB.
Negative pressure on DIB’s VR could occur if there was deterioration in the domestic operating environment and in the bank’s asset quality, or if there was a continuing decline in capital ratios. Upward movement is unlikely considering the weak asset quality, on-going restructuring of large problem loans, the high loan book concentration and the risks inherent in Dubai’s real estate market.