Big slide in Tamweel, Amlak shares

Dubai: Saturday's announcement of merger talks between the two biggest Islamic mortgage lenders Amlak Finance and Tamweel failed to enthuse investors the day the markets reopened following the Eid Al Fitr holidays.

In a bearish Dubai market, which fell close to seven per cent, shares of both companies slid, with Tamweel down 7.37 per cent to Dh3.52 and Amlak losing 3.94 per cent to Dh3.17.

The impact of the continuing global credit crisis is being increasingly felt closer home as a liquidity squeeze by banks and fin-ancial companies curtails lending, adding to worries of a slowdown in the booming real estate sector.

And in case these two mortgage companies are looking at a merger as a way to surmount the liquidity crisis and lending at affordable rates, that may not necessarily work, according to analysts.

"You may be creating a bigger company, which is something positive, but still the combined entity will face financing challenges taking into consideration the tight financial conditions in the global economy, especially that the combined capital base will not be enough to fin-ance the huge projects in the market," said Fadi Al Said, head of equities at ING Investment Management, Middle East.

In a growing global and local credit crisis scenario, these companies are sensitive to financing costs. Moreover, mortgage companies are disadvantaged in not having the deposit base which banks have.

"In order to grow from the current capital base you need to raise financing," Al Said said. "And to do that they usually turn to the securitisation market, or raising bonds or sukuk or borrowing directly from banks, but at favourable terms.

"But now they are not going to get the same kind of terms as in the past. It is going to be very hard to do any fund raising in the current situation."

Raj Madha at EFG-Hermes agrees that the access to affordable funding may not be solved with a merger like this.

"The benefits of a merger are not clear," he said.

And given that the two are more concentrated on real estate, that is all the asset side is collateralised by the real estate sector, risks remain and that is a factor in the minds of the investors.

"So although these companies have been there from the beginning of the real estate boom, which means a big proportion of the properties they financed have appreciated substantially.

"This gives them a buffer zone, but the market is now focusing on the negative aspects and is ignoring the positive part of the merger, that of securing better financial deals," Al Said said.

The announcement seems to be ill-timed, according to some analysts.

"The merger announcement couldn't have come at a worse time," said Vyas Jayabhanu, head of Abu Dhabi based Al Dhafra Brokerage.

"The merger may be interpreted as a bailout of a different kind. But nobody knows what the real reason is and investors will be cautious."

The merger may also stem partially from investigations into financial misappropriations by two of Tamweel's officials and the Dubai government's pledge to root out corruption.

However, the Amlak-Tamweel merger would have combined market worth of around $2.4 billion and, with or without a crisis, a slowdown in real estate sector could increase competition among financing firms, which in turn could lead to consolidation.

"Amlak and Tamweel certainly may be an indication of further mergers to come," Madha said.

Results: Amlak profit rises

Amlak Finance announced that its net profit for the first nine months of the year ending September 2008 surged 157 per cent and expects stronger results for the last quarter of the year.

Amlak's net profit rose to Dh444 million compared with Dh173 million in the same period a year earlier.

Revenue was up 112 per cent to Dh963 million with the company's property financing activities contributing 71 per cent of the total revenue.