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Banks' year-end financials projected to be balanced

Most banks lending mortgages in the UAE are likely to show general provisions in their books for bad debts, said a mortgage broker.

Chris Dommett, CEO, John Charcol, said: "Most banks we have spoken to say they have some problem loans, particularly in cases for incomplete properties or where the borrower has lost his job. Banks are accepting that there are potential bad debts in their books."

Tim Searle, CEO, Globaleye, said the year-end financials of lenders who have been in the mortgage business since its beginning will be balanced, while Islamic lenders will have a more accurate picture only down the line.

"The lenders that were in the mortgage market at the beginning will see balanced mortgage books because even if they lent at 90 per cent four years ago there is still equity in those properties since valuations of those properties were low.

"In the case of Islamic lenders, the profit rate is deferred while the property is under construction since the applicant only starts to pay when the property is complete. In such a scenario, the lenders will know if a loan taker is in financial difficulty only down the line," he said.

Faisal Iqbal, Head of Secured Lending Business, Barclays, expects the bank to show a balanced and profitable mortgage portfolio.

"We expect to maintain this until the end of the year. We are beginning to see signs of improvement in the market and a positive variance has been reported in the number of transactions made in the third quarter of 2009," said Iqbal.

Searle said usually information related to banks' mortgage books is not made public. However, the non-performing loans have to be reported to the Central Bank and this affects how banks maintain their liquidity ratios. "Banks that were in the market at the beginning will have a higher amount of loans with lower loan-to-value (LTV) compared to banks that entered the market later when prices had risen. With regard to loans provided by Islamic banks on properties still under construction, the profit rate is not paid until completion so until the handover, the banks will not know if the client is going to have difficulty in paying back the amount. It is therefore difficult for banks to assess the full extent of possible non-performing loans," he said.

Searle said mortgage lenders have eased credit policies resulting in increased LTVs due to falling real estate prices.

"Banks are showing more appetite now as they see support from the federal government also."

Dommett said the current trend is firmly towards financing completed or nearly completed properties, with a preference for borrowers employed by larger companies and with low debt burden ratios. "Abu Dhabi lenders are more bullish about the market than they are on the Dubai market."

LTVs increase
All banks that Emirates Business spoke to said they have increased their LTVs to some extent especially for completed properties.

Iqbal said: "In November last year, our LTVs was a maximum of 60 per cent. Our current LTV offer is a maximum of 80 per cent up to a total amount of Dh7.5 million. Our LTVs for second home-buyers or non-owner occupied properties remains at 60 per cent. We are seeing increased mortgage offerings in the UAE primarily focussed on home-owners."

In March, HSBC increased its LTV ratios to 75 per cent on its Flexi-Loan, Eibor-based mortgage products and its HSBC Amanah Home Finance.

Abdulfattah Sharaf, CEO, Personal Financial Services, HSBC, said: "This move will provide more flexibility and choice for our customers who are looking to own a home. The offer is primarily targeted at end-users who have recently faced acute difficulties getting affordable mortgage finance."

Sundar Parthasarathy, Senior Vice-President, Head-Consumer Assets, Consumer Banking Group, Abu Dhabi Commercial Bank ( ADCB ), said: "We are one of the few players in the market offering up to 85 per cent LTV. There have not been any changes to our LTVs in that respect. We find that mortgage loans are readily available in the market, though there has been a reduction in the number of lending players."

Searle said LTVs in Dubai are generally at 85 per cent being the maximum for resident expats and 90 per cent for local nationals.

"These are generally only for completed villas where the lenders feel there is the least risk. The maximum lending for apartments is 80 per cent."

Dommett said: "After a long period when mortgages were very hard to find, things have started to look more positive. Those banks that see mortgages as a core retail product are looking to attract low-risk clients with better LTVs and lower interest rates. A number of banks have also re-entered the mortgage market, such as Dubai Bank , while others, such as ADCB , Mashreq and Standard Chartered , are actively looking to grow their market share."

He said mortgages are now accessible for good credit risk borrowers.

"Banks see those with stable jobs and with good salaries to be their prime target market, although the self-employed and non-residents still struggle to find a lender," said Dommett.

Searle said in the past six months mortgages were particularly looking up in key areas of Dubai such as Palm Jumeirah, Dubai Marina and some lower priced villas in Dubai have recorded increased mortgage activity.

"Completed areas such as Palm Jumeirah, Dubai Marina and the lower priced finished villa market are where banks are keen to lend at the moment. Dubai Marina in particular has seen a large influx of people who could not previously afford to live there. However, now that prices have fallne they want to upgrade."

Dommett said areas such as Emirates Living, Arabian Ranches, Dubai Marina and The Palm Jumeirah have seen an increased activity. Parthasarathy said: "In the past six months, our lending has spread across all areas of Dubai and Abu Dhabi but new deals are primarily happening in Greens, Springs, Meadows, Green Community, Uptown Mirdiff, JLT, Dubai Marina, Motor City and Burj Dubai, which together contribute 80 per cent of lending volumes."

Searle said: "The real estate market today is improving with more appetite from lenders now than previously. In the beginning of the year, the lenders were not really open for business. Although they said they were active, in reality the credit policies that were put in place made it impossible for 99 per cent of applicants to get a loan."

He said that has changed now and lenders in the market are actively looking for business as they can see that prices have stabilised for completed properties in good locations.

"There are, however, still rigid credit policies in place, which still make it challenging but banks are definitely open for business, which is a much needed improvement for the mortgage market," said Searle.

Interest rate drops
Current interest rates being charged by mortgage lender in Dubai are in the range of 6.25 per cent at the lower end to around nine per cent at the higher end.

Dommett said some lenders have dropped their rates as their cost of funds has reduced.

"Although some, such as Tamweel, are still charging more than nine per cent. The best deal for new borrowers at the moment is probably Standard Chartered , which is offering rates from 6.5 per cent. Those existing borrowers lucky enough to still have an Eibor-linked rate have benefited from the steady drop in Eibor over the past few months, and with the six months rate now at 2.15 per cent some borrowers are paying just 5.65 per cent.

"One or two of the banks are also prepared to give discounted rates for clients in the lowest risk categories."

Searle said lenders in the market continue to penalise certain categories such as self-employed applicants or applicants wanting loans over 75 per cent with higher interest rates.

Barclays' current interest rates are between 8.5 per cent and 9.5 per cent. "Our interest rates are reflective of our cost of funds and are determined after careful assessment of the risk profile of the customer as well as the type and location of the property," said Iqbal. "We always consider a customer's income in relation to the amount of mortgage they are requesting. Income levels are vital components in calculating the debt- service-ratio to determine whether the mortgage requested is within the customer's affordability and ability to repay," he added.

ADCB said the bank has not changed its interest rates this year since it was based on the philosophy of risk-based-pricing for its customers. "Our pricing takes into account key ingredients such as loan-to-value, developer profile, property type, customer profile, etc.

"Our rates are linked to the Bank's internal Retail based rate (RBR) and is not directly linked to Eibor fluctuations. This takes into account cost of funds, liquidity in the markets amongst others," said ADCB .

For HSBC, the last interest rate reduction was in July with all HSBC Flexi Loan customers on a variable rate mortgage getting a 100 basis points interest rate reduction on their existing rates. New mortgages geared for the end-user.

Ready properties
Banks said all new transactions were geared for ready properties or properties to be completed in few months. "Banks are comfortable financing ready properties from any developer as long as it has title deeds and the property is registered with the lands department," said Searle. Analysts said the next real estate driver will be the merger of Tamweel and Amlak, which will manage about 60 per cent to 70 per cent of the finance market.

"They are integral to the market and once open they will have to be active as the funds they are recapitalised with needs to work hard," said Searle.

"Other lenders had the ability to concentrate on different areas within banking, but Tamweel and Amlak do not offer any other services other than mortgages so they will need to be aggressive." He said the merger will give the market confidence and is expected to be completed within the first quarter of 2010.

By Anjana Kumar

© Emirates Business 24/7 2009