Tamilnad Mercantile Bank

Retail focused 100 years old private bank

Healthy financial performance with strong asset quality and diversified loan book, but regional concentration and legal matters are challenges

Tamilnad Mercantile Bank is one of the oldest and leading old private sector bank headquartered at Thoothukudi, Tamil Nadu with a history of over 100 years. It is a well-recognized and trusted brand in south India, particularly in Tamil Nadu. The bank was incorporated as ‘Nadar Bank’ in 1921 and name was changed to ‘Tamilnad Mercantile Bank’ in the year 1962. The license to carry on banking business was received from the Reserve Bank of India (the RBI) in 1962.

The bank has a network of 509 branches, 12 administrative offices, 1,141 ATMs, 282 cash recycler machines (CRMs), and 101 E-lobbies. Out of these 509 branches, 76 branches are in metropolitan areas, 80 branches are in urban areas, 247 branches are in semi-urban areas, and 106 branches are in rural areas. Bank has wide presence in south India and further diversifying branches in other states of India, with 90 branches located in the states of Maharashtra, Gujarat, Karnataka and Andhra Pradesh respectively.

The overall customer base is approximately 5.08 million end March 2022 and 4.05 million or 79.78% of customers have been associated for a period of more than five years and have contributed 78% to deposits and 65% to advances portfolios.

Tamilnad Mercantile Bank offers a wide range of banking and financial services primarily to retail customers, agricultural customer and MSME (RAM). Bank’s deposits have grown at a healthy pace of 10.46% CAGR compared to median of its peers at 7.90%, while its advances grew at 9.93% CAGR compared to median of its peers at 8.00% in last two years.

The advances portfolio primarily consists of lending to RAM segment, of which retail customers contributed 20.39% to total advances, agricultural customers 29.70% and MSMEs 37.38% end March 2022. The share of RAM segment in loan book has increased from 82.0% end March 2020 to 87.5% end March 2022.

The bank also offers various kinds of loans to corporate accounting for 12.53% of total advances. The corporate loan book has declined at a CAGR of 9% from March 2020 to March 2022 in line with strategy to move focus away from corporate customers in favour of RAM.

The bank has reported second highest Net Profit for FY2022 amongst Peers, and Return on Assets was also higher at 1.66% for FY2022.

K.V. Rama Moorthy is MD&CEO of the bank with more than 40 years of experience in the banking industry. Prior to joining the bank, he was Executive Director in United Bank of India till 2017.

The Offer and the Objects

The initial public offer (IPO) consists entirely of a fresh issue of 1.584 crore equity shares of face value of Rs 10 each to raise Rs 792.00 crore at lower price band of Rs 500 per share and Rs 831.60 crore at the upper band of Rs 525 per share.

There is not identifiable promoter for the bank and none of the shareholder holds more than 5% of the share capital of the bank.

The issue is to be made through the book-building process and will open on 05 September 2022 and will close on 07 September 2022.

Bank proposes to utilize the Net Proceeds towards augmenting its Tier–I capital base to meet its future capital requirements. Additionally, Bank expects to receive the benefits of listing the Equity Shares on the Stock Exchanges.

The listing of the shares of the bank is also in line with RBI requirement to relax restrictions for the bank on branch opening for failing to raise subscribed capital to at least one-half of authorized capital, as per RBI letter to bank dated 15 March 2021.

Strengths

CASA deposits ratio has improved from 25.85% end March 2020 to 30.50% end March 2022. CASA portfolio is diversified and has low concentration with 2.91% of deposits from top 20 deposit holders and 4.75% deposits from top 50 depositors end March 2022.

The retail term deposits contributed 87.1% to total term deposits with healthy renewal rates across term deposit categories.

The bank has reduced cost of deposits from 6.27% in FY2020 to 4.91% in FY2022. The saving deposit rate of the bank is on par with leading banks at 3.0% for deposits below Rs 10 lakh and 3.25% for deposits above Rs 10 lakh.

Bank has also increased focus on lower ticket size loans with an aim to manage risk of concentration and the loan book below Rs 25 lakh ticket has increased to 50.7% end March 2022 from 45.1% end March 2020.

With focus on keeping risk relatively lower and strong underwriting processes, the bank has consistently maintained and further increased secured lending from 98.82% of overall advances in FY2020 to 99.17% in FY2022.

The bank has reduced gross non-performing assets (GNPA) ratio from 3.62% end March 2020 to 1.69% end March 2022, which is lowest GNPA ratio among peer old private sector banks. Net non-performing assets (NNPA) ratio has also declined from 1.80% end March 2020 to 0.95% end March 2022. Further, bank has improved a provision coverage ratio (PCR) from 80.75% end March 2020 to 87.92% end March 2022.

NIM has improved from 3.64% in FY2020 to 4.10% in FY2022.

Weaknesses

37.73% of paid up equity share capital or 53.76 million Equity Shares are subject to outstanding legal proceedings which are pending at various forums. It is not known that when these matters will be resolved. Any adverse developments in such proceedings may lead to the imposition of injunctions or penalties.

Bank has high concentration of business in Tamil Nadu contributing 75.06% of business, 72.5% of branches and 85.03% of overall customer base. Any adverse change in the economic, political, or geographical conditions of Tamil Nadu and other states with significant presence may impact the performance.

Prospective Investors will not, without prior RBI approval, be able to acquire 5.00% or more of share capital of the bank.

There is restriction on the bank to open new branches unless it is listed on exchanges and it is also required to obtain prior permission from the RBI to open new branches.

Bank is currently significantly dependent on RAM segment financing account for 88.1% of net advances and any adverse developments in these segments could adversely affect business.

Valuation

PAT of Bank increased at a CAGR of 42% from Rs 407.69 crore in FY2020 to Rs 821.91 crore in FY2022. Bank has recorded 8% CAGR growth in total income from Rs 3992.53 crore in FY2020 to Rs 4656.44 crore in FY2022. Bank has improved cost-to-income ratio from 46.10% in FY2020 to 42.12% in FY2022. The bank has reported second highest Net Profit for FY2022 amongst Peers with strong RoA at 1.66% and RoE of 16.58%, as compared to 0.8% RoA and 8.3% RoE median for peers.

The annualized EPS on post-issue equity works out to Rs 51.9 for FY2022. At the price band of Rs 500 to Rs 525, P/E works out to 9.6-10.1 times of FY2022 EPS.

Post-issue, the book value (BV) will be Rs 389.5 at upper price band and adjusted BV (ABV) is Rs 363.8 (net of NNPA and 10% of restructured assets). The scrip is being offered at price to Adj BV multiple of 1.4x at the upper price band.

Among peer old private banks, City Union Bank is trading P/Adj BV (end March 2022) multiple of 2.57x, CSB Bank 1.90x, Federal Bank 1.44x, DCB Bank 0.90x, Karur Vysya Bank 0.89x, Dhanlaxmi Bank 0.67x, RBL Bank 0.63x, Karnataka Bank 0.48x and South Indian Bank 0.45x.

In terms of P/E, Tamilnad Mercantile Bank is offered at 10.1x of FY2022 EPS at upper price band. Among peers, South Indian Bank is trading at PE of 38.2x of FY2022 EPS, City Union Bank 17.5x, Federal Bank 13.0x, DCB Bank 10.2x, Dhanlaxmi Bank 8.4x, Karur Vysya Bank 8.1x, CSB Bank 8.0x and Karnataka Bank 4.6x.

On key financial parameters front, Tamilnad Mercantile Bank has lowest GNPA ratio and second lowest NNPA ratio end March 2022 amongst 10 peer old private sector banks. The bank also has second lowest level of restructured assets and second highest PCR. Bank has shown second highest level of PAT, CRAR, Tier I ratio and deposits growth. The net interest margin of the bank was third highest.

However, the bank lags on the size of business volumes and distribution network front at seventh position. CASA deposits ratio is ninth lowest and the loan growth is also weak at eighth position.

The listing of the bank would help the bank to expand its branch network which is under restriction pending for listing. The moderate loan growth and high base would be major impediment to earnings growth in FY2023. The any adverse outcome of pending legal matters may impact the bank.