Tamilnad Mercantile Bank
Tamilnad Mercantile Bank is coming out with a 100% book building; initial public offering (IPO) of 1,58,40,000 shares of Rs 10 each in a price band Rs 500-525 per equity share.
Not more than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
The issue will open for subscription on September 5, 2022 and will close on September 7, 2022.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 50 times of its face value on the lower side and 52.50 times on the higher side.
Book running lead managers to the issue are Axis Capital, Motilal Oswal Investment Advisors and SBI Capital Markets.
Compliance Officer for the issue is Prakash Chandra Panda.
Profile of the bank
The bank is one of the oldest and leading old private sector banks in India with a history of almost 100 years. It offers a wide range of banking and financial services primarily to micro, small and medium enterprises (MSME), agricultural and retail customers (RAM). As of March 31, 2022, it has 509 branches, of which 106 branches are in rural, 247 in semi-urban, 80 in urban and 76 in metropolitan centres. Its overall customer base is approximately 5.08 million as of March 31, 2022 and 4.05 million or 79.78% of its customers have been associated with it for a period of more than five years and have contributed to Rs 350,142.39 million or 77.93% to its deposits and Rs 219,022.26 million or 64.90% to its advances portfolios as of March 2022.
The bank was incorporated as ‘Nadar Bank Limited’ in 1921 and its name was changed to ‘Tamilnad Mercantile Bank Limited’ in the year 1962. It received its license to carry on banking business from the Reserve Bank of India in 1962. Since its incorporation, having head quartered at Thoothukudi, Tamil Nadu, India, it has built a strong presence in the state of Tamil Nadu, with 369 branches and 949 automated teller machines (ATMs) and 255 cash recycler machines (CRMs) as of March 31, 2022. Tamil Nadu, the fourth largest state of India, is one of the fastest growing states, with continued focus on MSME and textile industry. It also focuses on diversifying its growth in other high growth regions of India which will help increase its network and client base. Other than Tamil Nadu, it is present in 15 other states and 4 union territories of India. Apart from Tamil Nadu, it has sizable presence in the states of Maharashtra, Gujarat, Karnataka, and Andhra Pradesh with presence across 90 branches and 125 ATMs and 18 CRMs as of March 31, 2022. The company’s advances portfolio primarily consists of lending to Retail customers; agricultural customers and MSMEs (RAM). Its deposits portfolio consists of term deposits, recurring deposits, savings bank and current bank accounts amongst others.
Proceed is being used for:
Augmenting Tier-I capital base to meet its future capital requirements.
Meeting the expenses in relation to the offer.
Receiving the benefits of listing the equity shares on the Stock Exchanges.
Industry overview
The Indian banking sector is significantly under-penetrated, which provides immense opportunities for banks and other financial institutions. Financial inclusion has been one of the key priorities of the government as well as banks over the past decade. Pradhan Mantri Jan Dhan Yojana (PMJDY), launched in August 2014, is aimed at ensuring affordable access to financial services - banking/savings and deposit accounts, remittances, credit, insurance, and pension. PMJDY focuses on household coverage, while the earlier schemes focused on coverage of villages. It aims to extend banking facilities to all within a reasonable distance in each sub-service area (consisting of 1,000-1,500 households) across India. As on March 31, 2022, 450 million PMJDY accounts had been opened; of these, 67% were in rural and semi-urban areas with aggregate deposit of Rs 1,665,000 million.
The banking sector enjoyed a healthy deposit compound annual growth rate (CAGR) of 10% between fiscals 2016-21. With the outbreak of Covid-19 in fiscal 2021, conserving money became a priority and households reduced their private consumption, leading to 11% deposit growth in the fiscal. Further, the weighted-average domestic term deposit rate declined 80 basis points (bps) from 6.07% in April 2020 to 5.28% in March 2021. With the RBI keeping it stance accommodative and policy rates unchanged for the entire fiscal 2022, the weighted average term deposit rate declined a further 25 bps to 5.03% as of March 2022. During the monetary policy meeting in April 2022, the RBI signalled a gradual removal of the accommodative policy - it increased the policy repo rate by 40 bps in May 2022 and 50 bps in June 2022. CRISIL Research expects deposits to grow 9-11% during fiscal 2023, driven by an expected hike in policy rates by an additional 75 bps the fiscal, pushing the repo rate 50 bps above the pre-pandemic level by fiscal-end, and banks, in turn, transmitting the hike by increasing deposit rates.
Pros and strengths
Strong legacy, loyal customer base and focus on improving servicing framework: With almost 100 years of history, the bank has established itself as a well-recognized scheduled commercial bank having a strong network of branches, ATMs and CRMs across several states of South India including Tamil Nadu being its home state, along with Maharashtra, Gujarat, Karnataka, and Andhra Pradesh, which has enabled it to maintain a strong customer base. With a focus on increasing its existing customer base, it has introduced various alternate banking channels such as ATMs, CRMs, internet banking, mobile banking, E-Lobbies, point of sales (PoS), banking and debit and credit cards. It introduced internet banking to its customers in 2008 through ‘TMB-Econnect’ and utility payment facility which enabled its customers to pay bills for cable operators/DTH operators, electricity services, mobile phone utility services, other utilities and tax services. It has approximately 0.28 million customers using its internet banking facilities and approximately 0.28 million customers using its new mobile banking facilities introduced on October 11, 2021 as of March 31, 2022.
Strong presence in Tamil Nadu: Since bank incorporation, it has built a strong and trusted network of customers in the State of Tamil Nadu. As of March 31, 2020, 2021 and 2022 its deposits and advances in the state of Tamil Nadu contributed to 75.93%, 76.33% and 75.06%, respectively, of its Total Business. As of March 31, 2022, it had 4.32 million customers, 85.03% of its overall customer base, contributing to its deposits and advances portfolios in the State of Tamil Nadu. Recently, the state government of Tamil Nadu has also introduced various initiatives such as the Industrial Policy 2021 to achieve an annual growth rate of 15% in the manufacturing sector and the Tamil Nadu New Integrated Textile Policy, 2019, amongst others.
Advances with focus on MSME, agricultural and retail segments: The bank has traditionally focused on small ticket size loan products to MSME customers, agricultural and retail customers for its growth. Its advances portfolio consists of a wide basket of retail finance and small ticket size MSME finance products. Its focus is on understanding the needs and expectation of its customers, particularly in the RAM space and adopting strategies to target these customer segments for its growth. It has dedicated marketing managers and agri-officers across its regional offices who specifically focus on growing the network of its existing MSME and agricultural customers. It leverages its presence in semi-urban and rural regions where it is located to attract more customers in the RAM segment. It has structured loan products available to meet the financial requirements of its MSME customers, which aids in growing its MSME customer base across all places where it is currently present.
Strong asset quality, underwriting practices and risk management policies and procedures: The bank’s strong customer understanding, focus on secured granular loan products and strong under-writing and risk management framework has helped it to maintain and further improve asset quality and driving its growth with consistent profitability. This is particularly important to it given its RAM portfolio focusing particularly on its MSME customers. It focuses on selective lending and limits its exposure to certain industries and sectors as a part of its strategy to monitor concentration risk. It has a Risk Management Committee to monitor its corporate customers on a monthly basis. Further, with an aim to maintain and improve its asset quality, it follows specific processes prior to loan approval and during the tenure of the loans depending on the ticket size of the loans. Its term loans are reviewed annually and higher value loans are reviewed periodically depending on the size of the loan products. This enables to it escalate any defaults at its regional offices in a timely manner. It also has a dedicated credit audit monitoring department which monitors its advances and helps avoid any downgrading in asset classification. It also has recovery champions at specific branches, regional offices and its head office to enable it to maintain its asset quality.
Risks and concerns
Regional concentration in southern India, especially Tamil Nadu: The bank’s concentration in the southern India, and specifically in Tamil Nadu, exposes it to many adverse economic or political circumstances in the region as compared to other public and private sector banks that have a more diversified national presence. Any change in regulatory framework, political unrest, disruption, disturbance, or sustained downturn in the economy of Tamil Nadu and other states in southern India could adversely affect the ability or its borrowers to repay loans or the ability its customers to deposit funds or avail of its services, and may impact its business, financial condition, and results of operations. Instances of floods or other natural calamities in India, particularly in Tamil Nadu, could have an adverse effect on its business, financial condition, and results of operations. Such events may result in a temporary decline in the number of its customers or in its employees’ ability to perform their duties.
Business vulnerable to interest rate related risks: The bank’s interest income amounted to 82.33% of its total income in Fiscal 2022. Net interest income represents the excess of interest earned from interest-earning assets (such as performing loans and investments) over the interest paid on interest bearing customer deposits and borrowings. Its net interest margin for Fiscals 2020, 2021 and 2022 was 3.64%, 3.77% and 4.10%, respectively. Interest rates are sensitive to many factors beyond its control, including the RBI’s monetary policy and domestic and international economic and political conditions, as well as other factors. Volatility and changes in market interest rates could disproportionately affect the interest it earns on its assets as compared to the interest it pay on its liabilities. The difference could result in an increase in interest expense relative to interest income leading to a reduction in net interest income. Accordingly, volatility in interest rates could materially and adversely affect its business and financial performance.
Required to obtain various statutory and regulatory permits: The bank is required to obtain various statutory and regulatory permits and approvals to operate its business which requires it to comply with certain terms and conditions to continue its operations. For instance, it require approvals from various regulatory authorities for various aspects of its operations (including foreign exchange license, demat services) licenses. Failure to obtain these permits and approvals may result in imposition of fines and penalties by the relevant regulator. Further it is possible that the RBI may place stringent restrictions on its operations. There can be no assurance that any approval or extension sought by it will be granted without onerous conditions being imposed on it, or at all if any such conditions are not complied with. It can also not assure that the approvals, licenses, registrations or permits issued to it will not be suspended or revoked, or that applicable penalties will not be imposed on it in the event of non-compliance with any terms and conditions.
Rely extensively on information technology system: The bank is highly dependent on its information technology systems and its ability to efficiently and reliably process a high volume of transactions across numerous locations and delivery channels. As organizations extend out to clouds and mobile devices, IT departments have to radically change how they operate, including how they procure products and services, how they manage technology and data assets, and IT’s own role within the organization. To ensure a robust and secure technology platform for its Bank, suitable internal policies and procedures have been adopted. Its Information Technology consists of several other policies such as the information security policy, IT network policy and IT procurement policy. The information security policy further lays down a set of standards and procedures in relation to data leakage, network security, incident response management.
Outlook
Incorporated in 1921, Tamilnad Mercantile Bank (TMB) is one of the oldest private sector banks in India. It offers an array of banking and financial services to retail customers, micro, small, and medium enterprises (MSMEs), and more. The bank has a strong portfolio of advances and deposits from a diversified customer base including retail customers, agricultural customers, and MSMEs. It focuses on diversifying its growth in other high growth regions of India which will help increase its network and client base. Other than Tamil Nadu, it is present in 15 other states and 4 union territories of India. With a focus on increasing its existing customer base, it has introduced various alternate banking channels such as ATMs, CRMs, internet banking, mobile banking, E-Lobbies, point of sales (“PoS”), banking and debit and credit cards. On the concern side, the bank is subject to regulation and supervision by the RBI. It is subject to certain legal and regulatory risks which are inherent and substantial in its business. As it operates under several regulators, it is subject to actions that may be taken by such regulators in the event of any non-compliance with any applicable policies, guidelines, circulars, notifications, and regulations issued by the relevant regulator. Besides, the bank face strong competition from much larger government controlled public sector banks, Indian and foreign commercial banks, non-banking financial companies, payment banks, small finance banks and other financial services companies as well.
The issue has been offered in a price band of Rs 500-525 per equity share. The aggregate size of the offer is around Rs 792 crore to Rs 831.60 crore based on lower and upper price band respectively. On the performance front, total income increased by Rs 403.03 crore or by 9.48% from Rs 4253.40 crore in Fiscal 2021 to Rs 4656.43 million in Fiscal 2022. Net profit for the year was Rs 821.90 crore in Fiscal 2022 as compared to Rs 603.32 crore in Fiscal 2021. Meanwhile, the bank aims to expand the branch-wise targets by opening new Retail Assets Central Processing Centres (RACPCs) with dedicated home loan sales teams posted at these locations to drive further home loan portfolio growth. It is also focussed on diversifying its product portfolio so as to gain more customers and increase its market share. It will continue to expand its relationship banking facilities to increase its network. It intends to focus more on fee based products such as issuing debit cards, credit cards, general insurance, life insurance, online bill payment services, depository services, government schemes, e-stamping and bill payments to its existing as well as new customers.
