Tamilnad Mercantile Bank IPO: All You Need To Know

The 101-year-old Tamilnad Mercantile Bank will launch its Rs 832-crore initial public offering on Monday.

On Friday, the bank faced a serious challenge from a clutch of investors, who opposed a change in the structure of the IPO. However, the Securities Appellate Tribunal dismissed the challenges and allowed the issue to go through.

The issue, which opens on September 5 and will close on September 7, will be offered at a price band of Rs 500-525 per share.

Tamilnad Mercantile Bank IPO: Key Details

• Issue Opens: Sept. 5, 2022

• Issue Closes: Sept. 7, 2022

• Fresh Issue: 1.58 crore shares

• Price Band: Rs 500-525 apiece

• Issue Size: Rs 792-832 crore

• Face value: Rs 10 apiece

• Lot size: 28 equity shares and multiples

• Book Managers: Axis Capital, Motilal Oswal, SBI Capital Markets

Use Of Proceeds

The issue, partly prompted by the Reserve Bank of India, will help the old generation private bank open new branches.

In June 2019, after the bank reported non-compliance with certain regulations, the central bank withdrew the general permission for opening new branches, froze the managing director and chief executive officer's remuneration, restricted entry into new lines of business and stopped the bank from declaring and distributing dividends.

On a review in March 2021, the regulator removed most of the restrictions, subject to listing of TMB's equity shares by Dec. 31, 2021. In case of the restrictions of branch opening, the RBI said that it will review its decision after the shares are listed.

Business

TMB's net advances as of March 2022 stood at Rs 33,492 crore, up 21% from March 2020.

Being a large regional member, with most of its branch network in Tamil Nadu, TMB relies on retail, agriculture and micro, small and medium enterprises for its loan growth. The lender primarily offers home loans, personal loans, auto loans, educational loans, and security-backed loans of various types to its retail customers.

The bank's RAM portfolio has increased at a compounded annual growth rate of 12.94% from Rs 23,143 crore in the fiscal year ended March 2020 to Rs 29,521 crore in March 2022.

TMB's corporate loan book constituted 12.53% of the total book at the end of fiscal 2021-22.

As a conservative lender, TMB continues to maintain a large share of secured lending to its customers. The unsecured lending portfolio’s contribution has declined from 1.18% of overall advances as on March 31, 2020 to 0.69% as on March 31, 2021 but thereafter increased marginally to 0.83% as on March 31, 2022.

TMB's total deposits stood at Rs 44,933 crore as of March 2022, up 22% from March 2020. The ratio of low cost current account savings account deposits to total deposits increased from 25.85% in FY20 to 30.50% in FY22 at an annualised growth of 8.62%.

"While we have a presence in the states of Gujarat, Maharashtra, Karnataka, and Andhra Pradesh, we have an especially strong regional concentration in southern India, and in particular, in Tamil Nadu," the bank said in its red herring prospectus.

As of March 2022, Tamil Nadu contributed 75% of the bank's total advances and deposits.

Profitability

The regional focus and experience at TMB has helped it maintain strong profitability, even in the midst of the Covid-19 pandemic. It had the second highest net profit for fiscal 2022 amongst its peers, and its return on assets was also higher at 1.66% compared to a median 0.80% for its peers for fiscal 2022.

"A strong customer understanding, focus on secured granular loan products, and a strong under-writing and risk management framework has helped to maintain and further improve asset quality and drive growth with consistent profitability," Motilal Oswal said in its IPO note on Friday.

Further, the bank is also focusing on improving its digital footprint, which has helped the bank reduce costs and improve profitability.

The total income increased at a CAGR of 7.99% from Rs 3,993 crore in 2020 to Rs 4,253 crore in fiscal 2021 to Rs 4,656 crore in 2022.

In terms of a return on equity, the bank has a ratio of 16.58% in FY22, as compared to peers who reported a median of 8.30%.

Strong Asset Quality

Gross non-performing asset ratio for TMB has shown consistent improvement after worsening during the Covid-19 period.

The lender's risk assessment, mitigation, and management measures towards reducing NPAs and managing its stressed assets portfolio are particularly important to it, given its focus on its RAM portfolio.

"It also intends to reduce its NPAs by continuing to offer various schemes of settlement to address the issues specifically faced by small ticket borrowers," HDFC Securities said in a note on Friday. "Further, it proposes to boost NPA recovery through one-time settlements and monitoring of small-value NPA accounts."

TMB said in its prospectus that the provision coverage ratio for the bank stood at 87.92% for the lender as of March 2022, which is the second highest among peers.

Key Risks

The biggest risk is a long list of cases pending against it over the last few years. While these cases pertain to various issues, the question regarding the ownership of a few shares has raised concerns at the RBI and the Enforcement Directorate.

In March 2007, the central bank and the ED allowed three resident Indians to transfer 53,611 shares to a designated list of non-resident Indians. However, out of these, 46,862 shares (referred to as unacknowledged shares) were transferred on May 13, 2007 to a different set of seven NRIs.

Further, the bank approved transfers of 27,289 equity shares out of the unacknowledged shares to two other non-resident entities on Dec. 26, 2011 and June 11, 2012.

The ED investigated the matter and, by its order dated Aug. 14, 2020, levied a penalty of Rs 11.33 crore in respect of the transfer dated May 13, 2007 and Rs 5.67 crore in respect of the transfers dated Dec. 26, 2011 and June 11, 2012. The investigative authority also introduced penalties against key managerial personnel of the bank at the time.

The ED has also raised concerns regarding violation of the Foreign Exchange Management Act, in some of these transfers.

In May 2007, the bank had taken on record transfers of cumulatively 95,418 equity shares to several persons including the disputed NRI shareholders and 209 other Indian residents. In March 2011, the RBI found the transfers to be in violation of its bank ownership guidelines.

Separately, the bank also issued bonus shares in the ratio of 1:500 in Jan. 2016, which was further questioned by the RBI, since these bonus shares were also issued to the disputed NRI shareholders mentioned above.

In all, 37.73% of the bank's paid-up equity share capital or 5.4 crore equity shares are subject to outstanding legal proceedings which are pending at various forums, the bank said in its prospectus.