Analysts say ‘subscribe’ to Tamilnad Mercantile Bank’s IPO: read to find out why

Private sector lender Tamilnad Mercantile Bank (TMB)’s initial public offering opened for subscription on Monday. The price range of the issue is set at Rs 500-525. At Rs 525, the company aims to raise Rs 832 crore to increase its Tier I capital base to meet its future capital requirements.

The older generation bank mainly offers banking services to MSME, agricultural and retail clients. This lot represented 88% of the bank’s total advances in March 2022.

TMB is based in Thoothukudi, Tamil Nadu, which contributes 76% of its total advances. The bank’s dedicated customer base, strong financial track record, good asset quality and reasonable valuation have analysts optimistic about its IPO.

Of its 5.08 million customers, 80% have been associated with TMB for more than five years. Additionally, the bank’s return on assets (RoA) at 1.66% for FY22 was the highest among older generation private peers, according to the brokerages. This, they add, is supported by its 4.1% higher NIM for FY22.

Main risks: A total of 37.7 percent of the bank’s paid-up share capital is subject to legal action. Apart from this, significant regional concentration in Tamil Nadu and rising interest rates are other major risks.

Here is what the best brokers are saying:

Yes Titles | SUBSCRIBE

The brokerage said TMB’s asset quality results are at a stable and benign stage, with performance and loan growth prospects also reasonable. Based on its benchmarking of 11 mid- and small-cap private sector banks, it noted that TMB had the lowest Gross Non-Performing Assets (GNPA) ratio of 1.7% (from l 22) compared to 1.8 to 8.7% for its peers.

Its net NPA fell from 1.8% in FY20 to 0.95% in FY22. Additionally, it indicates that the bank’s exposure to corporate loans is low at 12 .5%. This low exposure implies a granular loan portfolio leading to greater asset quality stability. Exposure to high-risk unsecured retail segments is very low, with unsecured lending as a whole representing only 0.83% of the total lending portfolio.

ICICI Direct | SUBSCRIBE for long term

At the upper end of the price range, the bank is valued at 1.35x P/BV (price to post-issue book value) as of March 31, 2022, which seems reasonable. The bank’s total deposits grew at a CAGR of 10.5% in FY20-22, while its advances grew 9.9% over the same period. Its Current Account Savings Accounts (CASA) contributed 30.5% of total deposits, while retail term deposits contributed 87.1% of total term deposits.

Nirmal Bang | SUBSCRIBE

According to Nirmal Bang, TMB has demonstrated strong growth while managing a granular portfolio with superior asset quality metrics. He estimates that TMB can maintain the RoA at around 1.5% in the coming years thanks to a stable NIM (4%) and a drop in the cost of credit to less than 1%.

Religare Brokerage | SUBSCRIBE

The bank’s deposit base continues to grow, with a focus on low-cost retail CASAs. The bank has adopted a customer-centric approach with an emphasis on customer relationships. The financial results have been good for the company with total revenue and PAT CAGR of 7.99% and 41.99%, respectively, in FY20-22.

KR Choksey | NEUTRAL

The bank is well capitalized with a capital adequacy ratio of 20.4% as of March 31, 2022. The company plans to expand its branches once listing restrictions are lifted by the RBI. The current valuation reflects the premium for outperforming peers across all financial metrics. However, we remain cautious due to the higher geographic concentration and lower note sizes and the ongoing litigation with the bank.

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