Tamilnad Mercantile Bank Ltd (TMB) came up with its IPO in September 2022 at an issue price of ₹525. After making a weak debut, the shares of the bank made an all-time high of ₹611.35 in September 2023. Ever since, the stock has shed 24.3 per cent to ₹462.55, trading at a trailing price to book value (P/B) of 0.92 times.

The bank boasts of solid fundamentals with a CRAR of a whopping 29.4 per cent, an RoA of 1.8 per cent and a GNPA ratio of 1.4 per cent. Such numbers would certainly appeal to a value investor, given the attractive valuation. However, the fact that the bank is currently without a managing director and its legacy issues of litigations (which predate the IPO) involving violations of FEMA (Foreign Exchange Management Act) have been a cause for shares to underperform despite cheap valuations.

Nevertheless, the risks appear factored at current levels, and hence for investors who may have invested in the bank’s IPO or post that, we recommend that they continue to hold onto their shares. Resolution of legal and regulatory overhangs could be significant positive catalysts, but for now, the timelines for that are uncertain. Read on as we elaborate why.

Good operating/financial performance

Financially, TMB is on a solid footing. The bank has recorded its all-time high PAT of ₹1,072 crore for FY24. PAT grew at a CAGR of 14.2 per cent between FY22 and FY24. The NII has grown at a CAGR of 8.9 per cent between FY22 and FY24, reaching a record high of ₹2,151 crore. The NIM has remained consistently above 4 per cent over FY22 to FY24, improving from 3.6 per cent in FY20.

The bank is more than adequately capitalised, with a CRAR of 29.4 per cent with a CET-1 ratio of 28 per cent. It has added to its net worth at a CAGR of 18.8 per cent between FY20 and FY24, aided by steady profitability. The book value per share is at ₹500.23 as of FY24. The bank has added, on an average, ₹63 per year to its book value per share over FY23 and FY24. If the share price holds such that P/B stays at 1 time, the price can reach around ₹560 by the end of FY25.

The bank has, over the years, built a strong retail-focused, granular and secured loan book. Retail loans make up 21 per cent, Agri loans (secured by gold) 36 per cent, MSME loans 34 per cent and other advances (Corporate loans) 9 per cent. The unsecured book has remained under 1 per cent, leaving the bank unharmed by RBI’s recent crackdown on unsecured lending.

One area where it has underperformed is loan growth, which is, however, expected to improve from here. The bank has witnessed a loan growth of just 8.8 per cent CAGR between FY22 and FY24, which is lower than the industry average. This is because, as per the management, the bank is in the midst of a business process re-engineering with respect to MSME loans. The effects of these measures will start stabilising starting FY25 and the management expects a 15 per cent growth in loans in FY25. The management hopes to achieve this while keeping the RoA intact.

The bank has one of the best figures with respect to asset quality among peers. Delinquencies have been arrested consistently with GNPA ratio at 1.4 per cent as of FY24 from 3.6 per cent as of FY20. PCR, including technical write-offs at 87.5 per cent, shows the bank’s conservative stance. Credit cost has also declined from 1.5 per cent for FY20 to 0.4 per cent for FY24.

The bank has been spreading its reach both in Tamil Nadu as well as across India with 509 branches as of FY22 to 552 branches as of FY24, to 565 now — 415 in Tamil Nadu and the rest outside of it.

Legal and regulatory overhangs

S Krishnan, the Managing Director, resigned in September 2023 citing personal reasons. He had agreed to stay till a replacement was found. Later, in April 2024, the RBI rejected three external candidates identified by the bank and directed the bank to identify candidates with suitable experience. In June 2024, the board of the bank agreed to relieve Krishnan and has approved the appointment of a Committee of Executives (CoE) consisting of the General Managers of Credit, HR and PDRM to take over the administration of the bank in the absence of an MD.

Apart from these concerns, the bank faces legal action by the RBI and the Enforcement Directorate for the transfer of shares of the bank to certain non-residents in violation of FEMA. It is to be noted that these are legacy issues, which existed even before the IPO. As per the IPO prospectus, the penalties, in a couple of notices served by the ED, go up to ₹506 crore and ₹531 crore. While not small amounts, the impact will be manageable for the company, given its strong capital buffers.

This apart, there are numerous disputes as to the ownership of the bank’s shares in various fora across the country. As per the prospectus, shares representing 37 per cent of paid-up capital were subject matter of litigations, at the time of IPO. The status of the said litigations is not known and continues to be an overhang.

On these considerations, the market looks to have fairly priced the stock, giving due credit to the bank’s solid books, as well as to the uncertainties that may descend on the company.

Related Topics