Tamilnad Mercantile Bank IPO: Decent Financials But Questionable Corporate Governance

Tamilnad Mercantile Bank (TMB) recently filed papers for an Initial Public Offering (IPO). It will be raising money through fresh equity and also conduct an offer for sale (OFS) for existing shareholders. The company will be using a large portion of the funds raised through the IPO to stabilise its tier one capital base.

TMB was founded in 1921 and is one of the oldest private sector banks in India. The bank primarily caters to micro, small and medium enterprises (MSMEs), agricultural and retail customers.

As of the first quarter of the financial year 2021, the bank has 509 branches, of which 369 are located in Tamil Nadu. The bank has also been growing in other states, and Tamil Nadu contributes to around 76 per cent of the banks total deposits and advances. These states include states of Maharashtra, Gujarat, Karnataka, and Andhra Pradesh with presence across 90 branches in these states and remaining branches spread along other states.

The bank's main focus is on increasing its retail, agriculture and MSME businesses. It has been lowering its exposure to corporates that mainly operate in textiles and other industries.

• MSMEs: The bank primarily offers several loan products to its MSME customers operating in the manufacturing, trading and services segments. During Fiscal 2021, MSMEs contributed 39.08 per cent to the bank's total advances.

• Agricultural customers: TMB offers loan products to farmers and corporations in the agricultural sector. During Fiscal 2021, agricultural customers contributed 27.41 per cent respectively to the bank's total advances.

• Retail customers: In this segment, the bank offers home loans, personal loans, auto loans, educational loans as well as security backed loans of various types to retail customers. During fiscal 2021, retail customers contributed 20.60 per cent respectively to the bank's total advances.

The bank has been focusing on lower ticket size loans to reduce risks and the loan category segment between Rs 1 lakh to Rs 5 lakh has grown at the fastest pace in the last two years. In contrast, loans above Rs 25 lakh have seen a slight de-growth.

Its total advances stand at Rs 31,541 crore in 2021, and an increase of 12 per cent from the previous year's figure of Rs 28,236 crore. The bank's deposit base has grown from Rs 36,825 crore in the previous year to Rs 40,970 crore in FY21. It has also seen a fall in gross NPA from 4.32 per cent in FY19 to 3.44 per cent in FY21. Overall, the firm has shown decent financials.

However, investors should remember that accounting profits for banking and financial companies often do not give the full picture. Bank accounting often uses estimates and management suggestions. For instance, in the case of Yes Bank, the bank showed signs of improvement for a while and then almost collapsed.

Key Risks:

Questionable Corporate Governance

In the past, the bank has demonstrated lapses in corporate governance several times. Several institutional and individual investors have also filed cases against the bank in court, and the bank has received notices for not conducting annual meetings with shareholders. It has been investigated by the Enforcement Directorate (ED) several times, and a former director has also tried to stall the IPO, alleging mismanagement.

Concentration in Tamil Nadu

The bank's operations are heavily concentrated in Tamil Nadu, which implies that any slowdown in the state's economy or a calamity in the state could impact the bank's operations adversely.

Sectoral Risks:

The bank operates in a highly regulated sector. It already has a track record of run-ins with the law. Further, the sector is highly cyclical and immediately affected by macroeconomic issues.