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Company Background: 

Tamilnad Mercantile Bank Ltd. (Tamilnad) is one of 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, agricultural and retail customers. 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 FY22 and 4.05 million or 79.8% of its customers have been associated with the bank for a period of more than five years

Strong presence in Tamil Nadu:

Tamilnad has built a strong and trusted network of customers in the state of Tamil Nadu. As of FY22 deposits and advances in the state of Tamil Nadu contributed to 75.1% of its total business. Moreover, 85% of its overall customer base contributes to its deposits and advances portfolios in the state of Tamil Nadu. Apart from its home state, the bank is also focusing on diversifying its reach in already existing network including in the states of Gujarat, Maharashtra, Karnataka and Andhra Pradesh.

 Advances with focus on MSME

agricultural and retail segments: It has traditionally focused on small ticket size loan products to MSME customers, agricultural and retail customers. 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 customers, particularly in the RAM space and adopting strategies to target these customer segments for growth

Consistently growing deposit base with focus on low-cost retail CASA and strong asset quality: The bank has adopted a customer-first approach with an emphasis on customer relationships. Its deposits have grown at 10.5% CAGR over FY20-22. Its CASA deposits as a share of total deposits has increased from 25.9% in FY20 to 30.5% in FY22. On asset quality front, its Net NPA has reduced from 1.8% in FY20 to 0.95% in FY22.

Promising industry growth prospects:

The Indian banking sector is significantly under-penetrated which provides immense opportunities for banks and other financial institutions. Within this private bank are better placed given the higher degree of operational efficiency and well capitalized balance sheet

Tamilnad well placed to capitalize:

Tamilnad is well placed to capitalize the growing industry trends given the strong growth potential in geographies where the company is present. Moreover, the company would focus on improving technology which would help them achieve higher operational efficiency and improve drive customer experience

Healthy financial track record:

The financial track record has good for the company with total income and PAT growth of 7.99% and 41.99% CAGR over FY20-22. Its net interest margin has improved from 3.64% in FY20 to 4.1% in FY22. Its deposits and advances have grown at a healthy pace of 10.5% and 9.9% CAGR over FY20-22. On the valuation front, Tamilnad is valued at 1.4x pre-issue FY22 Price to Book Value.

Key Risks:

i) High dependence on Tamil Nadu state

ii) Rising interest rates and deteriorating asset quality.

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