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BACKGROUND

TMB is an old generation private bank having primary focus on MSME, Agri and Retail. TMB has 509 branches mainly in semi-urban areas of Tamil Nadu which contributes to 76% of its total advances. TMB has a sticky customer base owing to its century old legacy and strong regional brand. TMB has the highest ROA among old generation private banking peers at 1.66% for FY22. This is backed by its superior NIM profile at 4.1% along with prudent underwriting practices which have restricted GNPA / NNPA at 1.69% / 0.95% (lowest among peer banks)

Objects and Details of the Issue:

The public issue consists of fresh issue of Rs. 832 Cr to augment Tier 1 capital for future growth. More importantly, TMB was barred by RBI from expanding branches since June 2019 due to non-fulfillment of certain requirements pertaining to its share capital structure. RBI had instructed the bank that it shall lift the ban subsequent to listing of the bank.

Investment Rationale

* Strong legacy, loyal customer base

* Granular loan book has led to strong NIMs

* Robust underwriting practices reflecting in superior asset quality

Valuation and Recommendation

TMB has demonstrated strong track record of successfully growing and managing a granular portfolio with superior asset quality metrics. TMB stands out among the old generation private banking peers on most metrics. We believe TMB can sustain ROA at around 1.5% levels in coming years on the back of stable NIM at around ~4.0% levels and decline in credit cost to below 1%. TMB is being offered at 1.35x FY22 BV which is at a slight discount to peer banks having similar return ratio profile. Although pending legal issues regarding the bank’s share capital shall continue to be a hangover; considering the quality of business, top quartile earnings profile in the banking industry and reasonable valuations, we rate the issue as ‘Subscribe’.

Granular loan book has led to strong NIMs and return ratios for TMB

TMB has traditionally focused on small ticket size loan products to MSME (37% mix), agricultural (30% mix) and retail (20% mix) customers for its growth. TMB’s focus is on understanding the needs and expectations of its customers, particularly in the RAM (Retail, Agri, MSME) space and adopting strategies to target these customer segments for its growth. TMB leverages its presence in semi-urban and rural regions where it is located to attract more customers in the RAM segment. TMB has dedicated branches at Thoothukudi and Chennai in Tamil Nadu, and at Surat in Gujarat to cater to the requirements of MSME customers in these regions. Further, these dedicated branches act as facilitators for MSME customers with a focus on improving its loan processing timelines and faster disbursals to benefit the MSME customers. This targeted granular (lowest average ticket size among all peer banks) approach has resulted in TMB commanding superior NIMs of 4.1%.

Robust underwriting practices reflecting in superior asset quality

Focus on secured granular loan products, strong under-writing and risk management framework has helped TMB to maintain its asset quality at satisfactory levels. TMB focuses on selective lending and limits its exposure to certain industries and sectors as a part of its strategy to monitor concentration risk. TMB’s GNPA has reduced from 3.6% in FY20 to 1.7% in FY22, lower compared to peers. GNPA in RAM portfolio stands at 1.45% while in Corporate portfolio stands at 3.36%. NNPA has also reduced from 1.80% in FY20 to 0.95% in FY22.

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