Following the dismissal of shareholder petitions by the Securities Appellate Tribunal (SAT), the road is clear for Tamilnad Mercantile Bank (TMB) to open on Monday morning.

The professionally-managed private lender, which does not have any identifiable promoters, on Friday allotted 71,28,000 equity shares to 10 anchor investors and raised Rs 363.53 crore at Rs 510 apiece. This is against the price band of Rs 500 – Rs 525 per share for a fresh issue of 1,58,40,000 equity shares.

The bank was barred by the Reserve Bank of India from expanding branches from June 2019 due to non-fulfillment of certain requirements pertaining to its share capital structure. There are hopes the ban will be lifted after the IPO listing.

Analysts said while the cost of deposits is relatively on the higher side, the net interest margin is healthy. From the valuation point of view, the asking price is at 1.35 FY22 book value, which analysts said is attractive when compared with peers. Subscribe the issue with a long-term view, a few brokerages said.

Securities initiated coverage on this bank with a ‘subscribe’ rating with a base case target of Rs 843.60, 1.5 times FY25 book value, representing a potential upside of 60.7 per cent over the next 24 months.

In its bull case scenario, the brokerage has assumed FY25 gross advances for the bank at Rs 52,106.9 crore in FY25 (CAGR of 15.3 per cent over FY22-25) and NIMs of 4.2 per cent (up 40 bps over FY22). In its bear case scenario, it has assumed FY25 gross advances of Rs 44,388.2 crore in FY25, up 9.3 per cent. It sees NIMs of 3.4 per cent, down 42 bps over FY22, in the bear case scenario. The price targets for bull and bear scenarios stand at Rs 965.70 share and Rs 511.30, respectively.

YES Securities in its comparison of 11 small private banks said the 3-year FY19-22 loan CAGR for TMB at 8.1 per cent is the fourth best. The cost to assets for TMB at 2.2 per cent for FY22 stood at 5th lowest, it said, adding that the cost to income ratio at 42.1 per cent for FY22 was the second best in its comparison universe. Meanwhile, the cost of deposits for TMB at 4.9 per cent for FY22 is the second highest in its universe, although not necessarily high in the absolute sense.

Nirmal Bang said the private bank demonstrated a strong track record of successfully growing and managing a granular portfolio with superior asset quality metrics.

TMB, it said, stands out among the old generation private banking peers on most metrics.

The brokerage believes TMB can sustain ROA at around 1.5 per cent levels in coming years on the back of stable NIM at around 4 per cent levels and decline in credit cost to below 1 per cent.

“TMB is being offered at 1.35 times FY22 BV, at a slight discount to peer banks having similar return ratio profiles. 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,” it said.

YES Securities said TMB would trade at an FY22 P/B of 1.4 times. For FY22, it said, the bank delivered an RoA of 1.7 per cent and an RoE of 16.6 per cent.

“Importantly, given the business model of TMB, we do not see these return ratios as volatile, going forward. Consequently, we find the IPO valuation for TMB as eminently attractive,” it added.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)


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