Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the certificates of deposit of Tamilnad Mercantile Bank Ltd (TMB). 

 

The rating continues to reflect adequate capitalisation and above average profitability. These strengths are partially offset by average asset quality, a small scale of operations with high concentration in Tamil Nadu, an average resource profile and exposure to risks arising from an ownership dispute.

 

The bank has adequate capitalisation for its current and planned scale of operations. The Tier 1 and overall capital adequacy ratios (CARs) stood at 16.4% and 17.3% respectively as on December 31, 2020. The networth coverage for net non-performing assets (NPAs) stood at 2.9 times as on December 31, 2020; lower than in the past years largely on account of increase in proforma NPAs. With various initiatives taken by the bank since December 2020 to bring down the proforma NPAs and improve provisioning, the coverage is expected to improve by the end of the current fiscal. The bank also plans an initial public offering (IPO) in fiscal 2022, which would further bolster capitalisation.

 

Overall profitability remains comfortable, with overall net interest margin (NIM) of 3.4% and average pre-provisioning operating profitability of average assets at 2.8% (annualised) during the first nine months fiscal 2021. Further, return on assets (RoA) was 1.3% (annualised). As on December 31, 2020, the provision coverage ratio (PCR) was 71.6% on NPAs and around 33.9% on proforma NPAs as against PCR of 51.1% as on March 31, 2020.

 

Asset quality got impacted due to the Covid-19 pandemic that disrupted cash flows of several borrowers, especially small ones. The reported gross NPAs (GNPAs) and proforma gross NPAs stood at 3.2% and 7.8%, respectively, as on December 31, 2020, as against 3.6% as on March 31, 2020. Overall restructured advances stood at 0.6% of total advances as on December 31, 2020. The bank largely lends to medium, small and micro enterprises (MSME) and retail borrowers who carry high inherent risks. During the current quarter, regional recovery teams have focused on recovering the dues as business activities have opened up. As a result, the proforma GNPAs are expected to reduce from the peak December 2020 level. The bank is not expected to report a high number of restructured advances, which are likely to remain below 1.0% of the overall advances. It has taken high advantage of the entire ECLGS (Emergency Credit Line Guarantee Scheme) with the overall exposure at Rs 1,432 crore (4.7% of the total book) as on December 31, 2020. The overall MSME (43%), gold (23%) and retail loans (17%) book comprised 83% of the overall advances. These loans are largely backed by good quality collateral and thus loss given default is expected to be limited.

 

The resource profile remains adequate with cost of deposits improving to 5.6% for the first nine months of fiscal 2021 from around 6.0% for fiscal 2020. The CASA (current account and savings account) ratio has improved to 27.4% as on December 31, 2020, from around 25.8% as on March 31, 2020. The CASA growth is largely on account of high liquidity maintained since March 31, 2020, on account of a loan moratorium announced on Yes Bank. Sustainability of the overall CASA percentage level on a growing business will be an overall indicator of improved resources.

Analytical Approach

For arriving at the rating, CRISIL Ratings has evaluated the standalone business and financial risk profiles of TMB.

Key Rating Drivers & Detailed Description

Strengths:

* Adequate capitalisation

Tier I and overall CARs have been more than 12% (16.4% and 17.3%, respectively, with a networth of Rs 4,404 crore, as on December 31, 2020). Historically, the capital position was supported by internal cash accrual and below-industry-average growth in business. The networth coverage for net NPAs (proforma) stood at 2.9 times as on December 31, 2020. However this was largely on account of higher proforma GNPAs, which is expected to improve by the end of the current fiscal as the situation normalises backed by steady recovery.

 

The bank’s annual general meeting (AGM) held in October 2020 passed a resolution to go for an IPO in fiscal 2022. This is likely to be done during the second half of the fiscal. The bank expects to raise Rs 1,000-1,500 crore, most of which should be fresh issue. This will boost the networth significantly.

 

* Above-average profitability

Overall profitability remains comfortable with overall NIM at 3.1-3.4% over the past several fiscals. Average pre provisioning operating profitability has been at 2.2-2.8% of average assets during the past 3-4 fiscals on account of steady margins and stable costs. The overall average RoA between fiscals 2016 and 2020 stood at 0.8% (1.3% during the first nine months of fiscal 2021). The bank maintains a PCR of 40-55% on a steady-state basis; the current level of provisioning is expected to be adequate for the MSME and retail asset classes wherein the loss given default is limited as a significant amount of the exposure is backed by collateral and can be recovered by selling the underlying secured assets after the loans become doubtful assets. As on December 31, 2020, the PCR was 71.6% on GNPAs and around 33.9% on proforma GNPAs against a PCR of 51.1% as on March 31, 2020. The PCR is expected to improve by March 2021 with GNPAs reducing from the December level.

 

Weakness:

* Average asset quality

The reported GNPA and proforma GNPAs stood at 3.2% and 7.8%, respectively, as on December 31, 2020, as against 3.6% as on March 31, 2020. The overall restructured advances was 0.6% of the overall advances as on December 31, 2020. The bank largely lends to MSME and retail borrowers who have high inherent risks. During the current quarter, regional recovery teams have focused on recovering the dues as business activities have opened up and the customers’ cash flows have been improving. As a result, the proforma GNPAs are expected to reduce from the peak December 2020 level. The bank is not expected to report a high number of restructured advances, which should remain below 1.0% of the overall advances. It has taken high advantage of the entire ECLGS with the overall exposure at Rs 1,432 crore (4.7% of the entire book) as on December 31, 2020.

 

Since fiscal 2018, the bank has started focusing on MSME, retail and gold advances. It has not sanctioned any new loan of above Rs 25 crore ticket size over the past two years. It understands the MSME and small business segment well in Tamil Nadu regions of Madurai, Sivakasi, Thoothukudi and other regions. This lending is largely done to small textile, construction, manufacturing, food and beverages units. The overall loan book comprised of MSME (43%), gold (23%), retail (17%), corporate (11%) and agriculture (6%) as on December 31, 2020. While the overall composition for corporate advances has declined from 21% as on March 31, 2017, to 11% as on December 31, 2020, the other asset classes has improved significantly. Asset quality should remain exposed to inherent political, social, economic and environmental risks on account of exposure to small borrowers.

 

* Average resource profile

The deposit base of Rs 37,889 crore as on December 31, 2020, grew 7.7% from a year earlier. Further, CASA deposits ratio stood at around 27.4% as on December 31, 2020, against around 25.8% as on March 31, 2020. The CASA growth is largely on account of the high liquidity maintained since March 31, 2020, following the loan moratorium announced on Yes Bank during March 2020. Being already beefed up with high liquidity and low credit demand, the bank did not require high fixed deposits, as a result of which it lowered the rates on such deposits significantly during the first nine months of fiscal 2021, while maintaining the overall CASA offerings at competitive rates. This is in line with the overall deposit base of the other old private sector banks, which have also witnessed improvement in the CASA ratio during this period. Sustainability of the overall CASA percentage levels on a growing business will be an overall indicator of an improved resource profile. The resource base largely comprises of retail deposits, with limited bulk deposits at below 0.5% of the overall deposits as on March 18, 2021. The bank will continue to focus on improving the CASA ratio by getting local government departments to open such deposits with it.

 

* Small scale of operations, driven by regional and product concentration

Overall deposits and advances were Rs 37,889 crore and Rs 30,212 crore, respectively, as on December 31, 2020. This forms around 0.3% of the entire banking industry market share. Operations remain concentrated in Tamil Nadu with overall 72% of the branches, 77% of the advances and 76% of the deposits based in the state. The focus is expected to remain within the same region over the medium term. While the bank benefits from its established track record in its core geography, limited presence in the rest of India could constrain overall growth.

 

Within the overall advances mix, the bank has high concentration in MSME loans (43%) followed by Gold (23%) and retail loans (17%). It expects to focus on these segments with growth of over 15% per fiscal in the retail segment, led by housing and around 15% in the other segments during fiscal 2022.

 

* Exposure to risks arising from the dispute over ownership

The ownership dispute has carried on for the last several years. The bank conducted its AGM in October 2020 during which it passed a resolution for raising funds through an IPO, which is likely to be done during the second half of fiscal 2022. Although the board has approved the IPO, the prolonged adjudication of cases related to this dispute is a constraint. Hence, issues relating to shareholding and ownership of the bank will remain key monitorables.

Liquidity: Strong

The liquidity coverage ratio stood at 215.52% as on December 31, 2020. The bank maintains an excess statutory liquidity ratio (SLR) of 4-5% on a steady-state basis. As on December 31, 2020 the excess SLR ratio was around 6.6%. The bank has positive cumulative mismatches across buckets over the next one year.

Rating Sensitivity factors

Downside factors

• A decline in the capital adequacy ratio for Tier 1 capital to below 11.5%
• A significant increase in credit costs, leading to deterioration in profitability

About the Bank

TMB is a small, private sector bank with an asset base of Rs 45,918 crore as on December 31, 2020. The bank was established in 1921 by Nadar Mahajana Sangam, a society set up for the welfare of the Nadar community. Headquartered in Thoothukudi, TMB is largely present in south India with 509 branches as on December 30, 2020.

 
Gross advances and deposits were Rs 30,212 crore and Rs 37,889 crore, respectively, as on December 31, 2020. Proforma GNPAs increased to 7.8% as on December 31, 2020, from 3.6% as on March 31, 2020, because of low growth in the loan book.

Key Financial Indicators - As on / for the period ended March 31

Particulars		9MFY21	2020	2019
Total assets	Rs crore	45918	42759	40,533
Total income (net of interest expense)	Rs crore	1614	1846	1,640
Profit after tax	Rs crore	422	408	259
Gross NPA	%	7.8*	3.6	4.3
Overall capital adequacy ratio	%	17.3	16.7	16.2
Return on assets	%	1.3	0.8	0.7

*Proforma

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity Level	Rating Assigned  with Outlook
NA	Certificates of Deposit	NA	NA	NA	1000	Simple	CRISIL A1+