Rating Rationale
March 31, 2020 | Mumbai
Tamilnad Mercantile Bank Limited
Rating Reaffirmed 
 
Rating Action
Rs.1000 Crore Certificate of Deposits CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the certificate of deposits of Tamilnad Mercantile Bank Ltd (TMB).
 
The bank has adequate capitalisation for its current and planned scale of operations. The current tier 1 and overall capital adequacy ratios were 14.8% and 15.4%, respectively, as on September 30, 2019. The bank has adequate capital to meet its moderate growth plan over the medium term, and the profitability is healthy to support the planned growth. Furthermore, it will extend small-ticket loans, which have lower risk.
 
TMB's operating profitability was healthy at 2.15-2.20% of average assets during the past 2-3 fiscals on account of steady margin and stable costs. Over the past 2 fiscals, the bank went slow on branch expansion; it has 509 branches. The operating profitability will remain stable over the medium term.
 
The asset quality is modest on account of large exposure to small industries and borrowers, which are exposed to inherent political, social, economic, and geopolitical risks. The gross non-performing assets (GNPAS) were at 5.2% as on December 31, 2019, compared with 4.3% as on March 31, 2019. However, the low slippage rate of 2.0% expected in fiscal 2020, compared with 4.0% in fiscal 2019, provides comfort. The slippage rate in fiscal 2020 is significantly lower, as the bank recognised non-performing assets (NPAs) of large, stressed assets between fiscals 2017 and 2019, and disbursed loans only to micro, small and medium enterprises (MSMEs), where it has a good track record of collection and recovery.
 
TMB's resource profile is average, as the cost of borrowing is 6.0-6.5% on account of the current and savings account (CASA ratio) deposits ratio of around 25%.
 
The bank's presence is limited, with geographic concentration in Tamil Nadu, which accounts for 70-75% of the deposits and advances.
 
The dispute over ownership has been a key risk for TMB over the past several years. However, the bank will hold an annual general meeting (AGM) once the lockdown announced by Prime minister of India gets over and the gathering of people is allowed, where it will try to resolve some of the issues.
 
The rating continues to reflect TMB's adequate capitalisation and stable operating profitability. The strengths are partially offset by its modest asset quality, small scale and geographic concentration of operations, average resource profile, and exposure to risks arising from the ownership dispute.

Key Rating Drivers & Detailed Description
Strengths
*Adequate capitalisation
TMB's capitalisation was healthy, as reflected in the tier I and overall capital adequacy ratios of more than 12%. As on September 30, 2019, the bank's tier I and overall capital adequacy ratios were 14.8% and 15.4%, respectively, and net worth was Rs 3,725 crore. Historically, the bank's capital position was supported by its internal accrual and below industry average growth in business. While TMB is not likely to grow aggressively over the medium term, it will need external equity if the profitability remains low. TMB's ability to raise equity capital after resolving investor issues, and maintain its tier I capitalisation above 11% will remain the key monitorables.

* Stable operating profitability
The bank's operating profitability was average, driven by stable net interest margin (NIM) of 3.1-3.5% over the past 5 fiscals. Cost of funds was stable between 6.0% and 6.5% in fiscal 2020, which is comparable with that of peers and will continue to support the operating profitability. Moreover, the bank has maintained its operating expenses at 1.9-2.0% for many years now, driven by limited expansion in operations, which will continue.

Weaknesses
*Modest asset quality
Asset quality was modest, driven by slippages among large ticket loans during fiscals 2016-2019. However, the slippage rate of TMB improved to around 2% in fiscal 2020, from around 4% in fiscal 2019, on account of recognition of all large stressed assets. The bank has now refocused its sourcing and disbursements towards MSME loans below Rs 5 crore and housing loans to existing customers. These products are well understood by the bank, and their recovery is higher. The asset quality was 4.3% and 5.2% as on March 31, 2019, and December 31, 2019, respectively. However, on account of low slippage, high recovery, and growth over the last 3 months of fiscal 2020, GNPAs are expected below 4% as on March 31, 2020. The asset quality is likely to improve over the medium term on account of TMB's focus on granular MSMEs and retail loans.

* Average resources profile
The deposit base of Rs 35,174 crore as on December 31, 2019, grew 13.9% from a year earlier. Until fiscal 2016, the proportion of CASA deposits was lower than that of peers at 22%; however, post demonetisation, CASA deposits accounted for 25% of the total deposits as on December 31, 2018. The bank wants to overcome traditional challenges such as limited branch presence and negligible market share in corporate banking, and to increase its retail deposit base and sustain its renewal rate of 76-80%. The cost of funds was stable at 6.0-6.5% between fiscal 2017-2019. The resource profile of the bank is likely to remain average.

* Small scale of operations, driven by regional concentration
Scale of operations, reflected in deposits and gross advances of Rs 35,174 crore and Rs 27,369 crore, respectively, as on December 31, 2019, was modest, with a market share of 0.3% systemic deposits and advances. The bank had 509 branches as on December 30, 2019, wherein 72.5% were in Tamil Nadu, indicating high geographic concentration. While the bank benefits from its established track record in its core geography, limited presence in the rest of India constrains its position.

*Exposure to risks arising from the dispute over ownership
The dispute among shareholders has not been settled for 2 decades. On account of this, six AGMs could not be convened in a timely manner and were subsequently conducted all at once on January 29, 2016 on court's order. In the AGMs, resolutions pertaining to splitting of share capital and issuance of bonus shares were passed; however, the shareholders failed to pass a resolution on raising capital through initial public offering. The bank will conduct AGM of the bank once the country wise lockdown announced by Prime minister of India is lifted and gatherings of people is allowed within the country. The bank will conduct AGMs for 4 years, all at once. TMB will propose reduction in share capital to Rs 280 crore from Rs 500 crore, and will discuss the resolution for diluting 10% stake. While RBI has insisted to resolve this issue, the prolonged adjudication of cases allied to this dispute is a constraint. Hence, issues relating to shareholding and ownership of the bank will remain the key monitorables.
Liquidity Strong

The bank's strong liquidity is reflected in excess statutory liquidity ratio of 3-4%. It does not have cumulative mismatch during the next 6 months. A high renewal rate of 75-80% is expected in in the current year The credit deposit ratio was around 75% as on December 31, 2019, and will be a key monitorable.

Rating Sensitivity Factors
Downward factors
*Increase of more than 3% in credit costs, weakening profitability and capital adequacy
*Decline in capital adequacy below 10%.

About the Bank

TMB is a small, private sector bank with an asset base of Rs 41,992 crore as on December 31, 2019. The bank was established in 1921 by Nadar Mahajana Sangam, a society set up for the welfare of the Nadar community. Headquartered in Thoothukudi, Tamil Nadu, TMB is largely present in south India with 509 branches as on December 30, 2019.
 
Gross Advances and deposits were Rs 27369 crore and Rs 35,174 crore, respectively, as on December 31, 2019. GNPAs increased to 5.2% as on December 31, 2019, from 4.3% as on March 31, 2019, because of low growth in the loan book.

Key Financial Indicators - As on/for the period ended March 31
Particulars Unit 9M FY20 2019 2018
Total assets Rs crore 41,992 40,533 37,920
Total income (net of interest expense) Rs crore 1,328 1,640 1,709
Profit after tax Rs crore 244 259 246
Gross NPA % 5.2 4.3 3.6
Overall capital adequacy ratio % NA 16.2 14.8
Return on assets % 0.8 0.7 0.6

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs.Cr)		 Rating Assigned  with Outlook
NA Certificates of Deposit NA NA 7 to 365 Days 1000 CRISIL A1+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Certificate of Deposits  ST  1000.00  CRISIL A1+      26-03-19  CRISIL A1+  01-03-18  CRISIL A1+  02-03-17  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Banks and Financial Institutions
CRISILs Criteria for rating short term debt

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