Why TMB management is banking on an IPO
The management of this small, conservative bank views a public issue as a means of ending a long shareholder feud and unlocking value for its next phase of growth
Hundred-year old Tamilnad Mercantile Bank (TMB), which has been at the centre of an internal feud for nearly two decades, is gearing up for an initial public offering (IPO) later this year. Is this undue optimism on the part of a small, conservative bank roiled by warring shareholders and little known outside its home state?
In fact, the IPO is seen as a way of ending the dispute by opening the exit door for some investors even as it allows for price discovery for existing shareholders, most of whom are businesspeople. TMB’S management, now busy meeting lead managers and investors, is confident of getting a good valuation principally because it has managed to insulate the bank’s performance from the controversies (see table).
The nine months ended December, which has been challenging for the banking industry as a whole, saw TMB’S profit rise 73 per cent to ~422.35 crore from ~243.49 crore in the same period a year ago. Gross NPAS dropped to 3.24 per cent from 5.16 per cent and net NPAS to 0.92 per cent against 2.13 per cent in the same time period.
“TMB is one of the strongest banks with enviable performance ratios in the industry,” said Kumarpal R Chopra, corporate lawyer & partner of Mitraa Legal, which advises several funds and high net worth individuals on investments in India.
Although almost 95 per cent of TMB’S shareholders have approved the IPO, issues relating to shareholding and ownership of the bank will remain the key to its success.
TMB was formerly known as the Nadar Bank (it was renamed in 1962) and is exclusively owned by and servicing that community since it was set up in 1920. The dispute began in 1984 when some shareholders sold nearly 67 per cent of the shareholding to the Essar group, which in turn sold it to C Sivasankaran, the maverick NRI businessman and promoter of the Sterling Infotech group.
Sivasankaran was building investments in India’s newly opened telecom and infotech sectors at the time, but he faced stiff resistance from the original shareholders who were unwilling to admit outsiders. The Nadar community went on a fund-raising drive to buy back Sivasankaran’s shares but could not mobilise enough money to buy the entire stake.
Eventually, in 2007, Ramesh Vangal, the man who brought Pepsi to India, got into the act, with his Katra Holdings heading a foreign investors’ consortium to buy out Sivasankaran’s stake. The Katra consortium acquired a 24.93 per cent stake, and another 8.62 went back to the Nadar community.
In 2011, Katra Holdings sold a 3.6 per cent share to Subcontinental Equities, an arm of the Standard Chartered Bank. This proved a problematic deal and in September last year, Standard Chartered was slapped with a ~100 crore fine for violating the Foreign Exchange Management Act (FEMA). MGM Maran, former TMB chairman, was fined ~35 crore for the same transgression.
The investigation under FEMA was taken up following a reference made by the Reserve Bank of India, which wanted scrutiny of advance remittances received by certain entities for the purchase of TMB shares through an escrow mechanism maintained with Standard Chartered in Mumbai.
Some of the cases are pending in court and with various regulators. But TMB’S former nonexecutive chairman, S Annamalai, who spearheaded the board for four years from 2016, says those controversies did not disrupt the bank’s performance. He and another five promoters, who together hold around 20 per cent in TMB, have been on the board since 2016. Annamalai is the older brother of S Ashok, who brought foreign investors and the Nadar community together.
“When we took over, we said we will focus only on the bank’s performance and what is best for all the stakeholders, including customers, employees and shareholders,” said Annamalai.
In 2017, the board appointed former United Bank of India (UBI) Executive Director K V Rama Moorthy as managing director. He came with over three decades of experience.
One of the initial decisions the new management took was to stay away from consortium lending. The decision was taken after the board found that its non-performing assets were largely due to consortium lending, which was taking a toll on profits. Instead, the focus was to be on the bank’s strengths — retail, agriculture and MSME, or RAM as they called it.
The change in strategy slowed the bank for a year or two, but the management was vindicated by the experience of peers such as Lakshmi Vilas Bank, which was recently merged with Singaporeowned DBS Bank after mounting NPAS due to high corporate exposure nearly pulled it under.
“We have no regrets saying no to big-ticket lending,” said Annamalai, pointing out that medium and small enterprises are easy to monitor and risk is also lower.
Moorthy added that RAM used to account for around 71 per cent of TMB’S loan portfolio in 2016-17; it has increased to 86 per cent. “Being a commercial bank, one cannot stay away from corporate lending, we choose select mid-size corporations depending on performance, books, viabilities and relationship,” he said.
One of the decisions Moorthy took early on was to make branches build relationships with customers, a critical approach since many customers had been with the bank through four generations.
He also created 107 “clusters”, each with about six people, including one from the regional office, people from branches with expertise or specialists in verticals such as mobilising deposits, retail banking, developing alternate channels and recovery.
“Initially, employees were reluctant. Then they realised what it means to take ownership for the sake of the bank and for their own growth,” he said. As on March 31, 2017, out of the 505 branches, 116 were lossmaking. By March 31, 2020, only 48 (of the 509 branches) were making losses.
The bank has set a target to double its balance sheet to ~1.25 trillion and more than double profit to ~1,000 crore in five years. The IPO will not only strengthen its capital base but also help it expand in Tamil Nadu, which is the one of the fastest growing states in the country.
TMB’S management thinks this is a good time to approach the market because of growing investor interest in private banks, which have a better net interest margin than public sector banks (3.4 per cent vs 2.4 per cent). Some of the successful IPOS in the last two years include Fairfaxbacked CSB Bank and Equitas Small Finance Bank. But much depends on whether the market values TMB’S performance over its shareholder feud.
The bank aims to double its balance sheet to ~1.25 trillion and more than double profit to ~1,000 crore in five years. The IPO will not only strengthen its capital base but also help it expand in Tamil Nadu
Underscoring Islamabad’s insistence that Pakistan remains relevant and important to the global community, 45 countries are coming together for a combined naval exercise being organised by the Pakistan Navy in mid-february in the Arabian Sea.
“This year, the
7th edition of Exercise Aman is scheduled this month, where around 45 countries are participating with surface and air assets, special operations forces, marine teams and observers, and senior officers,” stated a Pakistan Navy press release.
The exercise will kick off with a ‘harbour phase’ from February 11-14, followed by a ‘sea phase’ on February 15-16.
The participants will include navies of the US, China, Russia, the UK, Turkey, Bangladesh, Sri Lanka, Indonesia, Malaysia, and several African countries. This will be the first time in a decade that the Russian Navy exercises alongside warships from North Atlantic Treaty Organization countries.
Since Exercise Aman began in 2007, participation has steadily risen from 28 countries the first year to 45 countries this year.
Briefing the media in Karachi, the Pakistan Fleet commander, Rear Admiral Naveed Ashraf, stated that the Pakistan Navy, which believes in ‘collaborative maritime security’, has been participating in counter piracy operations since 2004. It has also partnered foreign navies in ‘regional maritime security patrols’ since 2018.
Ashraf cited three reasons for Pakistan’s interest in safer and crime-free seas: “Firstly, our extraordinary dependence on the seas for trade; secondly, operationalisation of the Chinapakistan Economic Corridor project, and lastly, our strategic location astride the global energy highway.”
The Pakistan Navy, which has traditionally been treated by that country’s Armydominated military establishment as relatively inconsequential, has begun coming into its own with warship purchases from China.
Last week, Pakistan’s Navy chief, Admiral M Amjad Khan Niazi, told China’s Global Times newspaper that the Pakistan Navy had contracted with China Shipbuilding & Offshore International Co. for eight Hangor-class submarines. Four will be built in China and the remaining four in Pakistan.
These will join five French Agosta submarines that the Pakistan Navy already operates.
In addition, Pakistan has contracted with China for four Type 054A/P frigates, the second of which was launched at a shipyard in China last week. These will join four F-22P Zulfiquar-class frigates that Pakistan has already bought from China.
In addition, Pakistan plans to induct another four frigates in collaboration with Turkey and another six guided missile frigates that it may build indigenously.
The exercise will kick off with a ‘harbour phase’ from February 11-14, followed by a ‘sea phase’ on February 15-16