Our expectations were met with HDFC Bank’s fourth-quarter 2014 earnings growing 23% over the prior comparable period. Despite net revenues growing at a slower pace (up 14%) than we anticipated, good cost control kept growth in operating costs to less than 1%. Careful cost management is a hallmark of the bank, and is serving it well in a year when funding costs have been under pressure and fee-based services have been hard to grow. The ability to control costs is one of the primary reasons we award HDFC Bank a narrow economic moat rating.
Interest income grew 15% during the quarter as net interest margins, or NIMs, popped 20 basis points higher to 4.4%. Fee-based income grew slower at 11%, as mutual fund and insurance commissions were lowered by regulations, and volumes were hit owing to weak market sentiment. From a cost perspective, loan provisions as a percentage of average loans was under 0.5%, much lower than peers. The bank’s greater proportion of retail loans (53% of all loans) compared to its peers (Axis Bank has 30% retail, and SBI 20%) has allowed it to suffer lower loan losses, as retail loans are more resilient during an economic slowdown. On the operating expenses side as well, the bank has opened 341 new branches this year, without increasing costs or hiring additional staff. As 230 of these were small branches opened in rural and semi-urban areas, manned by just two or three employees, the incremental cost of setting up these branches was low.
The bank’s full-year earnings grew 26%, marginally ahead of our expectations of 24%. Deposits and loans grew strongly at 24% and 26% respectively. While changes to loan and deposit growth have a relatively small impact on our valuation, we will be revising our fair value upwards to adjust for the additional cash generated since our last update, shortly. Overall we continue to believe the bank’s conservative cost management and better loan mix will garner superior returns going forward.
