HDFC Bank’s first-quarter 2015 earnings were up 21% on the prior comparable period, beating our expectations as good cost control made up for slower revenue growth. Both provisions (down 8%) and operating expenses (up 5%) grew significantly slower than net revenue (up 11%), though revenue growth lagged both our 24% full-year forecast, and the bank’s five-year average of 22%.
At 21%, growth in advances continued to show strength (versus 26% in fiscal 2014). However, net revenue took a hit from a shift in loan mix, which sent net interest margins (NIMs) narrower, to 4.4% versus 4.6% last year, as high-margin retail loans formed a smaller proportion of loans (at 52%, versus 54% last year). Within retail loans as well, lower yield home loans formed a greater proportion, further pressuring margins.
On the fee income front, regulatory changes on mutual fund commissions, no charges on minimum bank balances and curbs on lending for buying gold weighed on fee-based revenue, which now account for 26% of net revenue, versus 30% in the same period last year.
Operating expense ratio touched a historical low of 45% on a trailing twelve-month basis, as the bank accrues the benefits of scale economies. Management stated that some strategically held back expenses may now be undertaken as the bank grows its revenue base. We see the expense ratio coming closer to the 48% mark for the year. As such, we keep our earnings outlook for HDFC Bank unchanged.
During the remainder of the year, we see revenue growth bouncing back as the loan book grows and as the bank finds other avenues to generate income. Overall, we maintain our narrow economic moat rating and our long-term upbeat view on the bank, as it continues to generate the highest margins in the Indian banking arena.
The bank plans to raise equity this year to fund its growth. We anticipate the issuance to be priced well above book value.
