HDFC Bank’s second-quarter 2015 earnings were up 20.1% over the corresponding period last year, broadly in line with our five-year growth estimate of 21.3%. Net interest income grew strongly (up 23%) as net interest margins (NIMs) expanded to 4.5% versus 4.3% last year, and total loans grew by a healthy 22% --as both retail loans (up 17.3%) and wholesale loans (up 21.8%) picked up momentum. Non-interest income grew by 11% aided by fees and commissions (75% of non-interest income) which were up 13%. Over the conference call, management shared that 80% of its fees are derived from its retail clients and with market demand for mutual funds and insurance picking up the bank’s fee-based products are witnessing increased volumes. On the expense front, both provisions and operating expenses grew at a slower pace than we expected as the bank continues to wear its strong suit of cost management. We are increasing our valuation for HDFC Bank to INR 840.60 per share or USD 41.34 per ADR, as we adjust our cost estimates for our five year forecast downwards.
The bank’s cost-to-income ratio on a trailing twelve-month basis was 45.0%, but for the quarter jumped to 46.3% as the bank increased its employee strength by over 5000 new employees during the quarter (taking total headcount to 75,339) to meet the growing needs of the bank. Management has guided that cost-to-income should remain below the 50% but above 45% for the coming years. In line with recent trends, we are taking our average five year cost-to-income forecast down to 47% from 48% assumed previously. Similarly, the bank’s provision-to-loan ratio was 0.54% for the preceding twelve months, and 0.6% for last year, and we cut our five year forecast down to 0.7% from a prior cautious estimate of 1.0%. Overall, we continue to maintain our narrow economic moat rating as the bank benefits from scale advantages with costs falling as a proportion of revenue.
