Second-quarter 2016 earnings for HDFC Bank broadly met our estimates; however, loan growth was higher than expected.
First-half fiscal 2016 stand-alone earnings ended at Rs 55 billion, versus our annual consolidated earnings of Rs 118 billion. What the bank lost in margins (which fell by 10 basis points over the prior year to 4.2%) it more than made up with a stupendous loan growth of 29% over last year.
The bank experienced above-30% growth across 45% of its loan portfolio, comprising home loans, personal loans, agricultural loans and two-wheeler loans, as it gained market share over competitors. While overall loan growth in the system remains weak as a result of a slow pickup in corporate lending, this retail lender is benefiting from its position in the pockets of affluent clients as green shoots begin to emerge.
In line with these results, we are modifying our forecast to incorporate higher loan growth of 26% for fiscal 2016, versus 20% assumed before, along with 24% average loan growth for the next five years. This results in an uptick in our forecast earnings growth over five years, up to 21%, versus 17% assumed earlier, and increases our fair value estimate by 8% to Rs 1,130, or $52 per ADR.
Our other assumptions on fee income, net interest margins, or NIMs, and loan losses remain unchanged for this narrow-moat stock, which we view as fairly valued at current prices.
Margins for the quarter were lower at 4.2%, mainly because of increased deposit growth of 30%, as individuals and corporates locked in a higher interest rate of on-term deposits in a falling rate environment. Keeping the longevity of term deposits in mind, we reduce our fiscal 2016 NIM forecast to 4.3%. However, our five-year NIM forecast remains at 4.5%, as only 30% of the loan book is linked to the base rate, while 70% is on a fixed-interest-rate schedule.
The equal and opposite impact of higher loan growth and lower NIMs keeps our 2016 earnings estimate unchanged at Rs 118 billion.
HDFC Bank continues to expand its branch presence, taking the total number of branches to 4227, 55% of which are in non-urban locations. On the other hand, the number of ATMs dropped, as the bank rationalised its cash-withdrawal locations in an economy that is beginning to increasingly adopt cashless forms of transacting.
We view these moves in positive light, as branches remain important to garnering cheap liability funding, and ATMs are a necessary evil in what is thus far a predominantly cash-based economy.
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