HDFC Bank’s fourth-quarter fiscal 2015 earnings grew by 20.6%, in line with our full-year estimates. Provisions were higher than anticipated, with the bank selling Rs 5,500 million in gross loans from a specific corporate account to an asset reconstruction company ahead of the loan going bad. The majority of this was provided for from floating provisions of the bank. During the conference call, HDFC Bank’s management shared that other peers lending to the same entity are yet to recognize this account as a bad loan. These actions on its loan underwriting and bad loan recognition support our Exemplary stewardship rating.
Overall, HDFC's shares look fairly priced, trading at a modest discount to our fair value estimate of Rs 1,050 per share. Our outlook remains upbeat as far as quality of book and high earnings growth is concerned, projecting gross non-performing loans below 1% and earnings growth of 20% during the next five years.
As the bank continues to improve market share (albeit only 4% of the Indian market) and grow its loan book faster than the market, we harbor a favorable view of the bank's future prospects. We believe the bank will continue to earn return on equity of 20% or higher over the coming decade, reaffirming our narrow economic rating. The recent equity raise has provided the company with an adequate run rate for the next four to five years, with Tier 1 and capital adequacy ratios at 13.7% and 16.8% as of March 2015, respectively.
The bank’s low-cost liability franchise continues to grow strongly despite the fact that it offers lower savings rates than most of its newer competitors. HDFC's 4% deposit rate is similar to other large banking peers, but lower than Kotak’s 6% or Indusind 5.5%. As of March 2015, HDFC Bank’s deposits grew by 23% over prior year, and ahead of loan growth of 21% over the same period, driven by its brand and customer stickiness.
The bank also continues to maintain a high cross-sell ratio of its products, building in further stickiness with its existing liability customers. The bank continually earns 30% of its total income from fee based noninterest income. This revenue continues to grow on the back of buoyant market conditions, as fees on transactions and commissions earned on market-linked products, such as mutual funds, investments, and derivatives transactions, account for a large proportion of this revenue.
In order to expand its reach to the non-urban part of India, the bank increased its branch number by 18% this year to total 4,014 branches. Despite this large expansion, its cost-to-income ratio dropped by 100 basis points, to 44.6% for fiscal 2015. We believe the bank has already reached adequate scale of operations to reap the benefits of operational leverage. While the branch expansion by such a large number is surprising, given that a significant proportion of HDFC Bank’s transaction now take place through alternate channels. Management's strategy is to continue to spend on technology and mobile initiatives, but they believe complete branchless banking is still some ways away in India.