We are raising our fair value estimate for IDFC by 5% to Rs 152 per share, which represents 1.7 times our fiscal 2016 book value per share, and 11 times 2016 earnings per share estimate. Our new fair value estimate is based on a 60%-20%-20% weighting to our base, upside, and downside scenarios, respectively, (versus 70%-10%-20% earlier) as we take a more balanced view of the banking opportunity for IDFC.
We continue to assume stable NIMs of 3.9% on average in our base case, as we believe IDFC could find more profitable avenues to grow its loan book while continuing to meet regulatory requirements on CRR, SLR, and priority sector lending. We also build higher fee income growth derived from IDFC’s brokerage and asset management business with an improvement in market sentiment, and higher loan growth of 16% annually over a five-year horizon (versus 10%), as the new regulations should now allow IDFC to issue seven-year bonds for its infrastructure loan book. Both these changes result in higher net revenue growth of 17% (versus 10% earlier) in our revised model. Despite higher growth assumptions, we're holding onto IDFC's no-moat rating.
On the expense side, we see some headwinds. IDFC will need to spend significant amounts to set up banking technology, advertise its brand, and build branch infrastructure. We see its cost-to-income ratio going up to 25% by fiscal 2019 (versus 17% previously assumed). This is still significantly below most banking peers, as we anticipate IDFC will utilize a sophisticated technology platform to provide retail banking services, with the increased proliferation of mobile phones and Internet access to the Indian population. We believe this is doable, as close to 40% of transactions done by State Bank of India customers are through alternate channels (outside of a traditional bank branch) as of June 2014. Overall, we believe IDFC's banking journey will be choppy, justifying our high uncertainty rating on its fair value estimate.
