We are raising our fair value estimate for State Bank of India by 9% to Rs 278 per share (or $45 per GDR) as we adjust for the recent share split and lift our fee income growth forecasts.
Largely driven by changes to ATM transaction fees, our fee income growth forecast for fiscal 2015 is now 17% from 10% and over the next five years is 13% from 10%. Our new fair value estimate is 1.2 times 2015 book value per share and 11 times our fiscal 2015 earnings per share estimate (which we project to grow 23% over fiscal 2014, versus 15% previously). Given our very high uncertainty rating, we require a larger margin of safety before recommending SBI, which currently looks relatively fairly valued.
Our other assumptions are unchanged. Average loan-loss provisions over five years remain at 1.4% and net interest margins are 3.4%. Given the narrow-moat bank's large customer base, SBI has the ability to garner large fee-based income from the sheer volume of transactions it handles. Like all Indian banks, SBI will benefit from higher ATM transaction fees, as banks find new avenues to generate fee income while complying with Reserve Bank of India regulations. As mandated by RBI, the first three ATM transactions in metro cities and the first five across other locations are free. Beyond these limits, customers will be levied a fee of up to INR 20 per transaction.
Earlier this year, RBI banned banks from levying penalty charges for non-maintenance of minimum balances in nonoperative accounts, forcing banks to find new avenues of fee generation. We continue to maintain our cost/income ratio at 59% on average over the next five years, as we believe the bank will face challenges to reduce overhead significantly, given its large employee base and expansive branch network. Overall, we believe the bank will begin earning returns on equity close to its estimated cost of equity of 13% over the next five years and we maintain our narrow economic moat rating.
To read a detailed analysis of SBI, click here.
