High provision levels drove IDFC Limited’s third-quarter 2015 earnings down 16%, despite provisions trending lower since fiscal 2014's fourth quarter. We hold our fiscal 2015 projection for an 0.8% earnings decline, as the very small base of 2014's fourth quarter should help full-year earnings approach our expectation. Higher provisions owed to the troubled energy sector, which accounts for 41% of outstanding loans. Loan growth also contracted by 1% over last year, as the firm looks to limit its higher exposure to the familiar infrastructure sector, and diversify its loan book early as it prepares to transition to a bank in October 2015. We continue to expect a loan book decline of 1% for fiscal 2015 and IDFC's INR 154 fair value estimate and no-moat rating are unchanged. We believe IDFC will take several years to build cost advantages derived from scale and a sticky deposit base, which other entrenched banks have built over decades.
In lending, things look gloomy. Net interest income declined 2% over last year, and net margins lost 30 basis points, to 3.7% on a rolling twelve-month basis. The only ray of hope was fee income, with improved capital markets sentiment driving growth in its asset management fees (up 61% over last year) and investment banking revenue by 9%.
As expected, the firm's return on assets (ROA) and return on equity (ROE) have been shrinking in fiscal 2015. We see ROAs improving as the loan book diversifies, and as loan losses come down. A revival in capital investment across the infrastructure sector, and stable power sector policies should result in improved loan losses. When IDFC begins to use greater financial leverage as it turns into a bank, we see ROEs popping higher than they did during its days as a financial lender. While ROEs are likely to cross our 14% cost of capital in fiscal 2016, this alone does not provide confidence it can prudently maintain these returns over the long-term. Our outlook remains pessimistic.