Federal’s 4Q08 profits (+4% yoy) were 30% below estimates on higher-than-expected bond portfolio charges and some rise in loan loss provisions. Core operations grew by 37%, strong on the back of a sharp increase in margins. We believe its new capital allows management to seek higher growth opportunities, both organic and inorganic, and will be a key valuation driver.
Federal’s margins increased to 376bps (+60bps qoq) and were a key beneficiary of its new capital. While we expect NIMs to moderate from current levels, management seemed confident of maintaining them at 340-350bps despite aggressive 25% loan growth target.
Retail loans (and provisions) showed higher stress for a second successive quarter. While asset quality is fairly comfortable (0.2% net NPLs), we believe its rising predilection for retail and SME warrants greater caution in the current environment.
We expect a Negative Growth in EPS and it is expected to report Rs 27.49 for Fy09 lower than Rs 28.66 reported in Fy08.