We are upgrading our recommendation on the shares of SLM Corporation (SLM) to Outperform. Based in Reston, Virginia and commonly known as Sallie Mae, SLM Corporation is the nation’s market leader in education finance. The company manages student loans of roughly 10 million customers.
Sallie Mae’s third quarter earnings of 26 cents per share were well ahead of Zacks Consensus Estimate, driven by an increase in loan originations and an improvement in credit markets. However, loan loss provisions were high.
Sallie Mae’s leading position in the student lending market and its sturdy cost structure provide it with an edge over its peers, given the expected growth rate of the college-age population. Its business is less prone to interest rate volatility than many other financial institutions.
With a target to reduce costs and improve operating efficiencies in response to recent legislative changes and the current capital market challenges, Sallie Mae initiated a restructuring program over a year ago. Though such measures results in incurring upfront cost, we believe these actions will support bottom-line improvement in the near future.
Sallie Mae continues to migrate business to its owned brands, with private student loans and direct channel loans expected to support spreads in the upcoming quarters. Given its low-cost business structure, we expect this will support its profitability and produce an acceptable risk-adjusted return.
However, in the near future, the company could face uncertainty over the enactment of the legislation eliminating private lenders from the student loan market. This legislation could put an end to the Federal Family Education Loan Program and severely impact student lenders such as Sallie Mae.
If such a situation arises, Sallie Mae’s traditional role would change to one of originator and its loan portfolio would become heavily weighted toward higher-risk private student loans. Additionally, the stressed economic conditions and the credit market challenges are expected to be a drag on earnings.
Nevertheless, we expect that if the bill is enacted, Sallie Mae will be a major participant in the Department of Education’s servicing contract, under which it will service and collect government guaranteed loans. Pending further developments, we recommend investors buy shares of Sallie Mae.
Read the full analyst report on “SLM”
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