Sallie Mae Loan Quality, Funding Key Concerns For Investors
April 16 2009 - 1:03PM
Dow Jones News
Credit quality and adequate funding remain key concerns for SLM
Corp. (SLM) investors as the largest U.S. student-loan company
reports first-quarter results on April 22.
These concerns come amid the lender's continuing struggles to
access traditional funding sources, which have dried up because of
tight credit markets.
The company, commonly known as Sallie Mae, earlier this month
said it would create 2,000 jobs by bringing its overseas operations
to the U.S. The move, say analysts, was aimed at garnering
political support amid a budget proposal by the Obama
administration that would diminish the role of private lenders,
such as Sallie Mae, in federal student loans -- potentially
eliminating a vital source of income.
Sallie Mae shares recently traded at $5.99, down about 33% so
far this year.
Sallie Mae, which makes private and federal student loans, gets
nearly one-third of its income from the federal student loans it
makes on behalf of the government.
It earns another third of its income from the interest it
charges on private student loans; the remaining one-third comes
from a number of smaller businesses, including fees from college
savings plans and collecting defaulted student debt.
"From an earnings standpoint, people will be looking for credit
quality on the private loans," says Sameer Gokhale, an analyst at
Keefe, Bruyette & Woods, who has a 'buy' rating on Sallie Mae's
shares. "Liquidity is also a primary concern."
Private student loans, which aren't guaranteed by the
government, are riskier - and more profitable - than federal loans.
But private loan volume has declined because of the freeze in the
credit markets where lenders like Sallie Mae would fund these
loans.
Analysts polled by Thomson Reuters expect earnings of 18 cents a
share on revenue of $787 million for Sallie Mae's first quarter. A
year ago, the company reported earnings of 34 cents a share on
revenue of $838.5 million.
Investors will be looking for increasing signs of wear and tear
in the company's portfolio of private student loans.
KBW's Gokhale estimates that net charge-offs - or student loans
deemed uncollectible - will total $266 million on Sallie Mae's
private loans, compared with $216 million in the fourth quarter and
$119 million a year ago.
The charge-off rate will total 5.4% for private in the first
quarter, according to KBW estimates, compared with 4.46% in the
fourth quarter and 3.29% a year earlier.
Also eagerly awaited: an update on an imminent funding source
from the U.S. Department of Education. Through this asset-backed
commercial paper facility, Sallie Mae could fund as much as $16
billion of federal student loans, says KBW's Gokhale. "This would
alleviate some funding pressures."
The lender had $34 billion in private loans at the end of the
fourth quarter and $146 billion in federal student loans. It
originated $4.8 billion in student loans in the fourth quarter. Of
these, new federal student loans totaled $3.9 billion, a 25%
increase from a year earlier.
It's no wonder, then, that the Obama administration's proposal
to eliminate the income that Sallie gets on federal student loans
has investors worried.
One silver lining: The Obama budget proposal requires the
participation of private lenders for the servicing of the federal
student loans.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com