Sallie Mae (SLM) Q1 Earnings Top Estimates On Solid Revenues

Sallie Mae (NASDAQ:SLM) delivered a positive earnings surprise of 13.3% in first-quarter 2019. The company reported core earnings of 34 cents per share, surpassing the Zacks Consensus Estimate of 30 cents. Moreover, the figure jumped 25.9% from the prior-year quarter.

Increase in net interest income, aided by rising rates, along with elevated non-interest income, were tailwinds. The private education loan portfolio and deposits grew considerably. However, these positives were offset by elevated expenses and poor credit quality.

The company’s GAAP net income attributable to common stock came in at $154 million or 35 cents per share compared with $123 million or 28 cents per share reported in the year-ago quarter.

Rise in Net Interest Income & Other Income Offsets Higher Expenses

Net interest income for the first quarter came in at $402 million, up 20.7% year over year. This improvement was mainly driven by higher interest income on elevated loans. Net interest margin expanded 11 basis points (bps) year over year to 6.28%.

The company reported non-interest income of $16 million, up 23.1% from the prior-year quarter. This upside stemmed from rise in other income, partly offset by lower gains on derivatives and hedging activities.

The company’s non-interest expenses flared up 12% year over year to $140 million. The upsurge mainly resulted from increased compensation and benefits expenses, along with other expenses.

Efficiency ratio, on a non-GAAP basis, decreased to 33.8% from 36.5% in the year-ago period. Generally, a lower ratio indicates improved profitability.

Credit Quality Worsens

Provision for loan losses was $64 million, up 18.5% from $54 million witnessed in the prior-year quarter.

Delinquencies as a percentage of private education loans in repayment were 2.5%, in line with the year-ago quarter tally.

Growth in Deposit and Loans

As of Mar 31, 2019, deposits of Sallie Mae Bank were $19.7 billion, up from $16.5 billion as of Mar 31, 2018. Increase in retail and other, along with brokered deposits, contributed to this upside.

As of Mar 31, 2019, the private education loan portfolio was $21.6 billion, up 16.1% year over year. Further, loan origination climbed 8% to $2.1 billion in the reported quarter. Average yield on the loan portfolio was 9.5%, advancing 66 bps.

Strong Capital Position

As of Mar 31, 2019, Sallie Mae Bank’s common equity Tier 1 capital was 11.9%, exceeding the “well capitalized” industry benchmark in regulatory requirements.

2019 Outlook

The company estimates core earnings per share in the range of $1.23 to $1.26 for this year. Private education loan originations are projected at $5.7 billion.

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The company’s full-year non-GAAP operating efficiency ratio is expected in the 35-36% band.

Our Viewpoint

Results of Sallie Mae highlight continued focus on increasing private education loan assets, maintaining a solid capital position by introducing multiple complementary products and improving efficiency.

We believe improving economic conditions and lower tax rate will further assist Sallie Mae in maintaining its leading position in the student lending market. Additionally, its focus on solidifying presence in the consumer banking business space bodes well for the upcoming quarters. However, worsening of credit quality and escalating expenses keep us apprehensive.