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Why Is Sallie Mae (SLM) Up 7.7% Since Last Earnings Report?

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A month has gone by since the last earnings report for Sallie Mae (SLM - Free Report) . Shares have added about 7.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Sallie Mae due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Sallie Mae Q4 Earnings Top Estimates as Expenses Fall

Sallie Mae fourth-quarter 2020 earnings per share of $1.15 (on core basis) handily surpassed the Zacks Consensus Estimate of 33 cents. Also, the bottom line compared favorably with 33 cents reported in the prior-year quarter.

Results benefited from the company’s prudent cost management and improved fee income. Also, benefit from loan losses was a tailwind. However, lower loans and deposits balance posed a major undermining factor.

The company’s GAAP net income attributable to common stock was $431 million or $1.13 compared with $137 million or 32 cents a year ago.

In full-year 2020, Sallie Mae reported GAAP net income attributable to common stock of $871 million or $2.25 per share compared with $561 million or $1.30 in 2019.

Net Interest Income Declines, Expenses Fall

Net interest income in the fourth quarter was $367 million, down 12.4% year over year. The decline is attributable to lower interest income. Net interest margin contracted to 4.82% in the quarter from 5.41% in the year-ago quarter.

The company’s non-interest income was $1 million against non-interest loss of $4 million in the prior-year quarter. The rise mainly stemmed from higher other income and gain on derivatives and hedging activities.

The company’s non-interest expenses fell 12.7% year over year to $124 million. The fall mainly resulted from lower FDIC assessment fees and other operating expenses, partly offset by higher restructuring expenses.

Credit Quality: A Mixed Bag

The company recorded a benefit from loan losses of $316 million against provisions of $98 million witnessed in the prior-year quarter.

Delinquencies as a percentage of private education loans in repayment were 2.8%, stable year over year.

Loans & Deposits Fall

As of Dec 31, 2020, deposits of Sallie Mae were $22.7 billion, down 1.9% from $23.1 billion as of Sep 30, 2020. Lower brokered deposits contributed to the downside.

Loans held for investment were $19.2 billion as of Dec 31, 2020, down 11.3% sequentially. Private education loan portfolio (96% of total loans) was $18.4 billion, down 12% on a sequential basis. During the quarter, the company witnessed private education loan originations of $627 million.

Capital Position Strong

As of Dec 31, 2020, Sallie Mae’s common equity Tier 1 capital was 14%, exceeding the “well-capitalized” industry benchmark in regulatory requirements. Also, it compared favorably with year-ago quarter figure of 12.2%.

Outlook 2021

The company expects earnings per share (on GAAP basis) to be between $2.20 and $2.40.

Total portfolio net charge-offs of $260-$280 million are anticipated for full-year 2021.

Private education loan originations are projected to grow 6-7% year over year.

The company’s non-interest expenses are expected to fall in the $525-$535 million band.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 32.35% due to these changes.

VGM Scores

At this time, Sallie Mae has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Sallie Mae has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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