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Sallie Mae (SLM) Beats on Q2 Earnings, Ups 2016 EPS View
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Sallie Mae (SLM - Free Report) delivered a positive earnings surprise of 9% in the second-quarter 2016. The Delaware-based company reported core earnings of 12 cents per share, outpacing the Zacks Consensus Estimate by a penny. However, the reported figure plunged 40% year over year.
Better-than-expected results were driven by increased net interest income. Continued rise in private education loan originations was among the tailwinds. However, these positives were partially offset by the absence of gains on sales of loans in the quarter, along with higher expenses and a significant rise in provisions.
Sallie Mae (formally SLM Corporation) reported core earnings (primarily adjusting for derivatives), attributable to the company's common stock, of $51 million, a significant drop from $86 million in the prior-year quarter.
The company’s GAAP net income came in at $57 million, down from $91 million in the year-ago quarter.
Private Education Loan Growth Boosts Net Interest Income
Net interest income amounted to $212.8 million, up 26% year over year. The rise was mainly driven by an increase in the portfolio size of private education loans. Net interest margin increased 33 basis points (bps) year over year to 5.84%.
Non-interest income came in at $15.8 million, reflecting a whopping decline of 82% year over year. The decrease primarily reflects absence of gains on sales of loans in the reported quarter, compared with gains on sales of loans of $76.9 million in the year-ago quarter.
The company’s total expenses increased 5% year over year to $95.0 million. The rise in expenses was mainly due to increased compensation and benefits expenses.
Efficiency ratio decreased to 41.6% in the quarter, from 49.9 % in the year-ago quarter. Generally, a lower ratio indicates improved efficiency.
Provision for loan losses was $41.8 million, a significant climb from $15.6 million in the prior-year quarter.
As of Jun 30, 2016, the private education loan portfolio was $12.2 billion, up 32% year over year. Notably, loan origination increased 10% year over year to $423 million in the reported quarter.
Average yield on the loan portfolio was 7.98%, up 2 bps year over year. Delinquencies as a percentage of private education loans in repayment were 2.1%, up from 1.7%.
Deposits Rise
As of Jun 30, 2016, deposits of Sallie Mae Bank were $11.9 billion, up from $10.3 billion as of Jun 30, 2015. Increases in brokered deposits, along with retail and other deposits, contributed to the rise in deposits.
Strong Capital Position
As of Jun 30, 2016, Sallie Mae Bank’s Tier 1 capital to risk-weighted assets and common equity Tier 1 capital were both at 13.5%. Capital ratios exceeded the “well capitalized” industry benchmark in regulatory requirements.
Upbeat 2016 Outlook
Sallie Mae provided updated guidance for 2016. The company expects core earnings per share in the range of 51–52 cents for the year, up from the prior outlook of 49–51 cents. Operating efficiency ratio is expected to improve 10% compared to the previous guidance range of 8–10%. Private education loan originations are projected to be $4.6 billion for the year, unchanged from the previous guidance.
Our Viewpoint
Results of Sallie Mae, which started operating independently following the separation of SLM Corporation in Apr 2014, reflects the company’s continued focus on increasing private education loan assets and revenues while maintaining a strong capital position and improving efficiency.
We believe that Sallie Mae’s leading position in the student lending market and its focus on solidifying its presence in the consumer banking business space would help it to perform well in the upcoming quarters. The economic recovery and declining unemployment rate should further enhance the prospects of consumer banking.
Nevertheless, we remain cautious owing to several issues that the entity is facing. These include a competitive environment in the saturated banking space and the prevailing regulatory headwinds.
Sallie Mae currently carries a Zacks Rank #3 (Hold).
Among other firms in the finance space, Regional Management Corp. (RM - Free Report) and Ally Financial Inc. (ALLY - Free Report) are expected to release results on Jul 26, while World Acceptance Corp. (WRLD - Free Report) is expected to release results on Jul 28.
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Sallie Mae (SLM) Beats on Q2 Earnings, Ups 2016 EPS View
Sallie Mae (SLM - Free Report) delivered a positive earnings surprise of 9% in the second-quarter 2016. The Delaware-based company reported core earnings of 12 cents per share, outpacing the Zacks Consensus Estimate by a penny. However, the reported figure plunged 40% year over year.
Better-than-expected results were driven by increased net interest income. Continued rise in private education loan originations was among the tailwinds. However, these positives were partially offset by the absence of gains on sales of loans in the quarter, along with higher expenses and a significant rise in provisions.
Sallie Mae (formally SLM Corporation) reported core earnings (primarily adjusting for derivatives), attributable to the company's common stock, of $51 million, a significant drop from $86 million in the prior-year quarter.
The company’s GAAP net income came in at $57 million, down from $91 million in the year-ago quarter.
Private Education Loan Growth Boosts Net Interest Income
Net interest income amounted to $212.8 million, up 26% year over year. The rise was mainly driven by an increase in the portfolio size of private education loans. Net interest margin increased 33 basis points (bps) year over year to 5.84%.
Non-interest income came in at $15.8 million, reflecting a whopping decline of 82% year over year. The decrease primarily reflects absence of gains on sales of loans in the reported quarter, compared with gains on sales of loans of $76.9 million in the year-ago quarter.
The company’s total expenses increased 5% year over year to $95.0 million. The rise in expenses was mainly due to increased compensation and benefits expenses.
Efficiency ratio decreased to 41.6% in the quarter, from 49.9 % in the year-ago quarter. Generally, a lower ratio indicates improved efficiency.
Provision for loan losses was $41.8 million, a significant climb from $15.6 million in the prior-year quarter.
As of Jun 30, 2016, the private education loan portfolio was $12.2 billion, up 32% year over year. Notably, loan origination increased 10% year over year to $423 million in the reported quarter.
Average yield on the loan portfolio was 7.98%, up 2 bps year over year. Delinquencies as a percentage of private education loans in repayment were 2.1%, up from 1.7%.
Deposits Rise
As of Jun 30, 2016, deposits of Sallie Mae Bank were $11.9 billion, up from $10.3 billion as of Jun 30, 2015. Increases in brokered deposits, along with retail and other deposits, contributed to the rise in deposits.
Strong Capital Position
As of Jun 30, 2016, Sallie Mae Bank’s Tier 1 capital to risk-weighted assets and common equity Tier 1 capital were both at 13.5%. Capital ratios exceeded the “well capitalized” industry benchmark in regulatory requirements.
Upbeat 2016 Outlook
Sallie Mae provided updated guidance for 2016. The company expects core earnings per share in the range of 51–52 cents for the year, up from the prior outlook of 49–51 cents. Operating efficiency ratio is expected to improve 10% compared to the previous guidance range of 8–10%. Private education loan originations are projected to be $4.6 billion for the year, unchanged from the previous guidance.
Our Viewpoint
Results of Sallie Mae, which started operating independently following the separation of SLM Corporation in Apr 2014, reflects the company’s continued focus on increasing private education loan assets and revenues while maintaining a strong capital position and improving efficiency.
We believe that Sallie Mae’s leading position in the student lending market and its focus on solidifying its presence in the consumer banking business space would help it to perform well in the upcoming quarters. The economic recovery and declining unemployment rate should further enhance the prospects of consumer banking.
Nevertheless, we remain cautious owing to several issues that the entity is facing. These include a competitive environment in the saturated banking space and the prevailing regulatory headwinds.
SLM CORP Price, Consensus and EPS Surprise
SLM CORP Price, Consensus and EPS Surprise | SLM CORP Quote
Sallie Mae currently carries a Zacks Rank #3 (Hold).
Among other firms in the finance space, Regional Management Corp. (RM - Free Report) and Ally Financial Inc. (ALLY - Free Report) are expected to release results on Jul 26, while World Acceptance Corp. (WRLD - Free Report) is expected to release results on Jul 28.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>