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Sallie Mae (SLM) Beats on Q3 Earnings, Provisions Rise
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Sallie Mae (SLM - Free Report) delivered a positive earnings surprise of 9% in third-quarter 2016. The Delaware-based company reported core earnings of 12 cents per share, outpacing the Zacks Consensus Estimate by a penny. Also, the bottom line improved 20% year over year.
Results were driven by increased net interest income as well as non interest income. Continued rise in private education loan originations was among the tailwinds. However, these positives were partially offset by 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, up 21% from the prior-year quarter.
The company’s GAAP net income came in at $57 million, increasing 24% year over year.
Revenue Growth Outweighs Cost Pressure, Provisions Up
Net interest income amounted to $223.3 million, up 27% year over year. The rise was mainly driven by an increase in the portfolio size of private education loans. Net interest margin expanded 22 basis points (bps) year over year to 5.58%.
Non-interest income came in at $23 million, reflecting a whopping increase from $9.9 million in the prior-year quarter, primarily supported by significant rise in other income. The reported quarter also recorded gains on derivatives and hedging activities, compared with a loss in the year-ago quarter.
The company’s total expenses increased 6% year over year to $100 million. The rise in expenses was mainly due to increased compensation and benefits expenses and higher FDIC assessment fees.
Efficiency ratio, on a non-GAAP basis, decreased to 40.6% in the quarter, from 50.3 % in the year-ago quarter. Generally, a lower ratio indicates improved efficiency.
Provision for loan losses was $41.8 million, up 52% year over year.
As of Sep 30, 2016, the private education loan portfolio was $13.7 billion, up 27% year over year. Notably, loan origination increased 7% year over year to $1.8 billion in the reported quarter.
Average yield on the loan portfolio was 8%, up 13 bps year over year. Delinquencies as a percentage of private education loans in repayment were 2.04%, up from 1.91%.
Deposits Rise
As of Sep 30, 2016, deposits of Sallie Mae Bank were $12.9 billion, up from $10.6 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 Sep 30, 2016, Sallie Mae Bank’s Tier 1 capital to risk-weighted assets and common equity Tier 1 capital were both at 12.4%. Capital ratios exceeded the “well capitalized” industry benchmark in regulatory requirements.
Revised 2016 Outlook
Sallie Mae provided updated guidance for 2016. The company estimates core earnings per share of 52 cents for the year, revising from the prior outlook range of 51–52 cents. Operating efficiency ratio is expected to improve by more than 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 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.
Among other firms in the finance space, Capital One Financial Corporation (COF - Free Report) , Ally Financial Inc. (ALLY - Free Report) and Regional Management Corp. (RM - Free Report) are expected to release results on Oct 25, Oct 26, and Oct 27, respectively.
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Sallie Mae (SLM) Beats on Q3 Earnings, Provisions Rise
Sallie Mae (SLM - Free Report) delivered a positive earnings surprise of 9% in third-quarter 2016. The Delaware-based company reported core earnings of 12 cents per share, outpacing the Zacks Consensus Estimate by a penny. Also, the bottom line improved 20% year over year.
Results were driven by increased net interest income as well as non interest income. Continued rise in private education loan originations was among the tailwinds. However, these positives were partially offset by 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, up 21% from the prior-year quarter.
The company’s GAAP net income came in at $57 million, increasing 24% year over year.
Revenue Growth Outweighs Cost Pressure, Provisions Up
Net interest income amounted to $223.3 million, up 27% year over year. The rise was mainly driven by an increase in the portfolio size of private education loans. Net interest margin expanded 22 basis points (bps) year over year to 5.58%.
Non-interest income came in at $23 million, reflecting a whopping increase from $9.9 million in the prior-year quarter, primarily supported by significant rise in other income. The reported quarter also recorded gains on derivatives and hedging activities, compared with a loss in the year-ago quarter.
The company’s total expenses increased 6% year over year to $100 million. The rise in expenses was mainly due to increased compensation and benefits expenses and higher FDIC assessment fees.
Efficiency ratio, on a non-GAAP basis, decreased to 40.6% in the quarter, from 50.3 % in the year-ago quarter. Generally, a lower ratio indicates improved efficiency.
Provision for loan losses was $41.8 million, up 52% year over year.
As of Sep 30, 2016, the private education loan portfolio was $13.7 billion, up 27% year over year. Notably, loan origination increased 7% year over year to $1.8 billion in the reported quarter.
Average yield on the loan portfolio was 8%, up 13 bps year over year. Delinquencies as a percentage of private education loans in repayment were 2.04%, up from 1.91%.
Deposits Rise
As of Sep 30, 2016, deposits of Sallie Mae Bank were $12.9 billion, up from $10.6 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 Sep 30, 2016, Sallie Mae Bank’s Tier 1 capital to risk-weighted assets and common equity Tier 1 capital were both at 12.4%. Capital ratios exceeded the “well capitalized” industry benchmark in regulatory requirements.
Revised 2016 Outlook
Sallie Mae provided updated guidance for 2016. The company estimates core earnings per share of 52 cents for the year, revising from the prior outlook range of 51–52 cents. Operating efficiency ratio is expected to improve by more than 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 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). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Among other firms in the finance space, Capital One Financial Corporation (COF - Free Report) , Ally Financial Inc. (ALLY - Free Report) and Regional Management Corp. (RM - Free Report) are expected to release results on Oct 25, Oct 26, and Oct 27, respectively.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand.Click to see them now>>