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Sallie Mae (SLM) Down 9.4% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Sallie Mae (SLM - Free Report) . Shares have lost about 9.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sallie Mae due for a breakout? 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 Q2 Earnings Beat Estimates as Revenues Rise

Sallie Mae reported second-quarter 2019 core earnings of 31 cents per share, surpassing the Zacks Consensus Estimate of 30 cents. Moreover, the figure jumped 24% from the prior-year quarter.

Increase in net interest income and elevated non-interest income were tailwinds. Deposits grew considerably and capital position was strong. However, these positives were offset by elevated expenses and deteriorating credit quality.

The company’s GAAP net income attributable to common stock came in at $146 million or 34 cents per share compared with $106 million or 24 cents per share reported a year ago.

Rise in Net Interest Income & Other Income Offsets Higher Costs

Net interest income for the second quarter came in at $397 million, up 16.4% year over year. This improvement was mainly driven by higher interest income. Net interest margin contracted 26 basis points (bps) to 5.88%.

The company reported non-interest income of $19 million, up significantly from the prior-year quarter. This upside stemmed from higher gains on derivatives and hedging activities, partly offset by lower other income.

The company’s non-interest expenses jumped 2.6% year over year to $138.8 million. The upsurge mainly resulted from increased compensation and benefits expenses.

Efficiency ratio, on a non-GAAP basis, decreased to 34.9% from 38.3%. Generally, a lower ratio indicates improved profitability.

Credit Quality Worsens

Provision for loan losses was $93 million, up 47.6% from $63 million witnessed in the prior-year quarter.

Delinquencies as a percentage of private education loans in repayment were 2.7%, up 5 bps.

Deposits Grow, Loans Decline

As of Jun 30, 2019, deposits of Sallie Mae Bank were $21.2 billion, up from $19.7 billion as of Mar 31, 2019. Increase in retail and other, along with brokered deposits, contributed to this upside.

Private education loan portfolio was $21.4 billion, down nearly 1% sequentially. Average yield on the loan portfolio was 9.39%, down 11 bps.

Strong Capital Position & Capital Deployment Update

As of Jun 30, 2019, Sallie Mae Bank’s common equity Tier 1 capital was 11.9%, exceeding the “well capitalized” industry benchmark in regulatory requirements.

The company repurchased $60 million of common stock under share repurchase program at an average price of $10.04.

2019 Outlook

The company estimates core earnings per share in the range of $1.21 to $1.23 for this year.

Private education loan originations are projected to be $5.7 billion. The company’s full-year non-GAAP operating efficiency ratio is expected in the 35-36% band.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -7.3% due to these changes.

VGM Scores

Currently, Sallie Mae has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Sallie Mae has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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