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SLM Corp (SLM) Ratings Affirmed by Moody's, Outlook Stable

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Ratings of SLM Corporation (SLM - Free Report) and its bank subsidiary, Sallie Mae Bank, have been affirmed by Moody's Investors Service. The outlook of the company is stable.

The bank’s standalone baseline credit assessment (BCA) has been affirmed at baa3. Also, SLM Corp’s long-term senior unsecured debt is rated Ba1 and the bank subsidiary has a long-term deposit rating of Baa1. Sallie Mae Bank's Prime-2 short-term deposit rating and its Baa3/Prime-3 counterparty risk ratings were also affirmed.

Ratings Rationale

Per the ratings agency, the company’s standalone credit profile incorporates the benefits to creditors from its good capitalization, which allows the bank to absorb unexpected losses, particularly during the time of stress. The BCA also takes into account the risks to creditors, stemming from elevated exposure to economic shocks as a result of its student loan concentration and the unsecured consumer loans that make up the portfolio.

Also, Moody’s remains optimistic of SLM Corp’s leading position in private education loans origination in the United States, with a market share of more than 50%. Also, it believes that the franchise drives its strong position as one of the most profitable Moody's-rated US banks.

However, since the student lender’s business is concentrated in the U.S. private student loan market and is heavily reliant on net interest income, which makes it vulnerable to economic shocks such as the present, as well as regulatory and legislative risks.

Per Moody’s, the company’s funding structure is comparatively weak due to heavy dependence on brokered deposits and savings accounts. Brokered deposits allow SLM Corp to obtain funding with longer maturities that are better-matched to the seven-year average life of its loan portfolio but they often pose greater refinancing risk and higher costs than branch-based deposits or transaction accounts.

Also, Moody's is of opinion that the company faces high regulatory risk. A large-scale program to refinance private student loans with direct loans funded by the US government would be credit negative for the company. While repayment at par would result in lenders not incurring credit losses on forgiven loans, a reduction in lenders' loan portfolios would deprive lenders of future net interest income and servicers of future servicing income.

Notably, the stable outlook reflects Moody's assessment that SLM Corp will maintain a credit profile compatible with the baa3 BCA of its bank subsidiary over the next 12-18 months despite asset quality and profitability pressure due to deteriorating economic conditions in the domestic economy.

Factors That Might Trigger Change in Ratings & Outlook

Per Moody’s, taking into consideration the deteriorating economic environment and the uncertain duration, an upgrade is unlikely over the next 12-18 months.

The rating, however, can be upgraded if the company continues to achieve solid profitability, and maintain solid capital levels and disciplined underwriting. In addition, the BCA could be upgraded if its funding profile continues to improve, increasing its reliance on direct deposits, thereby, reducing its dependence on confidence-sensitive wholesale funding and brokered deposits. A higher BCA is likely to lead to a ratings upgrade.

However, the BCA could be downgraded if capitalization weakens materially. Also, weaker asset performance or a material decline in liquidity could lead to a lower BCA.

Shares of SLM Corp have lost 40.8% so far this year compared with a 29.1% decline of the industry it belongs to.

 

 

Currently, the company carries a Zacks Rank #4 (Sell).

Some better-ranked companies in the same space are Credit Acceptance Corporation (CACC - Free Report) , OFG Bancorp (OFG - Free Report) and Cambridge Bancorp (CATC - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Credit Acceptance moved up 15.9% for the current year in the last 30 days. The company’s share price has gained 8.8% in the past year.

OFG Bancorp witnessed a 4.5% upward earnings estimate revision for the current year in the last 30 days. Its share price has declined 38.7% in the past year.

Cambridge Bancorp’s shares have lost 25.8% in a year and its earnings estimates for 2020 moved up 21.4% in the last 30 days.

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