We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Loan Origination Growth Aids Sallie Mae (SLM) Despite High Debt
Read MoreHide Full Article
Sallie Mae’s (SLM - Free Report) net interest income (NII) is expected to benefit from early enrollments, which is expected to drive education loan originations. Strategic inorganic growth moves will expand its operations and diversify revenue streams. However, overdependence on brokered deposits as a funding source and rising expenses are concerning. Sallie Mae’s high debt levels and volatile earnings make capital distribution activities seem unsustainable.
Being a dominant player in every phase of the student loan life cycle, the company’s operations are more dependent on students’ demand for educational loans. A low unemployment rate for the above-25-year-old college graduate cohort and early enrollment trends indicate the strengthening of longer-term secular growth trends in the private student lending industry. Considering such expectations, Sallie Mae will likely experience modest enrollment growth for the upcoming several quarters, leading to higher demand for education loans. This is expected to drive NII in the upcoming period.
Thus, efforts to enhance its private student loan business, maintain a strong capital position and introduce multiple complementary products are strategic fits. Management projects a 6-7% rise in private education loan originations for 2023. Further, in May 2023, the company sold its credit card business to recycle resources in its core business strategies. We expect net private education loans held for investment to grow 6.9% in 2023.
Sallie Mae has made efforts to expand its business operations on the back of investments in varied product offerings and inorganic activities. In July 2023, the company acquired several key assets, technology, intellectual property and experienced staff of Scholly — a scholarship publishing and servicing platform. Going forward, such inorganic moves are likely to aid it in becoming a holistic education solutions provider for students and drive loan originations for the company.
However, Sallie Mae’s sources of funding for its Private Education Loan originations are term and liquid brokered, along with retail deposits raised by the bank. However, such funding poses refinancing risks, as the average term of the deposits is shorter than the expected term of education loans originated by the company.
The company’s dependence on brokered deposits as a key source of funding is concerning. It needs to generate deposits from non-brokered channels to ease the matter, which will require some time.
SLM’s expenses witnessed a CAGR of 4.5% over the last five years (2017-2022). The rising trend continued in the first nine months of 2023 as well. The company expects non-interest expenses of $625-$630 million for 2023. We expect the metric to increase 12.3% in 2023. This is expected to impede bottom-line growth.
As of Sep 30, 2023, Sallie Mae had long-term borrowings worth $5.51 billion, greater than cash and cash equivalents of $3.54 billion. Hence, we believe that the company carries a higher likelihood of default of interest and debt repayments if the economic situation worsens.
This, along with volatile earnings and a higher debt-equity ratio than the broader industry’s average, suggests that Sallie Mae’s capital distribution activities might not be sustainable.
In the past three months, shares of this Zacks Rank #3 (Hold) company have rallied 17%, outperforming the industry's growth of 10.5%.
The Zacks Consensus Estimate for Tradeweb’s current-year earnings has been unchanged at $1.19 over the past 30 days. TW shares have gained 8.9% in the past three months.
The Zacks Consensus Estimate for Arrow Financial’s 2023 earnings has been unchanged at $1.81 over the past 30 days. In the past three months, AROW shares have jumped 69%.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Loan Origination Growth Aids Sallie Mae (SLM) Despite High Debt
Sallie Mae’s (SLM - Free Report) net interest income (NII) is expected to benefit from early enrollments, which is expected to drive education loan originations. Strategic inorganic growth moves will expand its operations and diversify revenue streams. However, overdependence on brokered deposits as a funding source and rising expenses are concerning. Sallie Mae’s high debt levels and volatile earnings make capital distribution activities seem unsustainable.
Being a dominant player in every phase of the student loan life cycle, the company’s operations are more dependent on students’ demand for educational loans. A low unemployment rate for the above-25-year-old college graduate cohort and early enrollment trends indicate the strengthening of longer-term secular growth trends in the private student lending industry. Considering such expectations, Sallie Mae will likely experience modest enrollment growth for the upcoming several quarters, leading to higher demand for education loans. This is expected to drive NII in the upcoming period.
Thus, efforts to enhance its private student loan business, maintain a strong capital position and introduce multiple complementary products are strategic fits. Management projects a 6-7% rise in private education loan originations for 2023. Further, in May 2023, the company sold its credit card business to recycle resources in its core business strategies. We expect net private education loans held for investment to grow 6.9% in 2023.
Sallie Mae has made efforts to expand its business operations on the back of investments in varied product offerings and inorganic activities. In July 2023, the company acquired several key assets, technology, intellectual property and experienced staff of Scholly — a scholarship publishing and servicing platform. Going forward, such inorganic moves are likely to aid it in becoming a holistic education solutions provider for students and drive loan originations for the company.
However, Sallie Mae’s sources of funding for its Private Education Loan originations are term and liquid brokered, along with retail deposits raised by the bank. However, such funding poses refinancing risks, as the average term of the deposits is shorter than the expected term of education loans originated by the company.
The company’s dependence on brokered deposits as a key source of funding is concerning. It needs to generate deposits from non-brokered channels to ease the matter, which will require some time.
SLM’s expenses witnessed a CAGR of 4.5% over the last five years (2017-2022). The rising trend continued in the first nine months of 2023 as well. The company expects non-interest expenses of $625-$630 million for 2023. We expect the metric to increase 12.3% in 2023. This is expected to impede bottom-line growth.
As of Sep 30, 2023, Sallie Mae had long-term borrowings worth $5.51 billion, greater than cash and cash equivalents of $3.54 billion. Hence, we believe that the company carries a higher likelihood of default of interest and debt repayments if the economic situation worsens.
This, along with volatile earnings and a higher debt-equity ratio than the broader industry’s average, suggests that Sallie Mae’s capital distribution activities might not be sustainable.
In the past three months, shares of this Zacks Rank #3 (Hold) company have rallied 17%, outperforming the industry's growth of 10.5%.
Image Source: Zacks Investment Research
Finance Stocks Worth a Look
A couple of better-ranked stocks from the finance space are Tradeweb Markets (TW - Free Report) and Arrow Financial Corporation (AROW - Free Report) . At present, AROW sports a Zacks Rank #1 (Strong Buy) and TW carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Tradeweb’s current-year earnings has been unchanged at $1.19 over the past 30 days. TW shares have gained 8.9% in the past three months.
The Zacks Consensus Estimate for Arrow Financial’s 2023 earnings has been unchanged at $1.81 over the past 30 days. In the past three months, AROW shares have jumped 69%.