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Sallie Mae (SLM) Q4 Earnings In Line, Cost & Provisions Rise

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Sallie Mae (SLM - Free Report) reported fourth-quarter 2017 adjusted core earnings of 19 cents per share, in line with the Zacks Consensus Estimate. The reported figure increased 22% from the prior-year quarter.

Earnings growth was supported by an increase in net interest income. The private education loan portfolio and deposits grew considerably. However, these positives were offset by lower non-interest income, elevated expenses and poor credit quality.

After considering the charges related to Tax Cuts and Jobs Act, core earnings attributable to its common stock for the quarter came in at $44 million.

For 2017, Sallie Mae reported core earnings of $278 million or 63 cents per share, up from $231 million or 53 cents per share registered in the prior year.

Rise in Net Interest Income Offsets Higher Expenses & Lower Other Income

Net interest income for the fourth quarter was $309.2 million, up 26% year over year. The improvement was mainly driven by an increase in the portfolio size of private education loans. Net interest margin expanded 45 basis points (bps) year over year to 6%.

The company reported non-interest loss of $22 million against income of $9.4 million in the prior-year quarter. The loss was attributable to a lower valuation of tax indemnification receivables in relation to the tax reform.

The company’s total expenses increased 20.8% year over year to $118.7 million. The rise was mainly due to increased compensation and benefits expenses, higher FDIC assessment fees and other expenses.

Efficiency ratio, on a non-GAAP basis, increased to 41.2% in the quarter from 37.9% in the year-ago period. A higher ratio indicates a decline in profitability.

Credit Quality Worsens

Provision for loan losses was $55.3 million, up 28% year over year.

Delinquencies as a percentage of private education loans in repayment were 2.4%, reflecting an increase of 3 bps in the year-ago quarter.

Growth in Deposit and Loans

As of Dec 31, 2017, deposits of Sallie Mae Bank were $15.5 billion, up from $13.4 billion as of Dec 31, 2016. Increase in retail and other deposits contributed to the rise.

As of Dec 31, 2017, the private education loan portfolio was $17.2 billion, up 22.2% year over year. Loan origination climbed 4% year over year to $634 million in the reported quarter. Average yield on the loan portfolio was 8.6%, up 53 bps year over year.

Strong Capital Position

As of Dec 31, 2017, Sallie Mae Bank’s Tier 1 capital to risk-weighted assets and common equity Tier 1 capital were both 12%. Capital ratios exceeded the “well capitalized” industry benchmark in regulatory requirements.

2018 Outlook

The company estimates core earnings per share in the range of 97 cents to $1.01 for this year. Operating efficiency ratio on a non-GAAP basis is expected in the range of 37-38%. Private education loan originations are projected to be $5 billion.

Also, the company plans to make investments of about $30 million in 2018, with a view to diversify its consumer lending platform into the personal loan and credit card businesses and also be technologically advanced.

Our Viewpoint

Results of Sallie Mae highlight consistent focus on increasing private education loan assets, maintaining a solid capital position by introducing multiple complementary new products and improving efficiency.

We believe improving economic conditions and lower tax rate will assist Sallie Mae in maintaining its leading position in the student lending market. Further, its focus on solidifying presence in the consumer banking business space bodes well for the upcoming quarters.

SLM Corporation Price, Consensus and EPS Surprise

Currently, Sallie Mae carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Amid an expected trading weakness, strong investment banking results and higher rates drove JPMorgan’s (JPM - Free Report) fourth-quarter 2017 earnings of $1.76 per share, which handily surpassed the Zacks Consensus Estimate of $1.69. Results exclude one-time tax-related charge of $2.4 billion or 69 cents per share.

Wells Fargo’s (WFC - Free Report) fourth-quarter 2017 adjusted earnings of 97 cents per share improved from the prior-year quarter earnings of 96 cents. Results included $3.35 billion after-tax benefit related to the Tax Cuts & Jobs Act, $848 million pre-tax gain from the sale of Wells Fargo Insurance Services and $3.25 billion pre-tax expenses related to litigation accruals.

Though fixed income trading income slumped as expected, Citigroup’s (C - Free Report) fourth-quarter 2017 adjusted earnings of $1.28 per share were driven by prudent expense management and strong consumer banking. The figure easily outpaced the Zacks Consensus Estimate of $1.19. Results included non-recurring non-cash charge of $22 billion related to the tax reform.

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