Sallie Mae SLM delivered fourth-quarter 2019 positive earnings surprise of 10%. Core earnings of 33 cents per share surpassed the Zacks Consensus Estimate of 30 cents. Moreover, the figure jumped 6.5% from the prior-year quarter.
Increase in net interest income and lower expenses were tailwinds. Also, improved deposits and loans balance supported the results. However, these positives were partially offset by lower non-interest income and poor credit quality.
The company’s GAAP net income attributable to common stock came in at $137 million compared with $143 million a year ago.
For 2019, core earnings of $1.27 per share grew 18.7% year over year, and also surpassed the consensus estimate of $1.23. Net income attributable common shareholders (GAAP basis) rose 18.9% to $561 million.
Net Interest Income Increases, Expenses Decline
Net interest income for the fourth quarter came in at $419 million, up 9.4% year over year. This improvement was mainly driven by higher interest income. Net interest margin contracted 70 basis points (bps) to 5.41%.
The company incurred non-interest loss of $4 million against non-interest income of $13 million in the prior-year quarter. This downfall mainly stemmed from losses on derivatives and hedging activities.
The company’s non-interest expenses declined 2.9% year over year to $141.7 million. The fall mainly resulted from lower other operating expenses, partially offset by higher compensation and benefits expenses.
Efficiency ratio, on a non-GAAP basis, decreased to 33.6% from 37.6%. Generally, a lower ratio indicates improved profitability.
Credit Quality Worsens
Provision for loan losses was $98 million, up 69% from $58 million witnessed in the prior-year quarter.
Delinquencies as a percentage of private education loans in repayment were 2.8%, up 2 bps.
Loans & Deposits Grow
As of Dec 31, 2019, deposits of Sallie Mae Bank were $24.3 billion, up from $22.6 billion as of Dec 31, 2019. Increase in retail and other, along with brokered deposits, contributed to this upside.
Private education loan portfolio was $22.9 billion, up marginally on a sequential basis. Average yield on the loan portfolio was 9.12%, down 22 bps.
Strong Capital Position & Capital Deployment Update
As of Dec 31, 2019, Sallie Mae Bank’s common equity Tier 1 capital was 12.2%, exceeding the “well capitalized” industry benchmark in regulatory requirements.
The company repurchased $9.6 million of common stock under share repurchase program at an average price of $8.73.
For 2020, Sallie Mae announced plans to buy back up to $600 million in common stock, under a new share repurchase program, effective immediately and to expire on Jan 21, 2022.
The company expects core earnings per share to be between $1.85 and $1.91. Also, provisions for credit losses in the range of $285-$305 million is expected. Total portfolio net charge-offs of $275-$285 million are anticipated for full-year 2020.
Private education loan originations are projected to grow 6% year over year. The company’s non-interest expenses are expected to fall in the $570-$580 million band. Further, loan sales of approximately $3 billion are targeted to fund up to $600 million of share repurchases.
Results of Sallie Mae highlight continued focus on increasing private education loan assets, maintaining a solid capital position by introducing multiple complementary products and improving efficiency. Also, decline in expenses is a tailwind.
We believe improving economic conditions will further assist Sallie Mae in maintaining its leading position in the student lending market. Additionally, its focus on solidifying presence in the consumer banking business space bodes well. However, worsening of credit quality keeps us apprehensive.
SLM Corporation Price, Consensus and EPS Surprise
Currently, Sallie Mae carries a Zacks Rank #4 (Sell).
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