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Sallie Mae (SLM) Q1 Earnings Beat, Cost & Provisions Rise

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Sallie Mae SLM delivered a positive earnings surprise of 12.5% in first-quarter 2018. The company reported core earnings of 27 cents per share, surpassing the Zacks Consensus Estimate of 24 cents. Moreover, the figure increased 28.6% from the prior-year quarter.

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

The company’s GAAP net income attributable to common stock came in at $123 million, increasing 38.2% year over year.

Rise in Net Interest Income & Other Income Offsets Higher Expenses

Net interest income for the first quarter was $333 million, up 24% year over year. The improvement was mainly driven by an increase in the portfolio size of private education loans. Net interest margin expanded 21 basis points (bps) year over year to 6.17%.

The company reported non-interest income of $13.5 million, up significantly from $6 million in the prior-year quarter. The rise was attributable to higher gains on derivatives and hedging activities.

The company’s total expenses increased 21.6% year over year to $125 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, decreased to 36.5% from 36.8% in the year-ago period. Generally, a lower ratio indicates improved profitability.

Credit Quality Worsens

Provision for loan losses was $53.9 million, up considerably from $25.3 million in prior-year quarter.

Delinquencies as a percentage of private education loans in repayment were 2.5%, reflecting an increase of 3 bps in the year-ago quarter.

Growth in Deposit and Loans

As of Mar 31, 2018, deposits of Sallie Mae Bank were $16.5 billion, up from $13.4 billion as of Mar 31, 2017. Increase in retail and other deposits contributed to the rise.

As of Mar 31, 2018, the private education loan portfolio was $18.6 billion, up 19.9% year over year. Loan origination climbed 7% to $2 billion in the reported quarter. Average yield on the loan portfolio was 8.84%, up 58 bps.

Strong Capital Position

As of Mar 31, 2018, Sallie Mae Bank’s Tier 1 capital to risk-weighted assets and common equity Tier 1 capital were both 11.7%. Capital ratios exceeded the “well capitalized” industry benchmark in regulatory requirements.

2018 Outlook

The company estimates core earnings per share in the range of 99 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.

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 that improving economic conditions and lower tax rate will further assist Sallie Mae in maintaining its leading position in the student lending market. Moreover, its focus on solidifying presence in the consumer banking business space bodes well for the upcoming quarters. However, worsening of credit quality and escalating expenses keep us apprehensive.

SLM Corporation Price, Consensus and EPS Surprise

SLM Corporation Price, Consensus and EPS Surprise | SLM Corporation Quote

Sallie Mae carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

People's United Financial PBCT reported net earnings of 30 cents per share in first-quarter 2018, in line with the Zacks Consensus Estimate. The reported figure improved 36.4% year over year.

Driven by top-line strength, Texas Capital Bancshares TCBI pulled off a positive earnings surprise of around 0.7% in first-quarter 2018. Earnings per share of $1.38 outpaced the Zacks Consensus Estimate by a penny. Moreover, results compared favorably with 80 cents recorded in the prior-year quarter.

Webster Financial's WBS first-quarter 2018 earnings per share of 85 cents surpassed the Zacks Consensus Estimate of 79 cents. Also, it compares favorably with 62 cents earned in the prior-year quarter.

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