Yahoo Finance Loan Originations Growth Aid Sallie Mae (SLM) Despite High Cost
Sallie Mae’s SLM rising average loan balance has been supporting NII growth. Strategic inorganic growth moves will expand its operations and diversify revenue streams. Overdependence on brokered deposits as a funding source and rising expenses are concerning.
The dominant player in every phase of the student loan life cycle, providing the continuing competitive advantage of scale. Its operations are more dependent on students’ demand for educational loans. The low unemployment rate for the over-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 growth in enrollment for the upcoming several quarters, leading to higher demand for education loans.
Thus, efforts to enhance its private student loan business, maintain a strong capital position and introduction of multiple complementary products are strategic fits. In first-quarter 2024, private education loan originations witnessed an upward trend on a year-over-year basis. To recycle resources in its core business strategies, in May 2023, the company sold its credit card business.
SLM has been focused on improving its NII by increasing the amount of cash and cash equivalents held to gain from yields on cash and other short-term investments. Also, the rising average loan balance has supported NII growth. The NII witnessed a CAGR of 5.6% over the last six years (ended 2023). Though the trend reversed in the first quarter, the company’s target to grow the Private Education Loan portfolio will continue to support NII growth in the quarters ahead.
In the past six months, shares of this Zacks Rank #3 (Hold) company have rallied 11.2%, outperforming the industry's growth of 7.4%.
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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 the education loans originated by the company. The company’s dependence on brokered deposits as a key source of funding is concerning.
The company’s non-interest expenses witnessed a CAGR of 4.2% over the last five years (2018-2023), with an uptrend continuing in the first quarter. Though the company focuses on lowering both servicing and acquisition costs and continues to gain efficiencies from operations, we believe that an increasing expense trend will hinder bottom-line growth in the upcoming quarters.
Stocks to Consider
Some better-ranked bank stocks are Banco Macro S.A. BMA and KBC Group NV KBCSY.
Banco Macro’s earnings estimates for 2024 have been revised 29.6% upward in the past 60 days. The company’s shares have gained 94.3% in the past six months. At present, BMA sports a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
KBC Group NV’s 2024 earnings estimates have revised 50.8% upward in the past 60 days. The stock has gained 8.7% over the past six months. Currently, KBCSY sports a Zacks Rank #1.
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