Sallie Mae (SLM) Q2 Earnings Beat Estimates As Revenues Rise

Sallie Mae (NASDAQ:SLM) reported second-quarter 2019 core earnings of 31 cents per share, surpassing the Zacks Consensus Estimate of 30 cents. Moreover, the figure jumped 24% from the prior-year quarter.

Increase in net interest income and elevated non-interest income were tailwinds. Deposits grew considerably and capital position was strong. 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 $146 million or 34 cents per share compared with $106 million or 24 cents per share reported a year ago.

Rise in Net Interest Income & Other Income Offsets Higher Costs

Net interest income for the second quarter came in at $397 million, up 16.4% year over year. This improvement was mainly driven by higher interest income. Net interest margin contracted 26 basis points (bps) to 5.88%.

The company reported non-interest income of $19 million, up significantly from the prior-year quarter. This upside stemmed from higher gains on derivatives and hedging activities, partly offset by lower other income.

The company’s non-interest expenses jumped 2.6% year over year to $138.8 million. The upsurge mainly resulted from increased compensation and benefits expenses.

Efficiency ratio, on a non-GAAP basis, decreased to 34.9% from 38.3%. Generally, a lower ratio indicates improved profitability.

Credit Quality Worsens

Provision for loan losses was $93 million, up 47.6% from $63 million witnessed in the prior-year quarter.

Delinquencies as a percentage of private education loans in repayment were 2.7%, up 5 bps.

Deposits Grow, Loans Decline

As of Jun 30, 2019, deposits of Sallie Mae Bank were $21.2 billion, up from $19.7 billion as of Mar 31, 2019. Increase in retail and other, along with brokered deposits, contributed to this upside.

Private education loan portfolio was $21.4 billion, down nearly 1% sequentially. Average yield on the loan portfolio was 9.39%, down 11 bps.

Strong Capital Position & Capital Deployment Update

As of Jun 30, 2019, Sallie Mae Bank’s common equity Tier 1 capital was 11.9%, exceeding the “well capitalized” industry benchmark in regulatory requirements.

The company repurchased $60 million of common stock under share repurchase program at an average price of $10.04.

2019 Outlook

The company estimates core earnings per share in the range of $1.21 to $1.23 for this year down from $1.21-$1.23 previously expected.

Private education loan originations are projected to be $5.7 billion. The company’s full-year non-GAAP operating efficiency ratio is expected in the 35-36% band.

Our Viewpoint

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, significant rise in fee income 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 and escalating expenses keep us apprehensive.

SLM Corporation Price, Consensus and EPS Surprise

Currently, Sallie Mae carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Banks

Navient Corporation (NASDAQ:NAVI) pulled off a positive earnings surprise of 37% in second-quarter 2019. Core earnings per share of 74 cents surpassed the Zacks Consensus Estimate of 54 cents. Also, the bottom line came in higher than the year-ago quarter figure of 49 cents.

CIT Group Inc. (NYSE:CIT) reported second-quarter 2019 earnings from continuing operations of $1.32 per share surpassing the Zacks Consensus Estimate of $1.13. In the prior-year quarter, the company recorded adjusted earnings from continuing operations of $1.00. Notably, the reported quarter did not have any noteworthy items.

Bank of Hawaii Corporation (NYSE:BOH) delivered a positive earnings surprise of 2.2% in second-quarter 2019, leading to an appreciation of 2.18% in shares, following the release. Earnings per share of $1.40 surpassed the Zacks Consensus Estimate of $1.37. Further, the reported figure compares favorably with $1.30 earned in the prior-year quarter.

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