Yahoo Finance Revenue Growth Supports Sallie Mae (SLM) Amid High Costs
Sallie Mae’s SLM diversified revenue streams, inorganic growth moves and introduction of multiple complementary products aid growth. Its net interest income (NII) has been increasing on private education loan portfolio growth. Also, decent liquidity will likely to support capital deployment activities in the near term. However, overdependence on brokered deposits as a funding source and rising costs are concerning.
Having the competitive advantage of scale and diversifying its revenue streams through acquisitions, Sallie Mae is the dominant player in every phase of the student loan life cycle. In 2022, SLM acquired Nitro College, a digital marketing and education solutions company to boost its outreach and brand position, while bolstering its digital marketing competencies and lowering the cost to acquire customer accounts.
Sallie Mae’s operations are more dependent on students’ demand for education loans. Considering a low unemployment rate for the over-25-year-old college graduate cohort and early enrollment trends, modest growth in enrollment for the upcoming several quarters is expected. This is likely to lead to higher demand for education loans.
With an intention of organic growth, SLM has been focusing on enhancing its private student loan business, maintaining a strong capital position and introducing multiple complementary products. The company’s private education loan originations have been rising over the years. In fact, first-quarter 2023 originations of $2.4 billion marked the highest level of originations in Sallie Mae’s history. Management projects 5-6% increase in private education loan originations for 2023.
SLM’s target to grow its private education loan portfolio has been supporting its NII and a similar trend is expected in the quarters ahead. It has been improving its NII from yields on cash and other short-term investments. Hence, NII has been rising over the years with increasing average loan balance and also providing some support. Our estimate for NII imply a three-year compound annual growth rate of 3.6% by 2025.
As of Mar 31, 2023, the company had long-term borrowings worth $5.51 billion and unrestricted cash liquid investments (consisting of cash and cash equivalents and available for sale investments) of $5.71 billion. SLM has undertaken capital deployment activities through dividend payments and share repurchase programs. Given the decent levels of liquidity, the capital deployment activities seem sustainable, enhancing investors’ confidence in the stock.
However, SLM’s major source of funding are term, liquid brokered and retail deposits raised by the bank. These pose refinancing risks as the average term of the deposits is shorter than the expected term of the education loans originated by the company.
Moreover, despite focusing on reducing servicing costs and gaining efficiencies from operations, SLM’s non-interest expenses have been growing over the years. Such an increasing expense trend is likely to hinder bottom-line growth in the upcoming quarters. We estimate 10.5% rise of the metric in 2023.
Shares of this Zacks Rank #3 (Hold) company have lost 10.5% against a gain of 2.2% recorded by its industry over the past six months.
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Finance Stocks Worth Considering
A couple of better-ranked stocks from the finance sector are OFG Bancorp OFG and Pathward Financial Inc. CASH, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for OFG’s 2023 earnings has been revised 3.3% upward over the past 60 days. The stock has declined 8.5% over the past six months.
The consensus estimate for CASH’s fiscal 2023 earnings has been revised 1.8% upward over the past 30 days. The company’s share price has increased 6.6% over the past six months.
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