The rating outlook of SLM Corp. (SLM), commonly known as Sallie Mae, has been raised to "stable" from "negative" by Moody's Investors Services, a unit of Moody’s Corp. (MCO). Better operating performance as well as an expansion in student loans were the driving factors for this rating outlook upgrade.
Sallie Mae's senior unsecured debt rating was affirmed at "Ba1" by the rating agency. Such a rating reflects the highest non-investment grade. Corporate family rating of "Ba1" was assigned to Sallie Mae.
The rating agency was impressed by the company’s steady progress in private student loan origination volumes, which helped it to offset the negative pressure on its net interest income.
Credit quality has also improved with the company reporting a fall in delinquencies and charge-offs level, resulting in lower requirement for provisions. In addition, the company enjoys sufficient financial flexibility and liquidity.
Yet Sallie Mae faces stiff competition from banks in the private student loan business. This could mar the company’s margins and overall loan volumes. Moreover, according to the rating agency, the company is experiencing an improvement in its capital position, but it still remains moderate compared to other finance organizations.
Last month, Sallie Mae, reported second quarter 2011 core earnings of $260 million or 48 cents per share, beating the Zacks Consensus Estimate of 42 cents. The results also compared favorably with the prior-year core earnings of $211 million or 39 cents per share.
Better-than-expected results at Sallie Mae were primarily driven by an increase in student loan originations, improved credit quality along with declines in student loan delinquencies and operating expenses.
For full-year 2011, Sallie Mae management expects to generate core earnings of $1.80 per share and anticipates private education loan originations of $2.5 billion. Cost cutting is the company’s primary focus. Moreover, the company expects to achieve its quarterly operating expense target of $250 million by fourth-quarter 2011.
Going forward, we believe that Sallie Mae’s leading position in the student lending market, its cost curtailment initiatives and the federal student loan assets acquisition bode well.
While pausing new federal student loan origination to comply with the legislation would affect revenue generation at the company, we believe that its diversifying efforts coupled with an economic recovery, though at a sluggish pace, would bolster its earnings by expanding its private education loan business and reducing its loan loss provision expenses. Capital deployment efforts also boost investors’ confidence in the stock.
Sallie Mae shares currently retain its Zacks #1 Rank, which translates into a short-term ‘Strong Buy’ rating. Considering its fundamentals, we have an Outperform recommendation on the stock.
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