Sallie Mae Benefits From Higher Originations, Costs A Woe

On Nov 13, we issued an updated research report on Sallie Mae (NASDAQ:SLM) . The company continues to benefit from its dominant position in the student lending market. Also, its focus on strengthening Private Education Loan assets and revenues bodes well. However, escalating expenses remain a headwind.

The student lender reported in-line earnings in third-quarter 2017. The results reflected higher net interest income along with considerable growth in loans and deposit balance. However, higher expenses and lower non-interest income were on the downside.

Sallie Mae shares have gained 4.2% over the past year, underperforming the industry’s rally of 6.6%.

The Zacks Consensus Estimate for the company’s current-year earnings have remained stable at 72 cents over the past 60 days. As a result, the stock carries a Zacks Rank #3 (Hold).

Loan originations have increased 8% in 2016, with the trend continuing in the first six months of 2017. Thus, the company seems on track to achieve originations of about $4.9 billion in 2017. Also, management expects to improve efficiency ratio through prudent expense management and growth in service portfolio loans.

Modest growth in demand for educational loans comes as a tailwind for the lender. However, with the economic recovery, Sallie Mae should be able to maintain a leading position in the student lending market.

Sallie Mae’s expenses have witnessed a compound annual growth rate of 12.1% over a period of five years (ended 2016).

Also, the company remains highly dependent on the broker deposits as a major source of financing. Moreover, the generation of deposits from non-brokered channels takes time. Thus, this significant exposure to just one source of funding remains a concern.

Stocks to Consider

Some better-ranked stocks in the same space are State Street Corporation (NYSE:STT) ,Washington Federal (NASDAQ:WAFD) and FB Financial Corporation (NYSE:FBK) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

For State Street, over the past 60 days, the Zacks Consensus Estimate has been revised 2.5% upward for 2017.

Washington Federal has witnessed an upward earnings estimate revision of nearly 1% for 2017, over the past 60 days.

FB Financial has witnessed an upward earnings estimate revision of 3.7% for 2017, over the past 60 days.

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