Sallie Mae posts profit as credit market improves

By MARK JEWELL

posted: 36 DAYS 13 HOURS AGO

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BOSTON -The student lender best known as Sallie Mae posted a third-quarter profit that beat Wall Street expectations as credit markets improved and student loan activity increased.

SLM Corp. said Tuesday it expects improving credit quality to continue to boost earnings, and its shares jumped nearly 8 percent in after-hours trading.

Sallie Mae said it has benefited from stabilized credit markets, including commercial paper, a major source of short-term borrowing for corporations to meet needs such as making payroll and paying vendors.

Government efforts to unfreeze the commercial paper market last fall sharply reduced rates to spur more lending, but eroded the interest that Sallie Mae earned. That's because the bulk of its federal student loan portfolio earns interest based on commercial paper rates, which were artificially lowered to levels that created a wide gap with the higher London Interbank Offered Rate, or LIBOR, the rate at which banks lend to one another.

Recent easing of the gap boosted Sallie Mae's results in the latest quarter, said Albert Lord, CEO and vice chairman.

"We expect credit quality to improve earnings in subsequent periods," Lord said.

The company's net income attributable to common shares was $116 million, or 25 cents per share, for the three months ended Sept. 30. That's a turnaround from the $186 million loss, or 40 cents a share, the Reston, Va.-based company reported in the same quarter a year ago.

The latest quarter's results were boosted by a $74 million gain recorded from Sallie Mae's recent repurchase of $1.4 billion in unsecured debt. That gain offset other one-time losses.

Excluding one-time items, Sallie Mae's adjusted profit for the latest quarter was $164 million, or 26 cents per share.

On that basis, analysts surveyed by Thomson Reuters had expected a far narrower profit of 4 cents per share.

After slipping 15 cents, or 1.7 percent, to close at $8.90 in the regular session, shares of SLM rose 70 cents, or 7.9 percent, to $9.60 in after-hours trading.

Stabilization in credit markets helped Sallie Mae originate $6.9 billion in federal student loans in the latest quarter, up 25 percent from a year earlier.

But originations of higher-risk private education loans not backed by the government plunged to $893 million from $2.1 billion, a drop Sallie Mae called "significant but not unexpected." Tightened underwriting standards and reduced loan demand amid the recession have severely eroded the private student loan market.

Sallie Mae's set-aside for loan losses was $321 million in the latest quarter, up from $187 million a year earlier.

(This version CORRECTS CEO first name to Albert, sted Arthur)

2009-10-20 19:07:11