SLM shares soar; co. sees loan defaults improving

posted: 34 DAYS 15 HOURS AGO

Text SizeAAA

NEW YORK -Shares of SLM Corp., the student lender known as Sallie Mae, rallied Wednesday after the company said it thinks charge-offs on student loans peaked in the third quarter and that improving credit markets may allow it to make more money on loans.

Charge-offs, or loans written off as not being repaid, rose to $443 million in the June-September period from $352 million in the second quarter, but the outlook is brightening as the profile of its borrowers improves, according to company officials.

"We expect credit quality to improve earnings in subsequent periods," SLM Corp. CEO Albert Lord said in a statement Tuesday.

That upbeat sentiment was echoed by Sallie Mae CFO Jack Remondi in a conference call with investors and analysts Wednesday.

Defaults likely peaked in the third quarter, with rates improving from July to September, Remondi said. In October, he expects a 25 percent decline in charge-offs from July, with improvement continuing into 2010 even if the economy doesn't get better, he said. The company also increased its operating earnings outlook above Wall Street expectations for the fourth quarter and 2010.

Shares soared $1.97, or 22 percent, to $10.87 in afternoon trading and traded as high as $11.54 earlier in the session.

Sallie Mae has been making an effort to work with stronger borrowers. "Non-traditional" loans, which Sallie Mae discontinued in January 2008, are slowly shrinking as a percentage of the company's loan portfolio. It stopped originating these loans, directed at students attending two-year colleges or schools with low graduation rates, in January 2008. The older "non-traditional" loans make up 13 percent of Sallie Mae's private credit portfolio, but account for nearly 50 percent of charge-offs, Remondi said.

The credit of its newest borrowers was "extraordinarily strong," Lord said during Wednesday's conference call.

The company is also benefiting from stabilized credit markets, including commercial paper, a major source of short-term borrowing for corporations. Last year, commercial paper rates were artificially lowered in an effort to unfreeze credit markets. Now that rates have stabilized, the company can make more money from its loans.

CEO Lord also said Sallie Mae had plans to continue company operations even if it was not an originator of federal student loans in the future, and he expected earnings to improve through 2011 in either case.

The Obama administration has proposed eliminating federal subsidies for private lenders and originating loans for students directly from the government. That would mean an end to Sallie Mae's government-backed student lending business, the bulk of its portfolio. The company currently has a contract with the Department of Education to service the government's student loans.

Stabilization in credit markets helped Reston, Va. 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." Tighter underwriting standards and reduced loan demand amid the recession have severely eroded the private student loan market.

Still, analysts were heartened by Sallie Mae's outlook.

"Core earnings are both strong enough and sustainable enough to support a higher share price," said FBR Capital Markets analyst Matt Snowling in a note to investors. He reiterated his "Outperform" rating and $15 price target on the shares.

2009-10-21 15:06:01