Sallie Mae swings to $104 million loss in 1Q
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Sallie Mae April 17th, 2008Sallie Mae loses $104M in 1Q, misses Wall Street estimates, sets aside $137M for loan losses
WASHINGTON (AP) — Sallie Mae lost $104 million in the first quarter and fell short of Wall Street’s expectations amid a severe disruption in the troubled student loan industry.
“Today’s environment is the most difficult we have seen in our 35-year history of student lending,” Albert L. Lord, the Reston, Va-based company’s chief executive, said in a statement.
The company, formally SLM Corp., said Wednesday it lost 28 cents a share in the first quarter. That compares with a profit of $116 million, or 26 cents per share, a year earlier. Sallie Mae set aside $137 million for losses on student loans.
Sallie Mae, the nation’s largest student lender, has suffered from financial losses, a failed buyout and reshuffling of top management in the past year. In January, the company said it was becoming more selective about student loans, and would emphasize the importance of graduation to predict students’ likelihood of repaying their debts.
Sallie Mae’s profit on a “core” basis was 34 cents a share in the first three months of the year. Analysts polled by Thomson Financial had expected the company to earn 40 cents per share on that basis.
Core earnings exclude treatment for student loans bundled together as securities and derivatives, the complex financial instruments used as a hedge against interest rate swings.
Sallie Mae’s shares, which have dropped from a peak of $58 per share last summer, fell $1.18 on Wednesday, or 6.8 percent, to close at $16.26. In after-hours trading, they rose 39 cents, or 2.4 percent, to $16.65.
The results were better than anticipated, said Sameer Gokhale, an analyst with Keefe, Bruyette & Woods Inc. “Expectations were already fairly low, given all the concerns that investors had about the company,” he said Wednesday evening.
The company’s top executives are scheduled to hold a conference call with investors at 8 a.m. EDT Thursday.
Like much of the student lending industry, Sallie Mae has also been caught up in the credit market distress of recent months.
Similar to residential mortgages, student loans are commonly packaged into securities and sold to investors. But demand for that kind of debt has plummeted, even though the majority of student loans are highly rated and carry a federal guarantee.
With investors seeking safer places to put their cash, Sallie Mae and other lenders have faced a dried-up market for securities and more expensive financing for those transactions.
These inhospitable market conditions come just months after a new law reduced government subsidies for federally guaranteed loans, whose interest rates are capped at 6.8 percent.
In the current market, Sallie Mae said, “loans can only be made at an economic loss.”
More than 50 student lenders have stopped making federally guaranteed student loans, either temporarily or permanently.
In the first quarter, $8.4 billion in securities backed by student loans were issued, down more than 60 percent from $21.7 billion a year earlier, according to the American Securitization Forum, an industry group.
Morgan Stanley analyst Kenneth Posner downgraded Sallie Mae on Wednesday citing the “double whammy impact” of the credit crisis and the new student-loan law. He projected that Sallie Mae would need to raise $500 million later this year.
Posner wrote that Democrats are likely to favor the federal government’s direct lending program, which doles out aid directly to students, rather than through the private sector. For the student lending industry, he wrote, “the situation could get worse if Democrats gain the presidency.”
Sallie Mae has been pushing for the Treasury Department to aid the stricken market by buying student loan securities. The company’s chief financial officer, John Remondi, warned senators Tuesday of a “shortfall in access to student loans this year.”
Lord reiterated that point Wednesday, calling federal intervention the only way to “meet the enormous student credit demands we are seeing.”
More student loan fallout came Wednesday, as Citigroup Inc.’s said its Student Loan Corp. subsidiary on May 1 will temporarily stop issuing loans to students at schools where profits have not been satisfactory. Citi did not say how many schools fit this description.
Citigroup will also stop issuing federal consolidation loans, which refinance outstanding student debt into a single loan, following Sallie Mae’s decision last week to cease doing so.
The student-loan provider reported net interest income of $276.4 million, down from $413.8 million a year ago. Net interest income is the difference between how much it costs a bank to borrow money and the amount it receives from lending money.
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