By Davit Kirakosyan
Sallie Mae (NASDAQ:SLM) shares gained more than 4% intra-day today after Morgan Stanley upgraded the company to Overweight from Underweight and raised its price target to $15.00 from $14.00 on better-than-feared credit quality.
The firm’s previous Underweight rating was due to concerns about the company's private student loan book's credit deterioration. This concern was confirmed in Q4/22 earnings with losses spiking to 3.15%. Since then, the stock has underperformed, down 25% year-to-date.
However, the firm is increasing its EPS estimates for 2023/24 by 11%/5% as SLM's credit performance has improved over the past several months, while the rest of the group's credit quality is declining. This is mainly due to one-time transitory issues that impacted performance in 2022, which have now eased. “Thus far in the quarter through February, annualized losses have declined to 2.17%, much better vs consensus at 2.8% for the full quarter. We are now looking for 2.3%, now the low on the Street,” said the firm.
Morgan Stanley expects to face pushback due to previous head fakes in 2022 and a tougher macro outlook from here. The firm doesn’t expect an immediate return to pre-2022 loss rates. “Two key elements likely to keep SLM's NCO rates above historical levels: 1) the impact of Gen Z students graduating with the most student debt ever amid the highest level of inflation in decades; and 2) seasoning and mix dynamics as SLM has held its managed portfolio flat while selling loans off balance sheet,” said the firm.
However, it expects lower credit costs than expected, with its new 2023/24 NCOs estimates of 2.24%/1.95% about 20-25bp better than consensus. This keeps the firm’s EPS 1% above consensus, which is significant compared to its other Consumer Finance coverage where it is below consensus 2024 EPS by almost 90%.