SLM Corp. - better known as Sallie Mae (SLM) - reported a 4Q07 core net loss of $0.36 per diluted share (substantially worse than the estimates), mainly stemmed from a steep rise in loan loss provision and higher funding costs. The credit quality, primarily in the private credit portfolio, has deteriorated significantly and the company now plans to decrease lending in this segment.
A recent downgrade by S&P and the possibility of a downgrade by Moody's, as well, create more headwinds for the company. After reviewing the results, we are lowering our EPS estimates and our six-month target price (to $18 per share). As we expect the funding and credit quality challenges to continue to impact the profitability of the company, we maintain our Sell recommendation on the shares.
Challenges of the credit markets have resulted in increased funding costs for SLM. The crisis in the markets has also resulted in rising defaults. Families who are facing mounting mortgage payments may have difficulty in keeping up with the student loan payments, especially when the situation is further compounded by the soaring oil prices.
Recently, private credit portfolio was also a negative driver for the company. During 4Q07, SLM experienced a significant decline in the credit quality associated with this portfolio.
Read the full analyst report on SLM.
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