The days of Federal subsidies may be gone at Sallie Mae following the Congressional approval to an overhaul of the college student loan program, but it does end the legislative uncertainty at the largest U.S. student loan provider.
Shares of the Virginia-based company rose as much 11 percent to $13.32 Friday on the New York Stock Exchange, hitting a new 52-week high. They have recovered sharply since hitting a 52-week low of $3.44 exactly a year ago.
At this point, eliminating the legislative uncertainty could be viewed as positive for Sallie Mae and Nelnet shares as the significant overhang from legislative risk will no longer remain, said analysts Sameer Gokhale and Brendan Sheehy at Keefe, Bruyette and Woods.
On Thursday, the Congress approved a bill to end the 45-year-old Federal Family Education Loan Program, which has supported private student lending with federal subsidies.
Sallie Mae's management team can (now) focus on running the business more efficiently, which unfortunately, now will require the loss of 2,500 jobs, the KBW analysts said.
Sallie Mae was facing uncertainties as fears of the legislation taking away a large slice of the $92 billion college student loan business from the company mounted.
The overhaul was approved by the U.S. House in September and sent to the Senate.
Critics of the overhaul say the action will reduce students' lending options and eliminate the jobs of thousands of private lenders, hurting efforts to remedy an ailing U.S. economy that has a 9.7 unemployment rate.
FBR Capital Markets said despite losing a core business, Sallie Mae's existing expertise and competitive advantage in the private student loan industry, coupled with newer opportunities in loan servicing still make its dynamics attractive.
FBR analysts, led by Matt Snowling, raised their price target on the stock -- that trades under the formal name of SLM Corp -- to $18 from $16. FBR also maintained an outperform rating on the stock.
As the market becomes more comfortable with the earnings power of the company's remaining businesses, we believe there is further upside to our price target, FBR said in a note.
FBR said earnings from the company's key ongoing businesses -- private student loan origination, servicing, and debt collections -- will continue to grow meaningfully and should be sustainable in the next few years.
Private lenders would still have a role despite the overhaul, albeit a greatly diminished one, in servicing loans, such as helping collect payments. Direct federal loans, unlike bank loans, must now be serviced by U.S. workers.
Credit Suisse analyst M. Orenbuch warned that risks still remain to Sallie Mae's business model after the developments, although it has made significant progress in shoring up its liquidity profile and managing its private lending credit costs.
The company has been hurt over the last year by disruptions in financial markets. Its assets generate interest based on commercial paper rates, while its liabilities are linked to the London Interbank Offered Rate, or LIBOR.
However, Sallie Mae has already started benefiting from the recent stabilization in credit markets, which played a key role in posting two consecutive profitable quarters.
(Reporting by Anurag Kotoky; Editing by Gopakumar Warrier)