The largest U.S. student loan company, SLM Corp. also known as Sallie Mae reported a loss of $123 million. Last year it made a profit of $ 266 million. The main reason of this huge loss is because it failed to make a provision for $484 million loss it sustained due to it’s involvement in Hedging and derivative market related activities.
In addition to above loss, it also set aside another $278 million for student loans that will go bad this year.
Although the core profit in last quarter was $170 million but it lost money as it engaged itself with toxic investments like hedging and derivatives.
Analysts were expecting a decrease in profit but no one seemed to be ready for such a phenomenal loss. The company stocks were down to $9.38 which is more than 7.8% decrease from before the announcement. The company stocks remained volatile during past 12 months and price varied between $3 and $14 per share.
At the end of academic session of 2008 – 2009, Sallie Mae issued loans of about $20 billion to students. This is 11 percent higher than last year. The company has been reported to issue even larger number of loans this year.
During last quarter, Sallie Mae extended federal student loans of $3.7 billion. A 53% increase compared to last year.
During last quarter, company also issue $387 million as private education loans under its new program called SMART Option Student Loan. This new product is suppose to increase credit quality standards and reduce the risk of default among borrowers.
Company also written off $355 million worth of private student loans for deserving student during last quarter. The huge losses are because of its engagement in a no-traditional , high risk segment of private student loan market. The company seized to issue high risk loans more than a year ago but it’s impact can still be felt of company bottom line.
Over all increase in student loan delinquencies in this quarter are also a major cause to worry. however the rate of late payments is under control in this quarter.
The net provision for Student Loans that will go bad is near $2 billion for the quarter ending in June 2009. The company is hopeful that it will cover the charge-offs till 2011.
There is also a drop in firm’s core earnings i.e. fee income from guarantor servicing and collections.
The only good news are that company has managed to decrease $34 million worth of operating expenses. And it last month won a crucial contract from the U.S. Department of Education to service federal student loans. The five-year contract will provide income that would help offset the loss in revenue stemming from the Obama administration’s plans to rein in subsidies on federal student loans, which make up a chunk of the portfolio of Sallie Mae and other student lenders.