Citibank's Student Loan Corp. Sees 50% Drop in First Quarter 2009 Earnings

Here is the earnings release for Citibank's Student Loan Corporation (STU). 

Two primary drivers of the earnings decline were:

• "...higher cost of funds resulting from the refinancing of maturing term debt with less favorable terms, resulting in higher credit premiums over the London Interbank Offered Rate (LIBOR)..."
• "In addition, there has been a significant divergence between the 90-day Commercial Paper rate as published by the Department of Education (CP), which determines special allowance payments, and LIBOR, which is the basis of the Company’s funding."
  • Sallie Mae reported on the same challenges last week during their conference call

On the origination front, Citibank saw strong increases in FFELP originations as that business continues consolidate favoring the largest lenders while private loan originations showed a slight decline:

• Originations for the quarter included FFELP Stafford and PLUS originations of $2.2 billion, a 16% increase from the same quarter of 2008.
• The Company also made new CitiAssist^® loan commitments of $0.6 billion, which was 1% lower than the same quarter of 2008.

In terms of delinquencies on their private loan portfolio, Citi saw just a slight uptick, which was quite different from Sallie Mae's numbers which showed accelerating delinquencies and losses in their private loan portfolio:

• The overall private credit delinquency rate continued to follow expected seasonal patterns with a delinquency rate of 2.0% at the end of the first quarter of 2009, compared to 1.9% at the end of the same quarter of 2008.

Finally, in terms of liquidity, Citi accessed the Department of Education's Loan Purchase and Participation program to the tune of $1.6 billion in the first quarter. 

Finally, the CEO's assessment of the current situation recognizes ongoing challenges:

"As we build on this success, we continue to work at securing competitive funding in this very challenging credit environment. Maintaining our focus on funding and cost reduction initiatives, both designed to mitigate the impact of external economic conditions throughout the upcoming year, are key priorities,” said Student Loan Corporation Chief Executive Officer, Mike Reardon.

One disappointment not mentioned in the earnings release was the fact that Citibank was not one of the six finalists selected to bid on the servicing contract for the Department of Education, despite having a managed student loan portfolio of $44.0 billion, as of the end of March 2009.  Unfortunately, Citibank does not do conference calls or detailed financial disclosures for their Student Loan Corporation subsidiary so there is little opportunity for them to answer key questions such as:

• What are the long-term plans are for STU given that they sit within Citi Holdings, the non-core side of the house for Citibank?
• Is Citibank committed to continuing to be the primary source of financing for STU given that they agreement expires later this year?

Update (9:07 PM)

• Wall Street Journal is reporting tonight that Citibank and Bank of America will be asked by bank regulators to raise additional capital as a result of the recent bank stress tests.  The banks still have a chance to appeal their cases before the Federal Reserve.