Sallie Mae executives presented at the Citi Financial Services conference today. Here are links to the webinar and presentation materials: Citi 2010 Financial Services Conference Citi 2010 Financial Services Conference - Presentation -------------------------------------------------- A few new insights:
March 10, 2010 - 8:00am
March 10, 2010 (pdf, 238kb)
- Company considering transitioning to become a bank holding company
- Mulling over options for $140 billion FFELP loan portfolio: Sell, spin-off or keep. If they become a bank holding company, keeping the portfolio would be a "non-starter"
- $3.5 billion goal for private credit originations for 2010 "not in the bag"
- Sallie Mae salesforce is saying that at least 1/2 of the federal loan business is in Direct Lending, up from 20% two years ago
- An SLA flash survey is measuring the trends between FFELP and DL; expect results early next week
- Elimination of FFELP is $0.40/share ($194 million) hurdle to overcome and will lead to major cost restructuring at the company; ready to provide guidance once legislative outcome is clear
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Here are the details (note that I have paraphrased the session below):
On schools transitioning to Direct Lending: "Federal government has been jawboning as if there is some inevitability about DL. Tend to describe it as nationalization or socializing (sic); large words; other words we use are a lot shorter but we don't want to use them here." Conservative forecasts in 2011 assume elimination of FFEL: "Don't have any interest income growth or fee income in 2011 projections." Non-traditional "bad loan" portfolio: "Originated about $6.0 with loss rate of about 40%. Most of those loans have gone through the pipeline. Over last two years loans going into repayment going into loss category; backed off on loan originations dramatically as a result" Believe that financing picture improving: "Obviously financing has been a challenge; beginning to abate. We are financing through the bank initially with long-term, 3.5 to 4.0 year deposits. Also doing ABS deals that are TALF-assisted. Did deal recently with assets in the bank. Seek to do not-Talf deal sometime over the balance of the year. Bank has begun a retail savings deposit program with $500 million target for deposits to diversify funding sources." Question and Answer period On competitive advantages: (Al Lord) "Advantages that we know the business better, we believe in the business. I think that we've studied student behavior more than our competitors. I don't think there is any particular secret sauce, we just view it as our business and intend to grow it."
FFELP portfolio generates lots of cash flow (consultants call these "cash cows"): "Generated $1.9 billion in cash flow, will generate $1 billion/year for a long time. We will be more precise soon."
Economics of private credit business: "Private credit has been growth engine for company for some time yielding 4.5% pre-tax, pre-provision (or $1.8 in gross revenue). Problem has been that the provision was 4% last year and is 3% this year so there is only 1.5% of net interest left this year or $600 million. We expect that pre-tax ROA after provision improving to 3.0% in 2012-13 time period. Long-term provision should only be 1 to 1.5%. With our 2009-10 originations to date (not so many), we have 4% pre-tax return (after provision)."
Private credit origination goals: Our volume goal is $3.5 billion for 2010; that is not in the bag. Goal would be to get that number to $5.0 by 2012-13
Private credit originations over last 18 months: "Avg. FICO close to 750 over last 18 months; had 88% at a rate of cosigners."
Indicated adjustments are coming to the product, but didn't provide details: "In the process of Adjusting product leaving a lot of high quality credit on the table tat this point."
Performance of traditional portfolio: "$33 billion is size of portfolio. Demonstrates performance of college graduates particularly in this environment. In 2009, about 4% of that business defaulted which was far higher than we had projected. Less than 60% of loans are cosigned, 35% have below 700 scores. What it really shows is value of education. It reinforces our view that financing serious college students is a very good business. Keys are not FICO scores or cosigners but graduation rates and quality of education that student receives."
Earnings target: "$1.50 to $1.60 this year; will improve in 2011 not withstanding challenges in having substantially less FFEL revenue."
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On private credit competitors: Citi, Chase, Wells and Discover.
(Jack Remondi): "We have the largest distribution network by far in this space; we talk to every school in the country. We have the largest salesforce selling and promoting the product. We are working with schools to understand what their needs are. Our knowledge and distribution along scale and efficiency gives us a tremendous competitive advantage. Competing against banks is nothing new for us. Results are pretty clear that we dominate this space. Growing substantially faster than substantially than anyone else in this area."
- Here are SLA's market share projections for the private loan space, including a 50% + decline in originations at Sallie Mae resulting in lower share for them.
- A great follow-up question would have been how the company plans to adjust their marketing mix as schools move away from preferred lender lists which could neutralize the value of their distribution network.
- Fascinating insights as to how they think about their private credit business here. I think it is a bit dangerous when a company discussing their competitive advantages focuses internally leaving out the bit about delivering value to their end customer, which is more than "studying student behavior."
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