Sallie Mae Corporation (NASDAQ:SLM) stock is trading higher on Wednesday. Bank of America Corporation (NYSE:BAC) initiated coverage of the student loan provider with a Buy rating and set a price target of $27.
The Details: Sallie Mae currently holds a 58% market share in private student loans, however, the bank indicates there's room for growth, describing the lender as "poised for market share gains."
Bank of America points to growth in college enrollment, increase in the price of college and competitors leaving the student loan market to support its market share growth belief. Specifically, the bank stated that college enrollment is estimated to grow by about 4% by 2027 and the cost of college has increased at a 3% compound annual growth rate since 1993-94.
The bank pointed to the past as evidence of Sallie Mae's ability to take advantage of competitors exit from the market. For instance, the lender increased its market share by 60pbs during the 2021-22 school year following Wells Fargo's exit.
Also, the bank highlighted the lender's focus on high credit-quality consumers. It stated that less than 8% of borrowers at the time of originations had a credit score lower than 670. Next, the note recognized the lender's efficient business model.
"Sallie Mae began a strategy in 2020 in which it seeks to minimize balance sheet growth and accelerate share repurchases
by selling student loans at high execution levels due to its strong credit profile. Through the "loan sale arbitrage" strategy, SLM has driven attractive returns, while not needing to expand capital levels to sustain its industry leading origination volumes," said the bank.
Bank of America also recognized some risks to its thesis including, scrutiny by oversight organizations like the Consumer Financial Protection Bureau and a growing number of students choosing to consolidate or refinance with firms that offer interest rates lower than Sallie Mae's.
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SLM Price Action: At the time of writing, Sallie Mae shares are trading 1.90% higher at $21.94, according to data from Benzinga Pro.
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