Sallie Mae Corporation (SLM) stock is experiencing a surge on Wednesday, fueled by a positive outlook from Bank of America Corporation (BAC). The investment bank has initiated coverage of the student loan provider with a Buy rating, setting a price target of $27. This optimistic stance stems from the bank’s belief that Sallie Mae is poised for significant market share gains.
Bank of America highlights several factors supporting its bullish outlook. Firstly, the company notes that Sallie Mae currently holds a commanding 58% market share in private student loans. Furthermore, they anticipate substantial growth opportunities driven by rising college enrollment, expected to increase by around 4% by 2027, and the escalating cost of education, which has been growing at a compound annual growth rate of 3% since 1993-94.
The bank also points to Sallie Mae’s ability to capitalize on competitors exiting the market. As an example, they highlight how the lender expanded its market share by 60 basis points during the 2021-22 academic year following Wells Fargo’s withdrawal from the student loan market. Additionally, Bank of America emphasizes Sallie Mae’s focus on lending to high credit-quality consumers. They emphasize that less than 8% of borrowers at the time of originations had credit scores below 670.
Furthermore, the bank acknowledges Sallie Mae’s efficient business model. Since 2020, the company has adopted a strategy aimed at minimizing balance sheet growth while accelerating share repurchases through selling student loans at high execution levels due to its strong credit profile. This “loan sale arbitrage” strategy has enabled Sallie Mae to achieve impressive returns without needing to expand its capital base to sustain its industry-leading origination volumes.
While Bank of America paints a positive picture, they also recognize potential risks to their thesis. These include potential scrutiny from oversight organizations such as the Consumer Financial Protection Bureau and the increasing number of students opting to consolidate or refinance their loans with firms offering lower interest rates than Sallie Mae.
At the time of writing, Sallie Mae shares are trading 1.90% higher at $21.94, according to data from Benzinga Pro. This positive momentum reflects the market’s reaction to Bank of America’s bullish assessment and the overall favorable outlook for the student loan market.
