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Fitch Publishes 'BB' Ratings for SLM Corporation; Outlook Positive
April 5, 2017 / 4:38 PM / 8 months ago

Fitch Publishes 'BB' Ratings for SLM Corporation; Outlook Positive

(The following statement was released by the rating agency) NEW YORK, April 05 (Fitch) Fitch Ratings has published a Long-term Issuer Default Rating (IDR) of 'BB' for SLM Corporation (SLM) and Sallie Mae Bank. The Rating Outlook is Positive. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRs, VR, AND SENIOR DEBT SLM's ratings reflect its market leading position in the U.S. private education loan industry, predominately prime loan portfolio and high co-signor rates, and the non-dischargeability of private student loans in bankruptcy. Rating constraints include SLM's monoline business model, the duration mismatch between demand deposits and longer-term student loans, and the sensitivity and stability of the deposit base to rising interest rates. The Positive Outlook reflects the expectation for stable credit performance in the face of increased portfolio seasoning, as a larger percentage of loans have entered repayment, enhanced earnings stability resulting from the reduction in gain on sale income, solid capitalization, improved funding diversification, with the inaugural unsecured debt issuance, and continued execution on growth and risk management objectives following the company's separation from Navient Corporation in 2014. Asset quality remains solid as the portfolio has continued to season and a larger percentage of loans have entered repayment. Net charge-offs as a percentage of average loans in repayment increased to 0.96% in 2016 compared to 0.82% in 2015 driven primarily by portfolio seasoning. The strong credit performance is supported by the 89% co-signer rate on loan originations and a prime-focused underwriting strategy as evidenced by the average FICO score of 748. Profitability has stabilized over the past year as the asset growth cap on SLM previously enforced by the FDIC was eased in 2015. This enabled SLM to cease selling a portion of the loans it originated, which had previously increased earnings volatility. Going forward, Fitch expects profitability to be more stable as gain on sale income will no longer be a significant component of SLM's revenue. SLM's net interest margin increased to 5.68% in 2016 from 5.49% in 2015, driven by loan growth which was partially offset by a higher cost of funds due to an increase in LIBOR. The stability of NIM will remain dependent on the stickiness of SLM's deposit base and its sensitivity to changes in interest rates. Capitalization remains solid with a common equity Tier 1 (CET1) ratio of 12.6% at the end of 2016 compared to 14.4% at the end of 2015. The decline in the CET1 ratio reflects strong loan growth of 8% in 2016. SLM also completed its first Dodd-Frank Act Stress Test (DFAST) exercise in 2016, which concluded that SLM has sufficient capital levels to support its student loan portfolio in the event of severe stress. Fitch expects SLM's CET1 ratio to trend lower in the near-term as loan growth remains elevated, but the firm is expected to maintain a cushion above well-capitalized requirements. Although SLM's funding profile has improved, it remains a ratings constraint. Prior to the unsecured debt issuance, SLM had targeted a funding mix of 80% deposits and 20% securitization. The majority of SLM's deposits are brokered, which are considered less stable than traditional retail deposits. Fitch also believes that the duration of brokered deposits does not align as well with student loan assets as would securitizations and unsecured debt, particularly during periods of rising interest rates. While Fitch views last week's unsecured debt issuance positively, as it increases SLM's funding flexibility, Fitch believes the transaction was driven primarily by an opportunity to refinance the preferred securities at a lower rate and does not expect unsecured debt issuance to become a meaningful portion of SLM's funding mix over the near-term. SUPPORT RATING AND SUPPORT RATING FLOOR SLM has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, SLM is not systemically important, and therefore the probability of sovereign support is unlikely. SLM's IDRs and VRs do not incorporate any support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Fitch's 'B+' and 'B' ratings on the Series A and Series B preferred shares, respectively, reflect their linkage the IDRs. The notching reflects the subordinated payment priority and weaker recovery prospects for these instruments, in accordance with Fitch's 'Global Bank Rating Criteria'. The Series B preferred shares are rated one notch below the Series A preferred shares, reflecting in part the non-cumulative nature of this instrument. Fitch expects the Series A preferred shares to be redeemed over the near-term with proceeds from the unsecured debt issuance. DEPOSIT RATINGS The uninsured long-term deposit ratings of Sallie Mae Bank are rated one-notch higher than SLM's long-term IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. RATING SENSITIVITIES IDRs, VR AND SENIOR DEBT Ratings could be upgraded if asset quality performance remains solid, as the portfolio seasons, profitability remains relatively stable through a rising interest rate cycle, internet-based deposits provide further evidence of durability in a rising rate environment, and SLM continues to expand the company's risk management infrastructure. Longer-term, ratings could also benefit from enhanced funding flexibility, including reduced reliance on brokered deposits, a higher unsecured funding component, successful execution on planned asset diversification, as measured by sustained profitability, further seasoning of the loan portfolio, and the maintenance of strong capitalization ratios. Ratings could be negatively impacted by deterioration in portfolio credit quality, a weakening funding profile, rapid asset growth, declining capital levels a material change in strategic objectives and priorities, such as rapid expansion into other areas of consumer lending, or increased political uncertainty pertaining to the student loan industry. SUPPORT RATING AND SUPPORT RATING FLOOR Since SLM's Support Rating and Support Rating Floor are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The preferred stock ratings are sensitive to any changes in SLM's VR. DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change in SLM's long- and short-term IDRs. Fitch has published the following ratings: SLM Corporation --Long-term IDR 'BB'; --Short-term IDR 'B'; --Support Rating '5'; --Support Rating Floor 'NF'; --Viability Rating (VR) 'bb'; --Series A Preferred Stock 'B+'; --Series B Preferred Stock 'B'. Sallie Mae Bank --Long-term IDR 'BB'; --Short-term IDR 'B'; --Support Rating '5'; --Support Rating Floor 'NF'; --VR 'bb'; --Long-term Deposits 'BB+'; --Short-term Deposits 'B'. Fitch has assigned the following rating: SLM Corporation -- Senior Unsecured 'BB'. The Rating Outlook is Positive. Contact: Primary Analyst Jared Kirsch, CFA Associate Director +1-212-908-0332 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Michael Taiano, CPA Director +1-646-582-4956 Committee Chairperson Nathan Flanders Managing Director +1-212-908-0827 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021699 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT <a href="">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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