By Sam Boughedda
Morgan Stanley analysts initiated Underweight ratings on student lender companies Navient (NASDAQ:NAVI) and Sallie Mae (NASDAQ:SLM).
The analysts said in a research note that valuations look cheap, but near-term risks skew negative, while they believe consensus earnings are likely headed lower on near-term headwinds.
The headwinds are higher rates, rising delinquencies, and political/regulatory headline risk.
"In the near term, private student lending has a number of key growth tailwinds. The pandemic is finally moving into the rear view mirror, driving what could be the first year of enrollment growth since 2019 as students return to a more normal campus experience," wrote the analysts. "But near-term risks of higher rates, rising delinquencies, FFELP loan runoff take our EPS below consensus."
"Once a single company, SLM and NAVI are now in different areas of student lending. SLM provides private loans to students in school as the cost of college is typically above federal borrowing limits. NAVI holds the largest portfolio of government-guaranteed loans from the FFELP program that ended in 2010, also offering private loan refi for those who have graduated. In the near term, the currently rapid rate of interest rate increase drives downside earnings risk at each. At SLM, we see risk of gain on sale margins falling, while at NAVI higher rates lowers the student loan refi opportunity," added the analysts.
They also pointed to credit risks being on the rise and stated the student debt forgiveness package helps consumers manage their debt loads, but the end of the payment moratorium at YE22 adds risks.
"Our 2023/24e EPS estimates are 7-8% below consensus at SLM and 6-7% lower at NAVI," the analysts continued.
Navient shares are down more than 3% Friday, while SLM is trading 2% lower.