Monday, July 21, 2008

Student Loan Corporation Steps Up Risk

Student Loan Corporation (STU) which is 80% owned by Citigroup (C) announced worsening results. Compared to the same quarter last year they dropped earnings by 40%. The press release went to great lengths to point out that they were able to successfully securitize and therefore off load much of their originations.

As any lender they are looking for ways to increase their spread. Read this quote:

“This increase was driven by higher average loan balances as well as an increase in net interest margin. Net interest margin for the quarter was 1.89%. This 15 basis point improvement over the second quarter of 2007 was driven by management’s repositioning of the portfolio towards higher rate loans, partially offset by a $20 million increase in funding costs due to higher credit premiums over LIBOR. The trend towards higher credit premiums is expected to continue as the Company refinances its maturing term debt under less favorable conditions.”

Basically they are taking more risk to generate more yield while at the same time the market is taking more risk on their paper. Sounds like a mugg’s game and STU will not be the winner.

How many times have we heard that one? Just take more risk and you will make more money. Student Loans needs to articulate a risk strategy. Right now they seem to be flip flopping around reflexively reacting to basis points changes in the risk spectrum. The strategy is reactive not proactive.