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Q & A Highlights

Q: Could you remind us what percentage of loans in the Grad Plus program you think are underwritable by the private sector and how Navient's products may differ from its peers? Also, do you think there might be any changes to the direct loan program which could be impactful to your business? A: The recent proposals about changes in federal education policy are complex, and it's unclear how they might expand the private loan market. Navient is confident in its ability to grow with existing products, particularly targeting graduate customers with high loan balances and low acquisition costs. Any changes to the direct loan program are uncertain, and Navient will continue to focus on its current plan while monitoring developments.

Q: The provision was up both in the felt portfolio and private credit due to increases in delinquent balances. Can you provide more color on what's happening there? A: The increase in delinquent balances is influenced by macroeconomic factors such as inflation and rising interest rates, which are creating pressure on borrowers. Additionally, the unique experience of student loans during the pandemic, with forbearance programs, has led to a rebound in credit statistics. Navient is proactively working with borrowers to help them repay their loans and is ensuring appropriate provisions are in place.

Q: Regarding strategic actions, what is the timeline for achieving the $204 million expense reduction, and is the intention to reach an earnings power similar to before these actions? A: The completion of the government services sale provides visibility into the timing of expense reductions, with expectations to achieve the $400 million target by mid-next year. The net savings and earnings power from ongoing operations are projected to be over $1 per share. Navient plans to share more information about growth initiatives in the second half of the year.

Q: On the NIM, should we expect it to stabilize going forward due to the slowdown in prepayments? Also, do you feel you have a good handle on delinquencies and reserves now? A: The NIM is expected to remain at the high end of the range in the near term, with some pressure anticipated in the second half due to expected rate cuts. Delinquencies were higher than expected, but provisions have been adjusted accordingly, and Navient will continue to monitor the situation.

Q: Could you talk about the spreads and return on equity of the new business you're putting on now? A: The new originations fit well into Navient's portfolio, which is built for mid-teens ROE. The securitization in the quarter met expectations, and the cost of funds aligns with plans for originations.

Q: What does "opportunistic" mean in terms of share repurchase strategy? A: Opportunistic share repurchase means balancing capital deployment between growth investments and returning capital to shareholders. The greater the discount to tangible book value, the more Navient would buy, contrasting with a more programmatic approach in the past.

Q: Is there a path to getting back to the 80 to 100 basis point range for the felt NIM over the medium term? A: Achieving the 80 to 100 basis point range would require a couple of rate cuts and stability in those rates. Once rates stabilize, the NIM could return to previous levels.

Q: If the government opportunity opens up for the in-school graduate market, would you consider strategic actions for the Earnest business, including a sale? A: Navient is focused on executing its current plan and will share more about the strategic direction of Earnest in the second half of the year. Any decisions regarding strategic actions will be considered in the future.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.