Synovus (SNV) organic growth displaces aid, costs are high – December 31, 2021
Synovus Financial Corp. (SNV – Free Report) benefits from the focus on strategic initiatives, better credit quality and higher interest income. However, escalating expenses due to investments in technology, high debt level and lack of diversification of the loan portfolio are the main short-term obstacles for SNV.
Zacks’ consensus estimate for Synovus earnings for the current year has been revised up slightly over the past 60 days.
The action is currently Zacks Rank # 3 (Hold). You can see The full list of Zacks # 1 Rank (Strong Buy) stocks today here.
Synovus shares have appreciated 7.1% in the past six months compared to industry growth of 7.3%.
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Synovus has recorded continuous organic growth over the past few years. Its loans registered a CAGR of 12.5% in the last five years until 2020. In addition, net interest income (NII) registered a CAGR of 13.9% during the same period, partially stimulated by acquisitions made during this period. Loans and NII improved in the nine months ended September 30, 2021. So, with commercial lending pipelines returning to pre-COVID levels and the US economy on the mend, the lending scenario is expected to return. improve over the coming period. We expect Synovus to remain well positioned to improve its NII in the coming quarters, driven by this tailwind.
Synovus is making significant progress on its “Synovus Forward” initiative, which was announced in March 2020. By the end of the third quarter of 2021, SNV had realized a pre-tax execution rate advantage of approximately $ 100 million through organizational efficiency, cost savings, branch consolidations and balance sheet management initiatives. This includes a reduction in expenses of approximately $ 50 million and income benefits worth $ 50 million.
Synovus is also streamlining its branch network and plans to close four branches in the fourth quarter, bringing total consolidations to 20 sites since the start of 2020. Through these initiatives, SNV expects to achieve forward execution rate advantages. taxes of an additional $ 75 million. , comprising $ 20-30 million in expense savings and $ 45-55 million in revenue benefits by the end of 2022.
Recovering from the unfavorable impact of the financial crisis caused by COVID, Synovus significantly reduced the percentage of loans in the residential construction and development and land acquisition portfolios. In addition, credit quality trends are expected to continue to show widespread improvement, with the release of provisions in the first nine months of 2021 on the basis of a more favorable economic outlook.
However, rising costs despite some cost reduction efforts can be a concern in the short term. Although costs have declined in the first nine months of 2021, Synovus spending has registered a CAGR of 11.8% over the past five years (2016-2020). As the bank intends to invest in technology and talent improvements to improve the user experience, these costs could weigh on its earnings expansion.
Synovus’ loan portfolio mainly comprises commercial and industrial loans as well as commercial real estate loans (nearly 77% as of September 30, 2021). Such high exposure can be risky for SNV, especially if it and the real estate industry as a whole weakens.
Long-term debt of $ 1.2 billion as at September 30, 2021, increased slightly sequentially and remained at high levels. In addition, cash and bank receivables of $ 483 million trended down from the level of the previous year. Therefore, given such a high debt burden and limited liquidity, Synovus may default on its short-term debt obligations if the economic situation worsens.
Actions to consider
Some better ranked actions in the banking space are Shore Bancshares, Inc. (SHBI – Free report), Southern First Bancshares, Inc. (SFST – Free report) and OZK Bank (OZK – Free report). Currently, SHBI and SFST each sport a Zacks Rank # 1 (strong buy), while OZK carries a Zacks Rank # 2 (buy).
In the past year, shares of Shore Bancshares have gained 42.1%, while shares of Southern First and Bank OZK have jumped 77.7% and 48.2%, respectively.
Over the past 60 days, Zacks ‘consensus estimate for Shore Bancshares’ current year earnings has been revised up 26.7%, while Southern First’s has moved 9 , 1% to the north. OZK Bank’s profit estimates for the current year have risen slightly over the past two months.