Synovus Stock: Delivering On Growth And Leverage (NYSE:SNV)

There have long been vocal doubters on Synovus (NYSE:SNV), and the company’s share price performance over the last couple of years has lagged its peer group, but with above-average fourth quarter results and guidance for 2023, Synovus is getting a little more positive attention lately. While I do think some of management’s growth targets for 2023 could prove challenging (if not ambitious), 3% to 4% core growth can drive a respective target price and anticipated return from here.

A Few Moving Parts, But A Solid Quarter On Balance

There were than a couple of adjustments to make to translate Synovus’s reported results into “core” results (and not all analysts make the same adjustments), but on the whole Synovus had a positive quarter with a nearly 2% beat at the pre-provision line and no real areas of concern.

Core revenue rose 19% year over year and more than 3% quarter over quarter, beating sell-side expectations by less than 1% (about $0.02/share). Net interest income (FTE basis) rose more than 28% yoy and 5% qoq, beating by close to 2% ($0.045/share). Synovus saw solid growth in earning assets (up 2.4% qoq), as well as further improvement in net interest margin (up 11bp qoq to 3.6%).

Core fee-based income fell 13% yoy and 4% qoq, missing by about 5% (close to $0.03/share). The major line-items were close to expectations, with service charges up 1%, brokerage up 17%, fiduciary/asset management down 2%, and cards up 5%, with the miss driven by the always-mysterious “other”.

Core operating expenses rose 7% yoy and 5% qoq, coming in a bit better than expected in absolute terms and about 40bp better in efficiency ratio terms (to 50.9%). Core pre-provision profits rose 34% yoy and 2% qoq, beating by close to 2% and by around $0.025/share. Provisioning expense was a bit higher than expected, but not significantly so.

Healthy Commercial Lending And Manageable Funding Costs

Synovus did reasonably well in terms of balance sheet growth, margins, and credit quality, and guidance for 2023 was rather strong where loan growth was concerned.

Loans rose almost 3% qoq on an end-of-period basis, with core business lending up about 5% – comfortably ahead of system-wide C&I loan growth. Getting to an “apples to apples” number for commercial real estate lending takes some adjustments, but core loan growth was in the 3% range, and likewise comfortably above the overall growth in the industry. Both middle-market C&I and CRE lending growth have been targeted efforts on the part of management.

Loan yields rose 76bp qoq to 5.36%, with commercial yields up 87bp to 5.52%. Credit line utilization has continued to improve, but I don’t expect significant growth from here given that I expect most businesses to work down their net working capital in 2023.

On the deposit side, overall deposit growth of 2.5% (qoq end of period) or 1.1% (qoq average balance) was a fair bit better than what most banks are reporting. So too as was the performance with non-interest-bearing deposits, which declined 2% on an average balance basis and 4% on a period-end basis.

Deposit costs rose 76bp yoy and about 50bp qoq to 0.88%, with interest-bearing deposit costs up 116bp yoy and 74bp qoq to 1.34%. Those numbers aren’t too out of line with the averages, and so not surprisingly the bank’s 27% cumulative interest-bearing deposit beta and 18% total cumulative deposit beta are middle of the pack-ish.

I do have some concerns about Synovus being able to cost-effectively fund the growth it’s seeking for 2023. Management guided to a pretty healthy 5% to 9% loan growth target, and with a loan/deposit ratio of 87% and non-interest-bearing deposits now about 34% of deposits, there could be some margin risk here. Management thinks they will grow core deposits at a low-to-mid single-digit rate in 2023 and doing so (and not having to rely on more expensive brokered deposits and/or FHLB advances or debt) will be important to net interest income performance.

The Outlook

Synovus is vulnerable to a weaker economy in 2023, but I think the Southeast region in which it operates will hold up better. Likewise, while competition in this region has been intense for some time, the company seems to be holding its own against newcomers like Fifth Third (FITB) and U.S. Bancorp (USB) and up-and-comers like Pinnacle (PNFP).

Continuing to execute on the company’s plans to grow its middle-market lending operations (particularly in Florida), as well as its CRE and specialty lending operations will go a long way toward driving healthy core earnings growth. I’m likewise bullish on new fee-generating initiatives like its MAAST banking-as-a-service platform, particularly for markets like consumer finance.

Moving the model a year forward, I’m looking for medium-term core earnings growth of around 4% and long-term core earnings growth of 3%-4% from Synovus. Management announced a meaningful new buyback ($300M), and I expect capital returns to increase over time.

Between discounted core earnings, ROTCE-driven P/TBV (2.2x), and P/E (10x), I believe Synovus is undervalued below the low-$50’s and could even have upside into the high-$50’s if sentiment shifts more positively for banks.

The Bottom Line

These shares have outperformed since my last update, helped, I think, by more confidence on management’s growth targets and opportunities to combine organic loan and fee growth with operating leverage. Competition and sentiment both remain threats, but I continue to believe that Synovus is undervalued at today’s price.