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On Oct 4, 2013, we upgraded our recommendation on Synovus Financial Corporation (SNV - Analyst Report) to Outperform from Neutral, based on its cost-curtailment initiatives and strong capital position. However, regulatory issues, a low interest environment and significant exposure to residential real estate markets remain matters of concern.

Why Upgrade?

In the current competitive banking environment, Synovus continues to reduce operating costs, implement strategies to broaden its loan portfolio and increase non-interest income. Since 2010, the company has ushered strategic initiatives to reduce expenses and streamline its processes. Notably, the expense reduction measure has led to a non-interest expense fall of 10.5% in 2011 and 9.7% in 2012 and 11.6% year-over-year fall in first-half 2013.

Synovus is well positioned from a balance sheet perspective. As of Jun 30, 2013, its capital ratios were at a well-capitalized level. Notably, about $675 million of net deferred tax assets (DTAs) continue to be excluded from regulatory capital as of Jun 30, 2013. The prohibited DTAs are expected to decrease over time, and thereby create additional regulatory capital in the future.

In Jul 2013, Synovus repurchased $968 million of its Series A Preferred Stock, which was issued to the U.S. Department of the Treasury as part of the company’s participation in the TARP. After settling the TARP obligation, we expect Synovus to deploy its capital through dividend hike and share repurchase, which will further enhance investors’ confidence in the stock.

Despite the macro pressure, Synovus’ credit quality continues to normalize. Credit metrics have been gradually improving since 2009 through first-half 2013. Further, we are impressed with the overall improvement in delinquencies and net charge-offs. This is expected to continue, thereby boosting future earnings.

For Synovus, over the last 60 days, the Zacks Consensus Estimate for 2013 and 2014 remained stable at 14 cents and 20 cents per share, respectively. Hence, Synovus currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some well performing Southeast banks include SY Bancorp Inc. (SYBT - Snapshot Report) and Simmons First National Corporation (SFNC - Snapshot Report) with a Zacks Rank #1 (Strong Buy), while WesBanco Inc. (WSBC - Snapshot Report) carries a Zacks Rank #2 (Buy).

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