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Synovus' (SNV) Organic Growth Profile Aids, Rising Costs Ail

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Synovus Financial Corp. (SNV - Free Report) is benefiting from its focus on strategic efficiency initiatives, better credit quality and organic growth. However, escalating expenses due to investments in technology, high debt level and lack of diversification in the loan portfolio are SNV’s major near-term headwinds.

The Zacks Consensus Estimate for Synovus’s current-year earnings has been revised marginally upward over the past week. The stock currently carries a Zacks Rank #3 (Hold).

Shares of Synovus have appreciated 24.6% in the past six months compared with the industry’s growth of 14.4%.

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Synovus recorded continued organic growth in the last few years. Its loans witnessed a CAGR of 12.2% over the last five years through 2021. With commercial loan pipelines returning to pre-COVID levels and the U.S economy on the mend, the lending scenario is expected to improve in the upcoming period. SNV will likely remain well-poised to enhance its net interest income (NII) in the quarters ahead, driven by a favorable lending environment and an improved deposit mix.

Synovus is making a significant progress on its "Synovus Forward" initiative, announced in March 2020. In 2021, SNV achieved a pre-tax run-rate benefit of approximately $110 million on the back of organizational efficiency, cost savings, branch consolidations and balance-sheet management initiatives. This comprised approximately $55 million of expense reduction and $55 million of revenue benefits.

Efficiency initiatives in 2022 entail closurean additional 15% of its branch locations, with an estimated run-rate savings of $12 million by 2022 end. Through these initiatives, SNV expects to achieve pre-tax run rate benefits of $175 million by 2022 end with an additional $65 million comprising $15-$20 million of expense savings and $45-$50 million of revenue benefits.

Recuperating from the unfavorable impact of the COVID-led financial crisis, Synovus is extensively scaling down criticized and classified loans. Also, credit quality trends are expected to continue showing a broad-based improvement, with the reversal of provision for credit losses of $106.2 million in 2021 on the back of a more favorable economic outlook against provision expenses of $355 million in 2020.

However, rising costs despite certain cost-saving efforts can be a near-term concern. Though costs declined in 2021, Synovus’ expenses saw a CAGR of 9.9% over the last five years (2017-2021). As the bank intends to invest in technology refinements and talent to improve user experience, such costs might weigh on its bottom-line expansion.

The loan portfolio of Synovus comprises majorly the commercial and industrial as well as the commercial real-estate loans (nearly 78% as of 2021end). Such a high exposure can be risky for SNV, especially if the same and the overall real estate sector weaken.

Long-term debt of $1.2 billion as of Dec 31, 2021, increased slightly sequentially and remained at steep levels. Also, cash and due from banks of $432.9 million witnessed a downtrend from the prior-year level. Hence, given such a high-debt burden and limited liquidity, Synovus might not meet debt obligations in the near term if the economic situation worsens.

Stocks to Consider

Some better-ranked stocks in the banking space are First Business Financial Services (FBIZ - Free Report) , UBS Group AG (UBS - Free Report) and PCB Bancorp (PCB - Free Report) . At present, both FBIZ and UBS sport a Zacks Rank #1 (Strong Buy), while PCB carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Over the past year, shares of First Business have jumped 56.5%, whereas the stocks of UBS and PCB have rallied 30.9% and 75.6%, respectively.

Over the past 30 days, the Zacks Consensus Estimate for First Business’ current-year earnings has been revised 9% upward, while the same for UBS has moved 8.5% north. Moreover, current-year earnings estimates for PCB Bancorp have moved 14.4% up over the past month.