All the long-term and short-term ratings, along with assessments of Synovus Bank, primary banking subsidiary of Synovus Financial Corporation (SNV - Free Report) , have been upgraded by Moody's Investors Service, the rating arm of Moody's Corporation (MCO - Free Report) . However, the rating firm’s outlook for the bank has been affirmed at “stable”.
Long-term deposit rating of Synovus Bank has been upgraded to A3 from Baa1 and issuer rating from Ba1 to Baa3. Further, counterparty risk rating has been upped to Baa2 from Baa3, while long-term counterparty risk assessment has been upgraded to Baa1(cr) from Baa2(cr).
In addition, short-term counterparty risk rating has been upgraded to Prime-2 from Prime-3. Notably, short-term deposit rating and short-term counterparty risk assessment has been maintained at Prime-2 and Prime-2(cr), respectively. Also, the standalone baseline credit assessment of baa3 for the bank has been upped to baa2.
Rationale behind the Upgrade
The outlook revision came on the back of Synovus’ increased diversified revenue sources on the successful integration of FCB Financial Holdings in early May.
Per Moody’s, improved risk profile of the bank has led to a better financial performance. On the exit of mostly residential construction, development and land loans, which are risky and more volatile asset class, the bank has recorded around 2% of this class of its total loans as of Mar 31, 2019, down from 25% as of Dec 31, 2008. However, per Moody’s, Synovus still has huge commercial real estate (CRE) concentration affecting the credit profile.
Over the last few years, deposit costs are on the rise, along with increasing short-term interest rates. Notably, due to high portion of CDs on acquisition of FCB, Synovus’ deposit costs have rose considerably. Nevertheless, Moody’s expects the bank to remain profitable owing to its improved core operational efficiency, despite elevated funding costs and a lower net interest margin.
Though the FCB acquisition was an all-stock transaction, share repurchases led to reduction in Synovus' capitalization till date in 2019. Moody’s expects this to continue modestly.
Reasons for Rating Upgrade or Downgrade
Reduction in CRE concentration, along with a lower-cost deposit base and healthy profitable position, will improve BCA, leading to an upgrade in ratings.
However, considerable worsening in credit quality or profitability might impact Synovus' BCA, displaying a weaker capital profile which might lead to a downgrade in ratings.
The rating upgrades are valuable for Synovus since these preserve investors’ confidence in the stock and boost creditworthiness in the market. Furthermore, lower non-performing assets and improving operating efficiencies will help the stock sustain investors’ interest.
Synovus currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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