It has been about a month since the last earnings report for Synovus Financial (SNV - Free Report) . Shares have added about 9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Synovus due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Synovus Q3 Earnings Miss Estimates, Costs Increase
Synovus reported adjusted earnings of 97 cents per share lagging the Zacks Consensus Estimate of $1. However, the bottom line was 2.9% higher than the prior-year quarter figure.
Escalating expenses and provisions were the undermining factors. Also, deterioration of credit quality was a headwind. However, higher revenues, backed by strong loan balances, stoked organic growth. Lower efficiency ratio and rising fee income were other positives.
Including certain non-recurring items, net income available to common shareholders came in at $127.4 million or 83 cents per share compared with $99.3 million or 84 cents per share recorded in the prior-year quarter.
Top Line Robust, Expenses Flare Up
Adjusted total revenues in the third quarter came in at $494.2 million, up 36.2% year over year. Further, the top line outpaced the Zacks Consensus Estimate of $488.1 million.
Net interest income surged 37.9% year over year to $402.1 million. Yet, net interest margin shrunk 20 basis points (bps) to 3.69%.
Non-interest income climbed 23.8% to $88.8 million, including a favorable adjustment in the fair value of private equity investments. Rise in almost all components of income drove this upside.
Non-interest expenses were $276.3 million, flaring up 25.4% year over year. Notably, rise in almost all components of expenses resulted in this increase.
Adjusted efficiency ratio came in at 51.71% compared with 55.55% reported in the year-earlier quarter. A decline in ratio indicates improvement in profitability.
Total deposits totaled $37.4 billion, decreasing 1.4% sequentially. Total loans, however, climbed slightly from the prior quarter to $36.4 billion.
Credit Quality Worsens
Credit quality deteriorated for Synovus in the September quarter.
Non-performing loans were up 6.9% year over year to $115.9 million. Non-performing loan ratio came in at 0.32%, contracting 10 bps.
Total non-performing assets amounted to $151.3 million, rising 29.4% year over year. Non-performing asset ratio shrunk 4 bps to 0.42%.
Net charge-offs rose 30.6% on a year-over-year basis to $19.9 million. The annualized net charge-off ratio was 0.22%, down 2 bps. Provision for loan losses was up 84% to $27.6 million.
Strong Capital Position
Tier 1 capital ratio and total risk-based capital ratio were 10.27% and 12.30%, respectively, compared with 10.57% and 12.36% as of Sep 30, 2018.
Also, as of Sep 30, 2019, Common Equity Tier 1 Ratio (fully phased-in) was 8.96% compared with 9.90% in the year-ago quarter. Tier 1 Leverage ratio was 9.02% compared with 9.58% recorded a year ago.
Capital Deployment Update
During the quarter, the company repurchased $343.5 million in common stock or 9.6 million shares.
For 2019, management projects average total loan growth of around 5.5-7.5% and deposits growth of about 3-5%, with deposits growing at a pace that supports loan growth, while maintaining an appropriate loan-to-deposit ratio consistent with earnings operating range of 95% to 97%.
In 2019, management expects tangible NIE to decline sequentially in the third quarter and fourth quarter and average approximately $250 million.
Given full-year growth expectations, along with the current forward curve, management estimates revenue growth to be at the lower end of the 5.5% to 7.5% range.
Adjusted total non-interest expenses are projected to increase 2-4%, net of synergies related to the FCB acquisition. Merger-related cost savings are likely to exceed $30 million, well ahead of original 2019 estimate of $20 million.
The company expects net charge-off ratio of 15-20 bps.
Management expects the tax rate to be at 24-25% in 2019.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month.
At this time, Synovus has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Synovus has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.