SYNOVUS FINANCIAL CORP.
Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) for
The Rating Outlook was revised to Negative from Stable.
Key Rating Drivers
Ratings Affirmed: The affirmation of
Stable Business Profile: SNV's franchise continues to mature with a focus on growing its capital markets, wealth, and treasury and payments businesses, to supplement its core commercial lending operations. If successfully executed, growth in these businesses would help the bank increase noninterest income and revenue diversity, although these segments remain highly competitive. Other objectives such as SNV's banking as a service platform, Maast, appear more aspirational and more likely to unfold over time. More immediately, recent expense initiatives have helped improve efficiency and the bank remains focused on expense discipline.
Asset Quality Trending Weaker: Asset quality metrics which to date have been supported by a buoyant regional economy, have begun to show signs of weakening with YoY increase on non-accruing loans and net charge-offs in 2023. Among mid-tier regional peers, SNV was among the banks experiencing the largest YoY deterioration in its ratio of impaired loans, which increased by 59 bps to 1.19%. While economic conditions have remained better for longer, some economic deceleration in 2024 remains likely.
Fitch notes that SNV's ratio of commercial real estate (CRE) to risk weighted assets (RWA) of 227% remains above the peer median of 175% and that segments that are more vulnerable such as multifamily and office CRE make up 9% and 4% of loans respectively. Additionally, construction loans, which are largely related to multifamily projects, constitute 8% of total loans. Fitch anticipates that these segments could experience greater headwinds with supply/demand dynamics normalizing in multifamily, and remote work arrangements continuing to pressure office occupancy. As a result, Fitch believes that SNV is could continue to experience a weakening of asset quality.
Profitability Trending Lower: SNV experienced greater pressure to its net interest margin (NIM) relative to peers, declining 11bps compared to 28 bps increase in the median for Fitch's mid-tier regional bank peer group, in 2023. This contributed to its ratio of operating profit to risk-weighted assets of 1.37% declining to greater degree than peers. The expectation of flat or low loan growth and continued margin pressure, is likely to produce lower net interest income (NII) in 2024. Similarly, higher levels of loan loss provisioning could further pressure earnings if credit quality weakens materially. With noninterest income making up roughly 19% of SNV's revenue, fee income is likely to only provide modest revenue diversity with which to offset lower spread income. The impact of lower NII will be partially mitigated by the cost savings achieved from recent expense initiatives, which helped improve the bank's efficiency ratio to 57%, the third best among peers.
Capital Lower than Peers': SNV's regulatory capital ratios have gradually increased from pre-pandemic levels, with its common equity Tier 1 (CET1) ratio at 10.22% as of 4Q23, in line with guidance of a ratio between 10%-10.5%. While Fitch notes this improvement, Fitch also notes that its CET1 ratio remains below the peer median of 10.94%, despite significant exposure to higher risk CRE and construction lending categories. In this light, Fitch views any contemplated stock repurchases cautiously, particularly with a possibility of weaker economic and revenue outlook in 2024. More positively, SNV experienced notable improvement in AOCI in 2023, which moved its tangible common equity ratio of 6.84%, closer to the peer median of 7.00%.
Deposits Stable: SNV maintains a solid deposit franchise with over 10% market share in the majority of the markets in which operates. This helped the bank maintain deposit stability through the turbulence that affected regional banks in the 1H23 and growing deposits 3.8% in 2023, although this was partially achieved through a higher use on brokered and time deposits. Despite use of these higher cost deposits, its cost of deposits of 3.38% remained below the peer median of 3.43% at 4Q23. Likewise, its loan-to-deposit ratio of 85.7% compares favorably to the peer median of 88.2%.
Holding Company and Subsidiaries: SNV's IDRs and VR are equalized with those of SNB, reflecting its role as the bank holding company. Bank holding companies are mandated in the
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Outsized loan losses relative to peers or sustained losses greater than twice the bank's four-year average of NCOs of 0.46%, could result in a downgrade;
Deterioration in earnings such that SNV's ratio of operating profit to RWA were to drop below 0.7 for the year could drive negative action;
SNV's ratings remain sensitive to its management of capital and negative rating action could follow if the CET1 ratio were to decline below 9.0% without a credible plan to build capital above that level within a reasonable timeframe;
Ratings would also be sensitive to outsized attrition of customer deposits that required significantly higher levels of wholesale funding or brokered deposits.
If SNV, the holding company, becomes undercapitalized or management sustains common equity double leverage above 120%, Fitch could notch its IDR and VR down from the ratings of SNB. The holding company could also be notched down from the bank ratings if cash and liquid assets cover less than four quarters of required cash outlays.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Over the longer term, positive momentum could develop from SNV maintaining a significantly higher CET1 capital ratio that is more in line with the peer median, indicating more a conservative approach to capital management;
Positive rating momentum could also result should SNV reduce its CRE concentration and/or further diversify its revenue mix without increasing its risk appetite;
Positive action would be contingent on stronger earnings, measured by operating profit to RWA consistently in line with higher-rated banks.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Long- and Short-Term Deposit Ratings
SNVs long-term deposits are rated one notch higher than its Issuer Default Rating (IDR) and senior unsecured debt because
SNV's preferred stock rating is notched four levels below the entity's Viability Rating (VR), two times for loss severity and two times for non-performance. SNV and SNB's subordinated debt is notched one level below the respective entities' VRs for loss severity. In accordance with the 'Bank Rating Criteria,' this reflects alternate notching to the base case of two notches due to Fitch's view of
SENIOR DEBT
SNV's and SNB's senior debt ratings are equalized with the respective entities' Long-Term IDRs, which reflects expected average recoveries. SNV's senior debt rating reflects the use of alternate notching for the entity's subordinated debt of one notch in which case the agency does not notch down senior unsecured debt.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
GOVERNMENT SUPPORT RATING (GSR)
SNV and SNB's GSRs are rated 'ns' and there is limited likelihood that these ratings will change over the foreseeable future.
LONG- AND SHORT-TERM DEPOSIT RATINGS
SNB's long-term deposit rating is sensitive to changes in the company's Long-Term IDR. SNB's short-term deposit rating is sensitive to changes in the long-term deposit rating and Fitch's assessment of SNV's funding and liquidity profile.
SENIOR AND SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings for SNV's and SNB's senior and subordinated debt are sensitive to any change to the respective entities' VRs. The ratings for SNV's preferred stock are sensitive to any change to SNV's VR.
VR ADJUSTMENTS
The Asset Quality score of 'bbb' has been assigned below the implied 'aa' category score due to the following adjustment reason(s): concentrations (negative), and historical and future metrics (negative).
The Earnings & Profitability score of 'bbb' has been assigned below the implied 'a' category score due to the following adjustment reason(s): revenue diversification (negative).
The Funding & Liquidity score of 'bbb' has been assigned below the implied score 'a' category score due to the following adjustment reason(s): deposit structure (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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