Synovus Financial Corp.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Synovus Financial Corp. is a regional financial services company, operating mainly in the Southeast U.S. It offers various services including commercial banking, insurance, and wealth management services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Synovus operates in a competitive industry with a multitude of regional and national banks, lacking a distinct competitive advantage, making its moat rather narrow.

Business Overview:

  • Revenue Distribution: Synovus primarily generates its revenues from net interest income, which depends on the spread between lending and borrowing rates. This is augmented by fee income from credit card and other services, as well as a smaller portion of trading income. The bank segments its reporting into three core areas: Wholesale Banking, Community Banking, and Treasury and Corporate Services.
  • Industry Trends: The banking industry is undergoing rapid technological change and increasing regulation, which requires continued investment in technology. Furthermore, there’s a strong pressure from fintech companies that are trying to take market share away from established players. The increased volatility of interest rates in the recent years also represents additional risk to the business.
  • Margins: Net interest margins are susceptible to interest rate fluctuations. Given the competitive environment, Synovus is challenged to maintain higher net interest margins, therefore, has been experiencing shrinking operating margins over the past several years.
  • Competitive Landscape: Synovus operates in a highly competitive environment, facing both regional and national players. Competition is driven by interest rates, service offerings, geographical presence, and technology. Many larger banks have more financial resources to invest in technology or improve the scale of their business. This makes it difficult for a regional bank like Synovus to establish a large competitive advantage.
  • What Makes Synovus Different: The company is focused on the Southeast region of the U.S., has been recognized for excellent customer service, and focuses on developing local expertise. However, none of these characteristics offers a wide moat because they can be relatively easily copied by competitors.
  • Other Important Factors: The company is trying to increase and improve its digital capabilities which helps to improve convenience and reduce cost for the consumer. They are also growing in wealth management in the southeast which is a big market. Finally, they are also trying to increase business loans and have also improved their credit ratings to A-.

Financial Analysis:

  • Income Statement:
    • Net interest income in 2023 was $1,282,518 (in thousands), which is down compared to 1,403,166 in the previous year (2022). This decline is concerning. The majority of the revenue for banks comes from net interest income. The bank has mentioned that their net interest income was under pressure because of increased cost of deposits as interest rates went up.

Net interest income has reduced because of a change in the interest rate environment. This is a big reason why banks have been performing worse in the past year. * The company’s total revenue for 2023 is $1,678,491 (in thousands) which is slightly less than $1,748,553 from the previous year. However, the company’s net income is $560 million, and adjusted for one-time items (gains from sales of loans), its at $570 million. It must be noted that adjusted net income in 2022 was $629 million. This means that this year’s profits were lower than the previous year.

Earnings have dropped in the past year. In order to make the company more profitable, management needs to take a look at both expense management as well as revenue growth.

  • Balance Sheet Health:
    • The company has a robust cash position, totaling to $67,729,000 (in thousands). Total liabilities amount to $58,728,958, with total stockholders equity at $5,972,620. The bank is in a healthy spot in terms of assets and liabilities.
    • The bank has significantly improved on liquidity in recent years which helps mitigate the risk for bank runs.
    • The CET1 ratio is a capital ratio that is set by regulatory bodies, and its ratio is 10.9, above its regulatory requirement of 8%

A high CET1 ratio is an indicator of a strong balance sheet, giving the investors more faith and stability in the company.

  • Loan Portfolio:
    • The loans outstanding total to $48.5 billion. The largest portions are in commercial and industrial loans (34.6B) and Commercial Real Estate (7.1B). Credit Quality metrics have generally shown improvement year over year. Non-performing loans continue to be below 1% which is a strong point for the company.

The loan portfolio is diversified across various industries with no concentration in any particular industry. The management team has been focusing on improving credit quality which helps in reducing risk.

  • Recent Concerns:
    • In the last earnings call, management admitted that “Net interest income came in below our expectations due to lower loan yields and higher deposit costs” due to rate changes in the past year. They are expecting that the pressure on net interest income will subside as interest rates may stabilize in the future.

High interest rates have impacted the bank negatively, reducing their income and margins. They are expecting for it to stabilize. * The company has also had a write down of $171 million due to the sale of certain investment securities, which also increased its costs. * In 2022, one of the senior officers for Synovus got charged with making a false statement to a mortgage company. However, management believes that it will not have a significant impact on the company’s future financials, as that officer was the head of a single area within the company.

This news created some negative sentiment in the company’s stock, which is not ideal for the stock price.

  • Recent Positives:
    • The company has consistently increased its return to stockholders in the past years, and it continues to do so as its core business and new acquisitions are showing positive results.
    • The company has also been able to improve credit rating to A- which is a good sign of stability in the company and the loans that it is holding.

Moat Analysis:

Based on the analysis, Synovus possesses a very narrow moat that is largely based on its local economies of scale. Here is the breakdown:

  • Intangible Assets: While Synovus does have a brand recognition in its operating region, this provides minimal price advantages over competitors that offer similar services. The value of these assets cannot be stated, and doesn’t really give a long-term advantage.
  • Switching Costs: Although people don’t switch their banks often, it is not a particularly difficult task. Switching costs don’t form a huge barrier to entry for other banks, but it does give a slight lock on customers who prefer to stay with an established institution.
  • Network Effects: The network effect in banking is typically not that strong. The services of a bank aren’t worth that much more as other people decide to become their clients. Though certain banks may become preferred by other institutions which allows for an increase in income and brand awareness, the value is not big enough to form a wide moat.
  • Cost Advantages: The company has some level of cost advantages through effective operation in its region, but it lacks unique assets that lead to long-term pricing power.

Based on all these factors, we rate the company’s moat as 2/5. The moat is a combination of minor switching costs and some scale advantages from its position in its geography. While that’s not bad, it’s not a particularly robust moat to ward off competitors in the long term. It could also be easily broken by technology innovations.

Risks to Moat and Business Resilience:

  • Interest Rate Sensitivity: Synovus’ revenues are sensitive to changes in the interest rate environment, which makes the earnings highly volatile and hard to predict.
  • Credit Quality: Even though the company has been improving on credit quality, its exposure to any major economic downturn could drastically increase the number of loan defaults, which will impact future performance.
  • Competition: The financial services industry is highly competitive, and Synovus faces competition from larger regional and national banks that have a lot of capital to invest in technology, and for growth.
  • Regulatory Changes: Constant and new regulations in the banking industry can increase costs and constrain their performance.
  • Technology: Rapid technological advancements may lead to disruption to traditional financial services.

The banking industry has a multitude of risks involved because of the dynamic nature of the economy and regulations.

Despite these risks, Synovus has shown resilience in the past, through its long history. It remains a well-established and trusted institution in its region. Its diversified business model also helps it in facing risks because its revenue streams are well diversified, thus, reducing risk.

Understandability:

The business of banking is simple in principle, but very complex in practice. Analyzing the financials of a bank requires a deeper understanding of accounting and other financial concepts. Understanding loan risks, interest rate sensitivity, and effects of government regulations can be hard for most investors. Therefore, Synovus receives a rating of 2/5 for understandability.

Balance Sheet Health:

Given the bank’s adequate capitalization and liquidity, its current financial situation is relatively robust. Although there is a debt-to-equity ratio of 3, the CET1 ratio shows its ability to handle more economic turbulence. The long history of operations, solid deposits and a diversified lending portfolio also contribute to the health of the business. Therefore, we give a rating of 4/5.