2023-11-28 05:11:49 ET
Summary
- Synovus Financial Corp Series D preferred shares have recovered in price, but the yield has floated to 9.1%.
- The bank has maintained its operating performance despite rising interest rates, with net interest income remaining above 2019-2021 levels.
- Synovus has bucked the trend of struggling regional banks by stabilizing its deposit base and continuing to grow its loan portfolio.
Synovus Financial Corp. (SNV) has been no stranger to the volatility affecting the regional banking sector this year. The bank saw its common and preferred shares sell off with the industry during the banking crisis this past spring. While the Series D preferred shares ( SNV.PR.D ) have recovered in price, the call date came and went in June. After the call date, the shares began floating at a dividend rate of $2.24 per share per year , 9.1% of the current share price. I believe the Series D preferred are a good choice for fixed income investors.
Synovus has seen changes in its operating performance due to the recent rise in interest rates, but the bank continues to hold up through the higher rate environment. Both interest income and interest expenses have risen, but net interest income (interest income less interest expense) remains above its 2019- 2021 levels although it has slowly declined since the end of 2022.
While regional banks have been struggling to maintain their deposit base, Synovus has been bucking the trend. At the end of the third quarter, deposits were 5% higher than the same period a year ago and have risen quarter to quarter for all three quarters of 2023. The stabilization of deposits has allowed the bank to continue to grow its loan portfolio, which is still growing year over year despite a pullback in the third quarter. The loan to deposit ratio is at 86%, which is higher than the industry benchmark, but closer to what you would expect from a smaller bank.
One risk that the bank faces is its elevated leverage ratio. To lend at a greater growth rate than deposits in 2022, the bank needed to take on additional leverage. Currently, the leverage ratio is 12 to 1, which is notably higher than the industry norm of 9.5 to 1. Higher leverage has also impacted the bank's interest rate spread and net interest margin, with the interest spread falling throughout the year below pre-pandemic levels.
Fortunately, with deposit growth outpacing loan growth in 2023, Synovus has been able to start addressing the leverage issue. The leverage ratio, while still high, is a full point lower than where it was last year. Additionally, Synovus has used some of the capital created by either loan principal paydowns or deposit growth to pay down its borrowing costs. The bank has reduced its long-term debt, federal funds loans, and short-term borrowings by more than $2 billion this year.
Another risk that is not absent from the regional banking sector is uninsured deposits. At the end of the third quarter, Synovus had more than $23 billion in uninsured deposits, which is nearly half of their deposit base. Fortunately, the bank has several sources of liquidity available to handle deposit flight, including the Federal Reserve. The total liquidity of the bank is more than $26 billion, which covers the number of uninsured deposits.
Synovus is not immune from the risks facing regional banks, but the bank has withstood the headwinds of 2023 very well. The bank has continued to maintain deposits and has been able to reduce its non-deposit related debts. The floating preferred dividend could drop if interest rates decline, but most market participants believe interest rates should hold near these levels through the end of 2024. The preferred dividend could be eliminated, but this historically has only been done if the life of the bank has been threatened, which I believe is unlikely. Until interest rates moderate, investors can enjoy a 9% dividend yield from Synovus Financial.
For further details see:
Synovus Financial: Floating Preferred Offering 9.1% Yield