Fitch Upgrades Synovus Financial Corp.'s Long-Term IDR to 'BB+'; Outlook Remains Positive

NEW YORK--()--Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) and Viability Rating (VR) of Synovus Financial Corp (SNV) and its primary bank subsidiary, Synovus Bank to 'BB+' from 'BB'. The Rating Outlook remains Positive. A complete list of ratings is provided at the end of this release.

KEY RATING DRIVERS - IDRS, VRs AND SENIOR DEBT

Today's upgrade reflects Fitch's view that SNV's financial condition continues to improve and converge with higher rated banks. The Outlook Positive reflects Fitch's expectation that management will continue to execute on its strategies to improve SNV's financial condition. Fitch expects earnings to marginally improve along with asset quality while the bank maintains a reasonable risk appetite and a solid risk management framework. SNV's ratings remain relatively low as compared to its peer group despite the upgrade. However, Fitch believes that SNVs have further upside over time as reflected in the Outlook Positive.

Fitch views SNV's weak asset quality and core earnings performance as key constraints to SNV's rating in the near term. However, both have significantly improved since Fitch's last rating action and are expected to remain on a positive trajectory going forward while the company maintains reasonable capital levels.

Fitch calculates SNV's NPAs at 3.6% at 3Q'14, an improvement of over 200bps year-over-year but still well-above those levels of higher rated banks. Over the same time period, the dollar volume of NPAs has dropped nearly 40% as management has remained successful in working out of problem loans and disbursing foreclosed property. Fitch notes that the reduction in NPAs has not come at the cost of significantly higher credit costs evidenced by year-to-date (YTD) net charge-offs (NCOs) of 41bps.

Improving trends in NPL inflows have also support overall declining balances of problem assets. When Fitch took positive rating action last year, NPL inflows were anticipated to remain between $50 and $75 million per quarter. Over the last five quarters, NPL inflows have averaged $38 million and have not exceeded $50 million at all; showing a stabilized and more granular loan portfolio, characteristics that are reflected into today's rating action.

The upgrade of SNV's ratings also reflects the bank's strong capital profile. SNV reports the highest tangible common equity ratio among its peer group and a strong estimated, fully phased-in Basel III CET1 ratio of 10.5% well above the 7% requirement. The bank recently announced an increase in its quarterly dividend and the initiation of a share buyback program. These actions are in line with Fitch's expectations given SNV's continued improvement in its financial condition. Fitch expects that SNV will continue to distribute some of this excess capital to shareholders; however, these distributions will be constrained by regulatory and internal stress testing, and as such, SNV's capital ratios will likely stay elevated over the near term. Fitch also observes that SNV has over $500 million in a disallowed deferred tax asset (DTA) that will continue to accrete into Tier 1 capital going forward, providing additional support to regulatory capital ratios and capital distributions.

After experiencing net losses from 2009 to 2011 due to poor asset quality, SNV has been able to generate more reasonable returns over recent periods, primarily due to lower credit-related costs (provisions, litigations costs, OREO expenses and, etc.). Through 3Q'14, the company generated a ROA of 72bps, a reasonable improvement over SNV's YTD ROA of 61bps but a level that remains below higher rated peer averages.

SNV, similar to the industry as a whole, continues to benefit from reserve releases. Fitch observes that reserve releases have accounted for 18% of pre-tax earnings on average over the last 5 quarters. Fitch observes that while this level is above current industry and peer levels, SNV also emerged from the crisis later than most and thus would be expected to have reserve releases start/end later than industry. That said, Fitch sees reserve releases diminishing going forward given continued loan growth and as allowance levels approach more normalized levels. Furthermore, Fitch expects SNV's ROA to remain below industry and peer averages as well as those long-term historical returns of investment grade banks over the next four to six quarters. Fitch views this relatively lower level of earnings as a constraint on SNV's current ratings.

Also reflected in today's rating action is Fitch's view that SNV's risk management practices are relatively solid compared to those banks of similar size. Fitch recognizes the level of investment in risk management systems the bank has needed to make over recent years as it has been rehabilitated. Fitch views these systems as an integral part of management's ability to execute on its strategic plan of reducing problem assets, managing capital, maintaining SNV's strong franchise and underwriting of new loans as the company now seeks to grow its loan portfolio after a long period of shrinking it.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

The Rating Outlook for SNV remains Positive. Fitch anticipates that over the near to mid term, SNV's financial and credit profile will continue to improve and converge with that of higher rated banks. To the extent that Fitch observes continued asset quality improvement that brings asset quality metrics such as NPAs, NCOs, NPL inflows, etc. in line with higher rated peers, additional positive rating action is likely.

As noted above, Fitch expects SNV's core earnings power to be weak relative to higher rated peers over the next four to six quarters. Once Fitch observes earnings performance consistently in line with those banks in higher rating categories, Fitch would likely take positive rating action. Although unexpected, to the extent that earnings remain depressed and Fitch foresees little uplift over the long term, SNV's Outlook could be revised to Stable from Positive. In general, Fitch views further upward momentum in SNV's ratings over the long-term given the strength of its franchise in its operating market, de-risking of balance sheet since the financial crisis, and various improvements made in its risk management program.

Finally, although not expected, negative rating pressures could result if SNV were to manage capital more aggressively in payout levels or through or growth. Moreover, should wholesale funding revert back to the level it was leading up to the 2007-2009 financial crisis, negative rating action is possible.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

SNV's uninsured deposit ratings at the subsidiary bank are rated one notch higher than the company's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by SNV's bank subsidiary are primarily sensitive to any change in the company's IDR. This means that should a long-term IDR be downgraded, deposit ratings could be similarly affected.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

SNV's subordinated debt and other hybrid securities ratings are notched below its VR of 'bb+' in accordance with Fitch's assessment of the instruments non-performance and loss severity risk profiles.

KEY RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of other hybrid securities are sensitive to any change in the company's VR.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

SNV has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, SNV is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

SNV's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - HOLDING COMPANY

The IDR and VR of SNV is equalized with its operating company, Synovus Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries.

KEY RATING SENSITIVITIES - HOLDING COMPANY

If SNV became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

Fitch has upgraded the following ratings with a Positive Outlook:

Synovus Financial Corp.

--Long-term IDR to 'BB+' from 'BB';

--Viability Rating to 'bb+' from 'bb';

--Senior unsecured to 'BB+' from 'BB';

--Subordinated debt at to 'BB' from 'BB-';

--Preferred stock to 'B' from 'B-';

Synovus Bank

--Long-term IDR to 'BB+' from 'BB';

--Viability Rating to 'bb+' from 'bb';

--Long-term deposits to 'BBB-' from 'BB+';

The following ratings have been affirmed:

Synovus Financial Corp.

--Short-term IDR at 'B'.

--Support '5';

--Support Floor 'NF'.

Synovus Bank

--Short-term IDR at 'B'.

--Support '5';

--Support Floor 'NF'.

The following ratings have been assigned:

Synovus Bank

--Short-term deposits at 'F3'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);

--'U.S. Banking Quarterly Comment: 3Q14 (Fighting Against the Current of Low Interest Rates)' (Oct. 27, 2014);

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral)' (July 15, 2014);

--'Risk Radar Global 3Q14' (Sept. 15, 2014);

--'2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)' (Nov. 12, 2014);

--'U.S. Banks: Mid-Tier Regional Bank Guide (Weak Core Profitability Awaiting Reprieve from Low Rates)' (June 26, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

U.S. Banking Quarterly Comment: 3Q14 (Fighting Against the Current of Low Interest Rates)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=801608

Index Trend Analysis -- 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

Risk Radar Global 3Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568

2015 Outlook: U.S. Banks (Growth in a Challenging Rate Environment)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809228

U.S. Banks: Mid-Tier Regional Bank Guide (Weak Core Profitability Awaiting Reprieve from Low Rates)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750286

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=925155

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Contacts

Fitch Ratings
Primary Analyst
Bain K. Rumohr, CFA
Director
+1-312-368-3153
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Ryan Doyle
Director
+1-212-908-0162
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bain K. Rumohr, CFA
Director
+1-312-368-3153
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Ryan Doyle
Director
+1-212-908-0162
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com