S&P: Synovus Financial Corp. Rating Raised To 'BBB-' From 'BB+' On Improved Loan Performance; Outlook Is Stable
"The rating actions primarily reflect Synovus' improved financial performance in recent years, our expectation for further improvement, and the company's strengthened risk-management policies and procedures," said S&P Global Ratings credit analyst Robert Hansen. "Specifically, loan performance has improved substantially, capital ratios have risen, and the size of its construction loan portfolio has declined."
We expect Synovus to remain solidly profitable over the next two years, aided by moderate loan growth, some further improvement in loan performance, and modest expense growth. Despite these improvements, we still think the company faces some challenges, including loan concentrations by geography and by loan type, formidable competition, and below-average earnings capacity.
We think Synovus' risk position has improved as the substantial decline in nonperforming assets (NPAs) and low net charge-offs suggest. Specifically, adjusted NPAs (including restructured loans) to customer loans and other real estate owned declined to roughly 1.8% as of March 31, 2016, by our calculation, from nearly 7.0% as of Dec. 31, 2012. However, excluding restructured loans, the adjusted NPA ratio would be roughly 0.9% as of March 31, 2016, or roughly half the total NPAs, by our calculation. We think rising property prices and the seasoning of the loan portfolio have reduced the risk that restructured loans default. The company has also substantially reduced its construction and land loan exposures to roughly 9% of total loans from nearly 12% at year-end 2012, and we expect further declines, though these exposures remain larger than many peers'.
The stable outlook already incorporates our expectation that Synovus' overall financial performance will improve further over the next two years. If loan performance does not improve as we expect, including a reduction in restructured loan balances, or if funding and liquidity ratios deteriorate, we could lower the ratings. We do not expect to raise the ratings given the company's geographic concentration in Georgia, still large construction loan exposures, and very strong competition.