CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the long-term Issuer Default Ratings (IDR) and viability rating (VR) of Synovus Financial Corp. (SNV) and its subsidiaries to 'BB/bb' from 'BB-/bb-'. At the same time, Fitch has affirmed SNV's short-term IDR at 'B'. The Rating Outlook remains Positive. In addition, Fitch expects to assign the planned $130 million of noncumulative perpetual preferred stock a rating of 'B'. A full list of rating actions follows at the end of this press release.
RATING ACTION AND RATIONALE
On July 18, 2013 SNV communicated its intention to repay the TARP funds it received from the U.S. Treasury during the financial crisis. This action follows the termination of the outstanding MOUs at both SNV and its subsidiary, Synovus Bank during 2Q'13. The upgrade of SNV's rating reflects Fitch's previously communicated view that both of these regulatory-related actions, taken together or separately would likely be viewed favorably. Furthermore, SNV has sustained positive asset quality progress and Fitch believes that these trends will continue over the intermediate to long-term, leading to consistently positive earnings performance, a rating sensitivity previously communicated.
Fitch has maintained the Outlook at Positive reflecting its view that credit risk has stabilized and that management will continue to address its elevated level of problem credits in the intermediate term through various remediation tactics. Furthermore, Fitch expects that capital levels will be maintained at adequate levels to absorb on going credit losses. However, given Fitch's view on SNV's earnings power over the mid-term (12 to 18 months) as well as the company's still-high level of nonperforming assets (NPAs) compared to higher rated banks, Fitch believes SNV is well-situated in the 'BB' rating category for the time being.
KEY RATING DRIVERS AND SENSITIVITIES - IDRS and VR
Fitch notes that since SNV's Outlook was revised from Negative to Positive in February 2013, the company has continued to make meaningful progress in addressing its elevated risk profile which will likely lead to further positive operating results. This is evidenced by the aforementioned termination of formal documents with state and federal regulators as well as the company receiving approval from federal regulators to repay TARP.
Fitch calculates SNV's NPAs at just under 6.40% at 2Q'13, an improvement of nearly 60 bps since 4Q'12 and 180 bps year-over-year but still elevated when compared to higher-rated banks. Fitch notes that half of its NPAs consist of troubled debt restructures (TDRs). Fitch also notes that nonperforming loan (NPL) inflows have continued their descent and were just $67 million in 2Q'13 and $151 million through the first half of 2013. This compares quite favourably to inflows $264 million during the same period a year prior.
Fitch anticipates that NPL inflows will, for the most part, remain between $50 and $75 million per quarter. To the extent that Fitch observes NPL inflows dipping below $50 million consistently, quarter-to-quarter, further positive rating action could be taken. However, Fitch believes that SNV's improvement in fundamental asset quality performance, a primary rating driver, will be a long-term process as existing NPAs are likely stickier than those that have been worked out of to this point. Fitch's expectations in regards to asset quality trends are reflected in SNV's rating and outlook.
Fitch believes that capital levels are adequate for the bank's upgraded rating and overall risk profile. While regulatory ratios will be adversely impacted by the nearly $1 billion TARP redemption, Fitch notes that SNV's core capital levels (TCE) are projected to increase by nearly 100 bps to 10.60% after TARP is repaid through a combination of a dividend from the bank as well as a common and preferred stock offering. Fitch observes that these actions track closely with management's prior guidance and reflect well on management's ability to continue to rehabilitate the bank.
Although notably reduced, Fitch does remain moderately concerned in regards to the level of construction A&D loans located in the south eastern region of the U.S. relative to capital, especially when considering their delinquency and charge-off rate. This concern is reflected in today's rating action and is considered a constraint on SNV's current rating.
Fitch also notes that earnings performance (current and expected) remain relatively weaker than higher rated banks. While SNV has remained consistently profitable, a trait reflected in today's rating action, the bank's return on assets has remained in the 45 - 55 bps range. Fitch expects this level of earnings to persist throughout 2013 and anticipates earnings to marginally improve in 2014 as credit costs reductions are off-set by continued net interest margin compression However, to the extent that asset quality trends reverse, adversely impacting earnings and thus capital build-up, Fitch could take adverse rating action.
RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
In Fitch's view, SNV is not considered systemically important and therefore, believes the probability of state support is unlikely. Therefore, SNV's IDR and VR do not incorporate any government support.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Fitch expects to assign a 'B' rating to the noncumulative perpetual preferred stock SNV has planned to issue to repay TARP. Hybrid capital issued by SNV are notched down from its VR of 'bb' in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. This assessment is based off of Fitch's published criteria titled, 'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 2012). Their ratings are primarily sensitive to any change in the VRs of SNV.
KEY RATING DRIVERS AND SENSITIVITIES - HOLDING COMPANY
SNV's IDR and VR is equalized with the company's subsidiary banks 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 subsidiary. Double leverage was at 112% for SNV at March 31, 2013.
RATING DRIVERS & SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY RATING:
The below ratings factor in a high probability of support from the parent to its subsidiary. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults.
Fitch has upgraded the following ratings and revised the Outlook to Stable from Positive:
Synovus Financial Corporation
--Long-term IDR to 'BB' from 'BB-';
--Viability Rating to 'bb' from 'bb-';
--Subordinated Debt to 'BB-' from 'B+';
--Senior Unsecured to 'BB' from 'BB-';
--Support Floor at 'NF';
--Support at '5'.
Synovus Bank
--Long-term IDR to 'BB' from 'BB-';
--Viability Rating to 'bb' from 'bb-';
--Long-term Deposits to 'BB+' from 'BB';
--Support Floor 'at NF';
--Support at '5'.
Fitch has affirmed the following ratings:
Synovus Financial Corporation
--Short-Term IDR at 'B'.
Synovus Bank
--Short-Term IDR at 'B'.
Fitch has assigned the following expected ratings:
Synovus Financial Corporation
--Noncumulative Perpetual Preferred Stock at 'B'.
Additional information is available at www.fitchratings.com.
In addition to the source(s) of information identified in Fitch's Master Criteria, these actions were additionally informed by information provided by the companies.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);
--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);
--'Assessing and Rating Bank Subordinated and Hybrid Securities' (Dec. 05, 2012);
--'Risk Radar' (Apr. 4, 2013);
--'U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)' (June 18, 2013);
--'U.S. Bank Mergers and Acquisitions' -- When Will The Catalysts Kick In? (July 11, 2013);
--'U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)' (Sept. 17, 2012);
--'Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)' (Aug. 7, 2012).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542
Risk Radar - Global
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=703937
U.S. Banks: Interest Rate Risks (What Happens When Rates Rise)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710875
U.S. Bank Mergers and Acquisitions -- When Will The Catalysts Kick In?
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712539
U.S. Banks: Rationalizing the Branch Network (Witness the Incredible Shrinking Branch Network)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688330
Treatment of Unrealized Losses in U.S. Bank Capital Rule Proposal (Pro-Cyclical Capital Policy to Create Greater Capital Volatility for Banks)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685638
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=797145
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