Synovus Financial: Interesting Dividend But It’s Not Enough (NYSE:SNV)

Synovus Monetary Corp. (NYSE:SNV) operates as a financial institution holding firm for Synovus Financial institution; it was based again in 1888 and is headquartered in Columbus, Georgia.

Regardless of a slight restoration in current weeks, the consequences of the banking crises triggered by SVB’s chapter are nonetheless being mirrored within the worth of Synovus Monetary, which is certainly removed from its all-time excessive. Nevertheless, such a decline has revealed alternatives that weren’t there earlier than, together with a dividend yield of 4.80%.

As I’ll present you all through this text, at this worth Synovus Monetary could also be an excellent choice, particularly for these on the lookout for excessive and sustainable dividends. However it’s most likely not for me.

Deposits High quality

For my part, deposits high quality is the primary facet to think about when analyzing a financial institution, as it’s the uncooked materials on which your complete monetary construction relies. I’ll now present you the way Synovus Monetary is positioned on this respect.

To begin with, about 73 % of deposits are insured, collateralized or insurable. The deposit base is each diversified and never very concentrated, which is constructive. In actual fact, the highest 100 uninsured prospects account for simply over 10 % of whole deposits.

In all probability the least constructive facet issues the price of deposits, in truth in March 2023 the common curiosity paid was 1.63% when just a few months earlier it was 0.88%. As well as, it is usually vital to say that non-interest-bearing deposits have decreased by $1.55 billion in comparison with This autumn 2022, which is certainly an element to think about. Synovus Monetary has needed to discover different methods to interchange these free funds, together with time deposits and brokered CDs, each of that are considerably costlier. Combining each deposits and loans, the general common value amounted to 2.33 % in March, 101 foundation factors greater than in This autumn 2022.

Evaluating the rise within the Fed Funds Charge and the price of deposits, Synovus Monetary was in a position to obtain a deposit beta of 30 %, which is a good consequence however actually not optimum. In line with the most recent Fed estimates, we are able to anticipate a minimum of two extra 25 foundation level hikes by the tip of the 12 months, which may imply that the deposit beta may proceed to rise.

Over the previous month I’ve been analyzing many regional banks, and Synovus Monetary reveals common outcomes when it comes to deposit prices; nothing worrisome however nothing thrilling both. For instance, there are banks like Banner that haven’t been affected as a lot by the rate of interest improve; in truth, it nonetheless displays a deposit value of lower than 0.30 %.

Incomes Asset Composition and Web Curiosity Margin

The deposits value just isn’t the one issue that adjusts for rates of interest; there’s additionally the yield on belongings.

The mortgage portfolio fee progressively elevated every quarter and reached 5.89 %, which makes the rise in the price of liabilities much less bitter. On the similar time, the securities portfolio additionally offered a development in yield, though its dimension remained nearly unchanged from Q1 2022.

Though not featured on this slide, with regard to the securities portfolio it ought to be identified that, as of Q1 2023, it’s registering an unrealized lack of as a lot as $1.28 billion, a considerably giant determine. In actual fact, it represents about 27 % of fairness. Synovus Monetary, in addition to many different banks, made main purchases of fixed-rate securities earlier than the Fed aggressively raised rates of interest, and this led to a big unrealized loss, particularly for prime length securities. If the Fed had been to chop rates of interest rather a lot, the issue would recede: the purpose is that earlier than 2024 it’s unlikely to occur. So, so long as the macroeconomic situation stays the identical, we’ve got to think about this massive unrealized loss in Synovus Monetary’s stability sheet. The latter, in fact additionally weighs on the E book Worth per share, a key metric to which every financial institution’s worth per share follows.

Staying with rate of interest danger, within the final slide we are able to see the anticipated change in internet curiosity revenue (NII) as rates of interest change. A 100-basis level improve would have a +3.30 % impression on NII; a 100-basis level lower would have a – 3.60 % impression. In brief, the financial institution is positioned towards an extra improve in rates of interest. Thus, ought to the Fed scale back them, on the one hand the unrealized lack of the securities portfolio can be lowered, however then again the NII would undergo.

Returning briefly to the mortgage portfolio, we are able to see that in the meanwhile the principle indices used for credit score danger are all in good standing. So, regardless of Synovus Monetary’s vital publicity to the CRE section, in the interim, there isn’t a purpose to doubt the creditworthiness of its debtors.

In any case, though the yield on belongings has improved, it has not been in a position to totally cowl the rise in the price of liabilities. In actual fact, the web curiosity margin decreased by 13 foundation factors in comparison with This autumn 2022.

Asset yield affected +0.45%, however it was not sufficient in opposition to – 0.49%. As well as, extra money and deposit combine additionally didn’t assist Synovus Monetary; – 0.02% and – 0.07% respectively.

Dividend Evaluation

As anticipated at the start of the article, the dividend yield of Synovus Monetary appears engaging for many who want to put money into firms with a excessive dividend yield; on this case, we’re speaking about 4.80%. However is it sustainable?

Evaluating diluted EPS with dividend per share, it’s evident that the previous are considerably increased than the latter. In actual fact, the payout ratio is kind of low, solely 29.30 %. So even when EPS slows down within the coming years because of the long-awaited recession, for my part, administration will proceed to concern an excellent dividend anyway. In any case, Synovus Monetary has a dividend yield of 4.80 % with a payout ratio of 29.30 %; if EPS dropped even 20-30 %, the payout ratio would nonetheless be lower than 50 %.

In brief, barring any sensational unexpected occasions, I think about the dividend to be sustainable within the coming years.

Lastly, based on Searching for Alpha’s knowledge on the dividend security, Synovus Monetary’s ratios are sometimes higher than its friends. In brief, a minimum of for the second the state of affairs is steady.

Valuation

To evaluate the truthful worth of Synovus Monetary, I’ll use a weighted common amongst three valuation strategies; the primary could have a weight of 40% and will probably be primarily based on e book worth, the second could have the identical weight however will probably be primarily based on EPS, and the third will probably be a dividend low cost mannequin with a weight of 20%. All knowledge will probably be obtained from Searching for Alpha.

1. The typical worth/e book worth during the last 5 years is 1.31x; multiplying this determine by the present e book worth per share of $28.98 ends in a good worth of $37.96 per share.
2. The typical P/E for the previous 5 years has been 10.82x; multiplying this determine by the anticipated EPS for 2023 of $4.73 (Road estimates), the truthful worth quantities to $51.17 per share.
3. As for the dividend low cost mannequin, the inputs will probably be as follows:

• Annual Payout (FWD) of $1.52 per share.
• Annual return required from the funding 15%. We’re speaking a few small regional financial institution, and being a really dangerous funding, for my part a excessive return is required to take this danger.
• Dividend development of 8% per 12 months. Over the previous 10 years the CAGR has been 17.79%, nevertheless I needed to incorporate a extra conservative worth. In any case, the macroeconomic atmosphere has positively modified from 10 years in the past.

The ensuing truthful worth following these assumptions is $23.45 per share.

Summing it up, the primary two strategies present that Synovus Monetary is undervalued, particularly the one with earnings, whereas for the dividend low cost mannequin this financial institution is overvalued. Within the final technique, the required return positively affected rather a lot, however I feel it’s unavoidable given the riskiness of the funding.

By making the weighted common of the three fashions based on the instructions I discussed earlier, the truthful worth of Synovus Monetary is $40.34 per share, so the inventory is undervalued.

Remaining Ideas

General, Synovus Monetary is a financial institution that has suffered from the rising value of deposits and this has affected the web curiosity margin. Unrealized losses are one other concern to observe, however I stay optimistic as a result of when the Fed reduces rates of interest this loss will disappear. In the intervening time, the market is discounting these points within the worth of Synovus Monetary, which is why it seems slightly at a reduction. So, the inventory is undervalued, the dividend is excessive, however why do not I put money into it?

The reason being that like Synovus Monetary, many different regional banks are in the same state of affairs, which leads me to keep away from investing in them. Moderately than make investments individually in all these banks with comparable traits and issues, I want to purchase an ETF. If I’ve to put money into a single financial institution, I need it to have peculiarities which can be out of the unusual. On this regard, I recommend you learn my article on Banner Company, a semi-unknown financial institution that I consider could mirror the latter description.