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* JPM, BB&T, SunTrust, TD, RBC may want to look
* Purchase accounting, 30 banks make deal harder
* Synovus has insisted it has enough capital
NEW YORK, Jan 13 (Reuters) - Synovus Financial Corp (SNV.N) might need to look for a partner if its losses deteriorate, and it could drum up interest thanks to its U.S. Southeast footprint, but a deal without government assistance will be hard.
Synovus, which has about $35 billion in assets, holds many commercial real estate and construction loans in some of the worst markets in the country, making credit quality a major concern and raising questions about whether the bank will need to raise more capital.
If the economic recovery continues apace, the bank -- which received $968 million in U.S. government bailout money -- could be just fine, and perhaps even overcapitalized. But at least some investors see capital raising as a real possibility.
As of the end of last year, nearly 10 percent of the company's shares were sold short in a bet their value would drop -- up from 8 percent in the middle of December and well above the average of 3.4 percent.
"Synovus' future is not in their hands -- it's in the hands of the economic recovery," said James Ellman, president of hedge fund Seacliff Capital in San Francisco.
Synovus sold $600 million of shares at $4 apiece in September and exchanged some of its debt for equity, which helped bolster its capital position.
But soon after raising capital, the bank said it was writing down its deferred tax assets, which are expected future tax benefits, by about $150 million, in part because it may not generate enough profit to realize those assets any time soon.
Concerns about profitability, combined with the bank's current share price of about $2.80, could make raising capital in the public markets difficult.
If Synovus does need more capital, selling all or a portion of itself to a bank could be a logical choice.
"It's not a pretty picture going forward, and there are those who believe they will have to partner up or they won't be able to continue," a senior banking executive familiar with Synovus' markets said.
Bankers who did not want to speak on the record about potential deals said some banks might be interested in Synovus because of its presence in markets -- such as Florida -- that are considered desirable over the long term as Americans retire and move to warmer climates.
Toronto Dominion Bank (TD.TO), which wants to grow in the U.S. Southeast, and Royal Bank of Canada (RY.TO) could be potential suitors, the senior banking executive said.
A financial institutions investment banker also saw JPMorgan Chase & Co (JPM.N), BB&T Corp (BBT.N) and SunTrust Banks Inc (STI.N) as possible fits, although BB&T is still digesting Alabama-based Colonial Bank and SunTrust has problems of its own. [ID:nN08257412]
Synovus spokesman Greg Hudgison declined to comment, citing a quiet period before the company's earnings announcement. The other banks either declined to comment or were not immediately available.
Synovus has above-average concentration in commercial real estate loans, including a higher exposure to loans to investors, which are considered riskier than those for owner-occupied properties, according to Citigroup analyst Greg Kelton.
One of the bank's largest problem loans was made to fund a real estate development spearheaded by a former director.
Synovus loaned more than $300 million to former director Bill Jones' Sea Island Co to redevelop the coastal Georgia resort into a luxurious destination for the wealthy. Synovus has since classified Sea Island as a nonperforming asset.
Insider loans account for $1.1 billion of Synovus's total loan portfolio of $26 billion as of Sept. 30, according to the most recent data available.
One reason Synovus has so many of this kind of loans is that it is really an amalgamation of 30 banks, each with its own board of directors. That structure could make acquiring the bank complicated for a potential buyer.
Moreover, with accounting rules that mandate a bank's book be marked to market value at the time of an acquisition, any buyers could face an unattractive capital hole if they tried to take the bank over without support from the Federal Deposit Insurance Corp (FDIC).
Synovus, which posted $1.2 billion in losses in the first nine months of 2009, is operating under a regulatory directive to minimize credit losses and reduce nonperforming loans.
In late November, a Collins Stewart analyst estimated that the bank will need about $700 million of additional capital. [ID:nBNG504305]
Still, the bank may not need to sell. Synovus has been aggressively selling problem loans and insists that it has enough funds to ride out the credit cycle.
"The big question with Synovus is, do they need to raise more capital or not?" said Michael Rose, an analyst with Raymond James. "I am in the camp that they can make it through in the near term, but at some point they may need to raise capital." (Additional reporting by Joe Rauch in Charlotte; Editing by Gary Hill) (For more M&A news and our DealZone blog, go to www.reuters.com/deals)