TEXT-Fitch Affirms Synovus Financial's Ratings, Positive Outlook Following Mid-Tier Regional Peer Review

Thu Feb 14, 2013 6:39pm EST

NEW YORK, February 14 (Fitch) Fitch Ratings has affirmed the long-term and short-term Issuer Default Ratings (IDRs) of Synovus Financial Corp. (SNV) and its subsidiaries at 'BB-/B'. The outlook has been revised to Positive from Negative. A full list of ratings follows at the end of this release. Fitch reviewed Synovus Financial Corp. as part of a peer review that included 16 mid-tier regional banks.

The banks in the peer review include: Associated Banc-Corp., Bank of Hawaii Corporation, BOK Financial Corporation, Cathay General Bancorp, Cullen/Frost Bankers, Inc., East West Bancorp, Inc., First Horizon National Corporation, First National of Nebraska, Inc., First Niagara Financial Group, Inc., Fulton Financial Corporation, Hancock Holding Company, People's United Financial, Inc., Synovus Financial Corp., TCF Financial Corporation, UMB Financial Corp., Webster Financial Corporation.

Refer to the release titled 'Fitch Takes Rating Actions on Its Mid-Tier Regional Bank Group Following Industry Peer Review' for a discussion of rating actions taken on the entire mid-tier regional bank group. The mid-tier regional group is comprised of banks with total assets ranging from $10 billion to $36 billion. IDRs for this group is relatively dispersed with a low of 'BB-' and a high of 'A+'.

Mid-tier regional banks typically lag their large regional bank counterparts by asset size, geographic footprint and product/revenue diversification. As such mid-tier regional banks are more susceptible to idiosyncratic risks such as geographic or single name concentrations. Fitch's mid-tier regional bank group has fairly homogenous business strategies. The institutions are mostly reliant on spread income from loans and investments.

With limited opportunity to improve fee-based income in the near term, Fitch expects that mid-tier banks will continue to face greater earnings headwinds in 2013 than larger institutions with greater revenue diversification. Share repurchases is common theme amongst the mid-tier banks. As mid-tier banks face earnings headwinds, institutions have begun repurchasing common shares to improve shareholder returns.

Fitch anticipates continued repurchase activity in 2013 as the return on equity lags historical norms for the group. In addition to share repurchases, Fitch has observed that some mid-tier banks have looked to their investment portfolio to improve returns. Most notably, CLOs and CMBS have become more popular amongst mid-tier banks.

Although such securities are beneficial to yields and returns, Fitch notes that such purchases can be a negative ratings driver if the risks are not properly measured, monitored and controlled. Asset quality continues to improve throughout the banking sector. Both nonperforming assets (NPAs) and net charge-offs (NCOs) are down significantly year over year. Fitch anticipates further asset quality improvement as nonperforming loan (NPL) inflow slows. Reserve levels have also declined as asset quality improves, which has been beneficial to earnings in 2012. Fitch expects further reserve releases in 2013 but at a slower pace.

RATING ACTION AND RATIONALE

The long-term and short-term ratings of SNV have been affirmed at 'BB-'. The Outlook has been revised to Positive from Negative. The Outlook revision to Positive from Negative reflects Fitch's view that credit risk has stabilized and that management will continue to address its elevated level of problem credits in the intermediate term.

Further, Fitch believes that capital levels are now sufficient to absorb future credit losses as they occur and are adequate relative to the company's rating level. The ratings affirmation reflects the company's high level of NPAs (inclusive of accruing TDRs) in both relative and absolute terms as well as a weak earnings profile going forward.

Fitch notes that SNV management has made modest progress in addressing the company's high risk profile and stabilizing its balance sheet through loan sales, loan workouts and equity raises over the last 12 to 24 months which will likely lead to more positive operating results going forward. This is evidenced by management's reversal of $800 million in reserves held against the company's deferred tax asset (DTA) which significantly boosted core capital at year-end 2012.

However, SNV's asset quality remains noticeably worse than other higher rated credits in the peer group reviewed and continues to be a negative rating driver. Further, in Fitch's view, core earnings performance will continue to lag peer institutions as credit costs will continue to weigh on the bottom line.

RATING DRIVERS AND SENSITIVITIES - IDRs and VRs SNV reported NPAs at just over of 7% at fourth quarter of 2012 (4Q'12), a moderate improvement from previous quarters due to a 4Q'12 bulk loan sale but still considerably higher than most others in the peer group. Fitch notes that NPL inflows, while still high in both relative and absolute terms, have been trending down consistently since 2011. Given the company's levelof accruing substandard loans, inflows could spike up over coming quarters similar to in 4Q'12 when one relationship moved to nonperforming. However, Fitch expects the general improving trend in NPL inflows to continue going forward along with other AQ metrics. Fitch does remain relatively concerned about the sustained high level of construction A&D loans located in the southeastern region of the U.S. relative to the loan book as well as to capital. Capital levels are now stable and have even shown some improvement through one-time items as well as nominal earnings retention.

Core capital levels (TCE) increased over 225 basis points (bps) as the result of the aforementioned Deferred Tax Asset (DTA) allowance reversal and are sufficient to absorb future credit losses, in Fitch's view. Moreover, regulatory capital ratios, aided by around $1 billion of TARP funds have remained at appropriate with Tier 1 leverage of nearly 11% and comfortably above minimums outlined in the MOU with state and federal regulators. Management has not wavered in its previous guidance that TARP funds will likely be paid back before the dividend rate reset date in the fourth quarter of 2012 with a combination of holding company cash, a dividend upstream from the bank sub (subject to regulatory approval),a debt issuance and potentially a preferred or common equity issuance. This action would likely be viewed positively by Fitch. Fitch believes SNV's earnings are adequate at the company's rating level but will continue to be relatively weak in the intermediate term given its level of credit costs and NPAs.

While the company reported a large profit for the year 2012 due to the reversal of a DTA allowance, it had reported modest profitability of just 53 bps through 3Q'12 with very little noise associated with the results. Fitch expects a similar level of profitability to continue throughout 2013, marginally improving in 2014 and notes that the level is considerably lower than other higher rated credits within the mid-tier peer group. Fitch notes that sustained positive AQ trends leading to consistently positive earnings performance and capital augmentation could result in positive rating action in the intermediate term. Fitch expects the outstanding MOU to be terminated as well as CPP preferred shares being paid off in 2013. As communicated in the past by Fitch, both of these events could result in positive rating action. Conversely, a sharp reversal in AQ trends resulting in negative earnings performance and capital deterioration would likely result in adverse rating action. Further, any abnormal delay in paying back TARP prior to the dividend rate reset rate could cause Fitch to reevaluate SNV's ratings or Outlook.

RATING DRIVERS AND SENSITIVITIES - Support Ratings and Support Floor Ratings:

All of the mid-tier regional banks in the peer group have Support Ratings of '5' and Support Floor Ratings of 'NF'. In Fitch's view, the mid-tier banks are not considered systemically important and therefore, Fitch believes the probability of support is unlikely. IDRs and VRs do not incorporate any government support for any of the banks in the mid-tier regional bank peer group.

RATING DRIVERS AND SENSITIVITIES - Subordinated Debt and Other Hybrid Securities:

Subordinated debt and hybrid capital instruments issued by the banks are notched down from the issuers' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. The ratings of subordinated debt and hybrid securities are sensitive to any change in the banks' VRs or to changes in the banks' propensity to make coupon payments that are permitted but not compulsory under the instruments' documentation.

RATING DRIVERS AND SENSITIVITIES - Holding Company:

All of the entities reviewed in the mid-tier regional bank group have a bank holding company structure with the bank as the main subsidiary. All subsidiaries are considered core to parent holding company supporting equalized ratings between bank subsidiaries and bank holding companies. IDRs and VRs are equalized with those of its operating companies and 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 subsidiaries.

RATING DRIVERS AND SENSITIVITIES

- Subsidiary and Affiliated Company Rating: All of the entities reviewed in the mid-tier regional bank group factor in a high probability of support from parent institutions to its subsidiaries. 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 affirmed the following ratings and revised the Outlook to Positive from Negative: Synovus Financial Corporation; Positive Outlook;

--Long-term IDR at 'BB-';

--Short-Term IDR at 'B';

--Viability Rating at 'bb-';

--Subordinated Debt at 'B+';

--Senior Unsecured at 'BB-';

--Preferred at 'CCC';

--Support Floor at 'NF'

--Support at '5'. Synovus Bank

--Long-term IDR at 'BB-'; Positive Outlook;

--Long-term Deposit at 'BB';

--Short-Term IDR at 'B';

--Viability Rating at 'bb-';

--Support Floor 'at NF';

--Support at '5'.