Strategic Repositioning And Risk Management Will Fuel Sustainable Growth In Banking Sector

Key Takeaways

• Strategic focus on high-growth areas and analytics boosts potential revenue and earnings through business expansion and efficiency in conversion rates.
  
• Reduction in fraud and operational losses, alongside capital and liquidity optimization, signals improved net margins and supports EPS growth.
  
• Heavy reliance on securities repositioning and aggressive share repurchases may pose sustainability risks, possibly affecting future profitability, capital flexibility, and shareholder value.

Catalysts

Operates as the bank holding company for Synovus Bank that provides commercial and consumer banking products and services.

• The securities repositioning and risk-weighted asset optimization efforts have set a foundation for net interest margin (NIM) and net interest income (NII) expansion, which is directly related to future growth in revenue.
  
• Tactical initiatives in commercial and wealth lines of business, along with a 60% increase in new revenue from the retail analytics platform, indicate potential for increased revenue streams impacting future earnings.
  
• A focus on business owner wealth strategy, achieving a 52% conversion rate on qualified referrals, suggests an operational catalyst driving customer base expansion and potentially increasing net margins through higher conversion efficiency.
  
• Operational efforts to reduce fraud and operating losses, with an 11% reduction in related expenses, contribute to improved net margins by reducing cost inefficiencies.
  
• Commitment to optimizing the balance sheet and maintaining robust capital and liquidity positions, enabling further share repurchases, indicates a strategic approach to managing capital efficiently, which is expected to support earnings per share (EPS) growth.

Assumptions

• Analysts are assuming Synovus Financial's revenue will grow by 18.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.2% today to 0.3% in 3 years time.
• Analysts expect earnings to reach $965.4 million (and earnings per share of $5.26) by about August 2027, up from $239.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2027 earnings, down from 27.3x today. This future PE is lower than the current PE for the US Banks industry at 11.6x.
• Analysts expect the number of shares outstanding to decline by 1.5% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• Despite reported improvements in adjusted earnings, net interest income, and reduced non-interest expense, significant reliance on securities repositioning for capital benefits introduces risk. This strategy may not be sustainable long-term, potentially impacting future profitability and net margins.
  
• The decline in period-end loans despite an increase in loan production due to payoffs and lower utilization in commercial segments suggests the potential for slowing loan growth, which could affect future interest income and overall revenue.
  
• A decrease in core deposits, driven by a drop in non-interest-bearing deposits, might signal risks in maintaining stable funding sources. This could increase funding costs and affect net interest margin.
  
• The adjustment of revenue growth guidance to the negative 3% to 0% range, despite reporting growth in certain revenue streams, indicates potential concerns over achieving forecasted growth. This may reflect underlying risks in maintaining consistent revenue and earnings progression.
  
• While the company's focus on risk-weighted asset optimization and balance sheet management has bolstered its capital position, aggressive share repurchases could limit future growth opportunities or capital flexibility, affecting shareholder value if market conditions change unfavorably.

Valuation

• The analysts have a consensus price target of $50.45 for Synovus Financial based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.8 billion, earnings will come to $965.4 million, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $45.39, the analyst's price target of $50.45 is 10.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.