At Synovus, Deposit Growth Means Short-Term Pain, Long-Term Gain

Executives at Synovus Financial in Columbus, Ga., are hoping a focus on retail banking will help its bottom line in the future, even if doing so creates some short-term pain.

Synovus has been aggressively courting new clients. As a result, average core deposits rose by nearly 18% during the second quarter, to nearly $21 billion. But those efforts also increased the company's funding costs, contributing to net interest margin compression.

Still, the $28 billion-asset company's initiatives — which are more about adding customer relationships than hoarding deposits — could produce solid returns when the Federal Reserve Board eventually raises interest rates, industry experts said.

Management, meanwhile, also stood by its efforts.

"We believe it's a good solid strategy," Kessel Stelling, Synovus' chairman and chief executive, said during a conference call Tuesday to discuss quarterly results. That initiative "was not so much about rates as it was a deliberate strategy to increase … the productivity of the retail side."

Stelling and other bankers this earnings season have been peppered with questions about the trajectory of interest rates and what they are doing in preparation for eventual Fed action. Some expect heightened competition for consumer deposits, while others have expressed concerns that funding costs could rise at a faster rate that what took place in prior cycles.

A stockpile of core deposits should give Synovus more options at a time when it is unclear when — and how — rates will influence balance sheets and the bottom line.

"I don't think anyone knows what will happen when rates rise," said Brad Milsaps, an analyst at Sandler O'Neill. "Every time we've had rates rise, it's always different. … If the [Fed] moves slowly the banks can lag a little more. If rates go up really fast then it becomes more problematic."

Synovus has historically had a commercial focus, with a notable concentration in real estate. The company began an overhaul of consumer banking a decade ago, including an effort to bring in more retail deposits, but management's attention shifted to putting out fires in the aftermath of the financial crisis.

Now that it is back on solid footing, Synovus has ramped up its advertising, invested in technology, stepped up mortgage efforts and pursued new product lines such as Small Business Administration lending.

"It's a comprehensive effort that most people didn't pay a lot of attention to" in past quarters, said Jefferson Harralson, an analyst at Keefe, Bruyette & Woods. People are paying more attention to deposits, at Synovus and elsewhere, because there is a "feeling that an increase is more imminent."

Bankers have also been talking more about the impact of higher rates.

Don Kimble, KeyCorp's chief financial officer, said during a conference call last week that bankers are better prepared for an increase today, compared to the early 2000s, because of lower loan-to-deposit ratios. Marianne Lake, JPMorgan Chase's chief financial officer, recently warned that retail deposits should reprice higher and faster this time around because of technological and regulatory changes.

Higher deposit pricing has already started, as a number of banks have needed to pay more to fund stronger loan growth, Harralson said.

Synovus' funding costs for core deposits inched up during the second quarter, though some of the rise was tied to promotions it used to lure customers.

"We had campaigns, products, prices and incentives focused with the front-line team members to make sure that the deposits were important as loans," Thomas Prescott, Synovus' chief financial officer, said during Tuesday's conference call. "I could see us backing away from that in the second half of the year."

Synovus' cost of funding could actually decline in coming months, Prescott added.

The company also expects to decelerate deposit growth as it seeks ways to put its added liquidity to work. And having more liquidity should serve the company well over the long term, industry experts said.

Synovus "may sacrifice the net interest margin in the near term, but it may pay off" should rising rates lead depositors across the banking industry to start moving money around, Milsaps said.