Synovus out to prove increased spending will pay off
Synovus Financial in Columbus, Ga., spent a large portion of its earnings call explaining to analysts how increased expenses are really an investment in long-term revenue growth.
The $48.3 billion-asset company reported Friday that noninterest expenses, excluding merger costs and other one-time items, rose for the third straight quarter since it bought FCB Financial in early 2019.
Executives made it clear during the call that they expect costs to remain elevated in 2020 — by 3% to 5% year over year — as they keep hiring revenue producers in high-growth markets where big bank mergers have taken place. Synovus is also upgrading its digital platforms.
“I think we'll continue to be aggressive,” Kessel Stelling, the company's chairman and CEO, said during the call.
“While there’s some disruption, while there are good bankers in the market, we certainly want to make sure that we're front and center in that decision,” he added. “Hiring comes with a cost … [and] it takes a while to generate the revenue to cover that.”
Stelling and his team pointed to other metrics to show that the strategy is working. Total loans increased by 2.2% from the third quarter to $37.2 billion, and fee income rose 10% to $98 million.
Total deposits increased 3%, with more than a third of the growth coming from core transaction deposits. The efficiency ratio improved from 56.20% at Sept. 30 to 53.44% at the end of the year.
“Quite frankly, I think we still show very well relative to our peers as it relates to the efficiency ratio,” said Kevin Blair, Synovus’ president and chief operating officer.
Analysts, however, were fixated on the 2.4% increase in operating expenses, which contributed to a 6% linked-quarter decline in profit to $140.1 million. Adjusted earnings per share of 94 cents missed the average estimate of analysts polled by FactSet by 3 cents.
(Year-over-year comparisons were skewed by the FCB deal.)
Synovus had discussed a new efficiency effort during its third-quarter call, setting expectations that costs would stabilize by year-end, said Tyler Stafford, an analyst at Stephens. That effort “ultimately did not materialize,” he added.
Executives said during the call that a review of its operations, being led by Blair in conjunction with an outside consultant, is in its final stages. They said 20 initiatives to boost revenue and cut costs have been reviewed; about half will be prioritized in 2020. Vendor relationships, real estate use and staffing will be scrutinized.
“I think at the first-quarter earnings call, we'll provide a little more clarity as to the initiatives themselves,” Blair said, noting that new efficiencies are needed to offset investments in “new talent and technology.”
Synovus made it clear that, like other Southeastern regionals such as Pinnacle Financial Partners and Atlantic Union Bankshares, there is a rare opportunity to hire lenders and poach customers tied to large mergers. Stelling specifically mentioned several meetings with prospects around Atlanta.
Synovus also aims to be more competitive with technology. It debuted a new consumer digital portal last year, and plans are in place to introduce a commercial platform later this year.
BB&T in Winston-Salem, N.C., recently bought SunTrust Banks in Atlanta, moving the headquarters for the newly formed Truist Financial to Charlotte, N.C. First Horizon National in Memphis, Tenn., has agreed to merge with Iberiabank in Lafayette, La.
A Truist spokesman declined to comment. A call to First Horizon was not immediately returned.
Investors have limited patience for rising expenses, said Brad Milsaps, an analyst at Piper Sandler, predicting that Synovus’ executives should expect to field more questions about costs throughout the year.
“It’s a delicate balancing act,” Milsaps said. “They see the opportunity to create long-term value by capitalizing on the disruption. But the near-term costs are an issue. I think most people had hoped for flattish expenses this year.”
Higher expenses would be easier to digest if Synovus had some help from a steeper yield curve and higher interest rates. Instead, a trio of rate cuts have pinched its margin, which contracted by 4 basis points from the third quarter, to 3.65%.
Synovus, for its part, hopes to address the expense issue over the next two quarters.
“I think what you'll see with our quarterly expenses is that we'll hit a high-water mark in the first quarter and then expenses will trail off as the year continues,” Blair said. “So we'll be able to generate positive operating leverage as we get towards the second half of the year and most certainly as we look at 2021.”