Fitch Upgrads Synovus Financial (SNV) to 'BBB-'; Notes Asset Quality Improvements, Stable Operating Performance

Fitch Ratings has upgraded Synovus Financial Corp.'s (SNV) (NYSE: SNV) and its principal subsidiary Synovus Bank's long-term Issuer Default Ratings (IDRs) to 'BBB-' from 'BB+' and Viability Ratings (VRs) to 'bbb-' from 'bb+'. At the same time, Fitch has upgraded the companies' short-term IDRs (IDRs) to 'F3' from 'B'. The Rating Outlook has been revised to Stable from Positive. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

VR, IDR AND SENIOR DEBT
Today's action reflects SNV's improvements in asset quality, stable operating performance, along with the maintenance of strong regulatory capital ratios and the company's solid franchise in Georgia such that, in Fitch's view, its risk profile is more in line with other investment grade banks. The Rating Outlook has been revised to Stable from Positive indicating that further rating movement upward in the near to medium term is unlikely.

Asset quality, a ratings driver that Fitch had placed higher emphasis on for SNV, has continued its strong improvement over the last year and is more in-line with investment grade banks. Fitch calculates SNV's nonperforming assets (NPAs) at 2.10% at 3Q'15, an improvement of 145bps year-over-year. Over the same time period, the dollar volume of NPAs has dropped another 42% as management has remained successful in working out of problem loans (nonaccrual as well as accruing troubled debt restructures) and disbursing foreclosed property.

Furthermore, nonperforming loan (NPL) inflows have normalized considerably, averaging just $28 million per quarter over the last five quarters which has also played a role in reducing NPAs over time. The reduction in NPAs has not come at the cost of significantly higher credit costs evidenced by year-to-date (YTD) net charge-offs (NCOs) of 15bps vs. 40bps through the first nine months of 2014. Fitch's view that asset quality as a whole has improved such that it has converged with investment-grade peers is reflected in today's rating action. Moreover, while further asset quality improvement is likely over time, SNV's level of asset class concentration in commercial real estate and geographic concentration within the state of Georgia are seen as rating constraints in the medium to long term.

SNV's operating performance, another key ratings driver Fitch had identified in the past as a high influence factor on the company's overall rating, has remained in-line with other investment grade peer banks. SNV has been able to generate reasonable returns over recent periods, primarily due to lower credit-related costs (provisions, litigations costs, OREO expenses and, etc.) as well as improved operating efficiencies and a steady level of fee revenue. Through 3Q15, the company generated a return on average assets (ROA) of 80bps, a reasonable improvement over SNV's 72bps ROA through 3Q'14 and 61bps through 3Q13.

Assuming a marginal increase in interest rates into 2016, Fitch believes SNV's ROA could modestly improve given its disclosed asset sensitive balance sheet. However, Fitch expects operating performance to remain below that of higher rated peers over the near to medium term due to SNV's relatively higher cost structure and a greater reliance on spread revenue

Fitch views SNV's capital as adequate relative to both its risk profile and rating. SNV reports one of the highest tangible common equity (TCE) ratios among its peer group and a strong estimated, fully phased-in Basel III common equity tier 1 (CET1) ratio of 10% well above the 7% requirement. The bank has now increased its quarterly dividend two years in a row due to the above mentioned earnings improvement and announced a $300 million share buyback program to be completed over the remainder of 2015 and all of 2016. This comes on the heels of a $250 million buyback program executed over the last four quarters. These actions are in line with Fitch's expectations given SNV's continued improvement in its financial condition.

Fitch expects that SNV will continue to distribute some of this capital to shareholders; however, these distributions will be constrained by regulatory and internal stress testing, and as such, Fitch expects SNV's capital ratios will likely stay elevated over the near term. Fitch also observes that SNV has over $200 million in a disallowed deferred tax asset (DTA) that will continue to accrete into CET1 going forward, providing additional support to regulatory capital ratios and capital distributions.

Finally, incorporated into today's rating action is Fitch's view that management has successfully executed on rehabilitating SNV's financial profile and strengthened risk oversight while maintaining the bank's solid Southeastern U.S. franchise. SNV continues to have strong market presence, particularly in rural markets of southwest Georgia and eastern Alabama. Fitch believes this could have a net positive impact to funding costs and to the company's bottom line over time if it is able to successfully lag deposit pricing in those more isolated markets where it has dominant market share in a rising rate environment.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

SNV's subordinated debt is notched one level below its VR of 'bbb-' for loss severity. SNV's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of SNV are rated one notch higher than SNV's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

HOLDING COMPANY

SNV's IDR and VR are equalized with those of its operating company (Synovus Bank), 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. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.

SUPPORT RATING AND SUPPORT RATING FLOOR

SNV has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, SNV is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES

VR, IDRs, AND SENIOR DEBT
With today's action, further upward movement of the company's ratings are considered limited in the near to medium term. Fitch expects earnings and asset quality to improve over the rating time horizon. This expectation is incorporated into today's rating action. Fitch could take adverse rating action should earnings and asset quality improvement not come to fruition as expected evidenced by flat-to-deteriorating ROA or reversal in AQ trends.

Today's ratings action also incorporates Fitch's expectation that SNV will begin to more seriously seek merger and acquisition (M&A) opportunities in order to build out its franchise and potentially gain further operating efficiencies. Fitch expects SNV's M&A activity to be absorbed effectively, reasonable in size, in geography and within the bank's core competencies. To the extent that Fitch observes SNV partaking in M&A activity that does not fit these attributes and/or results in earnings and capital metrics that are not commensurate with its rating level, Fitch could take negative rating action.

Moreover, should wholesale funding revert back to the level it was leading up to the 2007-2009 financial crisis, negative rating action is likely.

Over the long-term, SNV could see upward rating movement given the bank's solid franchise in its primary operating markets. Improvement in SNV's ratings over the long term would be predicated on the maintenance of sound risk appetite leading to asset quality metrics more in-line with higher rated peers as well as earnings performance (both by level and revenue mix)improving to above peer averages.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for SNV and its operating companies' subordinated debt and preferred stock are sensitive to any change to SNV's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long-and short-term deposit ratings are sensitive to any change to SNV's long- and short-term IDR.

HOLDING COMPANY
Should SNV's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since SNV's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the following ratings:

Synovus Financial Corp.
--Long-term IDR to 'BBB-' from 'BB+'; Outlook Stable
--Short-term IDR to 'F3' from 'B';
--Viability Rating to 'bbb-' from 'bb+';
--Senior unsecured to 'BBB-' from 'BB+';
--Subordinated debt at to 'BB+' from 'BB'.

Synovus Bank
--Long-term IDR to 'BB+' from 'BB';
--Short-term IDR to 'F3' from 'B'
--Viability Rating to 'bb+' from 'bb';
--Long-term deposits to 'BBB' from 'BBB-'.

Fitch has affirmed the following ratings:

Synovus Financial Corp.
--Preferred Stock at 'B'
--Support '5';
--Support Floor 'NF'.

Synovus Bank
--Support '5';
--Support Floor 'NF'.
--Short-term deposits at 'F3'.

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