There is a lot of potential for bank stocks in 2021, as coronavirus vaccines begin to circulate across the U.S. and the economy looks to rebound. The industry will face many challenges in the new year, but with many bank stocks still trading at lower valuations, there should be lots of opportunities in the sector.
One bank I have my eye on in particular is Synovus Financial (SNV -1.87%), which has been making changes in its business model that have the stock poised for a breakout in 2021. Here's why.
Very attractive markets
Synovus Financial is a $53-billion-asset bank based in Columbus, Georgia, that also operates in Alabama, Florida, South Carolina, and Tennessee. The bank offers a range of products including private banking, treasury management, wealth management, mortgage services, premium finance, and international banking services.
These southern states are all experiencing high population growth, as people and businesses flood in seeking lower taxes and a more business-friendly environment. When you invest in community and even regional banks, you are really investing in the local economy itself. People are the biggest driver of the economy, so growing populations in Synovus' markets will likely translate to above-average loan growth for the bank.
That's important because the coronavirus pandemic has really put a hold on loan growth, as consumers and businesses limit spending and investing until the economic outlook is more certain. That -- combined with the low-rate environment, which has reduced the amount of interest banks will receive on many existing and new loans -- has limited and will continue to limit the amount of net interest income for banks in 2021. This is a major stream of revenue for most banks, and when the margin on loans compresses, the only way to offset the drop is to originate a lot of loans. That's why being in the markets that Synovus serves is such a huge advantage at a time when loan growth could be difficult to come by.
Growing non-interest income
Synovus has also been working to improve its non-interest or fee income business lines to make them a larger part of its total revenue stream, and I think these efforts will continue.
In 2018, Synovus acquired FCB Financial Holdings, the parent company of Florida Community Bank. Not only did this significantly bolster the bank's presence in the Sunshine State, but it will help it grow non-interest income. Non-interest income from Synovus' fiduciary and asset management business, card fees, brokerage revenue, capital markets income, and its insurance business grew between 2017 and 2019, the year that Synovus closed on the FCB acquisition.
But there is likely lots of potential to continue to grow these business lines. Non-interest income made up a small portion of FCB's total revenue, and Synovus has a lot of banking products that FCB didn't have, including capital markets and asset management. Synovus will be able to continue to cross-sell these items to FCB customers, and management at Synovus believes there is good momentum on several of their non-interest income business lines heading into 2021. Non-interest income is a source of revenue that is not sensitive to interest rates and can help make up for margin compression and a lack of loan demand.
Another big initiative Synovus has taken on is improving efficiency. Toward the end of 2019 and the beginning of 2020, the bank launched what it is calling Synovus Forward. Synovus Forward is a series of initiatives aimed at reducing annual expenses by $65 million and increasing annual revenue by $35 million to realize an additional $100 million in pre-tax income. That would boost pre-tax income by roughly 13% from full-year 2019 pre-tax income. This will also help the bank improve its overall efficiency ratio, an important metric that measures a bank's expenses expressed as a percentage of total revenue (lower is better).
Synovus has really only just started to execute on these initiatives, so many of them are not baked into the bank's current expense and revenue run rates yet. However, management expects to realize all of the cost savings in 2021, and also begin on the revenue initiatives in the first quarter of 2021. Additionally, $100 million in pre-tax income is looking like a base case for Synovus Forward. Management thinks there may be opportunities to realize more pre-tax income from organizational efficiencies or its work in customer analytics.
When it comes to the efficiency ratio, Synovus CFO Jamie Gregory said the goal is "top quartile performance." Judging by where some of Synovus' competitors are, that could be an efficiency ratio in the low 50th percentile, which would be great.
Also, it looks like Synovus will be able to bring down expenses over the next several quarters as well. Total non-interest expense of roughly $316.7 million in the third quarter of 2020 was elevated due to a $45 million, one-time goodwill impairment charge. Professional fees also seem to have been elevated through most of 2020, likely because Synovus has been working with the Boston Consulting Group on the Synovus Forward initiative. Synovus will also likely close more branches and continue to reduce total personnel. Soon-to-be CEO Kevin Blair said on the bank's third-quarter earnings call that digital user enrollment grew 10% through the first nine months of the year, while the bank also saw a 30% increase in the number of deposits handled outside Synovus' branch network.
Synovus began 2020 trading around $40 per share and 153% tangible book value. At Monday's close, it traded at $32.69 per share, or almost 120% tangible book value. The stock dropped 18% in 2020, which is more of a decline than many of the major bank indexes experienced. There should be plenty of room for growth, especially if management can hit its targets and possibly grow pre-tax income by more than $100 million in the Synovus Forward initiative. Synovus also has plenty of capital, which will allow it to support loan growth in its fast-growing markets and also potentially repurchase shares. With all of these tailwinds, I expect 2021 to be a breakout year for the stock.