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Searching for Survivors Among The Financial Wreckage
From The Inoculated Investor blog:
In response to a piece penned by Tom Brown of bankstocks.com about Synovus Financial, I carefully go through his bullish arguments and point out areas in which we do not share the same outlook. Tom Brown is an experienced analyst who has far more experience than I have. Accordingly, this is absolutely not an attempt to undermine his work. However, after digging into the credit trends I came to different conclusions about the near term prospects for SNV. Despite this fact, I actually do agree with Brown that that over the next few years there is the potential for the shares to appreciate meaningfully. But, in trying to assess the potential risks, the questions I try to answer are as follows: (1) Will SNV have enough capital to make it through the cycle without further diluting shareholders and (2) What is the probability that SNV does not survive this credit cycle?
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In case anybody interested in Synovus missed this article, there's an extraordinarily high amount of lending to companies controlled by board members, which is a blatant conflict of interest.
http://bloomberg.com/apps/news?pid=20670001&sid=aukpiXHglqP4
On Tom Brown, if you look at the quarterly 13-F filings of Second Curve for 2006-08 it's likely that his peak to trough decline was in the 80-90% range. I don't know that I've ever seen a money manager with such a high percentage of complete blowups: New Century, Indymac, First Marblehead, the list goes on and on. Not only did he not see the credit meltdown coming, he used his website to belittle and attempt to shout down anybody who had anything negative to say about one of his stocks. It's amazing to me that anybody still lets him manage their money.
Given that Brown starts his piece with Synovus with a reference to how big returns were made in the "last cycle", it appears that he still doesn't know what happened. This isn't a normal cycle, it is the bursting of a credit bubble that was 30 years in the making. How does Brown point to earnings during the peak stage of a bubble as "normalized"? Those earnings, as we've seen with the writedowns of the last several quarters, weren't real. They were in large part based on Ponzi finance loans, including to insiders, that subsequently blew up. Where is the demand from creditworthy borrowers going to come from over the next few years and how much lending will Synovus have the capacity to do based on the capital it has left if it survives the next year or two?
With regard to the past price to book numbers of Synovus, I suspect its P/B in the past was somewhat inflated by the 80% stake it held in Total Systems Services. Total Systems trades at over 3X book and I think it was closer to 5X book a few years ago. Total Systems was a pretty significant sized holding for a bank of Synovus' size because it had appreciated quite a bit over the last couple of decades, so the reflection of Total Systems' market value in Synovus' market value would have inflated the Synovus P/B multiple.
Finally, if you go to the Synovus website, its 2008 annual report was a whopping 8 pages. They leave all the disclosure on bad loans and insider lending to that boring black and white 10-K.
Great analysis, Inoc - one i agree with completely. SNV does not have the capital levels to sustain their rapidly deteriorating loan book, nor does it have the earnings power to make it magically vanish. I also agree, i believe the management is sticking their collective head in the sands of denial (a river in egypt? ha!) about their situation.
however, i think the bank survives, and the best way to play this is through the credit.
Back in september, they attempted to do an exchange offering with their 4-7/8s '13 subdebt. They offered between 65-70c, which resulted in only a 12% take up. These bonds traded down into the low 60s two-thre weeks ago, where we picked them up. They are trading 72-73 right now. At this level, the yield is still decent, and the odds that they will have to offer at least 80 c to exchange are pretty high.
if they do another equity raise, the credit is money good. If they do the exchange, you're sitting pretty good.
The risk is of course if they are so stupid and dont do anything before its too late and allow the bank to be seized (although, i think FDIC is loathe to do this because there arent that many players left that can digest this size of loan book, given the insolvency of the FDIC anyway).