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Question: When is owing the government a ton of money a good thing?

Recs

7

January 12, 2013 – Comments (1) | RELATED TICKERS: SNV

Answer: When you pay it off. 

Bank aren't usually my thing in investing, unless we're talking about a special situation like a mutual conversion, but Synovus Financial (SNV) is an interesting situation with several near-term catalysts that could cause its stock to continue to outperform.

According to a recent Wall Street Transcript interview with Matthew Schultheis from an investment bank called Boenning & Scattergood, a month or so ago SNV sold off a huge chunk of underperforming loans. Why does this matter? Unloading these bad loans will theoretically enable SNV to unlock some of its large loan loss reserves, or at least keep them from having to add as much to them going forward.  

Furthermore, Synovus is likely going to pay off its TARP loans in the near future...it currently owes the government more than any other bank in the country. 

Unloading these bad loans and paying off the government would in theory make it likely that SNV will be able to reverse the "deferred tax allocation" that it has on the books. This is all accounting stuff (probably why I stay away from banks), but according to what I've learned on this subject this is a very good thing. It is a sign of a healthy bank and bank stocks usually increase significantly when it happens. The Company's CEO believes that this reversal will happen some time in the first half of 2013.

Schultheis believes that these events would lead to an additional BILLION dollars in additional after-tax income for the bank. This naturally would lead to a significant increase in SNV's tangible book value...which might increase from its current $1.6 billion to as much as $2.3 to $2.6 billion by June. That's a big increase, we're looking at $2.88 per share versus a current share price of $2.44. A move like that would likely drive SNV's stock higher. 

Add to this the fact that the economy and housing are improving and good things should be in store for the bank.

As a potential takeover target, any acquisition would be made at a premium to this already increasing book value.

Out Of The Swamp With A 50% Upside By Spring
http://seekingalpha.com/article/1108311-out-of-the-swamp-with-a-50-upside-by-spring?source=email_investing_ideas&ifp=0 

SNL Report: Reversing DTA valuation allowance shows banks “back on track”

http://www.ababj.com/briefing/snl-report-reversing-dta-valuation-allowance-shows-banks-back-on-track-3312.html

I am only adding Synovus as a CAPS pick for now because I am not personally familiar enough yet with the bank accounting nuances to say that this is exactly how things are going to play out here, but this situation certainly looks very interesting.  I plan on looking into it more closely when I have time.

Deej 

1 Comments – Post Your Own

#1) On January 13, 2013 at 2:07 PM, Mega (99.97) wrote:

Meh, there are better financials (especially insurers) trading below tangible book value.

DTAs aren't particularly good assets. You can earn a return on cash or equipment - can't earn a return on a DTA - the only thing it's good for is paying taxes. 

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