ii view: buy-to-let lender Paragon exceeds expectations

Full-year results to 30 September

• Adjusted profit up 25% to £278 million
• Final dividend of 26.4p per share
• Total dividend for the year up 31% to 37.4p per share 
• Additional £50 million share buy-back planned for year ahead
• Capital cushion or CET1 ratio of 15.5%, down from 16.3% a year ago

Guidance:

Expects year ahead Net Interest Margin (NIM) of between 3% and 3.1%

Chief executive Nigel Terrington said:

“The Group’s diversification strategy and focus on specialist markets across buy-to-let and our commercial divisions provides resilience. 

“Whilst the external environment remains dynamic with high interest rates and inflation, the Group remains well placed to continue supporting its customers in its chosen specialist markets.”

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ii round-up:

Specialist UK lender and savings bank Paragon Banking Group (LSE:PAG) on Wednesday reported profit which beat City forecasts, with guidance for the year-ahead also topping estimates. 

Full-year profit rising 25% to £278 million surpassed analyst hopes for £260 million. Net Interest Margin (NIM), a key industry profit indicator, of between 3% and 3.1% for 2024 also bettered forecasts for 2.9%. NIM is a measure of the difference between interest earned on loans and interest paid on deposits. 

Shares in the FTSE 250 company rose by more than 6% in response to the news having come into this latest announcement down by just over a tenth year-to-date. That’s similar to price falls for Barclays (LSE:BARC) and NatWest Group (LSE:NWG) in 2023, although in contrast to a near one-fifth rise at Asia-focused bank HSBC Holdings (LSE:HSBA).

Paragon specialises in UK Buy-To-Let (BTL) mortgages largely for professional landlords along with lending to commercial customers and collecting retail customer deposits. 

High customer retention following products maturing such as mortgages helped net loan book growth of 4.7% over the year to £14.9 billion, while retail customer deposits grew 24% to £13.3 billion.  

A near one-third increase in the total annual dividend to 37.4p per share was accompanied by an additional £50 million share buyback programme to be made over the year ahead. 

Statutory pre-tax profit dropped by just over a half to £199.9 million, largely because of non-cash accounting fair value gains taken last year. 

Broker UBS reiterated its ‘buy’ stance on the shares post the results, highlighting an estimated fair value price of 690p per share. 

ii view:

Founded in 1985, Paragon today largely offers BTL mortgages, with commercial lending including asset finance and motor loans, mostly making up the balance. Since its commencement of a retail bank in 2014, customer deposits have grown, enabling it to reduce funding via the wholesale markets. 

For investors, although significantly below the industry average, a rise in BTL three-month-plus arrears to 0.34% from 0.15% in 2022 is not to be ignored. The economic backdrop for both the housing market and corporate customers remains tough, costs for businesses generally remain elevated, while competition across the banking industry is still intense. 

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To the upside, bad debt provisions remain low with deposits taken ahead of the broader industry. Paragon’s digitalisation of its products is ongoing, its cost:income ratio reduced to 36.6% from 39.4% a year ago, while its balance sheet, or capital cushion remains robust at 15.5%. 

For now, and despite ongoing risks, a forecast dividend yield in the region of 7% should secure the loyalty of income investors at this specialist UK bank.  

Positives: 

• Digitalising its products
• Attractive dividend yield (not guaranteed)

Negatives:

• Uncertain economic outlook
• Business costs remain elevated

The average rating of stock market analysts:

Buy