ii view: buy-to-let lender Paragon gets digital boost

First-half results to 31 March

• Total income up 2% to £259 million
• Adjusted profit down 2.5% to £145.7 million
• Net Interest Margin (NIM) - the difference between savings and lending rates – down to 3.08% from 3.13% a year ago
• Interim dividend up 11% to 15.1p per share
• New £50 million share buyback adding to an existing £50 million programme
• Capital cushion or CET1 ratio of 13.5%, down from 14.2% a year ago

Guidance:

• Now expects full-year mortgage lending at the lower end of a previous £1.5-1.7 billion range
• Expects a full-year 2027 NIM of 3%, up from previous estimate of between 2.9% and 3%

Chief executive Nigel Terrington said:

“Paragon delivered a strong performance in the first half, reflecting our long-term, disciplined approach to managing the business.

“Whilst we are mindful of the volatile external environment, our deep experience, strong capital ratios and ongoing technology improvements, mean that we remain well placed to support our customers, deliver sustainable growth and capitalise on any opportunities that may arise.”

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ii round-up:

Buy-to-let lender Paragon Banking Group (LSE:PAG) today lowered expectations for annual mortgage lending but improved its forecast operating annual cost performance as the bank continued its push towards digital services.

Full-year mortgage lending is now expected to come in at the lower end of a previous £1.5-1.7 billion range. Annual operating expenses of around £185 million are down from a previous forecast of below £190 million.

Shares in the FTSE 250 specialist lender fell modestly in UK trading having come into these latest results down just over a tenth so far in 2026. That’s similar to high street bank NatWest Group (LSE:NWG). The FTSE 250 is up almost 5% year-to-date.  

Paragon specialises in UK buy-to-let mortgages, largely for professional landlords, along with other loans such as commercial asset finance and collecting retail customer deposits.

Increased bad debt provisions, largely for corporate development financing, helped leave adjusted profit for the half-year to late March down 2.5% to £145.7 million. That broadly matched City expectations.

An 11% increase in the interim dividend to 15.1p, payable to eligible shareholders on 24 July, was accompanied by an additional £50 million to its existing and ongoing £50 million share buyback programme.

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Paragon now expects a full-year Net Interest Margin (NIM) - the difference between savings and lending rates – of 3%, up from a previous estimate of between 2.9% and 3%.

Broker UBS reiterated its ‘buy’ stance on the shares post the results. A third-quarter trading update is scheduled for 29 July.

ii view:

Headquartered in Solihull in the West Midlands, Paragon employs around 1,400 people. Mortgage lending accounted for its biggest chunk of revenue during its last financial year at 57%. Commercial lending came next at 28%, with other items accounting for the balance of 15%.    

For investors, a war in the Middle East and elevated energy prices now cast a shadow over inflation and therefore interest rates – potentially hindering lending activity. Bad loan provisions largely relating to commercial development financing have increased. An estimated net asset value-to-share price ratio of 1.0 times is more than other banks like Barclays at 0.8 times, suggesting the shares are not obviously cheap, while competitors such as Lloyds and NatWest are not standing still.

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On the upside, an improvement in the underlying return on tangible equity from 12.3% in early 2016 to the latest 17.4% suggests a well-managed bank. A focus on technology is also expected by management to drive increased cost efficiencies. Shareholder returns now total £1.2 billion over the last 10 years, while Paragon’s capital cushion, or CET1 ratio remains robust at 13.5%.

In all, uncertainty about the economic outlook now offers room for caution, but a forecast dividend yield of around 6% is likely to keep investors interested at a share price rarely seen in the past 13 months.

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