ii view: income play Paragon builds on growth initiatives

Nine-month trading update to 30 June

• New advances up 4.3% to £2.06 billion

Guidance:

• Continues to expect a full-year 2027 Net Interest Margin (NIM) - the difference between savings and lending rates – of 3%
• Continues to expect a full-year share buyback of up to £100 million

Chief executive Nigel Terrington said: “Paragon’s trading continues to be strong, with exciting new growth opportunities building on the underlying strength of the business. Credit performance remains excellent, and we are achieving good margins and operating leverage delivered through the strength of our franchises and our ongoing tight control of costs.

“We are confirming our guidance for the current year and remain well positioned to deliver further growth in FY27 as these new developments roll out.”

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ii round-up:

Paragon Banking Group (LSE:PAG) is a specialist UK lender and savings bank and a constituent of the FTSE 250 index.

Buy-to-let mortgages are its main product, accounting for close to three-fifths of lending during its last financial year, with commercial loans providing most of the balance.  

For a round-up of this latest update announced on 29 July, please click here.

ii view:

Headquartered in Solihull in the West Midlands, Paragon employs around 1,400 people. The FTSE 250 company has originated over £32 billion of buy-to-let lending since 1996. Mortgage-related customers total more than 46,000. A banking licence obtained in 2014 now sees it lending to over 42,000 small and medium-sized commercial customers.  

For investors, ongoing conflict in the Middle East and raised energy prices continue to cast a shadow over inflation and future interest rates, potentially hindering lending activity going forward. Bad loan provisions largely relating to commercial development financing increased as of half-year results. An estimated net asset value to share price ratio of 1.1 times sits ahead of other banks like Barclays at 0.9 times, while competitors such as Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG) are not standing still.

• Shares the pros are backing for solid dividend growth
• The Income Investor: a cyclical dividend stock in an ‘overlooked’ index
• Insider: ex-HSBC man backs recovery at this lender

On the upside, growth initiatives include looking to increase business with agricultural clients as well as developing the group’s short-term gap financing or bridging loan capabilities. An improvement in the underlying return on tangible equity from 12.3% in early 2016 to 17.4% as of half-year results suggests a well-managed bank. A focus on technology is expected by management to drive increasing cost efficiencies, while Paragon’s capital cushion or CET1 ratio remains robust at 13.5%.

For now, and while risks remain, a consensus analyst estimate of fair value sat at over £10 per share and an estimated future dividend yield of over 5% are grounds for ongoing long-term optimism.

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