ii view: mortgage lender Paragon beefs up shareholder returns

First-half results to 31 March

• Adjusted earnings per share up 9.6% to 54.7p
• Net Interest Margin (NIM) - the difference between savings and lending rates – down to 3.13% from 3.19% a year ago
• Interim dividend up 3% to 13.6p per share
• Increasing full-year share buyback programme to £100 million from £50 million
• Capital cushion, or CET1 ratio of 14.2%, down from 14.7% a year ago

Guidance:

• Now expects full-year NIM to come in at ‘over’ 3% as opposed to a previous ‘around’ 3%

Chief executive Nigel Terrington said:

“We delivered another strong financial and operational performance in the first half of 2025, reflecting our disciplined approach and consistent track record of execution.

“With strong momentum and a resilient business model, we are well placed to navigate the evolving external environment and remain optimistic about the remainder of the financial year and beyond.”

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ii round-up:

Buy-to-let lender Paragon Banking Group (LSE:PAG) today detailed higher interim profits as well as an increase in its ongoing share buyback programme.

Borrower moves to help beat changes in stamp duty helped push mortgage lending up 4.5% year-over-year to £13.7 billion, more than offsetting a £6.5 million provision taken for potential undisclosed motor loan commissions. 

Adjusted earnings for the first half to late March rose 9.6% from a year ago to 54.6p per share, aiding a doubling in the group’s annual share buy back programme to £100 million.

Shares in the FTSE 250 specialist lender rose 1% in UK trading having come into this latest news up by around a fifth so far in 2025. That’s comfortably ahead of a 2% gain for the FTSE 250 index itself year-to-date. Fellow major mortgage lender Lloyds Banking Group (LSE:LLOY) is up 40% during that time. 

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.

New mortgage lending increased by a quarter during the period, potentially assisted by borrowers rushing to beat the chancellor’s lowering of the first-time buyers stamp duty threshold to £300,000 from £425,000 effective from 1 April. 

New commercial lending for the half year reduced 3.7%, hindered by timing differences on the utilisation of new facilities and despite an increase in lending to small and medium sized businesses. Deposit balances increased 6.8% from a year ago to £15.8 billion. 

Paragon now expects full-year Net Interest Margin (NIM) - the difference between savings and lending rates - to come in at "over" 3%. That’s an improvement from management’s previous estimate for "around" 3%.  

An interim dividend of 13.6p per share, payable to eligible shareholders on 25 July, is up 3% from a year ago. A third-quarter trading update is scheduled for 29 July. 

ii view:

Started in 1985, Paragon today employs just over 1,400 people. Headquartered in Solihull in the West Midlands, the bank lends to more than 48,000 landlords and over 41,000 UK business customers. Direct savings customers total more than 291,000. Mortgage lending accounted for its biggest slice of operating income over its last financial year at 58%, followed by commercial lending at 27%, and central HQ activity a balance of 15%.

For investors, exposure to motor lending and current uncertainty regarding potential regulatory fines is not to be dismissed. An estimated net asset value-to-share price ratio of 1.2 times is ahead of other banks like Barclays at 0.7 times, suggesting the shares are not obviously cheap. Uncertainty regarding the housing market persists, with no guarantee of further UK rate cuts, while corporate lending impairments could rise given an increase in employment taxes. 

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On the upside, a solid ten-year track record both for growth in lending and adjusted earnings suggest a well-managed bank. Moves to offer apps under a digitalisation push likely support a further reduction in the cost:income ratio to 35.2% from 36.5% a year ago. A diversity of lending streams persists, while the bank’s capital cushion, or CET1 ratio remains robust at 14.2%. 

In all, and despite ongoing risks, a focus on shareholder returns and a forecast dividend yield of more than 4.5% are likely to attract attention to this specialist lender. 

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