ii view: mortgage lender Paragon punished for cautious outlook

Full-year results to 30 September

• Adjusted earnings per share up 8.5% to 109.7p
• Net Interest Margin (NIM) - the difference between savings and lending rates – down to 3.13% from 3.16% a year ago
• Final dividend of 30.3p per share
• Total dividend for the year up 8.7% to 43.9p per share
• New £50 million share buyback programme for the 2026 year ahead
• Capital cushion or CET1 ratio of 13.6%, down from 14.2% a year ago

Guidance:

• Expects the full year 2026 NIM at between 2.9% to 3%

Chief executive Nigel Terrington said:

“While the external environment remains uncertain, we see plenty of opportunity ahead in our chosen specialist markets. 

“With a strong capital position, a modern digital platform and a clear strategy, Paragon is well placed to continue building on this success, delivering sustainable growth and attractive returns for our shareholders."

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ii round-up:

Buy-to-let lender Paragon Banking Group (LSE:PAG) today detailed record annual earnings despite flagging stop-start customer demand due to heightened political uncertainty and related interest rate outlook volatility.

Reduced costs helped offset increased provisions and a hike in motor financing redress provisions to £25.5 million from a previous £6.5 million. Adjusted earnings rose 8.5% to a record 109.7p per share. 

Accompanying 2026 outlook comments pointed to an expected improvement in the property lending backdrop as rates reduce, although with the Net Interest Margin (NIM) - the difference between savings and lending rates – potentially coming in as low as 2.9%. Analysts had forecast a rate of 3%. 

Shares in the FTSE 250 specialist lender fell 6% in UK trading having come into these latest results up by just over a tenth so far in 2025. That’s ahead of a 6% gain for the FTSE 250 index year-to-date. Shares in standard mortgage lender Lloyds Banking Group (LSE:LLOY) are up by close to 80% over 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.

Total new lending over the year of £2.68 billion fell from 2024’s £2.73 billion. Mortgage Lending advances stayed flat at £1.49 billion, with commercial lending advances falling to £1.19 billion from the prior year’s £1.24 billion. 

Paragon’s ongoing push to digitalise services helped costs remain almost unchanged year-over-year with the cost:income ratio improving to 34.8% from last year’s 36.1%. 

A final dividend of 30.3p per share, and payable to eligible shareholders on 6 March, takes the total payment 8.7% year-over-year to 43.9p per share.

A further £50 million share buyback for the 2026 year ahead follows on from a £100 million programme during 2025. 

Broker UBS reiterated its ‘buy’ stance on the shares post the results. A first-quarter trading update is scheduled for 28 January.

ii view:

Headquartered in Solihull in the West Midlands, Paragon employs around 1,400 people. Mortgage lending net loan balances accounted for its biggest chuck of business over this latest year at 85%, with commercial lending making up the balance of 15%.  

For investors, likely ongoing interest uncertainty will probably continue to cast a shadow over core buy-to-let lending going forward. Bad loan provisions and largely relating to commercial development financing have increased. A forecast net asset value-to-share price ratio of 1.3 times sits ahead of other banks like Barclays (LSE:BARC) at 0.9 times, suggesting the shares are not obviously cheap, while competitors such as Lloyds are not standing still. 

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More favourably, a solid 10-year track record for growth in lending and adjusted earnings suggest a well-managed bank. Management comments highlight motor financing as a small part of the group’s overall business. A diversity of lending streams exists, while the bank’s capital cushion or CET1 ratio remains robust at 13.6%.

On balance, and despite ongoing risks, a focus on shareholder returns and a forecast dividend yield of over 5% are likely to keep fans of this specialist lender interested.

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