ii view: Paragon Bank shares near post-crisis highs after Q1 results

First-quarter trading update to 31 December

• New lending down 29% year-over-year to £611 million
• Capital cushion, or CET1 ratio of 14.7%, down from 15.5% in late September

Chief executive Nigel Terrington said:

"The first quarter of the new year has started well. The positive momentum seen in the business in 2023 has continued, alongside robust margins and a resilient credit performance. This, coupled with a notable improvement in sentiment, gives us encouragement for the remainder of the year."

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ii round-up:

Buy-to-let lender Paragon Banking Group (LSE:PAG) today flagged rising customer enquiries as it detailed trading inline with management expectations and unchanged year ahead estimates. 

Total first-quarter lending for the three months to late December, including both mortgages and commercial loans, declined by almost a third to £611 million as customer caution rose because of higher interest rates. However, its buy-to-let lending pipeline was now comfortably ahead of the £560 million position as of late December. 

Shares in the FTSE 250 company fell around 1% in UK trading having come into this latest news up by close to 5% over the last month. That’s similar to US banking giant Citigroup Inc (NYSE:C) and comfortably ahead of a 14% fall for UK high street lender Lloyds Banking Group (LSE:LLOY). The FTSE 250 index itself is down almost 2% in 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. 

Buy-to-let redemption rates had continued to fall during the quarter, with £205 million of loans redeeming compared to £408 million in the first quarter a year ago, reflecting strong customer retention levels at product maturity. 

Deposit balances grew by 7% during the period, supporting growth, while funding for its dividend and share buyback programme lowered the capital cushion, or CET1 ratio to a still robust 14.7% from the previous quarter’s 15.5%.  

Broker UBS reiterated its ‘buy’ stance on the shares post the trading update, highlighting an estimated fair value price of 730p per share. First-half results are due 5 June. 

ii view:

Started in 1985, the Solihull, West Midlands, headquartered lender today employs around 1,500 people. During its 2023 financial year to the end of September, mortgage-related lending accounted for the bulk of activity at around three-fifths, with commercial lending including asset finance and motor loans making up most of the balance. The commencement of a retail bank in 2014 and the taking of customer deposits has enabled it to reduce its funding via wholesale markets. 

For investors, although below the industry average, arrears for its variable rate legacy buy-to-let book continue to be impacted by higher borrowing rates. The economic backdrop for both the housing market and corporate customers remains tough. Costs for businesses such as wages continue to climb, while competition across the banking industry remains intense. 

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More favourably, there are hopes that UK interest rates will start to decline in 2024, likely fuelling increased customer enquiries. Customer arrears remain below the industry average, Paragon’s digitalisation of its products is ongoing and likely to reduce costs, while its balance sheet or capital cushion at 14.7% remains robust. 

On balance, and despite ongoing risks, a forecast dividend yield in the region of 5% will likely keep income investors sat tight. 

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