Interactive Investor

ii view: Paragon Banking raises dividend by 20%

Lending to professional landlords and with a tight grip on costs. We assess prospects for this buy-to-let FTSE 250 banking group.

5th June 2024 11:41

by Keith Bowman from interactive investor

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First-half results to 31 March

  • Adjusted profit up 13.5% to £146.3 million
  • Net Interest Margin (NIM) - the difference between savings and lending rates - up to 3.19% from 2.95% a year ago
  • Interim dividend up 20% to 13.2p per share
  • Capital cushion, or CET1 ratio of 14.7%, down from 15.6% a year ago

Guidance:

  • Now expects full-year share buybacks of up to £100 million, up from a previous £50 million
  • Now expects the NIM over the full year to exceed 3.1%, up from a previous 3.0-3.1%

Chief executive Nigel Terrington said:

"There has been a strong recovery in customer demand with new business pipelines materially above the levels seen at the year-end, improving the outlook for lending volumes for the rest of this year.

"The strength of our business model, long-term track record, and improving customer sentiment, means the Group is well placed to continue supporting our customers’ ambitions whilst delivering strong returns for our shareholders and capitalising on the opportunities in our chosen specialist markets.”

ii round-up:

Buy-to-let lender Paragon Banking Group (LSE:PAG) today detailed profit that beat City expectations as customer demand recovered and cost containment remained strong. 

Adjusted profit for the first half of its financial year to 31 March rose 14% year-over-year to £146.3 million. Analysts had pencilled in around £140 million. That helped underpin a one-fifth hike in the dividend payment to 13.2p and a potential doubling in its planned annual share buyback programme to £100 million. 

Shares in the FTSE 250 specialist lender rose 4% in UK trading to their highest since 2007, having come into these latest results up by just over a half during the last year. That’s ahead of a one-quarter rise for more traditional mortgage lender Lloyds Banking Group (LSE:LLOY) and comfortably ahead of an 8% improvement for the FTSE 250 index 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.

Its buy-to-let pipeline of lending rose to £0.87 billion as at late March, up from £0.59 billion in late September 2023 and with recent application flows maintaining a positive trajectory. 

Mortgage lending for the year to late September is now expected by management to come in at between £1.4 billion and £1.6 billion, up from a previous £1.3-£1.6 billion. 

Estimates for Commercial lending on the same basis rose to £1.1-£1.2 billion from a previous £1-£1.2 billion.

The full-year NIM is now forecast to be over 3.1%, up from a prior expectation of between 3% and 3.1%. 

First-half deposits to the end of March climbed to £14.8 billion from £11.9 billion a year ago. The cost:income ratio improved to 36.5% from 38.1% in late March 2023. 

A third-quarter trading update is scheduled for 30 July.    

ii view:

Started in 1985, the Solihull, West Midlands, headquartered lender today lends to more than 49,000 landlords and over 40,000 business customers. During its last financial year, 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 the wholesale markets. 

For investors, higher interest rates have resulted in a £2.8 million increase in bad-debt provisions year-over-year. The economic backdrop for both the housing market and corporate customers remains tough, with no guarantees of expected interest rate cuts from the Bank of England. Costs for businesses such as wages remain heightened, a pending UK election and a possible hung parliament could scare bond investors resulting in potentially higher interest rates, while competition across the banking industry remains intense. 

On the upside, hopes regarding cuts in UK interest rates later in 2024 persist, likely fuelling increased customer enquiries. A hard focus on costs continues to leave its cost:income ratio below other more traditional lenders such as NatWest Group (LSE:NWG). Like other lenders, current bad debt provisions could prove too high, allowing some returns to shareholders in future, while its balance sheet or capital cushion is still robust at 14.7%. 

For now, and despite continued risks, a forecast dividend yield in the region of 5% will likely keep income investors 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

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