Interactive Investor

ii view: Paragon profits propelled by pandemic recovery

8th June 2021 11:30

Keith Bowman from interactive investor

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Exposure to buy-to-let lending and an income yield of over 2.5%. Buy, sell or hold?

First-half results to 31 March

  • Adjusted profit up 45% to £83 million
  • Interim dividend of 7.2p per share
  • A share buy-back programme of up to £40 million
  • Capital cushion up 11% to 16%

Chief executive Nigel Terrington said:

"I am incredibly proud of these results. They reflect the hard work of our people during a challenging period as well as the success of our longstanding strategy to build a technology-enabled specialist banking group. We have delivered record half-year profits and go into the second half of 2021 with strong momentum, healthy new business pipelines and enhanced margins.

“Our people continue to excel, maintaining both productivity and flexibility as we look to develop options for the future operating model of the Group. We look forward to the second half with strong capital ratios, prudent liquidity and with growing confidence as the UK emerges from the Covid crisis."

ii round-up:

Specialist banking group Paragon (LSE:PAG) posted a record first-half underlying profit as lending volumes recovered from Covid-19 related disruption and uncertainty. 

New lending levels rose 45% from the second half of 2020, helping profit for the six months to the end of March rise to £83 million from a prior year £57 million. Bad debt provisions for the period fell to £6 million from £30 million during the pandemic hit first-half of 2020.

Paragon’s share price rose by around 10% in UK trading, with its share price having more than doubled since pandemic induced market lows back in March 2020. Shares for UK high street major Barclays (LSE:BARC) have risen by 120% over the same time, and Lloyds Banking Group (LSE:LLOY) is up by 62%. 

Along with an interim dividend of 7.2p per share, Paragon also announced a share buyback programme of up to £40 million. 

Buy-to-let advances, although down 5% on the first half of 2020 at £714.9 million, were up 58% on the second half of 2020. Its total buy-to-let portfolio rose 4.7% year-on-year to £10.9 billion as redemptions fell 8.6%, aided by an ongoing improvement in customer retention rates. 

Paragon's results come a day after the latest Halifax house price survey for May showing an average price gain year-over-year of 9.5%, with annual house price inflation now at its strongest level in nearly seven years. 

Paragon’s commercial loans fell due to the impact of the pandemic, although development finance volumes rose by 16%. Retail savings deposits during the period increased by a quarter to £8.6 billion. 

Accompanying management outlook comments pointed to growing confidence as the UK emerges from the Covid crisis.

ii view:

Specialist UK banking group Paragon employs over 1,300 people. Headquartered in Solihull in the West Midlands, it has over 70,000 buy-to-let mortgages, more than 35,000 commercial business customers and over 190,000 savings customers with an average deposit in the region of £30,000. It also operates in the idem capital space, buying and servicing loan portfolios from others which can include products such as leases, motor finance agreements and unsecured loans. Its lending is funded by deposits from savings customers along with wholesale funding such as loans from other banks or from pension funds. 

For investors, ongoing pandemic and economic uncertainty should not be ignored. The removal of government pandemic assistance schemes could at some point result in rising unemployment and increased housing-related payment arrears or default.

That said, these latest results indicate a rebound in customer confidence, given the continued vaccination programme and ongoing government assistance to the housing market. Diversity of product, a rising capital cushion and an historic and forecast dividend yield of over 2.5% all offer positives. In all, and with momentum moving in the right direction, investors are likely to regard the shares as attractive for the long term. 

Positives: 

  • Increased capital cushion
  • Commencing a share buy-back programme of up to £40 million

Negatives:

  • Ongoing Covid-19 uncertainty
  • Commercial lending, motor and SME lending volumes fell year‑on‑year

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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