ii view: Paragon still bullish on buy-to-let

Shares for this specialist UK bank are down by more than 10% in 2022. Buy, sell, or hold?

First-half results to 31 March

• Underlying profit up 27% to £105.5 million
• Interim dividend up 30.6% to 9.4p per share
• Increased full year share buy-back programme by £25 million to up to £75 million
• Capital cushion (CET1) of 15.4%, down from 16%

Chief executive Nigel Terrington said:

"Strong growth in new lending at attractive margins has supported the Group's earnings and return on tangible equity progression while capital levels remain comfortably in excess of our regulatory requirements, providing the foundation for further growth and additional capital returns in the future. Whilst the UK economy faces headwinds, we have a high-quality loan book and we are confident in our momentum, and have upgraded our guidance for the full year.”

ii round-up:

Paragon Banking Group (LSE:PAG) is a specialist UK lender and savings bank and a constituent of the FTSE 250 index. 

Buy-to-let mortgages provide its main product, accounting for over 80% of group loans. Commercial loans and motor finance are other products provided. 

In terms of funding, retail savings deposits now total close to £10 billion. 

For a round-up of these latest results, please click here. 

ii view:

Founded in 1985, Paragon today employs over 1,400 people. Along with specialist loan products and retail savings, Paragon also operates Idem Capital, 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 and wholesale funding such as loans from other banks or from pension funds.

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For investors, an uncertain economic outlook and a cost-of-living crisis for consumers offer a tough backdrop. Tenants of the bank's many buy-to-let loans may now be finding their finances increasingly stretched. Unemployment could also rise, while corporate loan demand could reduce as interest rates increase.

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More favourably, rising interest rates are generally considered to be positive for Paragon, giving banks more scope to widen margins between deposit rates and loan rates. The group’s digitalisation of products remains ongoing, its cost income ratio fell to 41.2% from 42.5% a year ago, and its capital cushion remains robust at 15.4%. On balance, and while some caution looks sensible, a forecast future dividend yield in the region of 5.5% at what is a well managed bank is likely to remain attractive to income investors.  

Positives: 

• Buy-to-let mortgage activity exceeded pre-Covid levels
• Extended share buy-back programme

Negatives:

• Uncertain economic outlook
• Business cost generally are rising

The average rating of stock market analysts:

Buy