ii view: specialist lender Paragon confident after positive start to year

Outperforming the FTSE 250 over the last year and offering an attractive dividend yield. Buy, sell, or hold?

First-quarter trading update to 31 December

• New lending up 22% to £862 million
• Expects full-year Net Interest Margin (NIM) to rise by a further 0.05% to +0.25%

Chief executive Nigel Terrington said:

“Clearly, the economic backdrop remains uncertain, but our financial year has started well with good loan book growth and net interest margins running at levels above expectations.  We remain confident in the guidance given for the full year and our strong capital levels mean we are well-positioned to continue to deliver excellent returns for our shareholders and further support our customers."

ii round-up:

Specialist UK lender and savings bank Paragon Banking Group (LSE:PAG) today cheered a ‘confident’ start to its new financial year.

New lending for the first quarter rose by just over a fifth year-over-year to £862 million, with the FTSE 250 company expecting its NIM, an industry profitability indicator, to rise marginally over the full year 2023. 

Paragon shares rose by around 2% in UK trading and now sit near a multi-year high having recovered from two sharp dips in the past year, nit dissimilar to Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG). The wider FTSE 250 index is down by nearly 10%.

NIM is a measure of the difference between interest earned on loans and interest paid on deposits and is likely to have been aided by Bank of England rate hikes. 

The volume of new buy-to-let mortgage advances, Paragon's biggest product, rose 45% to £591 million compared to the first quarter of last year, although its pipeline of new business shrank by around a quarter to £748 million, hindered by the disruptive Liz Truss mini-budget in September. Paragon did however point to a subsequent stabilization in the marketplace, with new business volumes recently proving encouraging. 

Commercial lending came in at £271 million for the quarter, down from £299 million this time last year. The overall loan book for the Birmingham headquartered bank rose 5.4% for the year to the end of December, reaching £14.4 billion. 

Broker UBS summarised the update as ‘encouraging,’ reiterating its ‘buy’ stance towards the shares. 

First-half results to the end of March are scheduled for 6 June. 

ii view:

Founded in 1985, buy-to-let mortgages today are Paragon's main product, accounting for over 80% of group loans. Commercial lending, including asset finance and motor loans, largely make up the balance. Since its commencement of a retail bank in 2014, customer deposits have grown to overtake securitisation as its core funding method. 

For investors, the highly uncertain economic outlook including a cost-of-living crisis and potential rise in unemployment cannot be ignored. Corporate loan demand could reduce, bad debt provisions may rise as the economy sours, while industry competition for deposits remains intense.  

On the upside, rising interest rates are generally considered to be positive, giving banks more scope to widen margins between deposit rates and loan rates. Paragon’s digitalisation of its products is ongoing, and its balance sheet, or capital cushion has stayed robust at 15.6%. 

For now, and while some caution remains sensible, a forecast dividend yield of over 5% should keep income investors happy. 

Positives: 

• Expanding loan book
• Attractive dividend yield (not guaranteed)

Negatives:

• Uncertain economic outlook
• Business cost generally are rising

The average rating of stock market analysts:

Buy