ii view: specialist lender Paragon restarts the dividend

Covid has hurt, but the worst might now be behind this specialist UK lender.

Full-year results to 30 September

• Pre-tax profit down 26% to £118.4 million
• Final dividend of 14.4p per share
• No interim previously paid - total dividend for the year down 32% to 14.4p per share
• Capital cushion up 4.4% to 14.3%

Chief executive Nigel Terrington said:

"Covid-19 has impacted every individual and business across the UK.  However, we entered this year from a position of strength, with strong capital and liquidity, an exemplary loan book and an increasingly diversified business. Our lending performance has been robust and we have seen a recovery and growing momentum in new lending activities.

"2021 will continue to present challenges for the people and businesses of the UK. Our financial and operational strength mean we are well placed to respond to these challenges and to react to the opportunities that will inevitably emerge."

ii round-up:

Specialist banking group Paragon (LSE:PAG) has reported a 26% fall in profits as bad debt provisions and disruption to the housing market during the Covid pandemic both impacted business.   

Bad debt provisions rose by 500% year-over-year to £48.3 million as buy-to-let mortgage advances retreated by nearly 15% to £1.12 billion. 

Paragon shares rose by more than 6% in UK trading to bring the year-to-date fall to around 15%. Shares of Provident Financial (LSE:PFG) are down by almost 30% in 2020, while shares of Onesavings Bank (LSE:OSB) are down by under 5%. 

However, the fall in profits proved to be better than City forecasts, with a return to dividend payments underlining a robust capital cushion position. Its Common Equity Tier one ratio or capital cushion rose by 4.4%. 

The performance of its retail deposits proved notable, growing by 22.9% to just over £7.8 billion. Direct customer deposits had been supplemented by closer ties with third-party platforms - helping to further diversify its funding for loans. 

Group lending overall grew by 3.7% year-on-year as lending volumes remained robust despite the pandemic. Growth of 6.2% in property development financing helped to offset reductions for both mortgage and commercial lending. 

ii view:

Founded in 1985, specialist UK banking group Paragon employs over 1,300 people. Headquartered in Solihull in the West Midlands, it has over 75,000 buy-to-let mortgages, more than 35,000 commercial business customers and over 180,000 savings customers, with an average deposit in the region of £29,000. It also runs acquired loan portfolios in its Idem Capital business, 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 its buy-to-let lending, a focus on professional landlords was previously made, reducing its exposure to the lower-priced amateur landlord sector. Corporate development finance and continued progress in SME lending has been the focus for commercial lending. But Covid-19 is now casting a major shadow over prospects.

For investors, pandemic uncertainty continues to overshadow the broader economy, as do the exact terms and conditions for leaving the European Union. But Paragon does enjoy diversity of product and the capital cushion has risen, while a return to a dividend payment is a sign of confidence in the outlook.  

Positives: 

• Increased capital cushion
• A return to a dividend payment

Negatives:

• Ongoing Covid-19 uncertainty
• Core buy-to-let lending fell

The average rating of stock market analysts:

Buy