ii view: mortgage demand is boost to Paragon profits

Full-year results to 30 September

• Operating profit up 5.4% to £292.7 million
• Net Interest Margin (NIM) - the difference between savings and lending rates - up to 3.16% from 3.09% a year ago
• Final dividend of 27.2p per share
• Total dividend for the year up 8% to 40.4p per share
• New £50 million share buyback
• Capital cushion, or CET1 ratio of 14.2%, down from 15.5% a year ago

Chief executive Nigel Terrington said:

"It has been another year of strong financial and operational performance, building on our consistent track record over the past decade, underpinned by the strength of our business model and long-term strategy.

“Paragon's consistent focus on sustainable growth, enabled by an increasingly diversified and digitalised operating model, together with strong internal capital generation, puts us in a strong position to continue delivering superior returns to our shareholders whilst continually supporting our customers' ambitions."

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ii round-up:

Improving loan demand helped buy-to-let lender Paragon Banking Group (LSE:PAG) today detail increased annual profits and a new £50 million share buyback programme. 

Net loan book growth of 5.6% year-over-year to £15.7 billion helped adjusted operating profit climb 5.4% in the year ended 30 September to £292.7 million. Net interest income rose 7.6% to £483 million, with customer deposit balances increasing 23% to £16.3 billion. 

Shares in the FTSE 250 specialist lender rose 2% in UK trading having come into these latest results up 7% year-to-date. That’s similar to major mortgage lender Lloyds Banking Group (LSE:LLOY) and in line with the FTSE 250 index. 

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.

The bank’s pipeline of buy-to-let mortgage lending at year end stood at £0.88 billion, up from £0.59 billion a year ago and supportive of performance in 2025. Pipeline lending for developmental commercial loans rose to £0.20 billion, up from £0.15 billion year-over-year. 

Management’s ongoing focus on costs pushed the efficiency or cost:income ratio down to 36.1% from 36.6% in 2023. A final dividend of 27.2p per share leaves the total payment for the year up 8% to 40.4p per share. 

A first-quarter trading update is scheduled for 24 January. 

ii view:

Started in 1985, the Solihull, West Midlands bank today lends today lends to more than 49,000 landlords and over 40,000 business customers. Mortgage lending accounted for its biggest slice of operating income over this latest financial year at 58%, followed by commercial lending at 27% and central HQ activity a balance of 15%. Mortgage related profits totalled £263 million with commercial lending at £107 million. 

For investors, pressured consumer spending likely helped drive an increase in three-month-plus buy-to-let arrears of 0.38% versus 0.34% in 2023. The economic backdrop for both the housing market and corporate customers remains tough, with no guarantees of Bank of England interest rate cuts. Recent budget measures may increase pressure on businesses and hinder corporate lending, while a net asset value-to-share price ratio of 1.2 times is more than other banks like Barclays (LSE:BARC) at 0.6 times, suggesting the shares are not obviously cheap.  

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More favourably, hope regarding UK rate cuts persists, likely fuelling robust mortgage demand. A focus on costs continues to leave the group’s cost:income ratio below that of other more traditional lenders such as NatWest Group (LSE:NWG). Like other lenders, current provisions for bad debt could prove too conservative, possibly allowing the return of cash to shareholders, while Paragon's balance sheet, or capital cushion remains robust at 14.2%. 

For now, and despite continued risks, a 10-year record of rising loan book growth and a forward dividend yield of more than 5% are likely to keep investors interested in this specialist lender. 

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