ii view: Paragon Banking takes Covid provisions and scraps dividend

This specialist lender was doing very nicely until Covid arrived. Buy, sell or hold?

Half-year results to 31 March 2020

• Net interest receivable up 2.4% to £141.4 million 
• Adjusted profit down 28% to £57.2 million/billion
• Covid-19 provision of £27.7 million
• No interim dividend payment

Chief executive Nigel Terrington said:

"Our priorities during the outbreak of Covid-19 have been to support our customers and suppliers, protect our people, safeguard our capital base and preserve the long-term value of our business. We reacted quickly and with agility, achieving full operational stability and making all products and services available.

"The group made strong progress up to the commencement of the UK lockdown, with lending volumes and yields broadly in line with expectations. We have a high-quality loan book, 98% of which is secured, and strong capital and liquidity, and our business stands ready to meet the changing needs of our customers throughout this challenging period and into the next business cycle."

ii round-up:

Specialist banking group Paragon (LSE:PAG) today posted a 28% fall in half-year profits as provisions made for the hit from the corona crisis impacted. 

The buy-to-let and business lender booked a £27.7 million charge to cover expected losses from the pandemic. First-half adjusted profit came in at £57.2 million, down from £79.8 million last year. 

Loan impairment provisions were raised by £24 million to a total of £30 million, while a £3.7 million provision was taken to cover expected lost income from previously purchased loan portfolios. 

Paragon shares were little changed in early UK stock market trading, having fallen by more than 30% year-to-date. Shares of Onesavings Bank (LSE:OSB) are down by a similar amount over 2020, while Provident Financial (LSE:PFG) shares have more than halved. 

In line with previous banking regulatory guidance, Paragon is not paying a half-year dividend, although will review the situation at the end of the financial year. 

New lending for the half-year was broadly inline with management’s expectations, although a curtailing of activity was seen in the second half of March as Covid-19 began to overshadow. Total mortgage lending for the period fell by nearly 5% to £793 million, while commercial lending rose by 5.7% to £481 million. 

Accompanying group outlook comments noted that “reduced demand across the UK economy will lead to decreased lending volumes which in turn will impact on the group's future income. At this stage, it is difficult to predict when lending markets will return to normality.”

The bank’s capital cushion, or common equity tier 1 ratio (CET1), stood at 14% at the end of March, up from 13.7% back in late September.

ii view:

Founded in 1985, Paragon today employs over 1,300 people. Headquartered in Solihull in the West Midlands, more than 1.5 million customer accounts help it generate deposits which it, by and large, lends out either in the form of buy-to-let mortgages or to Small to Medium Size Enterprises (SMEs). 

For its buy-to-let lending, a focus on professional landlords has recently been 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, reassurance can be taken from an increase in the bank’s capital cushion and a loan book which is 98% secured against assets. An attractive valuation, according to broker UBS, with a tangible net asset value of 0.9 times, also adds to Paragon’s attraction. But the loss of the 5%-plus historic dividend yield is a blow, while the level of uncertainty in the outlook significant. For now, cautious investors may want signs of economic recovery before adding to holdings in this formerly attractive income play. 

Positives: 

• Increased capital cushion
• Operating costs down over 1% year-over-year

Negatives:

• Dividend suspended due to Covid-19
• Additional Covid-19 provisions could in the future be required

The average rating of stock market analysts:

Buy