- Specialist lender lowers guidance for costs and raises guidance for net interest margin
- Mortgage demand remains strong
- Increase in loan impairments remains modest to suggest wider UK economy is holding up
- Bank increases its interim dividend and adds another £50 million to its share buyback scheme
“A strong set of first-half results, raised profit guidance for the full financial year to September and increases in both the dividend and the share buyback programme all highlight the potential virtues of Paragon Banking’s business model,” says AJ Bell investment director Russ Mould.
“Those looking for vices will note an increase in loan impairments and a provision for car financing commissions, but both are modest, and the shares’ biggest challenge may, for the moment, be the valuation, as only NatWest trades on a higher multiple of historic net asset value among the listed banks.
Source: Company accounts, Marketscreener, consensus’ analysts’ forecasts, LSEG Refinitiv data
“A good first half means that Paragon is gently raising earnings guidance for the year.
“Management still expects new business volumes of £1.7 billion in buy-to-let and £1.3 billion in commercial lending, at the mid-point of the target range, up from £1.5 billion and £1.2 billion respectively in the twelve months to September 2024. Chief executive Nigel Terrington still also sees the lender generating a return on tangible equity between 15% and 20% for the whole year, compared to 20.3% last year and 17.8% in the first six months of this one.
“An already lowly expense ratio is being further helped by the ongoing digitisation programme, whereby Paragon now offers an online buy-to-let lending platform and a new savings app.
“Operating costs are now expected to undershoot initial forecasts of £185 million and the net interest margin is now seen exceeding 3.0%, to perhaps leave it close to last year’s 3.16%. Both of those trends hint at earnings forecast upgrades and the prospect of tangible return on equity coming in toward the higher rather than the lower end of the target range.
“Nor is management seeing anything to cause undue alarm in terms of sour loans. In the first half, Paragon booked £15 million of loan impairments, up from £10 million a year ago. This just looks like a normalisation after a lengthy period of zero interest rate policies (ZIRP) and Quantitative Easing (QE) rather than a red flag about the wider state of the UK economy.
Source: Company accounts.
“The loan impairment charge equates to a cost-of-risk of just 0.19%, which compares favourably to many of its peers. Shareholders will doubtless keep an eye on the bank’s exposure to regulatory investigations into the car financing market and discretionary commission arrangements (DCAs) after the £6.5 million charge booked in the first half. Paragon continues to reassure that its overall exposure to the car financing market remains small, with new lending activity of just £71 million in the first six months of the financial year and total exposure that represents a low single-digit percentage of the overall £16 billion loan book.
Source: Company accounts
“Profits and the dividend look set to rise again in the year to September 2025 and Paragon is supplementing the dividend with another £50 million share buyback, to take the total to £100 million.
Source: Company accounts, Marketscreener, analysts’ consensus forecasts. Financial year to September.
“The only question there may be whether the maths behind the buyback remains compelling, now the shares trade at a lofty premium to book, or net asset, value per share and at levels last seen in 2007, just as the Great Financial Crisis started to hit home.”
