BoA Merrill downgrades Paragon on valuation

Bank of America Merrill Lynch downgraded Paragon Group to ‘underperform’ from ‘neutral’ on valuation grounds.

It noted the shares are up 5% year to date and 20% above their pre-Brexit levels, with Paragon the best-performing UK specialist lender in its coverage.

The bank increased its price target to 360p from 350p. It said the execution of the move is going “extremely well” as Paragon transitions to a retail funded, diversified banking group, but that the transition is not cost free and "substantial uncertainties" within the environment remain.

“While we fully endorse Paragon’s strategic initiatives, as the business mix becomes inherently riskier, and the environment more uncertain, we think there is a limit to where higher leverage can drive a higher equity rating.”

Since the 2008 financial crisis the company has opened other retail funding channels and launched a bank to provide it with new funding opportunities, but this brings increased regulatory scrutiny, Merrill said.

The bank said that the recent acquisition of 5 Arrows, an asset finance business, brings increased diversity, which should help offset a slowdown in Idem Capital, the group's loan acquisition business.

At 1430 GMT, the shares were down 6.10% to 347.90p.