Paragon's profit climbs as it transitions to retail banking

Mortgage provider Paragon Group drove annual profits higher as it transitions to a retail bank, hiking its dividend more than 20% and announcing a share buyback to further please investors.

In the year ended 30 September, underlying profit rose 9.1% to £146.9m compared to last year thanks to organic growth from more diverse income streams, together with merger and acquisition activity.

Profit before tax increased by 6.7% to £143.2m, earnings per share was up 14.1% to 40.5p and the dividend was increased 22.7% to 13.5p.

Underlying return on tangible equity improved 13.2% due to profit growth and a share buy-back programme, and there is a further £50m share buy-back programme planned.

Even after previous buybacks the tier one capital ratio (CET1) has slipped to a still-strong 15.9% from 19.1%, while the leverage ratio fell to 6.2% from 7.7%. The total capital ratio was 19%, enhanced by a £150m tier two issue.

The company said there was “strong” lending growth against a economic challenging backdrop, with total completions and asset purchases up to £1.64bn from £1.49bn.

Buy-to-let completions fell slightly to £1.16bn from £1,32bn, while the proportion of non-buy-to-let lending increased to 29.5% of total group lending from 11%.

The company said that Paragon Bank was fast becoming its “core engine for growth and diversification” as it swung to a profit of £11.6m from an £8.6m loss, as retail deposit balances increased by 164.4% over the year to £1.87bn.

There are plans to launch a range of specialist residential lending products this year to broadening its product range.

Idem Capital, the investment division of the company, is working with Paragon Bank to optimise retail deposit funding.

Chief executive Nigel Terrington said: "Whilst the year has been disrupted by fiscal and regulatory changes, as well as political and macroeconomic factors, our customers' performance has been exemplary and new business activity has seen encouraging growth recently.

“Paragon's operating model is undergoing significant change, as it transitions from a non-bank, securitised, monoline lender into a retail funded banking group. Paragon Bank is increasingly at the heart of the group's development, with its deposit book now exceeding £2bn and its franchise firmly established. This has facilitated further progress in our diversification strategy, notably through the acquisition of Five Arrows Leasing Group and, more recently, Premier Asset Finance, which together have given Paragon a strong platform to build on the significant growth potential in the UK SME finance market.”

Broker Shore Capital said the group’s capital position put it amongst the best capitalised of the quoted specialist banks.

"This provides significant strategic flexibility to fund a combination of growth, acquisitions and returns to shareholders. The funding position is also strong, noting that deposit balances now stand at over £2bn, having grown from a standing start over the past two years," analysts wrote.

"As such, the group is no longer reliant on wholesale wholesale markets to finance lending, with securitisation now used on a more tactical basis (indeed there is scope to use deposit funding to refinance some older securitisations and further lower group funding costs). Furthermore, the group plans to access the Bank of England's Term Funding Scheme (TFS) in the current financial year, thereby adding a further source of low cost funding."

Shares in Paragon Group of Companies were up 5.28% to 381.10p at 0823 GMT.