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Paragon shows resilience

A post-pandemic recovery in buy-to-let demand sustains the specialist lender’s performance
June 14, 2022
  • Loan book expands on buy-to-let demand
  • Base rates going in the right direction

Paragon’s (PAG) results didn’t show any sign that fears over the general direction of the UK economy were having much impact on the underlying demand for buy-to-let mortgages: the combination of an expanded loan book, plus rate rises coming through boosted the bank’s half-year net interest margin by 11 per cent. Some of that effect is down to customers accessing loans in the aftermath of the pandemic, but Paragon also benefited from the mismatch between deposit rates not yet catching up with the change in base rates. Either way, the market seemed impressed and the shares rose by 8 percent on an otherwise indifferent trading day.

It is the structural lack of supply that has kept house prices higher in the UK – though mortgage volumes are technically lower – but Paragon’s specialisation in the buy-to-let sector also helped - the overall loan book was up by 8.6 per cent. “We don’t operate in the mainstream market and the specialist landlord sector overall is less volatile,” said chief executive Nigel Terrington. However, the general state of the UK economy will influence things. Terrington added: “As things stand, we haven’t seen any evidence of a downturn in our markets, but we will make the provision in case that happens.”

Broker Peel Hunt upgraded its forecasts for 2022 by 12 per cent to give an EPS of 65p. That gives Paragon a forward PE rating of 7.8, which is mid-range for the sector. That suggests the possibility of further upside if it maintains its defensive performance. Buy.

Last IC View: Buy, 553p, 7 Dec 2021

PARAGON BANKING (PAG)  
ORD PRICE:511pMARKET VALUE:£ 1.24bn
TOUCH:510-512p12-MONTH HIGH:619pLOW: 408p
DIVIDEND YIELD:5.5%PE RATIO:6
NET ASSET VALUE:529p*LEVERAGE:14.4
Half-year to 31 MarNet operating income (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
202115596.429.47.20
202218214444.49.40
% change+17+49+51+31
Ex-div:7 July   
Payment:29 July