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Paragon banks the profits

The specialist lender has posted outstanding numbers for the year of soaring house prices
December 7, 2021
  • Paragon margins boost profitability
  • Pipeline looks sound for first quarter

A year marked by extraordinary price inflation across housing and car markets was good news for Paragon Banking (PAG), as the specialist lender finished the year by consolidating the expansion in its net interest margins. Paragon, like other banks, was able to release capital from reserves set aside to cover pandemic related losses, which provided a £5.9m boost to the full-year income statement, while the underlying expansion in net interest margins to 239 basis points laid the basis for a huge recovery in profits.

This was particularly notable in the bank’s exposure to mortgage lending in the buy-to-let and specialist markets at a time when demand in those sectors has topped all-time highs. The total mortgage book increased by 6 per cent, thanks to a near 30 per cent year-on-year rise in new business to £1.63bn, which together with tighter funding costs and sharp underwriting pushed up the segment's contribution from £154m to £214m. In absolute terms, commercial lending benefited the most from margin expansion and the reduction of provisions with a near 65 per cent rise in profits to £75.7m.

Chief executive Nigel Terrington said the key indicator for near-term trading will be the pipeline of new business, which is currently much higher than it was at the year-end.

Broker Panmure Gordon forecasts EPS of 54.5p and 58.1p for 2022 and 2023, giving a forward price/earnings ratio of 10 and 9.5, respectively. Paragon is clearly a quality business and has achieved margins far beyond its high street competitors, as well as a small premium in valuation, with more buybacks in the pipeline to please investors. Buy.

Last IC View: Hold, 539p, 8 Jun 2021

PARAGON BANKING (PAG)  
ORD PRICE:553pMARKET VALUE:£1.4bn
TOUCH:552-554p12-MONTH HIGH:570pLOW: 550p
DIVIDEND YIELD:4.7%PE RATIO:8
NET ASSET VALUE:496pLEVERAGE:

14.0

Year to 30 SepNet operating income (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201725314543.115.7
201830218255.919.4
201930715949.421.2
202029511836.014.4
202132521465.226.1
% change+10+80+81+81
Ex-div:27 Jan   
Payment:4 Mar