Paragon rides high on deposit rush

Hedging losses complicated the reported income statement at specialist lender Paragon Banking Group (PAG), but it is clear the company is enjoying the fruits of rising interest rates. The bank’s net interest margin increased from 2.57 per cent to 2.95 per cent year on year and is now expected to reach 3 per cent by 30 September, higher than previously forecast. With costs under control and a growing lending book, despite disruption in the market, investors were quick to bid up the shares on results day.

The competition to attract depositors’ hard-earned cash showed how the market for fixed-term savings products has suddenly reappeared after a 15-year hiatus. The bank’s deposits soared by £2bn to £11.9bn as Paragon competed for savers’ money with its own suite of fixed-term deposit accounts. Chief executive Nigel Terrington said: “Total deposits held in term accounts is still only 9 per cent, despite the interest rate rises, there is still room for growth.” Paragon maintained its cost ratio at 38 per cent, with cash costs projected to stay flat for the year at £170mn.

On the asset side of the balance sheet, the bank’s loan book grew by 2.4 per cent to £14.5bn, despite the disruption caused at the beginning of the half by the fallout from the ‘mini’ Budget. That performance was particularly robust given that the total mortgage market saw lending shrink by third over roughly the same timeframe.

Broker Shore Capital rates Paragon at a forward price/earnings ratio just over six times forward earnings for 2023. That is good value. Buy.

Last IC View: Buy, 471p, 6 Dec 2022