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Paragon's net interest margin rises

The buy-to-let lender grew its lending volumes by 9 per cent in the year to September
November 26, 2019

Amid intense competition for UK retail deposits and mortgage customers, it is tough enough for banks to grow both sides of their balance sheet. In its most recent financial year, Paragon Banking (PAG) not only managed this, but expanded the difference between its interest income and interest payments, relative to its growing loan book.

IC TIP: Buy at 502p

Put another way, that meant Paragon’s net interest margin rose eight basis points to 2.29 per cent in the 12 months to September. That’s also five basis points up on the half-year, and suggests that efforts to both expand the loan book and pull in savers’ cash have been prudently managed. 

Technology investments have played their part in that push, and help to explain the slight rise in the cost-to-income ratio to 42.1 per cent. But as chief executive Nigel Terrington tells it, the bank is now better connected to the mortgage brokers who source large numbers of buy-to-let customers, as well as the £800bn-worth of retail deposits currently sat idling in non-current accounts.

The latter has been possible thanks to distribution channel deals with fund supermarket Hargreaves Lansdown (HL.), cash platform Flagstone and digibank Monzo – rather than simply increasing savings rates – and helped deposits climb a fifth to £6.4bn. 

Analysts at Investec forecast adjusted net tangible assets of 408p for the September 2020 year-end, rising to 443p the same time the following year. 

PARAGON BANKING (PAG)  
ORD PRICE:502pMARKET VALUE:£1.29bn
TOUCH:501.5-502.5p12-MONTH HIGH:518pLOW: 379p
DIVIDEND YIELD:4.2%PE RATIO:10
NET ASSET VALUE:432pLEVERAGE:15.2
Year to 30 SepTotal operating income (£m)   Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201521213435.511.0
201624411640.513.5
201725314543.115.7
201830218255.919.4
201930715949.421.2
% change+2-12-12+9
Ex-div:9 Jan   
Payment:17 Feb