Paragon’s margins increase – Investors’ Chronicle

  • First-half results challenge the nervousness of the buy-to-lease market
  • Investors swoon at news of £ 40million buyout

The buy-to-lease market is not what it used to be, as homeowner surveys and grim headlines often point out. Due to the evolution of mortgage interest tax breaks and a long-standing capital gains raid, this was the reality long before the pandemic hit. Then the complications of phase closures and volatile house prices forced a recalculation.

You wouldn’t know it from Paragon banking group‘s (PAG) first half figures, wit. In the six months leading up to March, the homeowner-focused mortgage provider saw new loan levels jump 45% to just below the pre-pandemic execution rate, as the pipeline of new rental loans jumped 17% in one year. to 0.93 billion pounds sterling.

This apparent optimism – reinforced as never before by the long-term structural problems with housing in the UK – matches the latest quarterly survey from the National Residential Landlords Association (NRLA), which found confidence has improved for a second quarter. consecutive in the three months to March, although from the very low base of last summer.

At the same time, the NRLA found that the proportion of people looking to sell property had fallen, while a record 21% said they hoped to add to their portfolio, down from 14% within a year. Along with improving demand, falling attrition rates in Paragon’s mortgage portfolio suggests that homeowners are not bailing out.

They do not appear to be in economic distress either. Paragon said it had not seen any “material” changes in payment arrears or write-offs in its portfolio, with just £ 40million of the £ 11.1 billion mortgage portfolio now subject to payment holidays. This compares to a peak of £ 2.5bn last year, which suggests that landlords seized the opportunity to build sizable buffers for themselves and their tenants when industry support was at its peak. more generous.

To top it off, surging residential real estate valuations and a tightening in underwriting have lowered the average loan-to-value ratio by 330 basis points over the past year, to 64.4%.

“If you look at the loan portfolio, the credit performance has been outstanding,” CEO Nigel Territon told us. “If you had gone back a year ago and told me this is where we would be, I wouldn’t have believed it.”

It is possible that a mismatch between the financial difficulties of tenants and the strain on landlords has not yet emerged. Other anecdotal evidence and surveys of rental agents suggest many more tenants are late than before the Covid-19 strike.

Fearing the recovery would remain unpredictable, Paragon’s coverage ratio – the proportion of loan balances it expects to be written off – remained at 64 basis points. Relative to the size of their portfolios, more sources of stress are in the commercial lending arm of the bank and Idem Capital, the second loader and acquirer of unsecured consumer loans. Still, both seem manageable.

What has been managed very well is Paragon’s own funding base. In March, a first for the UK banking sector, the group cut the interest coupon on its subordinated debt by selling £ 150million of level 2 green bonds to expand its range of green mortgage products. At the same time, its new personal savings deposit rate fell from 1.63% to 0.39% in 18 months.

In turn, this lowered the total cost of retail deposits to 1.08 percent, while maintaining a healthy flow of new money. At £ 8.6bn, retail deposit balances have risen by a quarter in a year and 10% since September, but remain a decline in the £ 800bn cash savings ocean which would earn less than 0.25% interest.

“There has been a strong momentum in deposit because a lot of people have saved money, but one of the key aspects is how we have diversified,” Terrington said, highlighting links with the so-called neobanks like Monzo and Revolut and DIY investments. platform giant Hargreaves Lansdown (HL.), which directs its customers to Paragon savings products.

Against a solid generation of liquidity in the loan portfolio, this pushed the bank’s net interest margin to 2.32 percent, a trend that management expects to continue. This will likely mean an upward revision of the consensus forecast of 2.23% by September, as well as earnings of 45.6 pence per share for the full year.

Paragon’s share price, which rose more than 7% on the day these numbers were released, has recouped all losses from last year and is now at a post-GFC high. Betting on homeowners’ creditworthiness remains a solid business model, while its size gives its deposit-taking operations a useful structural advantage over High Street banks – at least for now. Hold on.

ORDER PRICE: 539p MARKET VALUE: £ 1.38 billion
TO TOUCH: 536-539p UP TO 12 MONTHS: 539p LOW: 287p
6 months to March 31 Total operating income (£ m) Profit before tax (£ m) Earnings per share (p) Dividend per share (p)
2020 150 57.1 17.6 nothing
2021 155 96.4 29.3 7.2
% change +3 +69 +66
Ex-div: 1st of July
Payment: July 23

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