Paragon Banking shares jump as buy-to-let specialist posts surge in profit and raises buyback

Nigel Terrington is approaching his 30th year as Paragon's chief executive

Paragon Banking Group, one of Britain’s leading buy-to-let mortgage lenders, has reported a surge in profit and boosted its share buyback programme, despite a drop in home loan volumes as higher interest rates put off borrowers.

The earnings sent the FTSE 250 firm’s shares up as much as 10 per cent on Wednesday morning.

Paragon posted a pretax profit of £110.6m for the six months ending on 31 March 2024, up 138 per cent from £46.4m in the same period last year. On an underlying basis, profit rose 13.5 per cent to £146.3m.

It announced a further £50m share buyback to reward investors, taking its full-year buyback programme to £100m. The bank has returned more than £1bn to shareholders through buybacks and dividends since 2015.

The group’s net interest margin (NIM) – measuring of the gap between interest received on loans and rates paid for deposits – came in 0.24 points higher year-on-year at 3.19 per cent.

Paragon, based in Solihull in the West Midlands, is a major provider of loans to professional landlords with at least four properties. It also lends to medium-sized housebuilders typically seeking loans between £5m and £10m.

The group said that, as expected, lending volumes were lower year-on-year during the six months. Its buy-to-let new advances dropped 36 per cent to £649.3m from £1.02bn. The group’s mortgage loan book grew four per cent to £13.1bn year-on-year.

Growth in its small and medium-sized enterprise division helped Paragon’s commercial lending volumes tick up £15.4m to £589.8m.

Long-serving chief executive Nigel Terrington told City A.M. that while “cash out of the door” was quieter during the period, “the momentum was really strong”.

“Our pipeline is up 47 per cent in buy-to-let and 21 per cent in development finance,” he added, which improved the outlook for lending volumes for the rest of this year.

The group now expects mortgage and commercial lending to come in at the higher end of its previously guided range for the full year, at £1.4bn to £1.6bn and £1.1bn to £1.2bn respectively.

It also forecasted its NIM to come in higher than the previously guided range of between three and 3.1 per cent.

Buy-to-let mortgage specialists spent much of last year dealing with fears of a major downturn in the housing market as cost-of-living pressures and interest rate hikes from the Bank of England caused some landlords to either sell their properties or pass on higher rental costs to tenants.

The number of UK buy-to-let mortgages falling into arrears surged 18 per cent in the last three months of 2023, according to banking trade body UK Finance, amid high rates and stricter regulation.

During the same period, the value of new buy-to-let lending more than halved as demand for new loans dried up. Arrears remained flat in the first quarter of 2024.

Paragon’s buy-to-let arrears rose to make up 0.68 per cent of the loan book, with this figure nearly tripling from a year prior. It said arrears remained “modest” in absolute terms and were low compared to the sector average.

“If you look at the early stage arrears – those that go from fully performing from one month down, to two months down, to three months down – it’s all slowing down, which points to this movement up in arrears is now past us and it should start to decline hereafter,” Terrington said.

Paragon raised its impairment charge by £2.8m to £10.3m, which it said largely reflected an increased number of receiver of rent appointments on legacy buy-to-let mortgage accounts, as well as higher-for-longer interest rates and cost of living pressures.

The group also offers savings accounts, with its deposit book growing 24 per cent to £14.8bn over the period, which it said provided strong liquidity. “It makes us the fastest-growing savings business in the UK,” Terrington said.

A strong set of results in December kickstarted a rally that has seen Paragon’s share price surge 68 per cent to date.

“The results this morning reinforce, in our view, that this is a well-run bank that should trade at a premium,” said Benjamin Toms, an analyst at RBC Capital Markets. “Paragon has had the third most consistent earnings since 1999 out of 45 European banks.”

Terrington, 64, is approaching three decades as Paragon’s chief executive since taking the helm in 1995. “I’m very much looking forward to driving right the way through that 30th year and beyond,” he said.

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