The lender has seen customer demand for buy-to-let mortgages begin to stabilise following a six-month drop caused by the increase in taxes on buy-to-let homes in April and Brexit uncertainty, Chief Executive Nigel Terrington said.

"We've started to now see a bit more confidence and... in the summer period, we've seen a pick up in buy-to-let activity,"Terrington told Reuters, adding that demand has also picked up for its unit that buys consumer debt and services third-party loans.

Although UK housing and buy-to-let demand has returned after an initial dip according to builders, lenders and surveys, some fear more pain as Britain begins its EU exit and the Bank of England implements proposals that include plans to limit loan-to-value ratios on buy-to-let mortgages.Terrington said Paragon had tightened lending criteria in January as it braced for a turbulent period, leaving it well placed to win business from rivals that are only now revising their criteria.

Paragon said total new buy-to-let originations and investments fell 12.4 percent to 1.16 billion pounds in the year ended Sept. 30, while its pipeline was down 55 percent to 321.1 million pounds.

However, its pipeline relating to professional company-backed or incorporated landlords stood at 61.8 percent going into 2017 compared with 45.5 percent 12 months ago.

"We believe that (Paragon) has potential to gain market share," Jefferies analysts wrote in a client note, flagging a "buy" stock rating.

Paragon's full-year pretax profit rose to 143.2 million pounds, which at least three analysts said beat expectations, as higher margins on new originations and portfolio purchases than those on maturing assets drove net interest margins up a better-than-expected 11 basis points to 2.15 percent.

The lender has been diversifying away from its buy-to-let mortgage market and now does around 29.5 percent of its lending in other sectors. Paragon Bank swung to a full-year underlying profit of 11.6 million pounds, from a loss of 8.6 million pounds a year ago.

Shares in Paragon, which announced a 50 million-pound buyback and hiked dividend by 22.7 percent to 13.5 pence, were up 2.4 percent at 370 pence at 0958 GMT.

(Reporting by Esha Vaish and Noor Zainab Hussain in Bengaluru; Editing by Sunil Nair)

By Esha Vaish and Noor Zainab Hussain