Paragon Banking : 06/12/2022 | Results statement

Paragon Banking Group PLC

RNS Announcement

Paragon Banking Group PLC

6 December 2022

Strong delivery and well positioned in volatile markets

Paragon Banking Group PLC ('Paragon' or 'the Group'), the specialist lender and banking group,

today announces its full year results for the year ended 30 September 2022

Nigel Terrington, Chief Executive of Paragon said:

"These results reflect an outstanding financial and operational performance, delivering good growth, enhanced margins and improved cost efficiency, all combining to deliver strong returns to shareholders.

As a leading specialist banking group we are increasingly using technology to strengthen our franchises. New digital platforms introduced in the last year are already seeing tangible evidence of an enhanced customer proposition and service delivery, as well as improved cost efficiencies.

Our cautious risk appetite, high quality loan book and extensive through-the-cycle experience ensure we are well positioned as we head into 2023 and are fully prepared to support our customers' needs."

Financial highlights

• Operating profit before fair value items increased by 16.4% to £226.0 million (2021: £194.2 million)
• Statutory profit before tax increased by 95.6% to £417.9 million (2021: £213.7 million) reflecting non-cash accounting fair value gains which will reverse over time, providing high levels of protection to pipeline margins
• Underlying cost to income ratio improved to 39.4% (2021: 41.7%)
• Economic scenarios in impairment calculations updated to reflect more cautious outlook with weighting increased on severe scenario
• Underlying EPS up 17.9% to 69.9p (2021: 59.3p), reported EPS up 98.2% to 129.2p (2021: 65.2p)
• Total dividend up 9.6% to 28.6p (2021: 26.1p) reflecting smoothing of pandemic catch-ups in 2021
• Capital ratios further enhanced: CET1 ratio at 16.3% (2021: 15.4%)
• Net interest margin increased by 30 basis points year-on-year to 269 basis points, reflecting the Group's diversification strategy
• Underlying Return on Tangible Equity increased to 16.0% (2021: 14.7%)
• 30 September 2022 Tangible Net Asset Value per share £5.33 (2021:£4.34) up 22.8%
• Share buy-back of up to £50.0 million announced for 2023 financial year

Paragon Banking Group PLC

Operational highlights

• Total new lending up 23.6% to £3.21 billion:

1. Mortgage Lending advances increased by 17.2% to £1.91 billion (2021: £1.63 billion)

1. Commercial Lending advances increased by 34.3% to £1.30 billion (2021: £0.97 billion)

• 1. Robust and high quality pipelines into 2023 provide an encouraging platform in the more uncertain new lending environment
• Over 70% of maturing complex buy-to-let customers retained at product maturity demonstrating the value of the proposition to landlords
• Arrears on the buy-to-let book reduced to 0.15% (2021: 0.21%) reflecting the quality of the portfolio
• Buy-to-letloan to value ratio at 57.9% (2021: 61.2%), representing significant asset backing
• Retail deposits up 14.7% to £10.7 billion (2021: £9.3 billion), exceeding £10 billion for the first time and providing a reliable, scalable and cost-effective source of funding
• Digitalisation process continuing at pace, with development finance successfully re-platformed and a new asset finance origination platform delivered during the year
• Phase 2 of IRB application ongoing, initial PRA feedback received
• Basel 3.1 consultation proposals broadly as anticipated, but Strong and Simple threshold increase and IRB proposals will be beneficial if retained in the eventual supervisory statement

The Group will be holding a presentation for sell-side analysts on 6 December 2022 at 9:30am, a recording of which will be available on the Group's corporate website at www.paragonbankinggroup.co.uk/investorsfrom 2:30pm that day. The presentation material will be available on the website from 7:00am on the same day.

Cautionary statement

Your attention is drawn to the cautionary statement set out at the end of this announcement.

Paragon Banking Group PLC

Introduction

The Group has maintained the progress seen in 2021 into 2022, delivering strong results which reflect its strategic positioning, strong operational performance, robust operating platform and the commitment and professionalism of its people.

Our business model has been designed, using extensive through-the-cycle experience, to be resilient in challenging environments. Further, our diversification strategy and balance sheet structuring are designed to deliver stable funding, generate improved returns over time and also benefit in periods of higher interest rates.

The 2022 outturns demonstrate the effectiveness of this strategy, with the net loan book growing by 6.0%, margins widening by 30 basis points, cost efficiency improving and the underlying return on tangible equity rising to 16.0%. Statutory tangible net asset value per share increased by 22.8% to £5.33 per share (2021: £4.34).

The Group maintains close relationships with its customers, intermediaries and other business partners which have been particularly important with both the increase in the cost of living, and then interest rates rising sharply during the year.

Alongside this strong financial and operational delivery, we have continued to implement our digitalisation plans, with a number of front and back-office developments being delivered during the year, making immediate tangible improvements to customer journeys and operational efficiency.

Financial performance

Trading has been strong across the Group in the year. A combination of strong loan growth, widening net interest margins and tight cost control have resulted in profit before fair value items increasing by 16.4% to £226.0 million (2021: £194.2 million).

We have updated the Multiple Economic Scenarios ('MES') used for our impairment assessments, particularly in light of recent instability arising from the end of the pandemic, the war in Ukraine, rising inflation and interest rates and the policy responses to this backdrop. The scenario changes are illustrated below by comparing the weighted average forecast levels of key variables for the quarter ending 30 September 2023 in the current forecast to those for the same period in the forecast used at the previous year end.

In addition to a harsher suite of assumptions, given the extreme volatility seen, particularly in the final quarter of the year, the Group has adjusted its downside / severe weighting mix from 35% / 15% in 2021 to a 30% / 20% in the current year. We have also released the remaining Covid overlays, but have added £15.0 million of judgmental adjustments to reflect the lack of observed data (notably in respect of inflation data) in the model build.

Paragon Banking Group PLC

The Group has always operated a cautious hedging strategy, designed to minimise interest rate risk. This hedging takes place for both completed loans and the pipeline, and the Group has strategically increased its level of pipeline hedging in the year to enhance the protection of future margins. Derivatives hedging the pipeline only qualify for hedge accounting when the loan actually completes and are measured on a fair value basis until that point. Taking swaps out early in the process has, in a rapidly rising rate environment, created a material (£191.9 million) fair value gain for 2022. Whilst this will reverse over the coming years, it evidences the value that would have been lost to the Group had the pipeline loans only been hedged when they actually converted.

Basic earnings per share rose 17.9% to 69.9 pence on an underlying basis (removing the after tax impact of the fair value gains). Including the gains, reported basic EPS rose by 98.2% to 129.2p per share.

The total dividend for the year of 28.6 pence per share represents around 40% of the underlying earnings per share, with the effects of fair value movements removed.

Trading performance

Aggregate new business levels rose by 23.6% from 2021's level to £3.2 billion in 2022. As well as new front-end systems in the Commercial Lending division, the Group also benefitted from system and processing enhancements in its buy-to-let business, most notably in its product maturity management.

Mortgage Lending new advances increased by 17.2% to £1.91 billion (2021: £1.63 billion). The focus continues to be on complex properties and professional landlords, with simple business comprising just 2.1% of completions (2021: 3.2%). Five-year fixed rate loans, which increased in popularity in 2017, started to reach product maturity in 2022. The Group has been particularly successful in retaining these customers, having developed an online portal to facilitate the maturity process, and over 70% of our maturing specialist landlord customers chose to refinance with the Group at product maturity. The credit performance of the buy-to-let mortgage portfolio remains strong, with indexed loan to values falling to 57.9% at September 2022 (2021: 61.2%) and with only 1.4% of the book having an indexed LTV above 80%. Three month plus arrears on the portfolio were 15 basis points at 30 September 2022 (2021: 21 basis points).

Commercial Lending also had a strong year, with our new advances increasing by 34.3% to £1.30 billion, with each of the four sub-divisions seeing year-on-year growth. A complete end-to-end replatforming was delivered in development finance and a new digital broker portal launched in SME Lending during the year, the latter having an immediate impact on our processing times and business flows, which saw a rise of 40.9% in the final quarter of the year compared to the third quarter. Further digital enhancements will be delivered in the next financial year.