Paragon Banking : 07/12/2021 | Results announcement

Paragon Banking Group PLC

RNS Announcement

Paragon Banking Group PLC

7 December 2021

Record profits underpinned by strong lending and margin growth

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 2021

Nigel Terrington, Chief Executive of Paragon said:

"We have delivered an outstanding performance in 2021, which is testament to the strength of our operating model, the quality of our customer base and the capability and adaptability of our people.

"Every lending business in the Group has this year made excellent progress, and at over £2.6 billion, aggregate new lending now comfortably exceeds pre-pandemic levels. We have made huge strides on the funding side, growing retail deposits by 18.4% at attractive rates, and have delivered significant digital improvements as part of the Group's cloud-based strategy.

"We delivered strong earnings growth with a 62% increase in profits to £194 million, an 81.1% increase in earnings per share and a total dividend for the year of 26.1 pence. This performance allowed us to return an additional £38 million through a buyback, and we still ended the year with stronger capital ratios, including CET1 at 15.4%.

"These results validate our longstanding strategy to concentrate on specialist lending markets where we add value for our customers with complex requirements.

"We enter 2022 with strong pipelines at near record levels, improved margins and the capital to continue to invest in and grow our business, as well as deliver additional returns for shareholders via a new buyback programme and materially increasing our full year dividend. We remain confident in our outlook and are on track with our plans to become the UK's leading technology-enabled specialist bank."

Financial highlights

• Underlying profit increased by 61.8% to £194.2 million (2020: £120.0 million)
• Statutory profit before tax increased by 80.5% to £213.7 million (2020: £118.4 million)
• Impairment coverage reduced to 49 basis points reflecting strong credit performance (2020: 64 basis points). Model overlays broadly maintained
• Reported EPS up 81.1% to 65.2p (2020: 36.0p), underlying EPS up 62.5% to 59.3p (2020: 36.5p)
• Full year dividend of 26.1p (2020: 14.4p)
• Capital ratios remain strong after accruing for the dividend; CET1 ratio at 15.4% (30 September 2020: 14.3%)
• Net interest margin of 239 basis points up from 224 basis points in 2020

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Paragon Banking Group PLC

• Return on Tangible Equity increased to 16.2% on a statutory basis, 14.7% on an underlying basis
• 2022 share buyback of up to £50 million announced (in addition to remaining £2.2 million from the 2021 buyback)

Operational highlights

• Excellent operational capability sustained throughout the pandemic, delivering record new lending volumes and new delivery systems
• Strong lending growth in core divisions:

1. Mortgage Lending advances up 29.4% to £1.63 billion, year-endbuy-to-let pipeline exceeds £1 billion

• 1. Commercial Lending advances up 22.9% to £0.97 billion, year-end development finance pipeline up 63.2% to £0.37 billion
• Retail deposits grew 18.4% to £9.3 billion (2020: £7.9 billion) at attractive rates
• Accessed £2.75 billion under the SME Term Funding Scheme ('TFSME') by 30 September 2021
• First UK Green Tier-2 bond issued
• LIBOR transition successfully delivered
• Phase 2 of IRB application ongoing, good progress made

For further information, please contact:
Paragon Banking Group PLC	Headland Consultancy
Nigel Terrington, Chief Executive	[e-mail]
Richard Woodman, Chief Financial Officer	Lucy Legh/Del Jones
0121 712 2505	020 3805 4822

The Group will be holding a call for sell-side analysts on 7 December 2021 at 9:30am, a recording of which will be available on the Group's 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 document.

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Paragon Banking Group PLC

Introduction

The Group has delivered record profits and an outstanding operational performance reflecting the strength of its franchise, the resilience of its operating platform and the commitment and professionalism of its people.

The Group's business model has been designed, using its extensive through-the-cycle experience, to be resilient in its operational performance and to maintain a strong balance sheet. Having developed an effective working approach at the onset of the crisis, the business was well placed to deal with the changing Covid conditions, particularly over the winter months, maintaining new business activities and paying close attention to the needs of our customers, employees and business partners as the situation developed.

This testing period brought out the best in our people and has given us the opportunity to demonstrate the strong fundamentals of the Group as we continue to generate improved returns and higher growth rates.

Despite the operational challenges the lockdowns brought, we have strengthened our franchise by building stronger relationships with customers, intermediaries and other business partners. Alongside this, we have delivered a number of key technology developments during the year. We also have an active change programme in progress, designed to optimise customer journeys, operational efficiencies and data and control needs across the business. The delivery of these, together with accessing the capacity and efficiencies they bring, will form a core part of our strategy in continuing to drive strong growth in a prudent manner in the UK's specialist financial services markets.

Financial performance

The Group delivered a strong financial performance reflecting the improvements in the UK economy and strong underlying trading. A combination of strong loan growth, improving net interest margins, tight cost control and a reversal of some of the Covid-related impairments enabled underlying profits to increase by 61.8% to £194.2 million.

Impairments for expected credit losses fell materially from their 2020 level, ending 2021 with a £4.7 million write-back compared to the £48.3 million charge in 2020. Notwithstanding this impairment volatility, pre-provision profits were up 12.6% on their 2020 level at £189.5 million. With the credit for impairments in the year, and strong fair value gains reflecting yield curve movements, overall reported profits before tax were 80.5% higher than their 2020 equivalent at £213.7 million.

Basic earnings per share were 59.3 pence on an underlying basis and 65.2 pence on a statutory basis. We continue to operate with a 40% dividend pay-out policy, which results in a dividend for the year of 26.1 pence, reflecting the strong underlying performance, impairment releases and fair value movements.

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Paragon Banking Group PLC

Trading performance

The Mortgage Lending and Commercial Lending divisions have each outperformed expectations during 2021, delivering strong new business flows, low arrears and finishing the period with record pipelines.

In Mortgage Lending, where we celebrated 25 years of serving the Private Rented Sector ('PRS'), we have continued to see strong demand from professional landlords, who generated 97% of new buy- to-let completions in the year. Total buy-to-let completions exceeded £1.6 billion in the year, generating an 8% increase in balances to £11.4 billion. Strong house price inflation and stable arrears have created a lower impairment requirement year-on-year and the portfolio remains conservatively leveraged with an average loan to value ('LTV') of 61.2% and only 1.9% of the portfolio having an LTV over 80%. The pipeline at the year end exceeded £1 billion, boding well for continued strong flows into the new financial year. With our half-year results we announced the cessation of lending on second charge mortgages, with the business being unattractive at our chosen risk appetite. All employees were offered redeployment in the wider business, with only six choosing the alternative of voluntary redundancy.

New business flows in Commercial Lending exceeded £0.97 billion, up 22.9% on their 2020 levels and above their 2019 equivalent. The growth was strongest in development finance, where new advances rose 32.5%, year-on-year, reflecting the continued high demand for residential property development in the UK and the Group's investment in expanding the relationship team. The development finance year end pipeline was up 63.2% from its equivalent level in 2020. SME lending saw a 17.0% increase in origination flows, but these remain below the pre-Covid equivalent given sector-wide challenges and the broad take-up of government-backed loans under the CBILS, BBLS and RLS during the year. However, growth was strongest in the longer-term,asset-secured part of the operation. The new portal delivered during the year leaves the business well placed to seize opportunities going forward as this sector recovers. Motor Finance volumes were broadly flat year on year, but this disguises a strong second-half recovery and strong momentum being carried through to 2022. Finally, our structured lending team has now refocused its attentions from account management to business development, driving portfolio growth and adding new facilities during the second half of the year.

Capital and funding

The past year has seen a material change in our funding structure, with our savings proposition delivering an 18.4% growth in balances at attractive rates. System enhancements during the year enabled increased levels of deposits to be sourced from third party platforms, while the SME savings market was accessed for the first time. During March 2021 we became the first UK bank to successfully issue a Green Tier-2 Bond, at a coupon of almost 3% less than the bond it was replacing. We have also refinanced the majority of our legacy securitisation structures, substantially repaid borrowings under the Bank of England Term Funding Scheme ('TFS') and drawn further on the Term Funding Scheme with additional incentives for SMEs ('TFSME'). Overall, the Group's cost of funds has dropped by 39 basis points from its 2020 level.

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Paragon Banking Group PLC

The refinancing of the legacy securitisation removed over £400 million of derivative assets from the Group's balance sheet against which regulatory capital had previously been carried, reducing capital requirements. The refinancing also facilitated the transition of the bulk of the Group's London Interbank Offered Rate ('LIBOR')-linked loan exposures to a Term SONIA basis. For all remaining LIBOR- linked assets an exit strategy is in place and the Group's remaining LIBOR-linked liabilities were either transitioned during the financial year, or a transition methodology has been agreed with the relevant counterparties.

With the strong capital position at the half-year, the Group declared an interim dividend in line with its guidance (being one half of the previous year's final dividend) and also announced a share buyback of up to £40 million, with £37.5 million (excluding costs) being utilised by the year end. This programme will be completed in the early part of the new financial year, and in December 2021 the Board authorised a further buy-back programme of up to £50.0 million, acknowledging the Group's continuing capital strength

We also benefitted from revised total capital requirements following the regular supervisory review undertaken by the PRA in late 2020. This saw our total capital requirement ('TCR') fall from 10.8% to 8.9% and contributed to a continued strong surplus over regulatory requirements at 30 September.

The Group submitted its buy-to-let Phase 2 IRB application modules to the PRA during the year. The process remains protracted, but we continue to receive constructive engagement from the PRA. In addition to further phases of the buy-to-let accreditation, our preparations to submit an IRB application for our development finance business, which represents the next stage in the IRB roadmap are well advanced.

Business model developments

Key developments during the year include the completion and roll-out of our Commercial Lending portal and the introduction of auto-decisioning to SME lending. We have also developed a new digital system for our surveyors, established a single payment platform across our banking relationships and implemented Mambu, a cloud-based core banking module, for managing our portfolio of savings platform relationships. Complementing these completed developments, our teams are actively managing process improvements in our Mortgage Lending division, embedding Mambu into development finance, reviewing post-completion systems across the Group and broadening the scope of our savings proposition to support additional future capacity.

People

Our people have made a remarkable effort during the past year, working flexibly to support the business and showing great agility as the operating and working environment has changed. Against this backdrop, the wellbeing of our people has been a primary consideration for the Board and has been demonstrated through numerous initiatives and regular engagement to ensure that effective feedback and communications were maintained throughout the year.

Our 2021 employee survey demonstrated exceptional levels of engagement, with an engagement score of 87% and an employee NPS of +24 , where +21 is the industry norm. 95% of our people agreed that they are proud to say that they work at Paragon.

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