-Interim results beat expectations
-Full year guidance raised
-Benefiting from rising interest rates
Shares in mortgage and loan provider Paragon Banking Group (PAG) jumped 9% higher following the announcement of half-year results to 31 March being ahead of expectations.
The company has increased guidance for the full year, and extended the share buy-back by an additional £25 million, bringing the total to £75 million.
Underlying profit before tax increased by 27% to £105.5 million, significantly ahead of consensus expectations. Return on tangible equity increased to 14.9%, up from 12.9% a year ago reflecting the improvement in returns.
The core tier 1 equity ratio -a key measure of risk- ended the first half at 15.4%, despite nearly £40 million of share buybacks. The company declared a dividend of 9.4 pence per share.
RISING INTEREST RATE BOOSTS PROFIT
Paragon has been a beneficiary of the rising interest rate environment.
The increase in the group’s net interest margin (the difference between the rate at which the company can borrow and lend) was significantly ahead of market expectations.
The overall net interest margin rose from 239 basis points to 257 basis points, as a result of a rise in interest rates.
Critically management has increased their guidance for the net interest margin suggesting it will increase from by over 20 basis points, compared to previous expectations of a 5 basis point increase.
According to Peel Hunt, this increase translates into a rise in full year 2022 operating profits of approximately 12%.
STRONG OUTLOOK
The outlook for both mortgage lending and commercial is robust, and is reflected in the increased guidance.
Guidance for the former (origination volumes), has moved from greater than £1.7 billon to great than £1.8 billion, and commercial from greater than £1.1 billion to greater than £1.2 billion.
The buy to let pipeline is approximately 44% ahead of the same period a year ago.
EXPERT VIEW
According to Peel Hunt analyst Stuart Duncan ‘Paragon Group is trading on a September 2022 price earnings of just over 7x, whilst yielding 5.4%. We continue to see good upside, from a combination of strong momentum in the business, improving returns and efficient capital management’.
