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Investing.com -- Paragon Banking Group PLC (LON:PAGPA) reported a strong first-half performance, with underlying profit up 2.1% to £149.4 million and statutory pre-tax profit rising 26.7% to £140.1 million.
Earnings per share (EPS) climbed 9.6% on an underlying basis to 54.7 pence, while return on tangible equity (RoTE) increased to 17.8%.
The net interest margin (NIM) held steady at 3.13%, down just 1 basis point (bp) half-on-half, better than the 10 bps decline expected by analysts.
"This was a strong performance given the 45bps drop in SONIA and the lack of any structural hedge tailwind (unlike the incumbent banks). Indeed, we estimate that deposit margins took almost 10bps sequentially off group NIM, all else equal," Jefferies analysts said in a post-results note.
The broker lifted its Paragon price target to 930p from 815p.
The group’s cost-to-income ratio improved to 35.2%, reflecting ongoing efficiencies and flat operating expenses. Paragon continued its digital push, completing the rollout of a new buy-to-let platform and launching Spring, a savings app using Open Banking, after the reporting period.
“Our digital technology programme is enhancing customer experience and productivity, and helping drive down our market-leading cost:income ratio even further," said CEO Nigel Terrington.
Buy-to-let lending rose 25.1% year-on-year to £812.2 million, lifting the mortgage loan book to £13.7 billion. Commercial lending volumes dipped 3.7% to £568.0 million, though SME and development finance grew.
The total loan book increased 4.9% year-on-year. Despite some pressure in development finance, the group reported broadly stable asset quality.
Paragon made a £6.5 million provision for potential redress related to motor finance commission, excluded from underlying results. CET1 capital ratio stood at 14.2%, supporting the group’s decision to double its share buyback programme to £100 million for the year. An interim dividend of 13.6 pence was declared, up 3%.
“With strong momentum and a resilient business model, we are well placed to navigate the evolving external environment and remain optimistic about the remainder of the financial year and beyond," Terrington noted.
Looking ahead, Paragon updated its NIM margin outlook for the full year, from “circa 3.0%” to “over 3.0%”.
Guidance for mortgage and commercial lending volumes remains unchanged. Operating expense guidance was revised down to “below £185 million” from "circa £185 million", while RoTE is expected to stay in the 15%–20% range.
Jefferies analysts said that, like many peers, Paragon’s shares have re-rated and are currently trading at 1.44 times the latest reported tangible net asset value. However, they added that this is “hardly expensive for a company that we expect to generate 15-16% ROTE for the foreseeable future.”