Rising rates and rental loan demand boost Paragon earnings

Paragon Bank raises forecast as rising interest rates and demand for loans from rental investors boost earnings

  • New loans rose by almost a third to £1.49bn in the six months to March
  • Mortgage demand from business owners has risen above pre-Covid levels
  • Buy-to-let lending pipeline at ‘record’ levels at end of March – up 44%
  • Lending to SMEs ‘solid’, but group notes ‘increasing economic caution’

Paragon Bank raised its forecast for 2022 after posting “record” profit on the back of an increase in new business lending and buy-to-let investors at “attractive margins”.

Despite the current uncertain economic situation in the UK, the specialist lender said demand for business homeowners’ mortgages had exceeded pre-Covid levels, while commercial lending also continued to grow.

This, coupled with higher interest rates on loans, helped push up profits.

Pre-tax statutory profit rose 49% to £143.6m from the first half to end of March as new global loans rose by nearly a third to £1.5bn from one year ago.

Buy-to-let boom? Paragon Banking said demand for mortgages from business owners exceeded pre-Covid levels from the first half to the end of March

Mortgages to business owners rose 18% to £855m, while commercial loans jumped 58% to £634m.

Rental mortgages are Paragon’s main product, accounting for over 80% of group loans. Commercial lending, which includes asset finance and auto lending, has grown and now accounts for more than 10% of group lending.

Paragon said its lending pipeline was at record highs at the end of March, with mortgages to let 44.4% higher at £1.34 billion.

Lending to SMEs remained “strong”, but the group noted “increasing economic caution” among UK businesses.

Rising lending rates mean net interest margin (NIM), a key measure of bank profitability, rose 25 basis points in the first half.

And for the year, the NIM – which measures how much a bank earns in interest on loans compared to what it pays in interest on deposits – is expected to rise another 20 points, compared to 5 points previously expected.

The lender also improved its outlook for business and mortgage advances and increased the buyout to £75m from £50m.

The optimistic results and improved guidance sent Paragon Banking Shares up 7% to 502.5p in Tuesday afternoon trade. However, the stock remains down about 8% from a year ago.

Chief executive Nigel Terrington hailed the “excellent” results and said the group’s capital levels were “comfortably in excess”, which would allow Paragon to continue to grow.

He added: “As the UK economy faces headwinds, we have a high quality loan portfolio and are confident in our momentum, and have improved our full year guidance.”

Peel Hunt analysts said Paragon should continue to benefit from strong demand for rental properties and higher interest rates.

“This is another set of strong results from Paragon with new loan growth, net interest margins and earnings all ahead of expectations,” they said.

And to add: “With strong demand from tenants and rising rents, the outlook remains positive.” In addition, changes in interest rates have a noticeably beneficial impact on net interest margins.

Demand for rental properties has increased in recent months, putting upward pressure on rents, as reported in the latest March survey from the Royal Institution of Chartered Surveyors.

RICS expects rents to rise by 4% over the coming year and average increases of 5% per year over the next five years.