Paragon bounces as buy-to-let mortgage demand remains

Paragon Group of Companies, the specialist lender and bank, enjoyed a robust third quarter, with strong buy-to-let (BTL) mortgage activity and a major loan portfolio acquisition.

Buy-to-let completions across the specialist lending arm and Paragon Bank totalled £370.3m during the period, almost double the same period in the last financial year and taking the total for the year to-date to £816.5m, of which £186m relates to the bank.

Operating profits of £98.0m for the nine months to 30 June were up 11% on the same period last year, with pre-tax profits, after a £0.5m charge for fair value hedging items, up 9.8% to £97.5m.

Shares in Paragon lost ground after Chancellor George Osborne's summer Budget aimed to "level the playing field" by clamping down on the amount of mortgage interest tax relief for buy-to-let landlords.

On this, Paragon said: "The recently announced Budget changes may impact some landlords' investment decisions in the future, but the private rented sector continues to see strong tenant demand, thereby providing the platform for strong and stable buy-to-let returns."

As of 30 June, the pipeline of buy-to-let business including from Paragon Bank stood at £864.9m, up from £352.7m a year ago, which the company said it "expected to lead to strong growth for 2015".

Elsewhere in the business the Idem Capital arm completed the acquisition of a £80.7m of loan portfolio investments, taking the total year-to-date to £101.7m.

Analyst Gary Greenwood at Shore Capital said profit in the three quarters of the year represented 73% of his full year forecast of £135.1m, equivalent to diluted adjusted EPS of 34.8p, so with the slight second-half bias to group profitability he was comfortable that this can be achieved.

He noted that while Paragon Bank continued to perform well, total other lending of car loans and second charge mortgages of £35.8m year-to-date, including £16.4m in Q3, was rather soft compared in light of his full year forecast of £100m, "which clearly is asking a lot of Q4, but we do not expect any downgrade here to materially impact on our full year profit estimates".

"With £388m of retail deposits sat on the balance sheet at the end of Q3, Paragon Bank remains well positioned to fund future loan book growth, in our view."

Numis noted that Paragon was, however, seeing a higher redemption rate of 14.9% on the very high margin post crisis portfolios.

While it sees the short term outlook for Paragon and the other UK specialist lenders as being positive, with the bening interest rate environment, though the BTL investment demand will reduce especially when interest rates increase.

But Numis added: "Competition and rising interest rates are expected to normalise returns, but this is expected to take a significant amount of time. We believe the impairment inflection point for Paragon is a base rate of 2-3% which we do not expect to see in the near future."