Paragon Banking Group Plc · LSE:PAG
Paragon Banking — FY2020 Earnings Presentation
41 slides from Paragon Banking's earnings presentation, November 2020
Slide 1: Resilient in an uncertain environment – rebuilding momentum
Paragon Banking Group PLC Resilient in an uncertain environment – rebuilding momentum Financial results 12 months ended 30 September 2020
Slide 2: Resilient performance, momentum rebuilding
2 Resilient performance, momentum rebuilding • Operating profit £120 million, down 27% year-on-year • COVID impairment charge dominant effect but materially lower in H2 Financial performance • Underlying RoTE 9.8%; CET1 up 0.6% to 14.3% • Dividend reinstated in line with existing policy • Strong ope
Slide 3: Adapted to COVID-19 with speed and resilience
3 Adapted to COVID-19 with speed and resilience Protecting our people and supporting the Supporting customers and partners community • Stable technology throughout with significant new deliveries implemented • 90%+ working from home within 4 days of lockdown • Products and services fully available •
Slide 4: Culture, sustainability and customers supporting our purpose
4 Culture, sustainability and customers supporting our purpose Our purpose: Culture • Our culture is unique, which we fiercely protect Supporting the ambitions of • Wide-ranging development programme the people and businesses of • Comprehensive wellbeing support to boost physical, emotional and fina
Slide 5: Financial results
5 Financial results 12 months ended 30 September 2020 Richard J Woodman Chief Financial Officer
Slide 6: Income statement
6 Income statement £ million 2020) 2019) Change) Net interest income 278.1) 278.4) (0.1%) 2019 benefits from higher Idem Capital income Other income 17.0) 19.2) (11.5%) End of term gains and servicing fee run-off Total operating income 295.1) 297.6) (0.8%) Operating expenses (126.8) (125.2) +1.3%) L
Slide 7: Segmental results
7 Segmental results COVID impairment charges and Idem Capital amortisation offset strong pre-provision profit growth in core divisions Underlying £ million Mortgage Lending Commercial Lending Idem Capital Central Total Total operating income 196.5) 92.0) 26.7) (20.1) 295.1) (2020) Change (v 2019) +1
Slide 8: Segmental influences on NIM
8 Segmental influences on NIM NIM progression – Group (%) Influence of base rate reductions felt in H2 – unwinding by year end 2.40 2.29 2.30 2.24 2.19 2.20 2.15 2.13 2.10 • NIM dropped to 213bp in four months following the base-rate led 2.00 asset reprice – largely recovered by September 1.90 • Low
Slide 9: Operating expenses
9 Operating expenses Cost:income broadly stable at 43% Underlying cost:income ratio (%) 45 43.0 42.1 40.5 40.6 40 36.7 • Slower income growth in H2 33.7 35 33.2 32.0 • Favourable cost movements: 30 • Variable remuneration reduced (cash and share based) • COVID pushed certain projects into 2021 25 •
Slide 10: Economic outlook
10 Economic outlook Multiple economic scenarios • Four scenarios updated from HY:20, weightings consistent with H1:20 Scenarios • Lockdown 2 assumed to cause GDP decline in Q4 Base Upside Downside Severe • Baseline FY:20 -10.2%, FY:21 +10.6% • Previous impacts assumed on HPI and unemployment shifted
Slide 11: Payment holiday overview
11 Payment holiday overview Extensive customer support given – strong subsequent recovery Payment holiday population (£m) 3,500 3,000 2,636 2,653 2,659 2,668 • Rapid escalation of payment holidays seen in March and April 2,554 2,606 2,500 2,310 • Approximately 30% of these ended up taking extensions
Slide 12: Impairments
12 Impairments Impairment Impairmentoverlay overlay Post Model Adjustments added to reflect Covid-19 policy response 2019 Year End (£m) 2020 Interim (£m) 2020 Year End (£m) Calculated provision £41.9 £42.7 £62.0 • Models are forward-looking, reflecting anticipated impacts of Overlay - £24.0 - foreca
Slide 13: Group capital
13 Group capital Improving capital position with material headroom over regulatory requirement Group consolidated capital Core Equity Tier-1 capital * £991.2m Capital ratios Tier-2 capital £150.0m Total capital resources £1,141.2m • CET1 and TCR remain strong Credit risk £6,318.1m • Capital surplus
Slide 14: Capital bridge / UK leverage ratio
14 Capital bridge Year-on-year capital accretion after reflecting dividend, loan growth and impairments FY 2019 / FY 2020 18% Tier 1 capital 7.1% 6.7% 7% 16% (0.4%) (0.5%) 2.1% 6% (0.1%) 1.4% 0.2% 14% 5% UK leverage ratio 12% CET 1 ratio 4% 10% 3% 14.3% 14.3% 13.7% 8% 2% 6% 1% 4% 0% FY 2019 IFRS 9 t
Slide 15: Strategy overview
15 Strategy overview Nigel S Terrington Chief Executive
Slide 16: Crisis reinforced our key strategic pillars and disciplines
16 Crisis reinforced our key strategic pillars and disciplines Strategic pillars Strategic disciplines Experience and data driven Self-funding Levelling the Low-risk playing field Culture Prudentially strong Sustainability Customers Diversified Technology Specialist enabled ROTE≥15% Focused and cust
Slide 17: Buy-to-let
17 Buy-to-let Focused, specialist and customer-led approach to buy-to-let, increased use of technology New lending Redemptions Net loan book • £1.2 billion advances (2019: £1.5 billion) • Better customer retention • £10.6 billion, up 4.8% on 2019 • Mid-March onwards volumes impacted • More professio
Slide 18: Proven resilience of business model through COVID
18 Proven resilience of business model through COVID Low risk, experience and data led buy-to-let proposition Low risk Experience and data led Payment holidays • Asset backing transformed since 2008 • Experienced team with through-the-cycle sector • 21% of customers at first lockdown • Average LTV 6
Slide 19: Commercial Lending provides increased diversification
19 Commercial Lending provides increased diversification Resilient performance in COVID shock Commercial Lending new business (£m) 100 • Commercial Lending is a key pillar in our diversification strategy 90 • Business grown through combination of organic and inorganic means 80 70 • Acquisitions focu
Slide 20: Commercial Lending – development finance
20 Commercial Lending – development finance Originations and loan book growth (£m) Continued growth with conservative approach 700 £609.0m Originations Net loan book 600 • Key differentiators for Paragon £506.5m • Experienced team 500 £385.3m • Broad product range 400 £352.8m £362.9m • Efficient del
Slide 21: Commercial Lending – SME lending
21 Commercial Lending – SME lending Broad-based proposition Originations and loan book growth (£m) 700 8% Originations Net loan book Yield £576.2m 7% 600 £554.0m £485.1m • Serving SMEs, local authorities and professions through both direct and 500 6% Originations (£m) £406.5m 5% broker channels 400
Slide 22: Retail savings – levelling the playing field
22 Retail savings – levelling the playing field New deposits (£m) / deposit rate (%) Boosting capacity and capability 800 2.0% • Continued strong growth in deposits – now £8.1 billion at end of October, 700 1.86% 1.85% 1.8% +26.5% from FY:19, with material fall in pricing 1.77% 1.73% 1.69% 1.76% 1.6
Slide 23: Strategic focus and values reinforced by COVID-19 pandemic
23 Strategic focus and values reinforced by COVID-19 pandemic • Provided substantial support to customers to help them through the pandemic • Our values and support for colleagues unchanged, emphasis on well-being and safety Rapid reprioritisation • Delivered a resilient financial and operational pe
Slide 24: Appendix
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Slide 25: Building a specialist bank
25 Building a specialist bank Underlying earnings per share (pence) COVID-related impairments impacted financial outturn, but Group remains profitable and resilient 60 50 51.1 40 48.2 43.3 • Expected Credit Loss approach under IFRS 9 accelerates impairment 36.6 40.7 30 36.5 recognition as soon as ec
Slide 26: Building a specialist bank
26 Building a specialist bank Significant shift in flow of new loan originations in 3 years (%) Specialist lending focus continues 100% 0.2% 0.0% 5.0% 3.5% 90% 19.9% • Commercial Lending and specialist BTL dominate new business flows 80% 29.4% 38.2% 38.6% • Specialist distribution 70% 60% 28.8% 18.1
Slide 27: Net interest income
27 Net interest income Net interest income (£m) Income dynamics in growth segments remain attractive 320 300 280 • Positive rate and volume effects in both Mortgage Lending and 260 Commercial Lending 240 • Absorbing adverse impact from H2 base rate impacts on variable 220 FY 2019 Mortgages Commercia
Slide 28: Structural improvement in NIM
28 Structural improvement in NIM Front:back-book dynamics generate underlying NIM enhancement Evidenced via higher yields in new portfolio Swapping lower margin legacy book for higher margin BTL / SME 7.61% Drag from Idem Capital materially less significant from FY 2021 8% 2.4% 7% 12.0% 6% 5% 34.6%
Slide 29: Provisions by stage and segment
29 Provisions by stage and segment IFRS9 provisions (£m) IFRS 9 impairments Mortgage Commercial Idem Lending Lending Capital Total Stage 1 9,822.6 1,384.2 122.9 11,329.7 Stage 2 903.2 132.3 9.9 1,045.4 Stage 3 127.0 20.2 28.9 176.1 POCI 15.0 6.7 140.3 162.0 Gross loan book 10,867.8 1,543.4 302.0 12,
Slide 30: Impairments – Mortgage Lending
30 Impairments – Mortgage Lending IFRS 9 provisions (£m) Arrears balance movements on non-payment holiday customers (£m) Coverage: FY 2020 48.3 0.44% Value improving -8.1 Value deteriorating 10.6 FY 2019 26.8 0.26% 0 10 20 30 40 50 60 Net movement 2.5 Stage 1 Stage 2 Stage 3 -50.0 -30.0 -10.0 10.0 I
Slide 31: Impairments – Commercial Lending
31 Impairments – Commercial Lending IFRS9 provisions (£m) Arrears movements on non-payment holiday customers (£m) Coverage: FY 2020 28.6 1.85% Value improving -0.4 Value deteriorating 2.0 FY 2019 10.7 0.73% 0 5 10 15 20 25 30 35 40 Net movement 1.7 Stage 1 Stage 2 Stage 3 POCI -1.0 0.0 1.0 2.0 3.0 4
Slide 32: Impairments – Idem Capital
32 Impairments – Idem Capital Non-POCI IFRS 9 provisions (£m) • For assets ‘Purchased or Originated as Credit Impaired’ (‘POCI’), a large Coverage: part of the Group’s acquired assets in Idem Capital, the carrying valuation FY 2020 4.9 3.03% is based on expected cash flows discounted by EIR determin
Slide 33: Diversification
33 Diversification Diversified loan growth Diversified funding Funding by type (£m) Originations £million FY 2020 FY 2019 Change 16,000 Securitisation Tier 2 bond Retail bonds Central Bank Retail deposits Specialist BTL 1119.0 1315.1 (14.9%) 14,000 Other mortgages 140.7 249.3 (43.6%) Commercial Lend
Slide 34: Mortgage Lending
34 Mortgage Lending Pre-provision performance maintains progress, despite COVID-related drop in demand during lockdown Originations Loans and advances FY 2020 £1,259.7m FY 2020 £10,819.5m FY 2019 £1,564.4m FY 2019 £10,344.1m • Origination flows firmly FY 2018 £1,623.2m FY 2018 £10,473.5m focused on
Slide 35: Buy-to-let
35 Buy-to-let BTL gross mortgage lending (£bn) Market-wide volumes reflect Paragon’s experience House purchase Remortgages Other 50 40.1 41.8 37.5 38.2 40 30 20 10 • Market saw lower demand from April – June 0 Oct-16 to Sep-17 Oct-17 to Sep-18 Oct-18 to Sep-19 Oct-19 to Sep-20 • Paragon’s specialist
Slide 36: Buy-to-let: keeping our customers for longer
36 Buy-to-let Keeping our customers for longer BTL redemptions (%) 30 25 • Further reductions in annualised redemption rates 20 • Historic peak driven by amateur products and strong refinance market 15 10 • Strong retention 5 • Longer average lives from 5-year fix business 0 Mar-07 Mar-08 Mar-09 Mar
Slide 37: Commercial Lending
37 Commercial Lending COVID-interruption stalls underlying strong progress Originations Loans and advances FY 2020 £790.8m FY 2020 £1,514.8m FY 2019 £968.0m FY 2019 £1,452.1m FY 2018 £710.0m FY 2018 £1,133.2m • New business volumes below FY 2017 £388.9m FY 2017 £558.8m 2019 peak SME lending Motor fi
Slide 38: Idem Capital
38 Idem Capital Portfolio amortisation rate maintained Investments Loans and advances FY 2020 £0.0m FY 2020 • Run-off fastest in high yield £297.1m books FY 2019 £4.2m FY 2019 £390.0m FY 2018 £83.4m FY 2018 £521.1m • Cash flow impacted during lockdown but rebounded FY 2017 £98.0m FY 2017 £611.4m str
Slide 39: Central
39 Central Central overheads increased year-on-year Underlying profit / (loss) contribution (£99.8m) FY 2020 (£95.3m) FY 2019 (£86.5m) FY 2018 (£88.1m) FY 2017 • Costs include £1.6 million increase in savings Corporate / central funding Unallocated / central costs administration expenses, which vari
Slide 40: Balance sheet
40 Balance sheet £million 2020 2019 Change (%) Mortgages 10,819.5 10,344.1 +4.6%) Steady growth. H2 completions slower but pipeline rebuilt Commercial Lending 1,514.8 1,452.1 +4.3%) SME and Motors books most impacted by COVID impacts on demand Idem Capital 297.1 389.8 (23.8%) Continued amortisation
Slide 41: Disclaimer
41 Disclaimer • This presentation has been issued by Paragon Banking Group PLC (“Paragon”). • It is supplied for information only and may not be reproduced or redistributed. This presentation is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscr