Paragon Banking Group Plc · LSE:PAG
Paragon Banking — H1 2020 Earnings Presentation
43 slides from Paragon Banking's earnings presentation, June 2020
Slide 1: Resilient in an uncertain environment
Paragon Banking Group PLC Resilient in an uncertain environment Financial results 6 months ended 31 March 2020
Slide 2: Our priorities facing Covid-19
2 Introduction • Support our customers and suppliers Our priorities • Protect our people facing Covid-19 • Safeguard our capital base • Preserve the long-term value of the business
Slide 3: Introduction
3 Introduction Existing strategy already based on long term sustainability, prudence and operational resilience Specialist bank Cautious risk appetite • Deliberate strategy post GFC to build and grow a leading specialist bank • Credit, capital, liquidity, operational risk all tightly monitored • Div
Slide 4: Paragon's response to Covid-19
4 Paragon’s response to Covid-19 Swift reaction delivering high operational and business resilience People and operations Customer support • Swift response to developing environment • Payment holidays granted across the business • Reflects highly agile capabilities • All products and services fully
Slide 5: H1 2020 results overview
5 H1 2020 results overview Underlying trading in line with expectation pre-Covid – total Covid P&L impacts £27.7 million Financial highlights Business developments Capital and funding • Underlying operating profits down 28.3% to • Underlying net loan book growth +6% • Savings deposits up 8.1% from S
Slide 6: Financial results
6 Financial results 6 months ended 31 March 2020 Richard J Woodman Chief Financial Officer
Slide 7: Covid-19 approach
7 Covid-19 approach Post Covid-19 outlook reflected though income recognition and impairment adjustments Purchased portfolio income recognition -£3.7 million • Income recognition impacted by discounting lower cash flow, with partial recovery as economy recovers • Instalment payments reflect longer t
Slide 8: Economic outlook
8 Economic outlook Multiple economic scenarios Unemployment (%) • Series of economic scenarios modelled ranging from swift recovery from 10 9 end of lockdown through to deeper recession, lower property and asset 8 prices, higher unemployment and second wave of lockdowns that slow 7 6 recovery furthe
Slide 9: Income statement
9 Income statement Pre and post-Covid adjustments £ million H1 2020) H1 2020) H1 2020 H1 2019) Change) Reported) Covid Adj) Pre-Covid Net interest income 141.4) (3.7) 145.1) 138.1) +2.4%) Other income 8.3) ) 8.3) 9.9) (16.2%) Total operating income 149.7) (3.7) 153.4) 148.0) +1.1%) Operating expense
Slide 10: Segmental results
10 Segmental results Core business line contributions more than offset by expected Idem Capital earnings fade Underlying £ million Mortgages Commercial Lending Idem Capital Central Total Total operating income (H1 2020) 99.1) 43.4) 13.5) (6.3) 149.7) Change (v H1 2019) +6.1) +7.3) (13.8) +2.1) +1.7)
Slide 11: Segmental influences on NIM
11 Segmental influences on NIM NIM progression – Group (%) Non-Idem Capital NIM progression remains strong 2.40 2.29 2.30 2.24 2.20 2.16 2.10 2.09 2.10 • Rate of run-off of Idem portfolio disproportionately impacts Group 2.00 NIM in the near term 1.90 1.80 • Potential demand disruption from Covid-19
Slide 12: Operating expenses
12 Operating expenses Improved cost:income ratio Underlying cost:income ratio (%) 45 42.2 42.8 41.8 40.7 40 38.5 • Costs marginally lower 33.8 35.2 35 32.2 • Lower share-based remuneration accruals • Continued investment in technology / infrastructure 30 • Project costs include ongoing support for I
Slide 13: Impairments
13 Impairments IFRS9 provisions (£m) Updated economic assumptions and other overlays Commercial Idem drive higher impairments Mortgages Lending Capital Total Stage 1 10,120.5 1,412.1 137.8 11,670.3 • Updated economics and overlays add £24.0 million (56%) to balance sheet provisions Stage 2 447.8 81.
Slide 14: Group capital
14 Group capital Strong ratios maintained – no interim dividend declared Group consolidated capital Core Equity Tier-1 capital * £983.3m Tier-2 capital £150.0m Total capital resources £1,133.3m Credit risk £6,197.3m Capital ratios Operational risk £516.6m • CET1 and TCR remain strong Market risk - •
Slide 15: Capital bridge
15 Capital bridge Removal of interim dividend supports growth in capital ratio FY 2019 / H1 2020 18% Tier 1 capital 7.0% 6.7% 7% 16% 2.3% 6% (0.2%) 0.2% 0.1% 0.6% 14% 5% UK leverage ratio 12% CET 1 ratio 4% 10% 3% 14.4% 14.4% 13.7% 8% 2% 6% 1% 4% 0% FY 2019 IFRS 9 transitional Retained Earnings Net
Slide 16: Strategy overview
16 Strategy overview Nigel S Terrington Chief Executive
Slide 17: Dynamic response to Covid-19
17 Dynamic response to Covid-19 Covid-19 strategy Actions Modified BAU • 90%+ working from home • Resource reallocation • Governance normalised • Support our customers and suppliers • Phase 2 forbearance engagement • Enhanced network resilience commenced • Cyber security controls strengthened • Prot
Slide 18: Buy-to-let
18 Buy-to-let Increasingly specialist lending with loan book growth and improving NIM New lending Redemptions Net loan book • Increasing focus towards specialist lending • Slower redemptions due to: • Down 1.1% on H1 2019 but up 6.0% • Mid-March onwards volumes impacted • More professionals / comple
Slide 19: Buy-to-let – defensive asset quality
19 Buy-to-let Defensive asset quality Prime quality loan book Strong asset backing Strong tenant demand continuing • Arrears rates consistently lower than industry • Significant asset backing strengthened since 2008 • Strong fundamental tenant demand average • Average LTV 67.7% (Sept-08 – 80.7%) • S
Slide 20: Buy-to-let – payment holidays expected to fall
20 Buy-to-let – payment holidays expected to fall Proportion of book value with payment holidays (%) 21.3 21.0 Payment holidays 20.3 • 17.9% customers granted payment holiday, representing 21.0% of loan book by value • 97.2% of payment holidays to accounts with sub 90% LTV • Specialists slightly mor
Slide 21: Mortgages – current trading
21 Mortgages – current trading New lending flows impacted by Covid-19 but will expand from current level Mortgages new business (£m) 160.0 137.8 • Buy-to-let pipeline reduced from March level due to restrictions on LTV 140.0 and HMO lending • 31 March 2020 – £789.8 million, 31 May 2020 – £598.7 mill
Slide 22: Commercial Lending – development finance
22 Commercial Lending – development finance Originations and loan book growth (£m) Continued growth and progress whilst enhancing 600 £502.2m resilience 500 Originations Net loan book £426.0m 400 300 £197.8m 200 £160.7m • In-house start-up enhanced by purchase of Titlestone in 2018 100 £35.1m £57.0m
Slide 23: Development finance – payment holidays and customer insight
23 Development finance – payment holidays and customer insight Site closures (number) Majority of sites remained open throughout 35 30 • Covid site closures peaked at 32, representing 22% of portfolio (where 25 20 ground broken) but quickly recovered 15 • Only one site still closed as at 1 June 2020
Slide 24: Commercial Lending – SME lending
24 Commercial Lending – SME lending Originations and loan book growth (£m) Further progress built on strong credit focus 700 8% Originations* Net loan book Yield £606.6m 600 £539.4m 7% • SME lending division built out of acquisition of Five Arrows Asset Finance 500 6% £427.7m Originations (£m) in 20
Slide 25: SME lending – payment holidays and customer insight
25 SME lending – payment holidays and customer insight Sector exposure (£m) Payment holidays 160.0 No forbearance Partial Full • Extensive use of payment holidays 140.0 • As at 31 May, as a proportion of these payment holidays: 120.0 • 84% making partial payments 100.0 • 16% with full payment holida
Slide 26: Commercial Lending – current trading
26 Commercial Lending – current trading Current trading robust particularly in development finance Commercial Lending new business (£m) 120 100 • SME lending and motor finance new business impacted most by Covid-19 due to business and car showroom closures 82.8 77.3 80 72.3 • CBILS and BBLS will aid
Slide 27: Strength of the deposit franchise
27 Strength of the deposit franchise New deposits (£m) / deposit rate (%) Expanding our addressable market in a changing market 600 2.0% • Built strong franchise 1.85%1.86% 1.8% • £6.9 billion balance at 31 March 2020, £7.5 billion at 31 May 2020 500 1.77% 1.73% 1.76% 1.6% 1.69% 1.68% • Significant
Slide 28: Conclusion
28 Conclusion • Swift response to Covid-19 with agile operational capabilities • Defensive balance sheet • High asset quality, 98% secured Covid-19 swift response • 14.4% CET1 with resilience • Protecting customers, whilst safeguarding capital base • Payment holidays • CBILS / BBLS • Cautious approa
Slide 29: Appendix
L 2 paragon * Appendix
Slide 30: Building a specialist bank
30 Building a specialist bank Underlying earnings per share (pence) Long-term sustainable delivery with change 30 • Strategic transformation whilst improving returns 25 25.0 20 22.5 20.7 • Bank formation and subsequent restructuring 15 19.1 17.4 17.6 • 4 acquisitions • 5 start-ups 10 • Technology in
Slide 31: Building a specialist bank
31 Building a specialist bank Significant shift in flow of new loan originations in 3 years (%) Increasingly focused on specialist BTL and SMEs 100% 11.0% 90% • Specialist focus avoids low return commoditised sectors 80% 37.8% • As a specialist we seek to achieve a deeper understanding of: 20.9% • M
Slide 32: Structural improvement in NIM
32 Structural improvement in NIM Our front book / back book structural dynamic is rare in today’s UK banking market Evidenced via higher yields in new portfolio Swapping lower margin legacy book for higher margin BTL / SME 7.53% Drag from Idem Capital materially less significant from FY 2021 8% 2.7%
Slide 33: Net interest income
33 Net interest income Net interest income (£m) Structural NIM improvement continues 160 140 Overall • NIM increased by 5bp to 229bp, which included a 6bp reduction 120 from Covid-19 overlays in Idem Capital Mortgages 100 H1 2019 Mortgages Commercial Idem Capital Central H1 2020 • Margins stable on
Slide 34: Diversification
34 Diversification Diversified loan growth Diversified funding Funding by type (£m) Originations £million H1 2020 H1 2019 Change Securitisation Tier 2 bond Retail bonds Central Bank Retail deposits Specialist BTL 694.6 693.1 +0.2%) 14,000 Other mortgages 98.2 140.8 (30.3%) 12,000 Commercial Lending
Slide 35: Mortgages
35 Mortgages Steady underlying growth and structural NIM improvement Originations Loans and advances H1 2020 £792.8m H1 2020 £10,676.1m H1 2019 £833.9m H1 2019 £10,783.9m • BTL new advances stable H1 2018 £721.0m H1 2018 £10,119.5m • Specialist residential lower as H1 2017 £587.7m H1 2017 £9,795.3m
Slide 36: Buy-to-let
36 Buy-to-let BTL gross mortgage lending (£bn) House purchase Remortgages Other Market 50 41.7 38.9 40.3 • Despite fiscal and regulatory changes, BTL volumes remained robust 40 35.5 • Remortgage activity continues to dominate (71.2%) 30 • Purchase activity increasingly focused towards specialist lan
Slide 37: Buy-to-let – keeping our customers for longer
37 Buy-to-let Keeping our customers for longer BTL redemptions (%) 30 25 • Redemption levels dropped in H1 2020 20 • Specialist landlords showing improved loyalty 15 • Improved retention strategies – direct and broker initiatives 10 • 5 year products extending redemption profile 5 • Expect lower red
Slide 38: Commercial Lending
38 Commercial Lending Divisional development accelerated by 2018 Titlestone acquisition Originations Loans and advances H1 2020 H1 2020 £1,494.3m £481.3m • Development finance H1 2019 H1 2019 £1,283.9m advances up 23.1% £455.3m • Motor finance advances H1 2018 £269.3m H1 2018 £680.1m SME lending 13.
Slide 39: Idem Capital
39 Idem Capital Portfolio amortising quickly given strong cash performance Investments Loans and advances H1 2020 £0.0m H1 2020 • NIM reduction reflects £335.7m September 2018 portfolio sale H1 2019 £0.0m H1 2019 £457.8m and portfolio amortisation H1 2018 £0.0m H1 2018 £547.1m • Unsecured loans -31.
Slide 40: Idem Capital
40 Idem Capital Opportunistic investments whilst maintaining strict pricing and quality discipline Cumulative portfolio cash flow (£m) 1400 Actual Estimated • Portfolio continues to perform well – cash flow 109.9% of expectations 1200 • Market remains highly competitive. Pricing has softened a littl
Slide 41: Central
41 Central Central funding stable, but costs higher reflecting project spend Underlying profit / (loss) contribution (£44.4m) H1 2020 (£47.1m) H1 2019 (£42.6m) H1 2018 (£44.6m) H1 2017 • Next corporate debt maturity scheduled in December 2020 Corporate / central funding Unallocated / central costs •
Slide 42: Balance sheet
42 Balance sheet £million H1 2020 H1 2019 Change (%) Mortgages 10,676.1 10,783.9 (1.0%) Reflects £0.7 billion PM12 disposal in May 2019 Commercial Lending 1,494.3 1,283.9 +16.4%) Led by development finance and SME lending Idem Capital 335.7 457.8 (26.7%) Strong cash flow amortising portfolio Loans a
Slide 43: Disclaimer
43 Disclaimer • This presentation has been issued by Paragon Banking Group PLC (“Paragon”). This presentation is directed only at persons in the United Kingdom who fall either within Article 19 (Investment Professionals) or Article 49 (High net worth companies) of the Financial Services and Markets
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