Paragon Banking Group Plc · LSE:PAG
Paragon Banking — FY2023 Earnings Presentation
38 slides from Paragon Banking's earnings presentation, December 2023
Slide 1: Paragon Banking Group PLC
Paragon Banking Group PLC Financial results twelve months ended 30 September 2023
Slide 2: Agenda
Agenda Financial overview Richard Woodman, Chief Financial Officer Strategy overview Nigel Terrington, Chief Executive Officer Conclusions
Slide 3: Strong performance enhancing our specialist franchise
Strong performance enhancing our specialist franchise Purpose … • Strong and growing franchise in specialist banking … to support the • Widening NIM, adjusting to higher rate environment ambitions of the people and businesses • High quality loan book delivering exemplary performance of the UK by del
Slide 4: Strong operational and financial performance
Strong operational and financial performance • Underlying operating profit £277.6 million, up 25.4% on 2022 • Pre-provision profit up 25.6% • Underlying EPS +34.8% Financial performance • NIM 3.09%, +40bps on 2022 • Cost:income ratio 36.6% • Underlying RoTE 20.2% • Full year dividend 37.4p; DPS +30.
Slide 5: Financial overview
Financial overview Richard J Woodman Chief Financial Officer
Slide 6: Income statement
Income statement £ million 2023 2022 Change Net interest income 448.9) 371.2) +20.9%) Other income 17.1) 17.2) (0.6%) Total operating income 466.0) 388.4) +20.0%) Rate environment supports above trend margin performance Operating expenses (170.4) (153.0) +11.4%) Reflects continued platform investmen
Slide 7: Segmental results
Segmental results Strong operating performance in both segments, Commercial Lending contribution exceeding £100 million Underlying £ million Mortgage Lending Commercial Lending Central Total Total operating income (FY 2023) 283.2) 147.2) 35.6) 466.0) Change (v FY 2022) +24.6) +26.2) +26.8) +77.6) Op
Slide 8: Net interest margin
Net interest margin NIM progression – Group (%) • Margin benefit switches from asset to liability side at higher rates 3.20 3.09 • Stronger returns on free capital – increasingly 3.00 being hedged to protect NIM if rates re-trace Structural NIM (£0.3 billion of £1.2 billion eventual hedge in 2.80 2.
Slide 9: Net interest margin (2)
Net interest margin (2) • From 2019 we have highlighted underlying NIM accretion in the 5-10bp range • 2023 actual is 60bp above the bottom of this range and 40bp above the top Recent margin levels • Compared to 2019, SONIA rate applied to tangible equity in 2023 gives a circa 25bp tailwind material
Slide 10: Operating expenses
Operating expenses Underlying cost:income ratio (%) 60 55 • Year-on-year cost growth 11.4% 50 43.0 • Annual IT cost increased from £14.9 million 45 42.1 41.7 39.4 in 2019 to £24.4 million in 2023 as we invest 40 36.6 Operating costs in line in a digitalised platform, with minimal capitalisation 35 3
Slide 11: Economic outlook
Economic outlook • Conservative MES position Scenarios Base Upside Downside Severe • Maintained even balance of base/upside and downside/severe scenarios to reflect ongoing Weighting 40% 10% 30% 20% uncertainty Impact of 100% £67.4m £59.0m £73.4m £95.8m • Downside/severe mix held at 30/20 weighting
Slide 12: Impairments
Impairments Impairment overlay FY 2020 FY 2021 FY 2022 FY 2023 • Main impairment driver is the MES rather than (£m) (£m) (£m) (£m) non-performing loan levels; coverage up YoY Calculated provision £62.0 £46.0 £48.5 £67.1 • Next generation IFRS 9 models support reduction Judgmental overlay £19.8 £19.4
Slide 13: Capital movements during the period
Capital movements during the period FY 2022 / FY 2023 22% 9% 7.9% 7.6% 20% 2.8% 0.8% 8% 0.1% 0.6% 18% 1.1% 7% 1.3% 2.0% 16% 0.3% 6% UK leverage ratio 14% 5% CET1 ratio 12% 4% 10% 16.3% 3% 15.5% 15.5% 8% 2% Tier-1 capital Tier-2 capital 6% 1% 4% 0% FY 2022 Underlying FV impact on IFRS 9 Net lending D
Slide 14: Group capital
Group capital Group consolidated capital Capital ratios Core Equity Tier-1 capital * £1,188.9m • 15.5% CET1 represents a strong surplus over Tier-2 capital £150.0m regulatory minimum (>£300 million) Total capital resources £1,338.9m • Group has no AT1 in capital structure Credit risk £6,884.9m • Tie
Slide 15: Capital management
Capital management Dividend per share (pence) 40.0 Interim Final 35.0 Dividend per share • Dividend per share continues to be based on underlying earnings and benefits from 30.0 up 30.8% share buy-back 25.0 26.4 • £483 million of share buy-backs completed / Covid New £50 million announced since 2015
Slide 16: Business performance review and strategic priorities
Business performance review and strategic priorities Nigel S Terrington Chief Executive Officer
Slide 17: Strategic pillars
Strategic pillars We have five clear strategic priorities underpinned by three strategic pillars Our strategy is driven by our purpose and helps us achieve our vision to Growth Diversification Digitalisation Capital management Sustainability become the UK’s leading technology-enabled Our strategic p
Slide 18: Strategic priorities delivery
Strategic priorities delivery • 6.4% reduction in new lending v 2022, 15.6% higher than 2021 … Growth • … but 4.7% loan book growth delivered • Commercial Lending 37.5% of Group’s 2023 new lending Diversification • Commercial Lending profit contribution £113.2 million (2020: £43.9m) • Technology tra
Slide 19: Operating model equilibrium – driving sustainable longer-term returns
Operating model equilibrium – driving sustainable longer-term returns Growth • Dynamic calibration of strategic levers to external environment and risk appetite shape the delivery • Fundamental banking inter-relationships are Medium term growth, returns and risk. Balance is key underlying RoTE targe
Slide 20: Mortgages – Continued focus on professional landlords driving loan book growth
Mortgages – Continued focus on professional landlords driving loan book growth Specialist new business (£m) Redemptions (% of book) Net loan book (£m) 2,000 16% 14,000 14% 12,000 Completions (£m) Loan Book (£m) 1,500 12% 10,000 Redemptions 10% 8,000 1,000 8% 6,000 6% 4,000 500 4% 2,000 0 2% 0 FY 202
Slide 21: Mortgages – Proven resilience of business model through-the-cycle
Mortgages – Proven resilience of business model through-the-cycle Arrears rate 3mths+ (bp) Average LTV 350 Paragon buy-to-let 85% 70% >80% LTV Average LTV 300 % of book over 80% LTV UK Finance buy-to-let (inc. RoR) 80% 60% 250 75% 50% Average LTV 200 70% 40% 150 65% 30% 100 60% 20% 69bp 50 55% 10% 3
Slide 22: Commercial Lending provides increased diversification and structural NIM expansion
Commercial Lending provides increased diversification and structural NIM expansion Commercial Lending operating profit (£m) 120 100 80 • 38% of Group’s new lending 60 40 • 13% of Group loan book 20 0 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 • 32% of Group income Profit contribution increased
Slide 23: Commercial Lending – Development Finance
Commercial Lending – Development Finance Originations and loan book growth (£m) 900 Originations Net loan book £747.8m 800 £719.9m 700 £632.2m £609.0m £608.2m 600 £528.1m £510.4m 500 £385.3m 400 • Volume reduced to £528.1 million as expected, 300 200 but… Through-the-cycle 100 0 management • Loan bo
Slide 24: Commercial Lending – SME Lending
Commercial Lending – SME Lending Originations and loan book growth (£m) Originations Net loan book 800 £757.6m £721.7m 700 £616.8m • Volumes stable with strict pricing discipline Robust new business 600 £554.0m • Loan book +5.0% to £757.6 million flows alongside Originations (£m) 500 £446.4m £447.9m
Slide 25: Commercial Lending – Motor Finance and Structured Lending
Commercial Lending – Motor Finance and Structured Lending Loan book growth Motor Finance – Motor Finance and Structured Lending (£m) Motor finance Structured lending • Volumes -2.4% to £162.2 million 350 • Loan book +14.0% to £297.4 million £297.4m 300 • Targeting niche markets such as leisure secto
Slide 26: Strong deposit growth with improved cost of funding
Strong deposit growth with improved cost of funding New deposits (£m) 1,400 1,200 Adapting to higher rate environment 1,000 800 • Continued strong growth in deposit book 600 – £13.3 billion, +24.3% 400 Material change in 200 • Higher rates changing customer behaviour 0 customer behaviour Jul-22 Jul-
Slide 27: Conclusions and FY24 guidance summary
Conclusions 2023 trading performance Outlook FY:24 guidance summary • Outstanding financial performance • Strong capital ratios and internal capital generation Volumes: • Loan book growth and NIM widened • Buy-to-let £1.3 – £1.6 billion • High quality loan book with prudent • Tight cost control prov
Slide 28: Appendix
Appendix
Slide 29: Strategic priorities – sustainability
Strategic priorities – sustainability ESG ratings Following investor feedback, we are most actively • £904.6 million new lending to EPC A-C properties engaging with the following ESG rating agencies: supported by our range of green mortgages Rating scale Our rating • In Development Finance, funding
Slide 30: Longer term trends
Longer term trends Underlying earnings per share (pence) 100 90 80 94.2 70 60 69.9 • 2023 metrics outperforming longer term trend 50 59.3 40 48.2 51.1 30 40.7 43.3 36.6 36.5 20 27.8 31.8 10 0 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Consistent delivery
Slide 31: Provisions by stage and segment
Provisions by stage and segment IFRS 9 impairments Mortgage Lending Commercial Lending Total Stage 1 12,159.7 1,812.6 13,972.3 Stage 2 625.0 119.8 744.8 Stage 3 142.2 63.8 206.0 POCI 17.7 7.1 24.8 Gross loan book 12,944.6 2,003.3 14,947.9 Stage 1 4.8 14.8 19.6 Stage 2 6.1 3.3 9.4 Stage 3 31.4 8.4 39
Slide 32: Impairments
Impairments IFRS 9 provisions (£m) – Mortgage Lending FY 2023 42.3 • Stage 1 overlays reduced from £15.0 million to £6.5 million FY 2022 38.0 0 5 10 15 20 25 30 35 40 45 50 Stage 1 Stage 2 Stage 3 IFRS 9 provisions (£m) – Commercial Lending Portfolio impairment movements Impairments Brought P&L W-of
Slide 33: Diversification
Diversification Diversified loan growth Diversified funding Funding by type (£m) Originations £million 2023 2022 Change 18,000 Specialist BTL 1,857.6 1,869.5 (0.6%) Securitisation Tier-2 bond Retail bonds Central Bank Retail deposits Repo 16,000 Other mortgages 22.3 40.5 (44.9%) 14,000 Commercial Le
Slide 34: Mortgage Lending
Mortgage Lending Originations Loans and advances FY 2023 £1,879.9m FY 2023 £12,902.3m FY 2022 £1,910.0m FY 2022 £12,328.7m FY 2021 £1,630.0m FY 2021 £11,829.6m FY 2020 £1,259.7m FY 2020 £11,101.1m Steady originations, 0 Amateur BTL 500 Specialist BTL 1000 1500 Residential 2000 Second charge mortgage
Slide 35: Commercial Lending
Commercial Lending Originations Loans and advances FY 2023 £1,128.7m FY 2023 £1,972.0m FY 2022 £1,304.7m FY 2022 £1,881.6m FY 2021 £971.5m FY 2021 £1,573.1m FY 2020 £790.8m FY 2020 £1,530.3m Growth in profit 0 SME lending 500 Development finance Motor finance 1000 Structured lending 1500 0 SME lendi
Slide 36: Central
Central Underlying profit / (loss) contribution (£82.2m) FY 2023 • Central area carries the cost of the Group’s (£94.9m) FY 2022 Funding benefit from tech spend, together with savings surplus liquidity and operations’ costs (£112.4m) FY 2021 return on net assets (£99.8m) FY 2020 Corporate / central
Slide 37: Balance sheet
Balance sheet £million 2023 2022 Change (%) Mortgage Lending 12,902.3 12,328.7 +4.7%) Commercial Lending 1972.0 1,881.6 +4.8%) Loans and advances to customers 14,874.3 14,210.3 +4.7%) Cash 2,994.3 1,930.9 +55.1%) Other assets 551.6 512.4 +7.7%) Total assets 18,420.2 16,653.6 +10.6%) Capital and rese
Slide 38: Disclaimer
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 subscribe