Paragon Banking Group Plc · LSE:PAG
Paragon Banking — H1 2022 Earnings Presentation
40 slides from Paragon Banking's earnings presentation, May 2022
Slide 1: Volume and margin growth delivering record profits
Volume and margin growth delivering record profits Paragon Banking Group PLC Financial results Six months ended March 2022
Slide 2: Strong operational and financial performance
Strong operational and financial performance • Operating profit £105.5 million, up 27.3% on H1 2021 • Pre-provision profit up 20.1% • Underlying EPS +29.4% Financial performance • Underlying NIM trajectory (2.57%, +25bps on H1 2021) accelerated by liability-side gains • Underlying RoTE 14.9% • Divid
Slide 3: Financial overview
Financial overview Richard J Woodman Chief Financial Officer 3
Slide 4: Income statement
Income statement £ million 2022 H1) 2021 H1) Change) Net interest income 175.2) 147.5) +18.8%) Favourable rate and volume impacts Other income 6.5) 7.2) (9.7%) Maintaining recent trends Total operating income 181.7) 154.7) +17.5%) Operating expenses (74.9) (65.8) +13.8%) Reflects investment / in lin
Slide 5: Segmental results
Segmental results Strong pre-provision profits in both key divisions Underlying £ million Mortgage Lending Commercial Lending Idem Capital Central Total Total operating income (H1:22) 124.9) 57.6) 8.3) (9.1) 181.7) Change (v H1:21) +18.9) +7.0) (2.7) +3.8) +27.0) Operating expenses (9.3) (12.8) (2.6
Slide 6: Net interest margin
Net interest margin Significant progress in rising rate environment NIM progression – Group (%) 2.80 2.57 2.60 2.40 2.29 2.32 • NIM progress faster than anticipated as deposit-led benefits supplement 2.24 2.16 underlying accretion from loan book dynamic, reversing trend seen in H2 2.20 2020 as rates
Slide 7: Operating expenses
Operating expenses Cost increase in line with guidance with strong progress on Underlying cost:income ratio (%) digitalisation programme 60 57.8 56.8 Group exc. Idem 54.9 55 Group 49.1 50 • Main areas of cost growth linked to higher activity levels and platform 44.1 45 43.5 investment: 41.7 40 42.8
Slide 8: Economic outlook
Economic outlook MES updated – outlook remains cautious • Four scenarios updated from September 2021 Scenarios • Even balance of base/upside and downside/severe scenarios maintained Base Upside Downside Severe to reflect ongoing uncertainty due to cost of living squeeze Weighting 40% 10% 35% 15% • U
Slide 9: Impairments
Impairments Impairment overlay Small charge posted in the period 2019 2020 2021 2022 Year End Year End Year End Interim • Post Model Adjustments (PMA’s) reduced to £14.1 million (£m) (£m) (£m) (£m) Calculated provision £41.9 £62.0 £46.0 £41.1 • Potential cost-of-living impacts replacing Covid-relate
Slide 10: Capital movements during the period
Capital movements during the period FY 2021 / H1 2022 Tier-1 capital Tier-2 capital 20% 7.5% 7.4% 8% 18% 0.1% 0.5% 7% 0.3% 0.6% 1.6% 0.1% 2.1% 16% 6% 14% 5% UK leverage ratio CET1 ratio 12% 4% 10% 15.4% 15.4% 15.4% 3% 8% 2% 6% 1% 4% 0% FY 2021 Retained earnings IFRS 9 transitional Net lending growth
Slide 11: Group capital
Group capital Capital ratios remain strong Group consolidated capital Core Equity Tier-1 capital * £1,092.4m Tier-2 capital £150.0m Capital ratios Total capital resources £1,242.4m • Capital ratios remain well in excess of regulatory requirements Credit risk £6,476.4m Operational risk £576.0m • Addi
Slide 12: Dividend per share
Dividend per share Interim payment in line with policy Dividend per share (pence) Reflects fair value 30.0 Interim Final movements and variance to “normal” cost of risk 25.0 Reflects • 2021 dividend per share inflated by: variance to 4.0 “normal” cost • Fair value movements (+2.3p) – fair values usu
Slide 13: Strategy overview
Strategy overview Nigel S Terrington Chief Executive 13
Slide 14: Our strategic priorities
Our strategic priorities Growth Diversification Digitalisation Capital management Sustainability Our strategic pillars A customer-focused culture A dedicated team Strong financial foundations Expert knowledge and experience, supported An experienced, skilled and engaged workforce, Prudentially stron
Slide 15: Continued progress in fully integrated strategic priorities
Continued progress in fully integrated strategic priorities • Strong growth being delivered Growth • Targeted approach to specialist lending, optimising return on capital • Discipline maintained on risk appetite • Commercial Lending 43% of Group’s new lending Diversification • Further product develo
Slide 16: Strategic priorities – growth
Strategic priorities – growth Long-term growth in new lending (£m) 1,600 • 18.1% CAGR in new lending delivered since H1 2015 continued in H1 2022 1,400 with strong pipelines supporting H2 1,200 • Continued focus on specialist markets • Operational leverage creates potential for strong growth with im
Slide 17: Strategic priorities – diversification
Strategic priorities – diversification • Commercial Lending progress maintained after Covid interruption • 43% of total Group lending • £42 million profit contribution • Targeting broader customer offering and extending distribution Growth divisions’ share of contribution (%) Operating profit by Com
Slide 18: Strategic priorities – digitalisation
Strategic priorities – digitalisation • Multi-business line multi-year re-platforming with segmental roll-out • Cloud-based with modular, best-in-class delivery Delivered to date … Delivering … • Savings technology platform managing • Cloud-based digital capability across all divisions 3rd party rel
Slide 19: Strategic priorities – capital management
Strategic priorities – capital management • IRB • Enhancing risk management capabilities, improving capital/risk alignment • Offering risk-based segmental pricing opportunities • Phase 2 submission progressing • Basel 3.1 now expected 1st January 2025, PRA still to consult on UK approach (expected Q
Slide 20: Strategic priorities – sustainability
Strategic priorities – sustainability Continued focus on doing the right thing for all our stakeholders as a responsible business Supporting our customers Moving towards operational Enhanced risk measures through transition footprint net zero by 2030 and ESG disclosures • Published Green Bond invest
Slide 21: Buy-to-let
Buy-to-let Excellent flow and retention dynamics supporting book growth Specialist new business (£m) Redemptions (% of book) Net loan book and margin (£m) 2,500 1,400 12% 14,000 2.5% 1,200 10% 12,000 2,000 2.0% Applications (£m) Loan Book (£m) 1,000 10,000 Pipeline (£m) Redemptions 1,500 8% 1.5% 800
Slide 22: Proven resilience of business model through the pandemic
Proven resilience of business model through the pandemic Low arrears levels throughout the cycle augmented by material increases in landlord equity Arrears rate – 3mths+ (bp) Average LTV 400 Paragon buy-to-let 85% >90% LTV 40% UK Finance buy-to-let (inc. RoR) Average LTV % of book over 90% LTV 80% 3
Slide 23: Commercial Lending provides increased diversification
Commercial Lending provides increased diversification Pre-Covid trend growth now restored Commercial Lending new business (£m) 700 600 500 • 43% of Group’s new lending (H1:21: 36%) 400 • H1 2022 profit contribution £42 million v £6 million in 2018 300 • Commercial Lending is not one business 200 • E
Slide 24: Commercial Lending – development finance
Commercial Lending – development finance New lending increased to £324 million (+41% on H1 2021) Originations and loan book growth (£m) 800 Originations Net loan book £672.9m 600 £552.3m £502.3m £426.0m • Developer demand and performance remains robust 400 £323.7m £229.5m • Undrawn commitment pipeli
Slide 25: Commercial Lending – SME lending
Commercial Lending – SME lending Gradual post-Covid growth Originations and loan book growth (£m) 800 8% Originations Net loan book Yield 700 £638.9m 7% £606.6m £571.8m 600 £539.4m 6% Originations (£m) 500 5% • Market disrupted by CBILS/BBLS which accelerated sector funding plans Yield 400 4% 300 £2
Slide 26: Commercial Lending
Commercial Lending Loan book growth – motor finance and structured lending (£m) Motor finance 350 Motor finance Structured lending • H1 2021 largely suspended due to pandemic 300 £290.4m • Effective relaunch with increased focus on specialist products £262.4m including leisure and electric vehicles
Slide 27: Funding
Funding Adapting to the higher rate environment New deposits (£m) / deposit rate (%) • Continued strong growth, well ahead of market – £9.85 billion at end of 600 1.4% March +14.2% YoY – now through £10 billion • Increase in portfolio rate driven by increased BoE base rate 1.2% 500 • Cost of deposit
Slide 28: Conclusions
Conclusions • Strong new lending growth and encouraging outlook – pipelines at record levels Strong trading • Enhanced customer retention activity supporting higher retention levels FY:22 guidance update performance • Widening NIM driven by both structural changes and rate environment • Upgraded gui
Slide 29: Appendix
Appendix 29
Slide 30: Underlying return on tangible equity
Underlying return on tangible equity Underlying RoTE back above pre-Covid period Underlying earnings per share (pence) 40 • Trend growth rates restored 30 32.6 • Reflects increasing profits and lower share count 20 25.0 25.2 22.5 20.7 17.6 10 0 H1 2017 H1 2018 H1 2019 H1 2020 H1 2021 H1 2022 Dividen
Slide 31: Net interest income
Net interest income Strong progress in key operating divisions Net interest income (£m) 200 • Continued margin and volume improvements 150 • Idem Capital portfolio reduction reflects ongoing strong cash performance 100 H1 2021 Mortgage Commercial Idem Capital Central H1 2022 Lending Lending Rate and
Slide 32: Provisions by stage and segment
Provisions by stage and segment IFRS 9 impairments Mortgage Commercial Idem Lending Lending Capital Total Stage 1 10,379.0 1,689.9 78.9 12,147.8 Stage 2 1,520.7 34.3 5.9 1,560.9 Stage 3 120.2 9.3 23.0 152.5 POCI 12.0 6.7 90.2 108.9 Gross loan book 12,031.9 1,740.2 198.0 13,970.1 Stage 1 5.4 14.9 0.0
Slide 33: Impairments
Impairments IFRS 9 provisions (£m) – Mortgages • Overlays stand at £14.1 million H1 2022 32.7 • Write off levels higher as Stage 3 accounts crystallised H1 2021 48.6 0 10 20 30 40 50 60 Stage 1 Stage 2 Stage 3 IFRS 9 provisions (£m) – Commercial Lending Portfolio impairment movements Impairments Bro
Slide 34: Diversification
Diversification Diversified loan growth Diversified funding Funding by type (£m) Originations £million 2022 H1 2021 H1 Change 16,000 Securitisation Tier-2 bond Retail bonds Specialist BTL 838.8 686.2 +22.2%) Central Bank Retail deposits Repo 14,000 Other mortgages 16.5 38.4 (57.0%) Commercial Lendin
Slide 35: Mortgage Lending
Mortgage Lending Net loan book Originations Loans and advances benefits from origination growth H1 2022 £855.3m H1 2022 £11,999.2m and strong H1 2021 H1 2021 £724.6m £11,130.6m retentions H1 2020 £792.8m H1 2020 £10,676.1m H1 2019 £833.9m H1 2019 £10,783.9m • Balance sheet growth 0 BTL 200 Amateur B
Slide 36: Commercial Lending
Commercial Lending Origination and Originations Loans and advances balance sheet H1 2022 £1,719.7m growth restored H1 2022 £634.2m H1 2021 £401.7m H1 2021 £1,427.1m H1 2020 £481.3m H1 2020 £1,494.3m H1 2019 £455.3m H1 2019 £1,283.9m • Origination and SME lending Motor finance balance sheet growth 0
Slide 37: Idem Capital
Idem Capital Strong cash Investments Loans and advances generation driving portfolio H1 2022 £0.0m H1 2022 £196.0m amortisation H1 2021 H1 2021 £0.0m £258.6m H1 2020 £0.0m H1 2020 £335.7m H1 2019 £457.8m H1 2019 £0.0m • Residual unsecured Discounted purchases Performing portfolio sold following 0 50
Slide 38: Central
Central Continued investment in digitalisation programme Underlying profit / (loss) contribution (£59.3m) H1 2022 (£55.8m) H1 2021 (£44.4m) H1 2020 (£47.1m) H1 2019 • Higher interest rates driving income on core liquidity Corporate / central funding Unallocated / central costs Underlying operating l
Slide 39: Balance sheet
Balance sheet £million 2022 H1 2021 H1 Change (%) Mortgages 11,999.2 11,130.6 +7.8%) Commercial Lending 1,719.7 1,427.1 +20.5%) Idem Capital 196.0 258.6 (24.2%) Loans and advances to customers 13,914.9 12,816.3 +8.6%) Cash 1,500.4 2,103.0 (28.7%) Other assets 335.7 569.5 (41.1%) Total assets 15,751.
Slide 40: 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
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