Paragon Banking Group Plc · LSE:PAG
Paragon Banking — H1 2021 Earnings Presentation
42 slides from Paragon Banking's earnings presentation, May 2021
Slide 1: Paragon Banking Group PLC
Paragon Banking Group PLC Record profits and strong new business momentum Financial results Six months ended 31 March 2021
Slide 2: Active period for business development
2 Active period for business development • Operating profit £82.9 million, up 44.9% on H1:20 • Underlying EPS +43.2% Financial performance • Stable asset yields and lower deposit costs supporting improving NIM trajectory • Provisions sharply lower with coverage maintained • Dividend at 7.2p in line
Slide 3: Key priorities
3 Key priorities • 90%+ working from home throughout Protecting our people • Wellbeing support maintained • Return-to-office in pilot – safety always the priority • Payment holidays reduced to negligible levels Supporting our customers and partners • CBILS/BBLS extended primarily to existing custome
Slide 4: Financial results
4 Financial results Six months ended 31 March 2021 Richard J Woodman Chief Financial Officer
Slide 5: Income statement
5 Income statement £ million 2021 H1) 2020 H1) Change) Net interest income 147.5) 141.4) +4.3%) Supported by attractive deposit pricing Other income 7.2) 8.3) (13.3%) Serviced portfolios running down Total operating income 154.7) 149.7) +3.3%) Operating expenses (65.8) (62.5) +5.3%) H1:20 reductions
Slide 6: Segmental results
6 Segmental results Continued strong growth in core Mortgage and Commercial Lending divisions Underlying £ million Mortgage Lending Commercial Lending Idem Capital Central Total Total operating income (H1:21) 106.0) 50.6) 11.0) (12.9) 154.7) Change (v H1:20) 6.9) 7.2) (2.5) (6.6) 5.0) Operating expe
Slide 7: Net interest margin
7 Net interest margin NIM progression – Group (%) Deposit-led pricing improvements accelerated NIM recovery from H2:20 2.40 2.32 2.29 2.30 2.24 2.20 2.16 2.09 2.10 2.00 • New business yields have remained stable in core divisions 1.90 • Continued amortisation of low-yielding legacy portfolio 1.80 HY
Slide 8: Structural improvement in NIM
8 Structural improvement in NIM Direction of travel renewed after base rate impacts in 2020 Evidenced via higher yields in new portfolio Swapping lower margin legacy book for higher margin BTL / SME Drag from Idem Capital materially less significant from 2021 9% 7.76% 2.0% 8% 11.2% 7% 6% 32.8% 5% 3.
Slide 9: Funding bridge
9 Funding bridge Repositioning funding mix to support SMEs, de-risk LIBOR transition and retire legacy instruments FY 2020 / H1 2021 18,000 1,115.0 50.0 19.1 725.0 16,000 774.6 872.4 60.0 14,000 12,000 10,000 Borrowings (£m) 8,000 13,647.7 13,949.0 6,000 4,000 2,000 0 FY 2020 Borrowings Savings TFSM
Slide 10: Operating expenses
10 Operating expenses Op-ex returning to underlying trend level Underlying cost:income ratio (%) 60 57.8 56.8 Group exc. Idem 54.9 55 Group 48.6 49.1 50 • 2020 benefitted from reduced investment and variable 43.5 44.1 remuneration costs 45 40 42.8 42.5 • Investment plans remain on track, with key pr
Slide 11: Economic outlook
11 Economic outlook Prudent multiple economic scenarios • Four scenarios updated from September 2020, severe = BoE 2021 stress Scenarios • Unemployment peak at 7.8% in Baseline, 11.9% in Severe Base Upside Downside Severe • House prices proved extremely resilient, in part a function of stamp duty We
Slide 12: Payment holiday overview
12 Payment holiday overview Payment holidays almost fully exhausted Payment holiday population (£m) • £2.7 billion of balances in aggregate, now below £0.03 billion 3,500 • Focus on post-holiday performance and any associated stress 3,000 2,645 2,666 2,679 2,675 2,673 2,675 2,673 2,674 2,672 2,668 2
Slide 13: Impairments
13 Impairments Impairment Impairmentoverlay overlay Cautious approach at interim, results in stable coverage 2019 2020 2021 • Underlying modelling reflects improving macro environment Year End Year End Interim (£m) (£m) (£m) • Core PMA approach maintained from year-end position Calculated provision
Slide 14: Capital movements during the period
14 Capital movements during the period Combination of strong earnings and improved balance sheet structuring underpin ratio enhancement FY 2020 / H1 2021 Tier-1 capital Tier-2 capital 7.7% 20% 8% 7.1% 18% 7% 2.2% 0.1% (0.3%) 0.8% 16% 6% 0.0% 1.1% 14% 5% UK leverage ratio CET1 ratio 12% 4% 10% 16.0%
Slide 15: Group capital
15 Group capital Capital ratios enhanced and regulatory surplus increased following 2020 C-SREP Group consolidated capital Core Equity Tier-1 capital * £1,057.3m Capital ratios Tier-2 capital £146.5m • CET1 and TCR remain strong Total capital resources £1,203.8m • Capital surplus over regulatory req
Slide 16: Strategy overview
16 Strategy overview Nigel S Terrington Chief Executive
Slide 17: Strategic pillars and disciplines
17 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 customer centric 17
Slide 18: A long-term sustainable business
18 A long-term sustainable business Our approach to sustainability Sustainability is central to our long-term success and it influences every aspect of our business At Paragon, sustainability means: • Reducing the impact our operations have on the environment • Ensuring we have a positive effect on
Slide 19: Buy-to-let
19 Buy-to-let Strong recovery in lending, aided by stamp duty holiday, at even more conservative LTVs New lending Redemptions Net loan book • £714.9 million advances (H1:20: £752.4 million) • Better customer retention • £10.9 billion, up 4.7% on H1:20 • Pipeline £926.7 million, up from £789.8 millio
Slide 20: Proven resilience of business model through the pandemic
20 Proven resilience of business model through the pandemic Low risk, experience and data-led buy-to-let proposition Low risk Multi-cycle experience Technology and data analytics • Asset backing transformed since 2008 • Experienced team with through-the-cycle • 750 million data points per month • Av
Slide 21: Commercial Lending provides increased diversification
21 Commercial Lending provides increased diversification Recovery from H2 lows, strongest in development finance Commercial Lending new business (£m) • Key component of diversification strategy 100 • Commercial Lending volumes more severely impacted by the pandemic, 90 but recovering strongly 80 • H
Slide 22: Commercial Lending – development finance
22 Commercial Lending – development finance Originations and loan book growth (£m) Steady progress on originations and portfolio growth 600 £552.3m Originations Net loan book £502.3m 500 £426.0m 400 300 £229.5m £197.8m • Team expanded with reputation strengthened during the pandemic 200 £160.7m £57.
Slide 23: Commercial Lending – SME lending
23 Commercial Lending – SME lending Slower recovery reflects general environment and Originations and loan book growth (£m) underweight position on CBILS 800 Originations Net loan book Yield 8% 700 7% £606.6m £571.8m 600 £539.4m 6% Originations (£m) 500 £427.7m 5% Yield • SME lending most impacted b
Slide 24: Funding
24 Funding Retail savings – material development in scale at attractive price New deposits (£m) / deposit rate (%) 800 2.0% • Strong half for deposit franchise – £8.6 billion at end of March 1.8% +10% from Sept-20 700 • Positive front book / back book dynamics 1.6% 600 1.63% • Cost of deposit 1.08%
Slide 25: Strategic conclusions
25 Strategic conclusions • Strong lending recovery with pipelines at near record levels Strong trading • Asset quality performance driven by through-the-cycle experience recovery • Positive NIM trajectory set to continue for the foreseeable future FY guidance • Customer retention supporting enhanced
Slide 26: Appendix
L 2 paragon * Appendix
Slide 27: Building a specialist bank
27 Building a specialist bank Underlying earnings per share (pence) Strong recovery from Covid-impacted 2020 40 30 • Earnings growth delivered with no impairment writeback 25.0 25.2 20 22.5 • H1:21 impairment £6.0 million v £4.9 million in H1:19 19.1 20.7 17.6 10 • Interim dividend reflects 50% of 2
Slide 28: Building a specialist bank
28 Building a specialist bank Significant shift in flow of new loan originations in 3 years (%) Slower recovery in SME and motor finance volumes in 100% H1:20 slowed longer term trend growth in Commercial Lending division 90% 27.2% 35.3% 37.8% 35.7% 80% 70% 24.2% 6.8% 60% 10.9% 7.7% • Property-relat
Slide 29: Net interest income
29 Net interest income Net interest income (£m) Continued NII enhancement in core businesses 160 140 120 • Mortgage Lending sees further growth and margin enhancement 100 H1 2020 Mortgage Commercial Idem Capital Central H1 2021 • Commercial lending focused on margin enhancement, average Lending Lend
Slide 30: Provisions by stage and segment
30 Provisions by stage and segment IFRS 9 impairments Mortgage Commercial Idem Lending Lending Capital Total Stage 1 10,063.9 1,352.0 107.2 11,523.1 Stage 2 980.0 79.8 7.4 1,067.2 Stage 3 121.3 17.7 27.7 166.7 POCI 14.0 6.7 121.0 141.7 Gross loan book 11,179.2 1,456.2 263.3 12,898.7 Stage 1 4.5 17.3
Slide 31: Impairments – Mortgage Lending
31 Impairments – Mortgage Lending IFRS 9 provisions (£m) Arrears balance movements on non-payment holiday customers (£m) Coverage: H1 2021 48.6 0.43% Value improving -9.7 Value deteriorating 8.1 H1 2020 37.3 0.35% 0 10 20 30 40 50 60 Net movement -1.6 Stage 1 Stage 2 Stage 3 -20.0 -10.0 0.0 10.0 20.
Slide 32: Impairments – Commercial Lending
32 Impairments – Commercial Lending IFRS 9 provisions (£m) Arrears movements on non-payment holiday customers (£m) Coverage: H1 2021 29.1 2.00% Value improving -3.6 Value deteriorating 0.3 H1 2020 24.2 1.59% 0 5 10 15 20 25 30 35 40 Net movement -3.3 Stage 1 Stage 2 Stage 3 POCI -6.0 -4.0 -2.0 0.0 2
Slide 33: Impairments – Idem Capital
33 Impairments – Idem Capital Non-POCI IFRS 9 provisions (£m) • For assets ‘Purchased or Originated as Credit Impaired’ (‘POCI’), a large part of the Group’s acquired assets in Idem Capital, the carrying Coverage: valuation is based on expected cash flows discounted by EIR H1 2021 4.7 3.30% determin
Slide 34: Diversification
34 Diversification Diversified loan growth Diversified funding Funding by type (£m) Originations £million H1 2021 H1 2020 Change 16,000 Securitisation Tier-2 bond Retail bonds Specialist BTL 686.2 694.6 (1.2%) Central Bank Retail deposits Repo 14,000 Other mortgages 38.4 98.2 (60.9%) Commercial Lend
Slide 35: Mortgage Lending
35 Mortgage Lending Loan book up 4.3% year-on-year despite Covid interruption in H2:20 Originations Loans and advances H1 2021 £724.6m H1 2021 £11,130.6m H1 2020 £792.8m H1 2020 £10,676.1m • Volumes recovered and H1 2019 £833.9m H1 2019 £10,783.9m margins strong H1 2018 £721.0m H1 2018 £10,119.5m •
Slide 36: Buy-to-let
36 Buy-to-let BTL gross mortgage lending (£bn) Strong demand for specialist BTL House purchase Remortgages Other 50 43.5 39.0 40.9 37.9 40 30 20 10 • Strong market-wide volumes 0 • Paragon’s focus remains in specialist segment Apr-17 to Mar-18 Apr-18 to Mar-19 Apr-19 to Mar-20 Apr-20 to Mar-21 • Pip
Slide 37: Buy-to-let
37 Buy-to-let Stronger retention levels year-on-year BTL redemptions (%) 30 25 • Annualised redemptions down from 7.8% to 6.8% 20 • Modest increase in March 2021 alongside planned SDLT holiday end 15 10 5 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Ma
Slide 38: Commercial Lending
38 Commercial Lending Strong growth in operating income and materially lower impairments Originations Loans and advances 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 • Operating income up 16.6% H1 2018 £269.3m H1 2018 £680.1m year-on-year 0 SM
Slide 39: Idem Capital
39 Idem Capital No further haircut to expected cash collections Investments Loans and advances H1 2021 £0.0m H1 2021 £258.6m H1 2020 £0.0m H1 2020 £335.7m H1 2019 £0.0m H1 2019 £457.8m • 2020 suffered from a H1 2018 £547.1m H1 2018 £0.0m £3 million adjustment to EIR, Discounted purchases Performing
Slide 40: Central
40 Central Higher central funding and operating costs Underlying profit / (loss) contribution (£55.8m) H1 2021 (£44.4m) H1 2020 (£47.1m) H1 2019 (£42.6m) H1 2018 • Central funding costs impacted by high liquidity levels Corporate / central funding Unallocated / central costs post onset of Covid • Ce
Slide 41: Balance sheet
41 Balance sheet £million H1 2021 H1 2020 Change (%) Mortgages 11,130.6 10,676.1 +4.3%) Commercial Lending 1,427.1 1,494.3 (4.5%) Idem Capital 258.6 335.7 (23.0%) Loans and advances to customers 12,816.3 12,506.1 +2.5%) Cash 2,103.0 1,206.8 +74.3%) Other assets 569.5 976.3 (41.7%) Total assets 15,48
Slide 42: Disclaimer
42 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
Paragon Banking Group — H1 2021 Earnings Presentation on 6ix