Paragon Banking Group Plc · LSE:PAG
Paragon Banking — FY2022 Earnings Presentation
41 slides from Paragon Banking's earnings presentation, November 2022
Slide 1: Strong performance and well positioned
Strong performance and well positioned Paragon Banking Group PLC Financial results twelve months ended September 2022
Slide 2: Agenda
Agenda Financial overview Richard Woodman, Chief Financial Officer Strong performance and well positioned Strategy overview Nigel Terrington, Chief Executive Officer Conclusions Financial results twelve months ended September 2022 2
Slide 3: Key messages
Key messages • Competitive advantage through specialisation • Optimising risk reward through better understanding and deep sector experience • Positive gearing to higher rates • Margins benefit from deposit beta and Purpose … diversification-led structural widening … to support the • Prudent through
Slide 4: Strong operational and financial performance
Strong operational and financial performance • Operating profit £226.0 million, up 16.4% on 2021 • Pre-provision profit up 26.6% • Underlying EPS +17.9% Financial performance • Underlying NIM trajectory (2.69%, +30bps on 2021) accelerated by liability-side gains • Underlying RoTE 16.0% • Full year d
Slide 5: Financial overview
Financial overview Richard J Woodman Chief Financial Officer
Slide 6: Income statement
Income statement £ million FY 2022 FY 2021 Change Net interest income 371.2) 310.5) +19.5%) Loan book growth and NIM accretion Other income 17.2) 14.4) +19.4%) Leasing income and activity-related fees strong Total operating income 388.4) 324.9) +19.5%) Operating expenses (153.0) (135.4) +13.0%) In l
Slide 7: Segmental results
Segmental results Strong progress in key segments Underlying £ million Mortgage Lending Commercial Lending Central Total Total operating income (FY 2022) 268.9) 122.9) (3.4) 388.4) Change (v FY 2021) +23.8) +19.7) +20.0) +63.5) Operating expenses (24.4) (24.9) (103.7) (153.0) Change (v FY 2021) (1.9
Slide 8: Net interest margin
Net interest margin NIM progression – Group (%) 2.80 2.69 • Diversification strategy and new buy-to-let 2.70 Structural NIM supports NIM accretion over time 2.60 2.50 accretion enhanced by • Group earns more on its equity at higher 2.39 2.40 rates (c £10m per 1.0%) 2.29 balance sheet • Legacy fundin
Slide 9: Fair values
Fair values • When pricing a fixed rate product the Group includes a “swap movement buffer” – withdrawing product when buffer is exceeded Unmatched hedge and swap rate volatility Pipeline hedging • New applications partially hedged on receipt, £m 2022 2021 2020 approach minimises hedge proportion in
Slide 10: Operating expenses
Operating expenses Underlying cost:income ratio (%) • Cost:income ratio benefitting from tight cost 60 control and strong income growth 55 • Wage inflation evident but tightly managed 50 Costs in line with 45 40.6 42.1 43.0 41.7 • Full year cost growth reflects increased headcount: 39.4 guidance • S
Slide 11: Economic outlook
Economic outlook • Four scenarios updated from March 2022 Scenarios Base Upside Downside Severe • Even balance of base/upside and downside/severe scenarios maintained to reflect ongoing uncertainty Weighting 40% 10% 30% 20% • Downside/severe mix moved from 35/15 to 30/20 Impact of 100% £53.3m £46.8m
Slide 12: Impairments
Impairments Impairment overlay • Strong LTV profile mitigates harsher economics FY 2019 FY 2020 FY 2021 FY 2022 • Management judgmental assessments switch from (£m) (£m) (£m) (£m) Covid-related to cost-of-living and associated uncertainties as the driver Calculated provision £41.9 £62.0 £46.0 £48.5
Slide 13: Capital movements during the period
Capital movements during the period FY 2021 / FY 2022 22% 9% 0.9% 7.9% 7.5% 20% 1.0% 8% 1.1% 18% 4.6% 0.7% 7% 2.0% 16% 6% Of which 0.4% UK leverage ratio Of which 2% from from derivatives 14% fair values /fair values 5% CET1 ratio 12% 4% 10% 16.3% 16.3% 3% 15.4% 8% 2% Tier-1 capital Tier-2 capital 6
Slide 14: Group capital
Group capital Group consolidated capital Capital ratios • 16.3% CET1 represents a strong surplus over Core Equity Tier-1 capital * £1,221.8m regulatory minimum Tier-2 capital £150.0m • Group has no AT1 in capital structure Total capital resources £1,371.8m • Tier 2 bond matures in 2026 Credit risk £
Slide 15: Dividend per share
Dividend per share Dividend per share (pence) 35.0 Interim Final Reflects fair value movements and variance 30.0 to “normal” cost of risk • 28.6 pence per share distribution in 2022 Reflects variance to represents 40% of underlying EPS 25.0 “normal” cost 4.0 of risk Dividend per share • Dividend gro
Slide 16: Strategy overview
Strategy overview Nigel S Terrington Chief Executive
Slide 17: Strategic priorities
Strategic priorities We have five clear strategic priorities underpinned by three strategic pillars Our strategy is driven by Growth Diversification Digitalisation Capital management Sustainability our purpose and helps us achieve our vision to Our strategic pillars become the UK’s leading technolog
Slide 18: Operating model equilibrium
Operating model equilibrium Growth • Dynamic calibration of strategic levers to external environment and risk appetite shape the strategic delivery Our growth, • Fundamental banking inter-relationships are diversification and growth, returns and risk. Balance is key capital management • Driving stra
Slide 19: Digitalisation
Digitalisation Multi-business line, multi-year re- Delivered to date … Currently delivering … platforming with segmental roll-out Cloud-based with modular, best-in- • Buy-to-let new business broker portal • SME enhanced auto-decisioning processes class delivery • 3rd party savings platform • Buy-to-
Slide 20: Sustainability
Sustainability Environment Social • Launched a range of sustainable products across our • Platinum accreditation from Investors in People businesses • 286 volunteering days across the Group • Signed up to Bankers for Net Zero • £75,000+ charitable donations and fundraising • Commitment to achieve ne
Slide 21: Buy-to-let
Buy-to-let Specialist new business (£m) Redemptions (% of book) Net loan book (£m) 2,000 1,400 14% 14,000 1,200 12% 12,000 Completions (£m) Loan Book (£m) 1,500 1,000 10,000 Pipeline (£m) 10% 8,000 Redemptions 800 1,000 8% 600 6,000 500 400 6% 4,000 200 4% 2,000 0 0 0 2% FY 2019 FY 2020 FY 2021 FY 2
Slide 22: Proven resilience of business model through-the-cycle
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% 50 55% 10% 41bp 0 15bp 50%
Slide 23: Commercial Lending provides increased diversification
Commercial Lending provides increased diversification Product divisions’ share of originations (%) Commercial Lending Mortgage Lending 100 • 41% of Group’s new lending (2021: 37%) 80 • 2022 profit contribution £89 million v 60 £21 million in 2018 40 20 • We provide our customers with specialist We a
Slide 24: Commercial Lending – development finance
Commercial Lending – development finance Originations and loan book growth (£m) • Volumes +24% to £632.2 million 800 Originations Net loan book £719.9m 700 £632.2m £609.0m £608.2m • Loan book +18.4% to £719.9 million 600 £506.5m £510.4m 500 • Highly experienced through-the-cycle £362.9m £385.3m 400
Slide 25: Commercial Lending – SME lending
Commercial Lending – SME lending Originations and loan book growth (£m) • Volumes +32% to £446.4 million • Loan book +17% to £721.7 million Originations Net loan book Asset-backed with 800 • New digital front-end platform – over 70% of £721.7m applications increased use of 700 • Further technology d
Slide 26: Commercial Lending – motor and structured lending
Commercial Lending – motor and structured lending Loan book growth Motor finance – motor finance and structured lending (£m) 300 Motor finance Structured lending £281.3m • Volumes +65.9% to £166.2 million £260.8m • Loan book +16.0% to £260.8 million £256.9m • Operates in niche markets such as leisur
Slide 27: Funding
Funding Adapting to the higher rate environment New deposits (£m) 800 • Continued strong growth – £10.7 billion at the end of 700 September + 14.7% YoY 600 500 400 • Higher rates are changing customer behaviour: 300 200 • Multi-year shrinkage of fixed rate bond market reversed 100 0 • Early signs of
Slide 28: Conclusions
Conclusions
Slide 29: Conclusions and FY23 guidance update
Conclusions 2022 saw strong trading performance … We are well positioned for 2023 FY:23 guidance update • Record financial performance • Strong franchises with good momentum going into the new year Volumes: • Significant margin improvement, expected to Buy-to-let £1.6 - £1.9 billion improve further
Slide 30: Strong performance and well positioned
Strong performance and well positioned Paragon Banking Group PLC Financial results twelve months ended September 2022
Slide 31: Appendix
Appendix
Slide 32: Underlying return on tangible equity
Underlying return on tangible equity Underlying earnings per share (pence) 80 70 60 69.9 15%+ RoTE target delivered in 2022 50 59.3 Growth, cost control 40 30 43.3 48.2 51.1 36.5 and capital 20 10 management combine 0 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 to enhance returns – Dividend per
Slide 33: Net interest income
Net interest income Net interest income (£m) 400 350 300 • New deposit pricing switched from SONIA+ 250 to SONIA- during 2022 200 Positive rate and • Asset diversification supporting structural 150 100 NIM development volume variances seen • No “structural hedge” – NIM increases as FY 2021 Mortgage
Slide 34: Provisions by stage and segment
Provisions by stage and segment IFRS 9 impairments Mortgage Commercial Lending Lending Total Stage 1 10,339.6 1,817.4 12,157.0 Stage 2 1,886.4 77.2 1,963.6 Stage 3 119.3 5.1 124.4 POCI 21.4 7.4 28.8 Gross loan book 12,366.7 1,907.1 14,273.8 Stage 1 5.8 19.7 25.5 Stage 2 6.1 1.9 8.0 Stage 3 26.1 2.4
Slide 35: Impairments
Impairments IFRS 9 provisions (£m) – Mortgage Lending • Overlays stand at £15.0 million FY 2022 38.0 • Cautious MES to underpin IFRS9 modelling, severe scenario weighting 20% (2021: 15%) FY 2021 37.7 • Spot arrears position and behavioural scores remain strong 0 5 10 15 20 25 30 35 40 45 50 Stage 1
Slide 36: Diversification
Diversification Diversified loan growth Diversified funding Funding by type (£m) Originations £million 2022 2021 Change 16,000 Specialist BTL 1,869.5 1,562.2 +19.7%) Securitisation Tier-2 bond Retail bonds Central Bank Retail deposits Repo 14,000 Other mortgages 40.5 67.8 (40.3%) Commercial Lending
Slide 37: Mortgage Lending
Mortgage Lending Originations Loans and advances 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 FY 2019 £1,564.4m FY 2019 £10,696.5m Stable loan book 0 Amateur BTL 500 Specialist BTL 1000 Residential 1500 2000 Second charge mortgages -
Slide 38: Commercial Lending
Commercial Lending Originations Loans and advances 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 FY 2019 £968.0m FY 2019 £1,489.6m Strong volumes and 0 SME lending 500 Motor finance 1000 1500 SME lending Motor finance * improved margins Devel
Slide 39: Central
Central Underlying profit / (loss) contribution (£107.1m) FY 2022 (£112.4m) FY 2021 Central funding • Central cost inflation includes variable pay accruals for divisions benefits from rising (£99.8m) FY 2020 • Reduction in corporate funding costs net asset returns reflects interest rate environment
Slide 40: Balance sheet
Balance sheet £million 2022 2021 Change (%) Mortgages 12,328.7 11,829.6 +4.2%) Commercial Lending 1,881.6 1,573.1 +19.6%) Loans and advances to customers 14,210.3 13,402.7 +6.0%) Cash 1,930.9 1,360.1 +42.0%) Other assets 512.4 374.2 +36.9%) Total assets 16,653.6 15,137.0 +10.0%) Capital and reserves
Slide 41: 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