Higher rates and demand for buy-to-let loans boost Paragon profits

Paragon Bank has upped its 2022 forecasts after posting ‘record’ profit thanks to a jump in new lending to businesses and buy-to-let investors at ‘attractive margins’.

Despite the current uncertain economic situation in the UK, the specialist lender said demand for mortgages from professional landlords had exceeded pre-Covid levels, while commercial lending also continued to grow.

This, coupled with higher interest rates charged on loans, helped push profits higher.

Statutory pre-tax profit rose 49 per cent higher to £143.6million in the first half to the end of March, as overall new lending rose by almost a third to £1.5billion compared to a year ago.

Buy-to-let boom? Paragon Banking said demand for mortgages from professional landlords had exceeded pre-Covid levels in the first half to the end of March

Mortgages handed out to professional landlords rose 18 per cent to £855million, while commercial lending jumped by 58 per cent to £634million.

Buy-to-let mortgages are Paragon’s main product, accounting for over 80 per cent of group loans. Commercial lending, which includes asset finance and motor loans, has expanded and now represents over 10 per cent of group loans. 

Paragon said its lending pipeline was at record levels at the end of March, with buy-to-let mortgages 44.4 per cent higher at £1.34billion.

Lending to SMEs remained ‘solid’ but the group noted ‘increasing economic caution’ amongst UK businesses. 

Higher rates charged on loans meant that net interest margin (NIM), a key measure of profitability for banks, increased by 25 basis points in the first half.

And for the year, NIM – which indicates how much a bank is earning in interest on loans compared to how much it pays in interest on deposits – is set to increase by another 20 points, up from 5 points expected earlier.

The lender also upgraded its outlook for commercial and mortgage lending advances and increased buyback to £75million, from £50million.

The upbeat results and upgraded guidance sent Paragon Banking shares rising 7 per cent to 502.5p in afternoon trading on Tuesday. However, the stock remains down by around 8 per cent compared to a year ago.

Chief executive Nigel Terrington hailed the ‘excellent’ results and said the group’s capital levels were ‘comfortably in excess’, which would allow Paragon to grow further.

He added: ‘Whilst the UK economy faces headwinds, we have a high quality loan book and we are confident in our momentum, and have upgraded our guidance for the full year.’

Analysts at Peel Hunt said Paragon was set to continue to benefit from strong demand for rental properties and higher interest rates. 

‘These are yet another strong set of results from Paragon with growth in new lending, net interest margins and profits all being ahead of expectations,’ they said. 

And added: ‘With tenant demand strong and rents rising the outlook remains positive. Added to that changing interest rates are having a materially beneficial impact on net interest margins.’

Demand for properties to rent has been rising in recent months, putting upward pressure on rents, as reported by the Royal Institution of Chartered Surveyors’ latest March survey. 

RICS expects rents to increase by 4 per cent in the coming year and average increases of 5 per cent per annum over the next five years.