Paragon Banking Group PLC

Solihull, United Kingdom-based Paragon Banking Group Plc (LON: PAG) is into the banking business. The company is a specialist in lending and offer a wide range of products related to savings through Paragon Bank PLC in the UK. The company, through its subsidiary Idem Capital, invest in and manage loan portfolios.

On 20^th May 2020, the company will announce its half-year results.
 
Recent News
On 16^th March 2020, the company has introduced Phase II of its Intermediary Portal, adding innovative features to enable brokers to handle clients’ applications more efficiently.
 
Decent Performance in the Trading Update (for the period from 1 October to 31 December 2019)
Paragon Banking Group released on 30^th January 2020 an update for 3 months period ending 31st December 2019. The company’s performance was in line with the expectations for the period. The volume of new business increased by 3.7 per cent at GBP 684.9 million with stable redemption levels. The net loan book went up by 1.6 per cent to GBP 12.4 billion for the period.

The Specialist buy-to-let lending surged by 1.1 per cent at GBP 375.4 million on a year-on-year basis.The company remained focused on professional business with higher margin, which resulted in lower buy-to-let volumes and overall mortgage lending declined by 4 per cent for the period.  For buyto-let, the pipeline figure stood at £814 million at the quarter-end (11.6% higher year-on-year), represents a 92% was specialist.
The new business volumes from commercial lending surged by 19.9 per cent.The commercial lending contributes around 12 per cent of net loan assets in the fourth quarter. Driven by the expansion of product and channel and savings proposition development, the deposits balances increased from GBP 5.6 billion to GBP 6.6 billion for the period. The CET1 ratio (unaudited) stood at 14.2 per cent for the period. For an IRB application, the Bank continues to make good progress in its preparations.

Share Price Performance

Daily Chart as on 20^th March 2020, before the market closed (Source: Thomson Reuters)

On March 20, 2020, Paragon Banking Group PLC shares were trading at GBX 254 at the time of writing before the market close (at 10:50 AM GMT), up by 5.62 per cent against the last day closing price. Stock's 52 weeks High and Low are GBX 555.50/GBX 217.00.

From the technical standpoint, 14 days relative strength index of the stock was favourable, and prices could rise further from the current trading level.

Valuation Methodology


Conclusion
The company has made a robust start to the financial year 2020, where good progress has been attained in the main divisions. On a statutory basis, the group’s Net Interest income recorded a growth of 9.3 per cent in FY19. The company’s total operating income had increased with the growth in the size of the average loan book. The company’s strategic transformation is reflected by good growth in the lending business, particularly in consumers and SMEs segments. The company had a strong capital base supporting the overall growth with basic CET1 of 14.2 per cent.In the short-term period, the outbreak of COVID-19 adversely impacted the performance of the company.
The loan portfolios continue to deliver excellent credit performance. Looking ahead, the company is in confidence that it will achieve good performance in the upcoming year. The group also continue to engage in a diversification strategy. While, Paragon Banking Group welcome in a recent survey reports shows improving confidence, it is too early to ascertain whether this will transform into a continued improvement in economic activity. The company will continue to retain conservative risk appetite.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “Buy” recommendation at the closing price of GBX 238.60 (as on 19^th March 2020) with lower double-digit upside potential based 0.6x NTM Price/Book Value (approx.) on FY20E book value per share (approx.).
 
*The “Buy” recommendation is valid for the current price as covered in the report (as on 20^th March 2020).
*All forecasted figures and Peer information have been taken from Thomson Reuters.

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