Paragon Banking Group PLC · LSE:PAG
Paragon Banking — FY2021 Earnings Presentation
42 slides from Paragon Banking's earnings presentation, November 2021
Slide 1: Paragon Banking Group PLC – Record profits and strong momentum
Paragon Banking Group PLC Record profits and strong momentum Financial results Twelve months ended 30 September 2021
Slide 2: Business developed at pace during FY21
Business developed at pace during FY21 • Operating profit £194.2 million, up 61.8% on 2020. Pre-provision profit up 12.6% • Underlying EPS +62.5% Financial performance • Stable asset yields and lower deposit costs supporting improving NIM trajectory • Underlying RoTE 14.7% • Dividend at 26.1p in lin
Slide 3: Key priority evolution
Key priority evolution 2020 / Pandemic 2021 / Recovery • High protection focus with enhanced • Hybrid model planning well advanced People employee engagement • Safety always paramount • Excellent operational resilience and agility • Strong employee engagement scores • Government support programmes •
Slide 4: Financial results
Financial results Twelve months ended 30 September 2021 Richard J Woodman Chief Financial Officer 4
Slide 5: Income statement
Income statement £ million 2021) 2020) Change) Net interest income 310.5) 278.1) +11.7%) Favourable margin and volume effects Other income 14.4) 17.0) (15.3%) Serviced portfolios running down Total operating income 324.9) 295.1) +10.1%) Operating expenses (135.4) (126.8) +6.8%) Share based led Pre-p
Slide 6: Segmental results
Segmental results Pre-provision profits up 15.4% in Mortgage Lending and 16.2% in Commercial Lending, Idem drag reducing Underlying £ million Mortgage Lending Commercial Lending Idem Capital Central Total Total operating income (2021) 225.3) 102.5) 20.5) (23.4) 324.9) Change (v 2020) +28.8) +10.5) (
Slide 7: Net interest margin
Net interest margin Structural NIM accretion returns after base-rate led drop in 2020 NIM progression – Group (%) 2.50 2.39 2.40 2.29 2.30 2.24 • Upwards margin trajectory resumed 2.20 2.13 2.19 2.10 • New mortgages carry higher margins than legacy book 2.00 1.90 • Commercial asset margins wider sti
Slide 8: Structural improvement in NIM
Structural improvement in NIM New books continue to generate higher yields than the legacy portfolio Evidenced via higher yields in new portfolio Swapping lower margin legacy book for higher margin BTL / SME 8% 7.41% 1.7% 7% 11.7% 6% 30.1% 5% 3.72% 3.87% 4% 3% 1.77% 2% 56.5% 1% 0% Legacy mortgages G
Slide 9: Funding bridge
Funding bridge Savings growth and TFSME drawings support growth and TFS / legacy securitisation repayment FY 2020 / FY 2021 18,000 1,840.0 875.4 2,241.1 16,000 1,443.8 60.0 14,000 12,000 10,000 Borrowings (£m) 8,000 13,647.7 13,755.0 6,000 4,000 2,000 0 FY 2020 Borrowings Savings TFSME TFS SPV/Wareh
Slide 10: Operating expenses
Operating expenses Income growth outstripping pace of operating expenses expansion Underlying cost:income ratio (%) 60 Group exc. Idem 55.6 54.2 • Continued investments in projects and technology 55 51.6 Group 50 48.5 • Share based costs drive bulk of movement in 2021 46.6 44.9 45 42.8 • Material ch
Slide 11: Economic outlook
Economic outlook Improved economic outlook, uncertainty remains Scenarios • Four scenarios updated from September 2020, severe = BoE 2021 stress Base Upside Downside Severe • Unemployment peak at 5.5% in Baseline, 11.9% in Severe Weighting 40% 10% 35% 15% • House prices proved extremely resilient, i
Slide 12: Impairments
Impairments Write-back in 2021 driven by improved economic scenarios Impairment overlay 2019 2020 2021 • Underlying modelling reflects improving macro environment, (£m) (£m) (£m) particularly house prices Calculated provision £41.9 £62.0 £46.0 • PMAs determined at portfolio level and allocated to in
Slide 13: Capital movements during the period
Capital movements during the period FY 2020 / FY 2021 Tier-1 capital Tier-2 capital 7.5% 20% 8% 7.1% Pension and securitisation 18% refinancing benefits 7% 0.2% 0.6% 0.9% 2.2% 16% 6% 2.3% 0.5% 1.0% 14% 5% UK leverage ratio CET1 ratio 12% 4% 10% 15.4% 15.4% 3% 14.3% 8% 2% 6% 1% 4% 0% FY 2020 Retained
Slide 14: Group capital
Group capital Capital strength supports growth and optimisation options Group consolidated capital Core Equity Tier-1 capital * £1,055.8m Tier-2 capital £150.0m Capital ratios Total capital resources £1,205.8m • CET1 and TCR remain strong • Capital surplus over regulatory requirement exceeds £0.4 bi
Slide 15: Dividend per share
Dividend per share Progression reflects underlying performance, strong fair values Dividend per share (pence) and impairment reversals 30 Reflects fair value movements and variance to “normal” cost of risk • 2020 dividend per share impacted by: 25 Reflects variance to “normal” cost 4.0 of risk • Fai
Slide 16: Strategy overview
Strategy overview Nigel S Terrington Chief Executive 16
Slide 17: 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 by An experienced, skilled and engaged workforce, Prudentially st
Slide 18: Strategic priorities – growth
Strategic priorities – growth 12.6% CAGR in new lending delivered since 2016 Continued focus on specialist markets Operational leverage creates potential for strong growth with improving efficiency IRB creates further growth opportunities Maintaining our disciplined risk appetite 18
Slide 19: Strategic priorities – diversification
Strategic priorities – diversification • Commercial Lending contribution almost fully offset Idem amortisation, but Idem run-off largely complete • Commercial Lending is not a single product line – comprises four sub-divisions, development finance, SME lending, motor finance and structured lending •
Slide 20: Strategic priorities – digitalisation
Strategic priorities – digitalisation • Multi business line programme with segmental roll-out accelerated • Cloud-based, but with modular, best-in-class delivery Delivering … Delivered … • Digital capacity across all areas • Savings technology platform managing • Open API access 3rd party relationsh
Slide 21: Strategic priorities – capital management
Strategic priorities – capital management • IRB • Good progress as we move through various modules • Enhancing risk management capabilities, improving capital/risk alignment • Offering risk-based segmental pricing opportunities • Basel 3.1 likely deferral to 2025 • Significant shareholder returns co
Slide 22: Strategic priorities – sustainability
Strategic priorities – sustainability Sustainability is central to our long-term success and it influences every aspect of our business • Reducing the impact our own operations have on the environment • Ensuring we have a positive effect on our stakeholders and communities • Delivering sustainable l
Slide 23: Buy-to-let
Buy-to-let Strong new business flows and improving margin Specialist new business (£m) Redemptions (£m) Net loan book and margin (£m) 3,500 1,200 700 12,000 2.50% 3,000 1,000 600 10,000 Redemptions (£m) 2.00% Applications (£m) Loan Book (£m) 2,500 500 Pipeline (£m) 800 8,000 2,000 400 1.50% NIM 600
Slide 24: Proven resilience of business model through the pandemic
Proven resilience of business model through the pandemic Continued low arrears and strong asset coverage Arrears rate – 3mths+ (bp) Average LTV 400 Paragon buy-to-let 85% >90% LTV 40% UK Finance buy-to-let (inc. RoR) 80% Average LTV % of book over 90% LTV 300 30% 75% Average LTV 70% 200 20% 65% 100
Slide 25: Commercial Lending provides increased diversification
Commercial Lending provides increased diversification Higher yield Commercial Lending division experiencing strong Commercial Lending new business (£m) volume growth 600 500 • Key element in the diversification strategy 400 • Record year of new originations at £971.5 million 300 (2020: £790.8 millio
Slide 26: Commercial Lending – development finance
Commercial Lending – development finance Strong drawdowns and pipeline Originations and loan book growth (£m) 800 Originations Net loan book £609.0m £608.2m 600 £506.5m £510.4m • Experienced team with expanded and enhanced geographical 400 £352.8m £362.9m £385.3m relationships 200 £136.8m • Product
Slide 27: Commercial Lending – SME lending
Commercial Lending – SME lending Steady progress in a more subdued market Originations and loan book growth (£m) 800 8% Originations Net loan book Yield 700 £616.8m 7% £576.2m £554.0m 600 6% Originations (£m) £485.1m 500 5% £406.5m Yield 400 £354.7m £336.9m 4% £288.0m 300 3% 200 2% • Government supp
Slide 28: Funding
Funding Increasing diversification enhancing pricing and growth New deposits (£m) / deposit rate (%) potential 800 1.8% • Continued strong deposit growth, +18.4% year-on-year to £9.3 billion • Favourable back book / front book dynamics 700 1.6% • Cost of deposits 91bp at Sep-21 (Sep-20: 134bp) 1.4%
Slide 29: Conclusions
Conclusions • Strong lending recovery with pipelines at near record levels • Retention focus enhances loan book growth outlook Strong trading FY:22 guidance • Positive NIM trajectory set to continue for the foreseeable future recovery • Robust underlying asset quality, conservative stance on PMAs re
Slide 30: Appendix
Appendix 30
Slide 31: A long-term sustainable business
A long-term sustainable business Our ESG landscape Helping customers Building a strong team • Insight team augments customer • Further progress on Equality, Diversity and understanding Inclusion • Increased awareness vulnerable customers • Gold Investors in People accreditation • 650 million+ items
Slide 32: Underlying return on tangible equity
Underlying return on tangible equity Strong recovery after Covid interruption Underlying earnings per share (pence) 70 60 • Steady earnings growth trend resumed 50 59.3 51.1 40 48.2 43.3 40.7 • 14.7% RoTE 30 36.5 20 10 0 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 Dividend per share (pence) Unde
Slide 33: Net interest income
Net interest income Progress in key divisions Net interest income (£m) 400 350 300 • Mortgages and Commercial Lending seeing higher volumes and 250 wider margins 200 150 • Idem drag effect reducing as portfolio amortises 100 2020 Mortgage Commercial Idem Capital Central 2021 Lending Lending Rate and
Slide 34: Provisions by stage and segment
Provisions by stage and segment IFRS 9 impairments Mortgage Commercial Idem Lending Lending Capital Total Stage 1 10,303.7 1,504.2 92.5 11,900.4 Stage 2 1,206.4 66.4 6.3 1,279.1 Stage 3 120.0 19.0 25.3 164.3 POCI 13.4 6.9 104.0 124.3 Gross loan book 11,643.5 1,596.5 228.1 13,468.1 Stage 1 1.7 12.9 0
Slide 35: Impairments
Impairments IFRS 9 provisions (£m) – Mortgages • Portfolio and economic performance underpins lower FY 2021 34.8 impairment levels in 2021 FY 2020 48.3 0 10 20 30 40 50 60 Stage 1 Stage 2 Stage 3 IFRS 9 provisions (£m) – Commercial Lending Portfolio impairment movements Impairments Brought P&L W-off
Slide 36: Diversification
Diversification Diversified loan growth Diversified funding Funding by type (£m) Originations £million 2021 2020 Change 16,000 Securitisation Tier-2 bond Retail bonds Specialist BTL 1,562.2 1,119.0 +39.6%) Central Bank Retail deposits Repo 14,000 Other mortgages 67.8 140.7 (51.8%) Commercial Lending
Slide 37: Mortgage Lending
Mortgage Lending Increasingly BTL Originations Loans and advances focused FY 2021 £1,630.0m FY 2021 £11,608.7m FY 2020 £1,259.7m FY 2020 £10,819.5m FY 2019 £1,564.4m FY 2019 £10,344.1m FY 2018 £1,623.2m FY 2018 £10,473.5m • BTL originations have 0 BTL 500 BTL 1000 1500 2000 Amateur BTL Specialist BT
Slide 38: Commercial Lending
Commercial Lending Record volumes Originations Loans and advances FY 2021 £971.5m FY 2021 £1,568.8m FY 2020 £790.8m FY 2020 £1,514.8m FY 2019 £968.0m FY 2019 £1,452.1m FY 2018 £710.0m FY 2018 £1,133.2m • Delivering growth in SME lending Motor finance 0 Development finance 500 Structured lending 1000
Slide 39: Idem Capital
Idem Capital Steady portfolio Investments Loans and advances amortisation FY 2021 £0.0m FY 2021 £225.2m FY 2020 £0.0m FY 2020 £297.1m FY 2019 £4.2m FY 2019 £390.0m £83.4m FY 2018 £521.1m FY 2018 • Cash generation Discounted purchases Performing 0 50 100 150 0 200 400 600 remains stable Net interest
Slide 40: Central
Central Cost growth focused on central areas Underlying profit / (loss) contribution (£112.4m) FY 2021 (£99.8m) FY 2020 (£95.3m) FY 2019 (£86.5m) FY 2018 • Projects, IT developments, increasing Corporate / central funding Unallocated / central costs control and risk expenditure Underlying operating
Slide 41: Balance sheet
Balance sheet £million 2021 2020 Change (%) Mortgages 11,608.7 10,819.5 +7.3%) Commercial Lending 1,568.8 1,514.8 +3.6%) Idem Capital 225.2 297.1 (24.2%) Loans and advances to customers 13,402.7 12,631.4 +6.1%) Cash 1,360.1 1,925.0 (29.3%) Other assets 374.2 949.1 (60.6%) Total assets 15,137.0 15,50
Slide 42: 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