Paragon Upbeat As Profits Rise

[brainclamp]

Paragon upbeat as profits rise

Wed Nov 23, 2005 09:01 AM GMT

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By Carmel Crimmins

LONDON (Reuters) - Mortgage lender The Paragon Group of Companies reported a 10.5 percent rise in full-year profit on Wednesday, in line with forecasts, and flagged a "fairly healthy recovery" in key sales to landlords.

Operating profit for the year to September 30 was 73 million pounds compared with 65.8 million pounds a year earlier. Analysts had on average forecast around 72 million pounds.

Paragon (PAG.L: Quote, Profile, Research) specialises in mortgages for people renting out their property, and the lender said increased rental demand on the back of a recent interest rate cut and a rise in the immigrant and student populations had triggered a significant rebound in sales in the second half.

"Last year there was concern about the housing market ... This year renewed confidence has come back in that the long-term stability of the sector is robust," Chief Executive Nigel Terrington said in an interview.

"Our pipeline ... is comfortably above where it was in the equivalent period last year ... It is boding well for first half volumes."

At 8:30 a.m., Paragon's shares were up 1.5 percent at 574-1/2 pence compared with a mid-cap index up 0.2 percent.

Paragon's buy-to-let sales were 64 percent higher at 1.03 billion pounds in the second half of its financial year compared with the first half.

Analysts said the in-line results and upbeat outlook were slightly tempered by slower sales of non-core personal loans.

"Margins and credit quality are performing well and cost efficiency is improving. However, while core buy-to-let loans are growing well, the good news is diluted by slower non-core business lines and closed portfolios," analysts at Keefe, Bruyette & Woods said in a note.

MORTGAGE MARKET

After more than a year in the doldrums, Britain's housing market is starting to pick up following a quarter-point cut in interest rates in August.

But economists are not predicting a return to a housing market boom, with interest rates likely to stay on hold and given uncertainty about the UK economy.

Terrington said he expected demand in the overall mortgage sector to remain "fairly quiet" over the next couple of years.

Last week, Nationwide, Britain's biggest customer-owned bank, reported a 14 percent rise in half-year profit and said it expected its gross mortgage sales to remain flat in 2006 due to stagnant house prices.

Unlike Nationwide, which is focusing more on the credit-card and personal-loan markets, Paragon has cut back on personal finance and does not offer unsecured personal loans amid rising bad debts across the industry.

Paragon said credit quality in its buy-to-let book remained strong, but provisions for bad debts overall rose to 16 million pounds from 11 million in the previous financial year as some borrowers struggled to repay personal debt.

Paragon recommended a full-year dividend of 12.6 pence a share, up 31 percent.

Paragon is increasing its payouts to cut its level of dividend cover to normal market levels. Its payouts are currently covered about 3.5 times by earnings, down from an earlier 6 times, and it wants to reduce it to between 2 and 3 times.

"Dividend growth was running at about 3 times earnings growth and it would not to unreasonable to expect that to continue for the coming 12 months," Terrington said.

[Time to raise the rents.]

So in short, this article says that landlords are paying their mortgages, but unsecured lending (ie non-landlords) is a problem.

No wonder the bears let it slip off the front page.

[IP Newcomer]

OK, they're doing well and good luck to them, but they do not seem to be saying where these extra saleare coming from. Is it displacement from other lenders (as this landlords thread on TMF suggests) or is it a rising tide lifting all boats.

Out of interest are they geographically concentrated?

Paragon (PAG.L: Quote, Profile, Research) specialises in mortgages for people renting out their property, and the lender said increased rental demand on the back of a recent interest rate cut and a rise in the immigrant and student populations had triggered a significant rebound in sales in the second half.

Very long term trends seem to have a remarkable effect on YoY earnings.

"Last year there was concern about the housing market ... This year renewed confidence has come back in that the long-term stability of the sector is robust," Chief Executive Nigel Terrington said in an interview.

Unless there is a strong geographic bias towards London or the far north, this is simply nonsense. Volumes have collapsed and prices have slipped outside London and the north - for different regions. Of course if they are taking on loans in a less competitive market....

"Our pipeline ... is comfortably above where it was in the equivalent period last year ... It is boding well for first half volumes."

Are there any figures - or is this like my company's "sales pipeline".

Paragon's buy-to-let sales were 64 percent higher at 1.03 billion pounds in the second half of its financial year compared with the first half.

Which sort of argues that there's some displacement going on as other lenders are getting tighter on BTL lending criteria.

After more than a year in the doldrums, Britain's housing market is starting to pick up following a quarter-point cut in interest rates in August.

This only affects the last six weeks of Paragon's reporting period.

Paragon said credit quality in its buy-to-let book remained strong, but provisions for bad debts overall rose to 16 million pounds from 11 million in the previous financial year as some borrowers struggled to repay personal debt.

This is a 45% increase in bad debt provisions compared to a 11% rise in profits.

Have Paragon split out where their bad debt provision is on their statement, or is this just an assertion? Far be it for me to suggest that they would blame any bad figures on their discontinued (personal finance) rather than their continued lines.