Paragon Banking Group PLC Financial Results for twelve months ended 3 September 218
218 results highlights 2 Strong financial performance and further strategic progress Strong operational performance New lending 2.3 billion (+25.9%) Mortgages 1.6 billion (+1.8%) Buy-to-let pipeline of 779 billion providing strong momentum into H1 219 Commercial Lending 71 million (+82.6%) with further products added Retail deposit funding 5.3 billion (+46.5%) NIM +8bp to 221bp Continued exemplary credit record Enhancing returns with strong capital base Underlying operating profits up 7.8% Underlying EPS +11.3% and RoTE at 14.% Increase in DPS +23.6%, 2.5x cover target achieved 28. million exceptional gain on Idem portfolio sale CET1 strong at 13.8% Total capital at 16.2% Diversified model and product range Increasingly specialist M&A Strategy December 217 acquisition of Iceberg July 218 acquisition of Titlestone September 218 disposal of Idem Capital portfolio Focus on building future shareholder returns through: Strong organic growth Potential to augment proposition if attractive Disciplined capital allocation
Section 1 Financial Results For twelve months ended 3 September 218 Richard Woodman Chief Financial Officer
Profit performance 4 Underlying profits up 7.8% at 156.5 million 'm Statutory Adjustments Underlying Statutory profits of 181.5 million include fair value movements and one-off items relating to acquisitions and portfolio disposals Exceptional items summarised as: Gross gain on Idem Capital portfolio disposal 28. million Net liquidity costs from acquisition funding and costs associated with Idem Capital disposal (funding and accelerated fee amortisation) 1.9 million Deal related costs and restructuring related overhead 2.3 million Interest Receivable 451.8.3 451.5 Interest Payable (197.2) (2.2) (195.) Net Interest Income 254.6 (1.9) 256.5 Gain on Disposal of Financial Assets 28. 28.. Other Income 19.3. 19.3 Total Income 31.9 26.1 275.8 Operating Expenses (114.2) (2.3) (111.9) Bad debt provisions (7.4). (7.4) Operating Profit 18.3 23.8 156.5 Fair value net gains / (losses) 1.2. 1.2 Exceptional Items. (23.8) 23.8 Profit Before Tax 181.5. 181.5 Remaining presentation focused on underlying results
million Income statement 5 Income growth underpinning stronger profits Underlying operating profits Total income increased by 9.1% year-on-year to 275.8 million Net interest margin +8bp to 2.21% 3 25 Income Impairments Costs Operating profit Average loan book up 6.4% to 11.6 billion 2 15 Operating costs increased by 9.4% to 111.9 million Cost:income ratio stable at 4.6% Operating profit CAGR of 8.6% per annum since 213 Cost of risk remains low at 6bp reflecting conservative risk appetite 1 5-5 -1-15 213 214 215 216 217 218 Underlying operating profits 213 214 215 216 217 218 13.5m 122.2m 134.7m 143.8m 145.2m 156.5m
million million Loan book 6 Organic advances and acquisitions accelerate loan book growth Loans and advances to customers Like-for-like lending up 18.1% at 2.19 billion All lending up 25.9% to 2.33 billion Fastest growth achieved in Commercial Lending advances Balance sheet to remain dominated by buy-to-let portfolio Change in business mix supporting margin growth 14, 12, 1, 8, 6, 4, 2, 2, 1,5 Mortgages Commercial Lending Idem Capital H1 215 H2 215 H1 216 H2 216 H1 217 H2 217 H1 218 H2 218 Originations and investments Mortgages Commercial Lending Idem Capital 1, 5 H1 215 H2 215 H1 216 H2 216 H1 217 H2 217 H1 218 H2 218
billion Deposit funding 7 Continued strong growth in retail savings deposits Deposit balances 6 Easy Access Savings 5 Notice Accounts Total deposit balances increased by 1.7 billion during 218 to 5.3 billion 4 3 2 1 1 Yr FRB 18 Month FRB 2 Yr FRB 3 Yr FRB 4 Yr FRB Monthly average new deposit costs depend on mix of tenors Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 5 Yr FRB Overall deposit book cost stable year-on-year (1.76% in September 218 compared to 1.71% in September 217) Cost of funds 2.5% 2.% 1.5% 1.%.5%.% Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Avg. cost of funds (%) Avg. new deposit rate (%)
% Net interest margin 8 NIM progress reflects diversification benefits Underlying net interest margin 2.4 NIM increased by 8bp year-on-year Mortgages NIM stable with a steadily growing portfolio Commercial Lending NIM lower as expected but faster volume growth Idem Capital NIM strong, reflecting portfolio cash flows 2.2 2. 1.8 1.6 1.4 1.2 1. 1.84 1.99 2.4 2.15 2.13 2.21 Figures exclude the gain on disposal.8 Disposal accelerated income levels.6 Mix led improvement, further widening expected.4.2. 213 214 215 216 217 218
Operating expenses 9 Further investment in growth platform Cost:income ratio progress 45 % Operating expenses increased 9.6 million to 111.9 million reflecting: New acquisitions 4 GDPR / IFRS9 / IRB and other IT investment Further investment planned in 219 but low 3s% cost:income ratio still targeted in medium term 35 3 213 214 215 216 217 218
25 H2 26 H1 26 H2 27 H1 27 H2 28 H1 28 H2 29 H1 29 H2 21 H1 21 H2 211 H1 211 H2 212 H1 212 H2 213 H1 213 H2 214 H1 214 H2 215 H1 215 H2 216 H1 216 H2 217 H1 217 H2 218 H1 218 Q3 Credit performance 1 Bad debt levels reflect conservative risk appetite Cost of credit remains low at 6bp 15 year BTL average cost of credit 9bp No emerging stress evident in behavioural scores Average first mortgage LTV 66.% compares favourably to 8.8% in September 28.4.3.2.1 % BTL long-term cost of risk Indexed credit behavioural scores by portfolio Sep-17 Sep-18 Buy-to-let: New 1. 11. Legacy 1. 1.4 New second charge mortgages 1. 99. Legacy second charge and Idem Capital assets 1. 13. Motor finance 1. 1.2. 5 4 3 2 1 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 % BTL 3 months+ arrears UK Finance: all mortgages 78bp UK Finance: buy-to-let (inc RoR) 42bp Paragon: buy-to-let (inc RoR) 11bp Source: UK Finance / Paragon Calendar years
Group capital 11 Capital levels remain strong Group consolidated capital Core Equity Tier-1 capital * 89.8m Tier-2 capital 154.9m Total capital resources 1,45.7m Credit risk 5,855.1m Operational risk 485.1m Market risk - Other 15.1m Total risk exposure 6,445.3m CET1 ratio * 13.8% Total capital ratio 16.2% Group consolidated leverage ratio Tier-1 equity * 89.8m Leverage exposure ** 13,892.2m UK leverage ratio * 6.4% Capital ratios Growth, M&A and distributions have brought CET1 to more on-target level Risk weightings Risk weights still calculated on a standardised basis. IRB application on track for early 219 Risk weight density increased following acquisitions in Commercial Lending division, trend to continue IFRS 9 Initial estimate of 27 million adjustment on transition Transitionary approach being taken for regulatory reporting purposes. IFRS9 impact on CET1 has expected to have immaterial impact on a transitionary basis and.3% on a fully loaded basis Full disclosure to follow in 219 * Adjusted for proposed dividend and subject to verification ** Excludes qualifying central bank claims in accordance with the rule modification applied to the UK Leverage Ratio Framework
CET 1 ratio UK leverage ratio Capital bridge 217/218 12 Continued strong capital generation employed in growth areas and distributions 2% 6.6% 6.4% 7% 18% 16% 2.6% (1.2%) (2.%) 6% 5% 14% (1.4%) (.1%) 2.4% 4% 12% 3% 15.9% 1% 13.8% 13.8% 2% 8% 1% 6% FY 217 Post-tax earnings Increases in lending Acquisitions Distributions Other movements FY 218 Total capital (Tier 1 and Tier 2) % UK leverage ratio Dividends.9% and buy-backs.5%
Section 2 Business Development Nigel Terrington Chief Executive
pence % pence Strong performance alongside strategic transformation 14 Total lending over last 5 years 7.7 billion Significant start-ups / acquisitions to deliver income diversification Bank formed in 214 restructured in 217 to subsume Group Majority of growth now retail funded All achieved whilst delivering Strong earnings momentum Cumulative buy-back of 19 million since 215 Improved dividend cover ratio to 2.5 times 6 5 4 3 2 1 Underlying earnings per share 218 statutory 55.9p 48.2 43.3 4.7 36.6 27.8 31.8 213 214 215 216 217 218 Dividend per share Underlying return on Tangible Equity (%) 2 18 16 14 12 1 8 6 4 2 19.4 15.7 13.5 11. 9. 7.2 213 214 215 216 217 218 18 16 14 12 1 8 6 4 2 218 statutory 16.1% 12.9 13.5 14. 11.8 1.9 1.2 213 214 215 216 217 218
Launch of Paragon Bank Greater optionality around capital deployment 15 28 21 214 215 216 217 218 Buy-to-Let Idem Capital Motor finance Gross income (% of total) Retail deposits Second charge mortgages 1% Mortgages Commercial Lending Idem Capital Asset finance (Five Arrows*) Development finance Premier Asset Finance* 8% Residential 6% Structured lending Iceberg* Titlestone* 4% 72.6% 67.4% 66.5% 65.8% 61.4% Operating model supports optionality Diversification added portfolio of investment opportunities Centralised operating model supports resources allocation Bank restructuring enhances capital mobility and funding Capital allocated and recycled to optimise growth / risk / return Disciplined organic focus adding loan growth at better margins Iceberg acquisition Titlestone acquisition Idem Capital portfolio disposal Share buy-backs 2% % 215 216 217 218 218 Q4 Excludes central segment * Acquisitions
Sep-6 Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 % million Buy-to-let new lending 16 Strong new lending and reducing redemptions driving loan book growth Buy-to-let completions BTL new lending up 6.8% to 1,495.5 million Growth in complex / professional benefitting from fiscal and regulatory changes Lower redemption levels enhance Improved retention strategies Reducing amateur / simple share of total 5 year products extending redemption profile Net loan growth +4.3% 1,6 1,4 1,2 1, 8 6 4 2 3 25 2 15 1 5 Impact of SDLT changes 1,495.5 1,399.9 1,326.6 1,161. 656.6 132.8 188.9 359.8 211 212 213 214 215 216 217 218 Buy-to-let redemptions (%)
Buy-to-let outlook 17 Focus on complex / professional % of specialist buy-to-let lending Continued focus on complex / professional landlords Competitive environment Simple / amateur pricing competitive reflecting wider mortgage market Complex / professional pricing more robust Pipeline increased to 778.9 million, 28.9% higher than 217 year end 9% 8% 7% 6% 5% 4% 3% 2% 1% % 79.3% 87.8% 64.5% 5.7% 216 217 218 218 Completions Pipeline Total specialist buy-to-let lending Completions Pipeline 216 FY 217 FY 218 FY 218 FY Corporate 13.4m 293.5m 656.7m 41.7m Complex 485.2m 69.4m 528.8m 272.9m Total 588.6m 92.9m 1,185.5m 683.6m % of total 5.7% 64.5% 79.3% 87.8%
million Development finance 18 Significantly enhanced by Titlestone acquisition July 218 Titlestone acquisition 227.4 million book acquired Significantly strengthens and expands organic business Total book size 352.8 million at 3 September 218 Service-led proposition Experienced team with 3+ years market experience Direct, relationship-driven origination c7% of new business sourced through direct channels Strong risk discipline Average LTGDV across organic and purchased book of 63.2% (217: 6.6%) Integration largely complete Combined 217/18 annualised pre-acquisition originations plus existing flows total 32.8 million Highly scalable platform and team with demonstrable track record 4 35 3 25 2 15 1 5 Development finance originations and loan book growth 9.1m Originations Net loan book 9.1m 48.9m 42.3m 136.8m Titlestone 49.1m Paragon 87.7m 216 217 218 352.8m Titlestone 255.4m Paragon 97.4m
Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 million million Asset finance 19 Further distribution and product development delivered Asset finance new originations New business volumes 354.7 million, up 61.2% year-on-year Lower margins associated with strategic move towards higher volume, better credit mix Competitive environment, but disciplined stance maintained Additional product range at enhanced margins Strong credit standards 4 35 3 25 2 15 1 Technology finance Construction equipment Commercial vehicles Business finance Iceberg 144.3m 22.m 354.7m 5 5 45 4 35 3 25 2 15 1 5 Asset finance portfolio growth 216* 217 218 * 11 months post acquisition Iceberg acquisition Specialist lender focused on professions financing Fast working capital cycle assets 217/18 new business flow of 95.5 million
million Idem Capital 2 Optimising returns through disciplined capital allocation Excellent financial performance Cumulative cash flow now 19.6% of underwriting estimate Market remains highly competitive Disciplined risk and pricing stance maintained Purchase transaction - 83.4 million Motor and asset finance assets Attractive price in competitive market Disposal transaction - 54.7 million Realised profit of 28. million against book value Recycled capital to support further growth in Commercial Lending 144.5 million sold from Idem Capital to Bank to improve funding costs 225 2 175 15 125 1 75 5 25 Portfolio purchase investment and disposals 28.8 121.9 99.2 95.4 83.5 83.4 57.6 53.8 35.2 2.7 22.7 16.2 2.9 2.6 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 21 211 212 213 214 215 216 217 218
million million Increasingly diversified funding strategy 21 Capacity and breadth of funding increasing Funding mix Diversification of new funding mix 12, 1, 8, Legacy New 123 283 699 1,8 3,142 4,481 5,997 7,475 8, 7, 6, 5, Warehouses RMBS Retail bonds ILTR Corporate bonds Idem Capital Savings TFS 6, 4, 2, 8,78 8,391 8,67 7,797 7,389 7,26 6,547 5,662 4,963 21 211 212 213 214 215 216 217 218 4, 3, 2, 1, 21 211 212 213 214 215 216 217 218 7.9% 9.4% Improving deposit franchise now covers 7.9% post-21 funding 5,297 million retail deposits outstanding 79.4% retention rate Net Promoter Score +61 (217 FY: +59) Long-term senior debt upgraded to BBB; subordinated debt BBB- PM25 April Paragon s first securitisation as a banking group and a return to market following 2 year absence 725 million securitisation ( 289 million retained) largest since 28 and at lowest pricing TFS drawings increased to 944 million prior to scheme close (217: 7 million) only 7.6% of total funding New 2 million warehouse facility from BAML will provide cost-effective standby funding
Brexit risks 22 A strong starting point UK domestic lending only, no notable direct exposures to trade and or currency risks Prudent risk appetite Exemplary credit record Operate well inside risk-appetite Risk appetite kept tight at this stage of the cycle and Brexit uncertainty Highly experienced with track record of managing through a down-turn Operational and liquidity requirements re-reviewed as part of contingency planning and stress testing framework A resilient balance sheet 98.2% of loan book secured 91.6% of loan book secured on property Average BTL LTV of 66.1% 97.9% of deposits covered by FSCS 74.5% of deposits are term or notice accounts 1. billion of HQLA 144.% LCR ratio No wholesale funding maturities until 221 CET1 of 13.8%
Conclusion 23 Strong financial and operational progress Strategic delivery supports positive medium term outlook Good financial performance Strong loan book growth in specialist segments Diversification-led earnings enhancement Robust credit record continues RoTE now 14% Significant strategic change in recent years Further growth with continued focus on specialist areas Positive structural growth drivers of NIM Continued low credit risk appetite Increasing capital and funding efficiency Disciplined capital allocation RoTE target of >15%
Section 3 Appendix
Mortgages 25 Portfolio growth with stable margins Originations Loans and advances 218 1,623.2m 218 1,473.5m Loan book now approaching 1.5 billion 217 1,464.5m 217 9,953.9m Originations in line with 1.6 billion guidance 216 1,25.9m 216 9,694.7m Segmental profit increased from 143.3 million in 217 to 144.8 million in 218 215 1,341.8m -1 Buy-to-let 4 9 14 19 Residential Second charge mortgages 215 9,425.8m 2 4 6 Buy-to-let Residential 8 1 12 Second charge mortgages 6.5 million increase in net interest offset in part by: Net interest margin Profit contribution Greater take-up of fee-free products lowers other income Operating costs higher as volumes increase Modest increase in bad debt back to 216 levels 218 217 216 1.54% 1.54% 1.49% 218 217 216 215 144.8m 143.3m 133.2m 125.4m 215 1.47%.%.5% 1.% 1.5% 2.%
Commercial Lending 26 Strong organic and acquisitive growth Originations Loans and advances 218 71.m 218 1,133.2m 217 388.9m 217 558.8m Total originations increased by 82.6% to 71. million. Excluding acquisitions made in the year the increase was 45.4% to 565.4 million Segmental profit increased from 14.1 million in 217 to 19.9 million in 218 216 215 233.2m 43.9m Asset finance 2 4 Motor 6 finance 8 Development finance Structured lending Net interest margin * 216 215 375.m 43.2m Asset finance Motor finance 5 1 Development finance Structured lending Profit contribution NIM reduction for the year reflects strategic repositioning of asset finance business, segmental NIM expected to expand in 219 218 * Calculated over average monthly balances 4.31% 218 217 14.1m 19.9m 217 4.98% 216 9.m 216 6.35% 215 ( 1.2m).% 2.% 4.% 6.%
Idem Capital 27 Strong cash flow and partial portfolio disposal Investments Loans and advances 218 83.4m 218 521.1m Idem Capital investments remain lumpy in nature New investments augment new product origination rather than purchase of discounted receivables Continued strong cash flow underpins earnings growth Underlying profits increased from 75.9 million to 78.2 million 217 98.m 216 28.8m 215 14.4m -1 4 9 14 19 24 Net interest margin 218 15.51% 217 216 215 218 611.4m 667.8m 593.4m 2 4 Discounted purchases 6 8 Performing Profit contribution 15.m Exceptional gain of 26.8 million (net of associated funding costs) on sale of secured portfolio 217 216 13.68% 13.92% 217 216 75.9m 79.m 215 13.5% 215 71.6m.% 5.% 1.% 15.% 2.%
Central 28 Unallocated costs stable Profit / (loss) contribution ( 86.4m) 218 ( 88.1m) 217 Central funding costs reduced year-on-year ( 77.4m) ( 61.1m) 216 215 Overheads increased, particularly around technology spend given resilience-based investment and new business system enhancements Corporate / central funding Unallocated / central costs Operating leverage * * Central operating costs as a proportion of total operating costs 218 217 216 215 58.4% 57.6% 58.5% 63.5%
Disclaimer 29 This presentation has been issued by Paragon Banking Group PLC ( Paragon ). This presentation is directed only at persons in the United Kingdom who fall either within Article 19 (Investment Professionals) or Article 49 (High net worth companies) of the Financial Services and Markets Act 2 (Financial Promotion) Order 25. 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 for any investment nor shall it form the basis of or be relied upon in connection with, or act as any inducement to enter into, any contract or commitment whatsoever. This presentation may contain certain forward-looking statements with respect to certain of Paragon s plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Paragon s control including among other things, UK domestic and global economic business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Paragon and its affiliates operate. As a result, Paragon s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in Paragon s forward-looking statements and reliance should not be placed on any such statement. Paragon undertakes no obligation to update the forward-looking statements contained in this presentation or any other forward-looking statements we may make regardless of whether such statements are affected as a result of new information, further events or otherwise.