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Numis ups Paragon estimates after strong first half

Numis has upped its earnings estimates for Paragon Bank after a strong set of results from the specialist buy-to-let lender.
The bank posted a near 70% jump in half-year profits on Tuesday, fuelled by growing demand for rental properties and buy-to-let mortgages, and said impairment charges had fallen to £6m. It also reinstated its dividend and announced a £40m share buyback.

In a report published on Wednesday, Numis said: “Following better-than-expected credit quality reported with the first-half results, which saw impairment decline by 80%, we have increased our underlying earnings per share forecast for this year by 24% to 49.0p from 39.3p.

“We have modestly upgraded up forecast for next year by 10%, to 55.0p, and by 6% to 61.0p for the year to September 2023.

“We have also adjusted our capital distribution assumptions, and now expect Paragon to buy back shares, as opposed to paying a special dividend, as a consequence of the surplus capital that is within our forecasts.

“The buyback adjustment has made a material contribution to our EPS upgrades, with our 2023 pre-tax profit increasing just 1% to £190.2m.”

Numis conceded that with government support still in place, it remained too early to see how the economy would fare post-pandemic.

But it expects Paragon’s net interest margin – the difference between saving and lending rates – to expand in the second half. The NIM rose 3 points in the first half.

It continued: “House prices have increased materially, and we see a combination of cheaper mortgage finance and the very substantial about of forced savings, supporting both house prices and buy-to-let volumes.

“We believe we are approaching th best point in the cycle for commercial lending, where the highest risk businesses have gone bust, margins are high, reflecting recession risks and expected credit loss provision assumptions.”

Numis has ‘hold’ rating on the stock and a target price of 616p. As at 1400 BST, shares in the stock were down 7% at 530.5p. On Tuesday the stock closed nearly 12% higher at 570p.

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