TIDMPAG
RNS Number : 2948X
Paragon Banking Group PLC
23 November 2017
Under stock exchange embargo until 7.00am Thursday 23 November
2017
TRANSITION TO BANKING GROUP
Paragon Banking Group PLC ('Paragon' or the 'Group') today
announces its full year results for the year ended 30 September
2017.
Financial highlights
-- Underlying profit rose by 1.0% to GBP145.2 million (2016:
GBP143.8 million) having absorbed GBP10.9 million of Tier 2 Bond
cost in the year
-- Statutory profit before tax increased by 1.1% to GBP144.8 million (2016: GBP143.2 million)
-- EPS up 6.4% to 43.1p (2015: 40.5p) and underlying RoTE improved to 13.4% (2016: 12.9%)
-- Dividend cover ratio reduced from 3.00 to 2.75 for 2017, 2.50 expected in 2018
-- Further GBP50.0 million share buy-back programme announced
-- Strong capital and leverage ratios maintained
Strong lending growth across buy-to-let and newer product
lines
-- Total lending increased 28.8% to GBP1,853.4 million (2016: GBP1,439.1 million)
-- Buy-to-let completions up 20.6% to GBP1,399.9 million (2016: GBP1,161.0 million)
-- Commercial Lending increased 66.8% to GBP388.9 million (2016: GBP233.2 million)
Increasingly deep and efficient funding base
-- Retail deposits nearly doubled over the year to GBP3.6
billion (30 September 2016: GBP1.9 billion)
-- Term Funding Scheme ('TFS') drawings totalled GBP0.7 billion,
with over GBP0.9 billion expected to be drawn in total
-- In addition to funding new advances, the Group has generated
efficiencies through refinancing several previously securitised or
warehoused portfolios
Commenting on the results, Nigel Terrington, Chief Executive of
Paragon, said:
"We have made outstanding progress across all business lines
with lending growth exceeding 29% and deposit funding nearly
doubling to GBP3.6 billion over the year. The improving strength
and depth of the Group's franchises reflects the growing importance
of specialist lending in the UK retail banking market as it
undergoes much needed structural change.
Paragon has undergone an extraordinary transformation in recent
years with the diversification strategy delivering six new lending
product lines and a growing deposit taking capability. The
organisational restructure completed recently has enhanced this
transformation, creating a new operating model which has immediate
organisational benefits and will deliver improving funding
efficiencies and capital mobility in the future. Significant
progress has been made in our strategic development and we have put
in place the foundations to support the growing demands and
expectations of our customers and intermediaries and the increasing
range of opportunities in specialist lending markets.
With a strong capital base and exemplary asset quality,
increasingly diversified funding, and a broadening product range
supported by a more financially efficient operating model, we are
well positioned to exploit the opportunities and manage the
challenges ahead."
Paragon Banking Group PLC
FINANCIAL HIGHLIGHTS
KEY PERFORMANCE INDICATORS
2017 2016 Change % change
------------------ ---------- ---------- -------- ---------
Profit before
tax GBP144.8m GBP143.2m GBP1.6m 1.1%
------------------ ---------- ---------- -------- ---------
Underlying
profit GBP145.2m GBP143.8m GBP1.4m 1.0%
------------------ ---------- ---------- -------- ---------
Basic EPS 43.1p 40.5p 2.6p 6.4%
------------------ ---------- ---------- -------- ---------
Dividend per
share 15.7p 13.5p 2.2p 16.3%
------------------ ---------- ---------- -------- ---------
Return on
tangible equity 13.4% 12.9%
------------------ ---------- ---------- -------- ---------
Cost:income
ratio 40.5% 37.9%
------------------ ---------- ---------- -------- ---------
Core Tier
1 ratio 15.9% 15.9%
------------------ ---------- ---------- -------- ---------
Total capital
ratio 18.7% 19.0%
------------------ ---------- ---------- -------- ---------
New Business Originations and Pipeline
investments
---------------- -------------------------- ----------------------
2017 2016 2017 2016
---------------- ------------ ------------ ---------- ----------
Mortgages GBP1,464.5m GBP1,205.9m GBP604.2m GBP321.1m
---------------- ------------ ------------ ---------- ----------
Commercial GBP388.9m GBP233.2m
Lending
---------------- ------------ ------------ ---------- ----------
Total loans GBP1,853.4m GBP1,439.1m
---------------- ------------ ------------ ---------- ----------
Portfolio GBP98.0m GBP208.8m
acquisitions
---------------- ------------ ------------ ---------- ----------
Total new GBP1,951.4m GBP1,647.9m
business
---------------- ------------ ------------ ---------- ----------
Retail deposits GBP3,615.4m GBP1,873.9m
---------------- ------------ ------------ ---------- ----------
For further information, please contact:
For further information,
please contact:
------------------------- --------------------
Paragon Banking Group Headland
PLC Lucy Legh
Nigel Terrington, Chief Del Jones
Executive Tel: 020 3805 4822
Richard Woodman, Chief
Financial Officer
Tel: 020 7786 8455
------------------------- --------------------
Paragon will be holding a results presentation for analysts on
23 November 2017 at 9:30am at UBS, 5 Broadgate, London, EC2M 2QS.
The presentation material will be available on Paragon Banking
Group's website at
https://www.paragonbankinggroup.co.uk/investor/reports-results-presentations
from 11am.
MANAGEMENT REPORT
STRATEGY REVIEW
The last few years have been a period of transition for the
Group from a monoline centralised lender to an increasingly
diversified banking group. Over the last twelve months, a
significant component of this transition was completed with the
reorganisation of the Group's operating structure, resulting in the
bulk of its activities moving under its banking subsidiary, Paragon
Bank, following authorisation from the Prudential Regulation
Authority ('PRA') and Financial Conduct Authority ('FCA').
Recognising the focus on a retail deposit led banking strategy,
the Group changed its name to Paragon Banking Group in September
2017 and has subsequently re-branded its operating units.
The reorganisation has created a simplified operating model,
enhanced governance processes with a streamlined and unified board
and management structure, and greater transparency. This has been
reflected in the way the Group now reports its results, as three
operating units - Mortgages, Commercial Lending and Idem Capital,
as well as its centralised operations.
The restructure will deliver significant liquidity benefits,
together with a notable reduction in the need for the Company to
issue debt over the medium term, thereby reducing the Group's
funding costs over time and, in turn, giving the Group far greater
access to the retail deposit market to support its lending
activities.
Notwithstanding the above, the overall Group's core strategy
remains unchanged. The Group is a leading UK specialist lender,
supporting the needs of consumers and SMEs. It is seeking to
develop its presence further in these broad markets by increasing
product diversification whilst utilising its highly efficient
centralised operating platform and excellent technology. Organic
growth has been strong and this is expected to continue into the
future and will be supplemented by M&A activity where
appropriate. The Group has an outstanding through-the-cycle track
record in challenging markets with excellent risk metrics,
reflective of the cautious and prudent approach it takes to its
risk appetite alongside the highly efficient operating model.
Alongside its transition to a banking model, the Group has made
good progress in delivering improved profits and strong organic new
business generation. Underlying profits rose by 1.0% to GBP145.2
million during the year (2016: GBP143.8 million) having absorbed
the costs of the Group's GBP150.0 million Tier 2 Bond, the start-up
costs of new lending lines, incurred as part of the diversification
strategy and the impact of the restructuring. Profits on the
statutory basis increased by 1.1% to GBP144.8 million (2016:
GBP143.2 million). Basic earnings per share ('EPS') increased by
6.4% to 43.1 pence (2016: 40.5 pence) and return on tangible equity
('RoTE') improved to 13.4% (2016: 12.9%).
Lending
The year has seen continued strong growth levels in organic
business generation and further debt purchase activity, albeit the
level of portfolio acquisitions, at GBP98.0 million, was at a lower
level than the GBP208.8 million achieved in 2016. Group-wide
organic originations rose 28.8% to GBP1,853.4 million compared to
GBP1,439.1 million last year. The combination of portfolio
purchases and organic growth contributed to net loan growth of 3.6%
to GBP11,124.1 million over the last twelve months (2016:
GBP10,737.5 million).
The Group's core business remains its buy-to-let franchise. The
UK private rented sector continues to see strong levels of demand
from tenants which is expected to continue for the foreseeable
future. The buy-to-let market has experienced a period of
disruption following a series of fiscal and regulatory changes
aimed at both landlords and lenders. These changes disrupted the
level of market activity during the year, dampening demand in the
sector at an aggregate level. Against this backdrop the Group's
performance has been strong, with its twenty-year experience of
servicing the complex needs of professional landlords
differentiating it from other lenders and allowing the business to
make market share gains during the year. New buy-to-let origination
levels increased by 20.6% from the previous year's level to
GBP1,399.9 million in the year to September 2017 (2016: GBP1,161.0
million), with the Group's market share, as measured by the figures
reported by UK Finance, increasing from 2.74% to 3.93%.
The most recent regulatory changes in the buy-to-let market
require lenders to collect and analyse more information about the
landlord's property portfolio and wider business than has
previously been common in the market. The Group considers that this
will lead to further disruption with some lenders restricting their
buy-to-let activity as a result of the increased demands of a
complex underwriting process. The Group's expertise in this
particular market segment positions the business well to benefit
from these changes and further increase its market share.
The Group's other mortgage businesses comprise its second
mortgage activities, where new origination levels rose 35.2% to
GBP60.7 million during the year (2016: GBP44.9 million) and a
specialist residential lending operation, which remains in its
pilot phase with distribution limited to a small fraction of the
Group's broker panel pending final systems and process
enhancements. New specialist residential volumes totalled GBP3.9
million during the year (2016: GBPnil).
Further asset and income diversification is generated by the
Group's Commercial Lending division. The principal activity of the
division is asset finance, where strong progress has been made
following the acquisitions made in the previous year. The Group's
asset finance activities are transforming to service a broader
mid-market range of SME customers, as opposed to the more limited
niches originally serviced. This strategy has resulted in higher
new business volumes (up 52.5% on the eleven month performance in
2016 to GBP220.0 million in 2017). Customer credit profiles are
generally stronger in this larger sector, with yields
commensurately lower. The Group's motor finance business also saw
strong growth in 2017. Operating in the hire and lease purchase
segments of the market (with no exposure to personal contract
purchase products), new business origination grew by 50.4% to
GBP120.0 million during the year (2016: GBP79.8 million). The final
established sector is the division's development finance operation,
providing funding to smaller property developers, where new
drawings totalled GBP48.9 million in the first full operating year
of the business (2016: GBP9.1 million).
The Group has also established a team to provide structured
lending solutions to non-bank financial institutions, with the
first lending scheduled for the second quarter of the Group's 2018
financial year.
The Group's portfolio purchase business, Idem Capital, is an
established purchaser of secured and unsecured portfolios. Gross
purchases in 2017 were GBP98.0 million (2016: GBP208.8 million).
The sector has proved increasingly popular for both specialist
purchasers and credit funds in recent years, with yields reducing
as a consequence. Idem Capital has retained its credit and pricing
discipline across the past year, but as a consequence investment
levels have reduced year-on-year.
Funding
The increased banking focus of the Group is evidenced by the
pace of development of its retail deposit funding base, together
with Paragon Bank's increased access to Bank of England facilities.
At 30 September 2017, retail savings balances were GBP3.6 billion
and Term Funding Scheme ('TFS') drawings totalled GBP0.7 billion,
compared with savings deposits of GBP1.9 billion and GBPnil TFS
drawings a year earlier. In addition to funding new advances, the
Group has also refinanced a number of previously securitised or
warehoused portfolios using retail deposit funding during the year,
with similar refinancing activity expected over the coming
years.
Retail deposits represent the Group's primary source of funding
for new lending, with its historical securitisation approach taking
a more tactical role as and when conditions in that market are
attractive, maintaining a diversified approach to the Group's
funding.
Capital
The Group's core equity tier 1 ratio ('CET1') remained unchanged
in 2017 at 15.9% (2016: 15.9%), despite balance sheet growth and
higher distributions to shareholders through buy-backs and enhanced
dividend levels. The Group's total capital ratio was 18.7% at
September 2017 (2016: 19.0%). Free cash resources totalled GBP305.5
million at the end of the period (2016: GBP383.1 million). During
the year, the Group repaid its GBP110.0 million subordinated bond
which matured in April 2017.
Enhancing shareholder returns on a sustainable basis is a key
objective for the Group and during the year basic EPS increased by
6.4%. The reorganisation of the Group in 2017 confers a number of
benefits but the impact on Group-level liquidity requirements is
particularly pronounced. Most notably, the Company no longer needs
to inject capital into Paragon Bank at the start of each year and
the requirement to fund the credit enhancement needs of the former
warehouse to securitisation financing model has been removed. Given
the increased efficiency of the new financing model, the Board has
reviewed the Group's earnings retention requirements and concluded
that it would be appropriate to reduce its dividend cover ratio
from the current 3.00 times on a stepped basis. The cover ratio for
2017 will therefore be 2.75 times, and this is expected to fall to
2.50 times for the 2018 financial year, subject to the requirements
of the business.
The increase in the Group's EPS and annual dividend rate over
the past five years, together with their compound annual growth
rates ('CAGR') is set out below.
2017 2012 Increase CAGR
p p p %
EPS 43.10 24.20 18.9 12.3
Dividend 15.70 6.00 9.7 21.2
------ ------
Dividend cover
(times) 2.75 4.03
====== ======
The Group will also adopt a formulaic approach to its interim
dividend levels going forward, with the interim dividend per share
for any given year being one half of the final dividend declared in
the preceding period in normal circumstances.
The Group's share buy-back programme has progressed well, with
GBP165.0 million having been invested to date. The GBP150.0 million
cumulative target announced with the 2016 preliminary results was
extended to GBP165.0 million during 2017 given the strong cash
flow. The programme will be extended by an additional GBP50.0
million in the current financial year, further enhancing
shareholder returns.
The business remains well funded, strongly capitalised and
effectively placed to continue to deliver long term, sustainable
returns through its robust operating model. The Group is positioned
to respond quickly to the challenges and to take advantage of the
opportunities that will arise given changes in the broader
operating environment.
A more detailed discussion of the Group's performance is given
below covering:
Business review Funding review Financial Operational
review review
--------------------- -------------------- ------------ ----------------
Lending, performance Retail deposits, Results for People, risk
and markets wholesale the year and regulation
funding and
capital management
--------------------- -------------------- ------------ ----------------
MANAGEMENT REPORT
LING REVIEW
Following the Group's reorganisation in September, its
operations are organised into three divisions, based on product
types and origination and servicing capabilities.
This review is based on the new organisational structure, and
amounts from previous periods have been reanalysed on the basis of
the new segments.
The Group's investments in loans and the amounts invested in the
year for each of its divisions are summarised below:
Advances Investments
and investments in loans
in the year at the year
end
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
Mortgages 1,464.5 1,205.9 9,953.9 9,694.7
Commercial
Lending 388.9 233.2 558.8 375.0
Idem Capital 98.0 208.8 611.4 667.8
--------- -------- --------- ---------
1,951.4 1,647.9 11,124.1 10,737.5
========= ======== ========= =========
The Group's loan investments increased by 3.6% in the year, with
new advances and investments 18.4% higher than in the previous
financial year.
A3.2.1 Mortgages
The Group's Mortgages division offers buy-to-let first charge
and owner-occupied first and second charge mortgages on residential
property in the UK. In all its offerings, it targets niche markets
where its focus on detailed case-by-case underwriting and its
robust and informed approach to property risk differentiate it from
mass market lenders.
As part of the Group reorganisation all lending on residential
property was brought into this division, creating efficiencies and
enhancing the service delivered to our customers and
intermediaries.
Housing and mortgage market
The UK mortgage market is currently finely balanced and there is
the potential for considerable volatility. However, the data would
indicate that the market has been more robust than some media
reports would suggest. Housing transactions, the key measure of
market activity, have been improving through the year and monthly
house purchase numbers are running at post-crisis highs. Mortgage
transactions have also been on the increase, with advances
increasing at a sharper rate than housing transactions.
The strength of the first-time buyer segment, supported by the
Government's Help-to-Buy scheme, is clearly bolstering housing
transactions in general and new build activity in particular. Gross
mortgage lending, however, is also benefitting from growth in
remortgaging activity which is being driven by increased levels of
maturing products in extant mortgage portfolios as well as
increased consumer sensitivity to potentially higher interest
rates.
As a result of these activity levels, despite some ongoing
weakness in London and the South, particularly for higher value
properties, house prices across the country have seen modest
increases in the period and the market remains stable.
Across the whole of the mortgage industry, the low interest rate
environment has led to benign conditions, with low arrears and a
negligible level of forced sales. Overall the economic environment
for the mortgage market currently appears both positive and
sustainable.
The downside risks centre on the impact of any potential
economic downturn, whether as a result of the Brexit process or
otherwise. The Group seeks to mitigate its exposure to such
conditions through a robust approach to property valuation across
all its brands, employing an experienced in-house property team who
undertake around two thirds of valuations and conduct validation
work on 100% of valuations by third party surveyors. The internally
conducted surveys are subject to regular monitoring and the Risk
and Compliance function includes qualified property risk
resource.
Buy-to-let
The buy-to-let market in particular has been disrupted through a
series of government and regulatory interventions, which are in the
process of reshaping the sector. Significant changes have been seen
to date, and the effects are yet to work themselves out fully. The
principal changes have been:
-- the introduction of a stamp duty surcharge on buy-to-let properties
-- the restriction of tax relief on finance costs for buy-to-let landlords
-- regulatory changes affecting buy-to-let lending
The stamp duty changes appear to have had the least effect, with
landlords considering their investment in the long term, mitigating
the impact.
Tax relief changes have had a marked effect on customer
behaviour, with amateur landlords (those with fewer than four
properties) moving away from the market, leading to a fall in the
volume of buy-to-let transactions which seems to be establishing a
new 'normal' level. The reaction of the more professional
landlords, who constitute the Group's main target customer base,
has been different. Their focus has generally been to adopt
defensive measures, including putting properties into corporate
structures and focussing on high yielding properties such as homes
in multiple occupation ('HMOs'). This has led to a sharper
distinction between professional landlord investors and other
buy-to-let borrowers, which the Group regards as a positive
development and one beneficial to its business model.
The regulatory changes in the year were implemented in two
phases:
-- From 1 January 2017 the PRA imposed common standards for
affordability testing in the buy-to-let sector, similar, in
principle, to the approach adopted by the FCA for owner occupied
cases. Most lenders, including the Group, were able to adopt these
changes without serious disruption
-- From 1 October 2017, lenders were required to underwrite
buy-to-let cases on a much more specialised basis, differentiating
between professional and amateur landlords, based on the number of
properties owned with buy-to-let finance. This caused little
disruption to the Group's business model as the PRA approach was in
line with that already adopted and the required specific changes
were put in place in July 2017. The market in general was slow to
reflect these changes in published criteria, leading to some
disruption around the implementation date, due to lack of clarity
on lenders' requirements. At present, some of this disruption
continues
Overall the Group sees these changes as positive, with a more
sharply focussed class of buy-to-let landlords emerging. These
should be motivated to provide a better service to tenants and
their funding requirements are a good match for the service offered
by the Group, providing an opportunity for the Group to grow its
market share, albeit in a potentially smaller market.
Lending activity
The new lending activity in the segment during the year is set
out below.
2017 2016
GBPm GBPm
First charge buy-to-let 1,399.9 1,161.0
First charge owner-occupied 3.9 -
Second charge 60.7 44.9
-------- --------
1,464.5 1,205.9
======== ========
The Group's buy-to-let lending increased by 20.6% year on year,
despite the disruption in the market described above and the
consequent pressure on volumes. The pipeline of buy-to-let loans in
process at the year end was GBP604.2 million, an increase of 88.2%
on the position a year earlier (2016: GBP321.1 million). It had
reduced, however, from the level at the half year as a result of
the market disruption caused by the implementation of the second
phase of PRA reforms.
The Group launched its pilot offering in the specialist sector
of the owner-occupied mortgage market during the year. This is
intended to address customers who are poorly served by mainstream
lenders and who might benefit from a more bespoke approach to
underwriting, including customers with irregular incomes or more
complex properties or those who might wish to borrow into
retirement, but not sub-prime cases.
The Group's approach to these cases involves a much more
holistic assessment of the proposition, speaking directly to
customers and their financial advisers to understand the case in
the round. The Group initially worked with three intermediaries to
prove the proposition, systems and processes were viable. The
results so far are pleasing and the offering is now being expanded
to a wider network of selected specialist intermediaries. Further
increases in capacity will be phased in over the coming financial
year, with the business not expected to reach its full capability
until after the end of the 2018 financial year.
The Group's second charge mortgage lending has increased 35.2%
during the year, but that is largely as a result of starting from a
low base. The second charge market is currently not large, with
total lending of GBP979 million in the financial year reported by
the Finance and Leasing Association ('FLA'), and a significant part
of this total does not fall within the Group's risk appetite. For
its new lending, the Group seeks to target the population of
customers seeking to access equity in their property while
protecting an existing beneficial first mortgage rate, rather than
those seeking to refinance consumer debt and adopts a cautious
approach to credit quality in this area.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
30 September 2017 30 September 2016
GBPm GBPm
Post 2010 assets
First charge buy-to-let 3,661.1 3,017.2
First charge owner-occupied 3.9 -
Second charge 98.4 54.1
------------------ ------------------
3,763.4 3,071.3
Legacy assets
First charge buy-to-let 6,175.4 6,604.0
First charge owner-occupied 15.1 19.4
------------------ ------------------
9,953.9 9,694.7
================== ==================
At 30 September 2017 the balance on the Group's mortgage
portfolio was 2.7% higher than a year earlier. The annualised
redemption rate on post 2010 buy-to-let mortgage assets at 22.7%
(2016: 16.2%), has reached the levels seen before the credit crisis
as the book matures. Redemption activity has been particularly high
over the summer months, influenced by very attractive refinancing
options on offer, as lenders have utilised the TFS to subsidise
product pricing. The annualised redemption rate on pre-crisis
lending, at 6.0%, has marginally reduced from the 6.2% seen in the
year ended 30 September 2016.
Average yields on the major product lines are set out below.
Average Yield Average Balance
2017 2016 2017 2016
GBPm GBPm
Post 2010 buy-to-let 4.48% 4.71% 3,326.8 2,786.0
Second charge 4.65% 4.87% 76.7 36.1
Legacy 2.02% 2.24% 6,386.3 6,831.2
======= ======= ======== ========
Yields in the segment have tightened somewhat in the year as a
result of competitive pressures and market interest rate movements,
but remain broadly in line with expectations and at sustainable
levels.
Arrears on the buy-to-let book as a whole have reduced in the
year to 0.08% (2016: 0.11%), with arrears on post-2010 lending
standing at 0.02% (2016: 0.01%). These arrears remain very low
compared to market performance, with UK Finance reporting arrears
of 0.45% across the buy-to-let sector at 30 September 2017 (2016:
0.52%). This exemplary performance reflects the Group's focus in
underwriting on the credit quality and financial capability of its
customers, underpinned by a detailed and thorough assessment of the
value and suitability of the property as security.
Second charge arrears increased to 0.06% from zero in the year,
as the book began to season, but remain negligible compared to
market levels.
The Group's receiver of rent process for buy-to-let assets helps
to reduce the level of bad debt. At the year end 821 properties
were managed by a receiver on the customer's behalf, a reduction of
13.2% since 2016 (2016: 946 properties) as cases on the old book
resolve and post 2010 cases perform well.
Outlook
The Group believes it is well placed to face the challenges of
the mortgage market going forward. Aside from an economic downturn,
the biggest risk to the business model is from further
interventions in the buy-to-let sector. Exposure on owner-occupied
lending is low, and the risk position on second charge lending has
been carefully maintained.
While arrears performance at the moment is exceptional, in the
event of an economic downturn the Group believes its strong credit
standards and robust assessment of security condition and value
will afford it a high degree of protection. Average loan-to-value
ratios on new buy-to-let lending remain at around 70% with stressed
affordability levels in line with or above the PRA requirements.
Continued strong rental demand and good affordability suggests the
Group's customers will be resilient in the face of anticipated rate
rises.
The Group believes that the current trends in the buy-to-let
market are likely to continue with the split between professional
and amateur landlords becoming more marked and professional
landlords increasingly dominant in the sector. This provides a good
match for the Group's offerings and 71.2% of applications at 30
September 2017 were from landlords the Group classes as
professional (2016: 67.2%).
This trend can be seen in the analysis of the Group's buy-to-let
pipeline application numbers over the last three years.
The Group believes the division is well placed to deploy its
core skills of bespoke assessment of credit risk, good customer
service, expert understanding of property valuation and modern
systems and processes, across a variety of niche markets in the
residential mortgage field, as well as in its existing core
buy-to-let specialism. These would be significant large,
underserved, markets where detailed underwriting and the careful
management of credit and property risk can produce a resilient and
sustainable lending business with total lending in excess of GBP1.6
billion anticipated for 2018.
A3.2.2 Commercial Lending
Building on the asset finance operation acquired in 2015, the
Group's Commercial Lending division brings together a number of
streams of mostly asset backed lending to, or through, commercial
organisations. The principal customer focus of the division is on
lending to SME and mid-sized corporate customers, which is an
important differentiator from the rest of the Group's business.
While asset and motor finance form the largest parts of the
division's operations and finance leasing is its principal product,
offerings are tailored to respond to specific needs identified in
the marketplace.
The Group recognises that whilst the asset finance market is
wide and deep, covering some GBP75.1 billion of outstanding
balances at 30 September 2017 (2016: GBP70.7 billion) and GBP31.6
billion of advances in the year then ended, most of this funding is
provided by commodity lenders. The Group targets niches within this
market where its particular skill sets can be best applied.
Examples of such niches are the financing of waste collection
vehicles for local authorities, construction equipment and complex
veterinary equipment. Outside the leasing market the division also
has niche offerings including invoice factoring, development
finance and specialist lending.
Access to customers is generally though specialist brokers,
including the Group's in-house brokerage, Premier Asset Finance
('Premier'), or equipment suppliers and the markets in which the
division operates tend to be fragmentary, with different brokers
focussed on different asset types.
The common themes of these diverse business lines are a reliance
on understanding and engaging with the customer and the valuation
of any security, together with expertise in collections and
security realisation. In common with the rest of the Group, the
division's focus is on the maintenance of strong credit standards
and it does not pursue business volumes at the expense of margins.
The division relies heavily on specialist teams to address the
separate business lines, either sourced externally or internally
developed.
Lending activity
The new lending activity in the segment during the year is set
out below.
2017 2016
GBPm GBPm
Asset finance 220.0 144.3*
Motor finance 120.0 79.8
Development finance 48.9 9.1
------ -------
388.9 233.2
====== =======
* 2016 activity for 11 months since acquisition
The asset finance business has seen a 39.8% annualised growth in
new advances in the first full year of the Group's ownership, as
changes made following the acquisition came into effect. Premier,
acquired in 30 September 2016, has proved valuable as a source of
new business, particularly in the business finance area. This has
taken place against a backdrop of aggressive competition in the
market and general economic nervousness in UK industry, leading to
some reluctance by SMEs to take on new finance commitments.
The asset finance business also made a significant investment in
assets for hire under operating leases, both term and spot,
acquiring GBP12.9 million of assets to generate future income
(2016: GBP8.7 million).
The motor finance business continues its development phase with
a 50.4% increase in new lending as its distribution network
expands. This rate of growth is expected to moderate as the
business becomes more mature.
The development finance business, which provides funding for
small scale property developments, was launched at the end of the
previous year. It has seen significant growth as it moves from its
pilot phase to a wider scale launch, expanding from its initial
focus on London and the South East.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
30 September 2017 30 September 2016
GBPm GBPm
Asset finance 325.0 250.4
Motor finance 163.0 95.3
Development finance 42.3 9.1
Invoice factoring 14.8 12.1
Unsecured business lending 9.0 4.8
Other loans 4.7 3.3
------------------ ------------------
558.8 375.0
================== ==================
The motor finance and development finance businesses continued
to mature in the year, with their distribution networks expanding
and internal systems developments supporting their growth. The
development finance business saw its first projects successfully
completed and paid down in the year and has seen significant
investment in systems and specialist personnel. Across all business
lines growth has been carefully controlled with credit quality and
margins prioritised over expansion.
Average yields on the major product lines are set out below.
Average Yield Average Balance
2017 2016 2017 2016
GBPm GBPm
Asset finance 9.35% 11.78% 311.1 247.6
Motor finance 5.13% 4.85% 125.7 71.9
Development finance 9.63% 9.34% 29.2 3.2
======= ======= ======== ========
Yields in the segment have remained strong. While the figures
for motor and development finance are affected by their growth
trajectories, the decline in the yield in asset finance reflects
its strategic repositioning under the Group's ownership, to address
the larger, higher quality but lower yielding mid--range segment of
the market.
Arrears on the segment's business remain low with arrears in the
asset finance business at 0.97% and motor finance at 0.56% (2016:
0.82% and 0.09% respectively), comparable to those in the wider
sector, with the FLA reporting average arrears for asset finance at
0.60% and car finance at 1.70% at 30 September 2017 (2016: 0.60%
and 1.50%).
Development finance accounts are monitored on a case-by-case
basis by the Credit Risk function. At 30 September 2017, no
accounts were in default and no defaults had been suffered in the
year. The average loan to gross development value for the portfolio
at the year end, a measure of security cover, was 60.6%.
Overall the charge for impairment in the segment was GBP0.1
million (2016: GBP0.8 million), representing both the quality of
the lending and the Group's success in realising security on
defaulted cases.
Outlook
The division seeks to develop its businesses, both increasing
the reach of its existing offerings and adding further lines or
specialisms either organically or through M&A activity. It
seeks to be responsive and flexible in addressing the market, but
its UK focus means that it is exposed to a downturn in investment
amongst UK business as a whole, particularly one affecting its core
construction and broadcast sectors.
The coming year will see development of new product lines,
including two already launched, aviation finance and structured
lending.
The structured lending team was established to provide senior
debt to the UK non-bank lending market. The business will deploy
loans of up to GBP25.0 million to help support 'best-in-class'
businesses working across consumer and commercial lending. The
Group will work alongside clients to help fund their growth. Each
transaction will be secured on underlying assets and structured
using established robust methodologies. It is anticipated that each
facility will generate attractive returns for shareholders and
present a low risk way of accessing familiar and new markets.
Structured lending is a means of addressing certain segments where
the Group may be underweight or has no exposure at all and where
working with a recognised industry expert would be preferable to
setting up a business.
Aviation finance builds on the division's existing asset finance
lending expertise, supplemented with product-specific teams joining
the business from outside. The first advance in this business was
made in the first weeks of the new financial year.
Further potential niche markets have been identified which might
be addressed through organic development using existing business
processes, creation of a new separate business line, or acquisition
in the field.
Overall the division has a good platform on which to build and
increasing scale will enable a better return to be generated from
its resources, control framework and investments in systems and
aggregate new advances of over GBP0.5 billion expected in 2018.
A3.2.3 Idem Capital
The Group's Idem Capital division includes its acquired consumer
finance portfolios, together with legacy consumer portfolios
originated before the credit crisis.
The division's focus is on acquiring portfolios where it can
enhance value through its collections process and access to
funding, using its analytical skills base, which it sees as a core
differentiator, to identify and evaluate portfolios brought to
market. Its principal area of focus over recent years has been on
portfolios of UK paying secured and unsecured consumer finance
balances.
Idem Capital has a strong capability in loan administration and
an ability to self-develop systems, allowing it to respond to
regulatory developments and more specialised portfolio
requirements. Unlike many market participants, Idem Capital is able
to deploy retail funding and securitisation funding to support its
investment.
In the market the division's strategy has been to seek better
returns, with a greater interest in transactions with a bespoke
aspect. It is also willing to consider transactions, deal by deal,
on a partnership basis, having acted as a co-investor, servicer or
both in various deals in the past.
Overall Idem Capital's success rests on understanding assets,
strong analytics, advanced servicing capabilities and the efficient
use of funding.
Lending activity
The portfolio purchase market has been busy in the year, with
over 40 transactions in various asset classes coming to market. In
transactions where it was successful, Idem Capital invested GBP98.0
million in loan portfolios (2016: GBP208.8 million). These
portfolios comprised unsecured consumer finance balances. Activity
in the asset sales market tends to be 'lumpy' and the level of
investment will reflect the number, type and quality of portfolios
offered, together with the levels of return other market
participants are willing to accept.
The Group believes that its ability to accurately evaluate a
potential acquisition is a core strength and it is not willing to
compromise on credit quality or target return levels in pursuit of
volumes. Idem Capital has participated in all the significant sales
processes in the year in its target markets and remains on the
panels of all the principal UK vendors.
The Group had also disposed of assets with a carrying value of
GBP18.5 million during the year. These were assets where the Group
had exhausted its collection procedures and therefore chose to
dispose of the assets to other institutions whose systems are
better set up to serve these customers and address such
balances.
Performance
The value of the loan balances in the segment are set out below,
analysed by business line.
30 September 2017 30 September 2016
GBPm GBPm
Second charge mortgage loans 392.3 472.7
Unsecured consumer loans 219.1 195.1
------------------ ------------------
611.4 667.8
================== ==================
The reduction in balances is a result of the scale of
realisations from the brought forward portfolio outstripping the
pace of acquisitions in the year. 120 month Estimated Remaining
Collections on acquired assets reduced from GBP740.7 million at 30
September 2016 to GBP688.8 million at the year end.
Average yields on the major product lines are set out below.
Average Yield Average Balance
2017 2016 2017 2016
GBPm GBPm
Second charge 13.13% 13.83% 432.6 435.9
Unsecured 17.73% 19.32% 237.7 210.2
======= ======= ======== ========
Yields in the segment have remained stable. The reductions in
the year can be attributed principally to mix variances as higher
yielding seasoned portfolios amortise and new investments are made
at yields below historic levels.
None of the division's portfolios at the year end were regarded
as materially underperforming, with strong overall cash generation.
Operational improvements have been made in systems, including the
launch of a new customer facing website designed to further enhance
customer service by increasing contact, information levels and
payment options. This development is also expected to generate
operational efficiencies in future periods.
Arrears on the segment's secured lending business remain in line
with recent performance at 17.5% (2016: 17.8%), which while higher
than the average for the sector reflect the seasoning of the
balances, which are mostly more than ten years old. Average arrears
for secured lending of 10.7% at 30 September 2017 were reported by
the FLA (2016: 12.4%).
The Group monitors actual cash receipts from acquired portfolios
against those forecast in the evaluation which informed the
purchase price. Up to 30 September 2017 such collections were
109.3% of those forecast to that point (2016: 109.0%).
Overall the charge for impairment in the segment reduced to
GBP1.5 million (2016: GBP2.1 million), representing the stable
arrears position and the impact of improving house prices on
secured provisioning.
Outlook
The Group expects the flow of sale transactions to continue into
the new financial year. Its strategic focus in this market will be
on transactions which are more idiosyncratic in nature and
therefore make best use of its core skills in pricing, data,
operations and account management in generating value.
While Idem Capital has the most significant experience in
secured and unsecured consumer loan transactions, it has access to
specialists in other asset classes across the Group, enabling it to
bid on a wider range of asset classes. It will also look for
opportunities to deploy retail and corporate funding, with access
to these funding sources giving it a potential competitive
advantage.
MANAGEMENT REPORT
FUNDING REVIEW
The Group's reorganisation in the period represents a major
stage in its transition from an entirely wholesale funded lender,
with equity representing a high proportion of working capital,
reflecting more closely a typical funding structure with retail
deposits at its core.
The structural changes have enhanced access to deposit funding
and facilitated a review of the Group's equity and dividend
strategy.
A3.3.1 Debt funding
During the year, the Group continued to pursue its strategy of
making increased use of its retail savings capability.
The availability of central bank funding at attractive rates to
support lending in the year impacted on the Group's use of other
wholesale funding, with no securitisation transactions taking
place. The amount of warehouse facilities available for new lending
was also reduced to take account of the increased availability of
retail funding.
The Group's funding at 30 September 2017 is summarised as
follows:
2017 2016 2015
GBPm GBPm GBPm
Retail deposit balances 3,615.4 1,873.9 708.7
Securitised and warehouse funding 7,781.8 9,947.1 9,700.0
Central bank facilities 700.0 - -
Tier 2 and retail bonds 444.8 554.3 404.9
--------- --------- ---------
Total on balance sheet
funding 12,542.0 12,375.3 10,813.6
Off balance sheet central
bank facilities 109.0 108.8 -
--------- --------- ---------
12,651.0 12,484.1 10,813.6
========= ========= =========
The Group's present medium term strategic funding objective is
principally focussed on retail deposits, while optimising the use
of central bank facilities. Securitisation will be used tactically
if market conditions are favourable, or where it is appropriate for
particular transactions.
Retail funding
Retail deposits represent a reliable, cost-effective and
scalable source of finance. As a consequence of the Group adopting
its funding strategy, the volume of retail deposits has grown
significantly during the year, with balances at 30 September 2017
reaching GBP3,615.4 million, an increase of 92.9% over the period
(30 September 2016: GBP1,873.9 million).
However, this represents only a small proportion of the UK
savings market, with household savings balances reported by the
Bank of England increasing by 1.3% in the year to 30 September 2017
to GBP1,120.8 billion (30 September 2016: GBP1,105.9 billion). This
strong supply has helped to maintain the recent trend for low
savings rates with the average annual interest on two year fixed
interest bonds, reported by the Bank of England, having increased
only from 1.00% in September 2016 to 1.26% in September 2017, in
expectation of the autumn increase in bank base rates.
Paragon's savings model provides customers with a range of
deposit options, offering value for money and competitive rates,
combined with the protection provided by the Financial Services
Compensation Scheme ('FSCS'). It provides the Group with a stable
funding platform, with a focus on term funding to manage interest
rate risk and the ability to limit product availability to short
periods of time.
The Group's straightforward approach and consistently
competitive products have been recognised in the industry and by
customers and Paragon was commended in the Best Online Savings
Provider category at the 2017 Moneyfacts Consumer awards, the third
consecutive year it has received this accolade.
In customer feedback 87% of those opening a savings account with
Paragon in the year, who provided data, stated that they would
'probably' or 'definitely' take a second product with Paragon.
(2016: 87%). The net promoter score in the same survey was +59, up
from +51 in 2016.
Savings balances at the year end are analysed below.
Average interest Average initial Proportion
rate balance of deposits
2017 2016 2017 2016 2017 2016
% % GBP000 GBP000 % %
Fixed rate deposits 1.89% 2.11% 24 28 74.0% 71.1%
Variable rate
deposits 1.21% 1.65% 19 15 26.0% 28.9%
--------- -------- -------- -------- ------- -------
All balances 1.71% 1.98% 23 25 100.0% 100.0%
========= ======== ======== ======== ======= =======
The average initial term of fixed rate deposits was 28 months
(2016: 26 months).
Following the restructuring in the year, the scale of
deposit-taking activity is expected to expand materially over the
next few years.
Wholesale funding
The year has seen a scaling back of the Group's wholesale
funding. The Group's strategic objective of creating a better
balanced funding base, coupled with the availability of
attractively priced funding from the Bank of England has meant that
the Group has not accessed the public securitisation market since
November 2015.
At the same time, the quality of the Group's loan assets has
enabled three mortgage securitisations to be paid down, including
one pre-credit crisis transaction, together with one of the Group's
pre 2007 consumer finance transactions. All were refinanced with
retail deposits, releasing significant cash balances for use
elsewhere in the Group. Further such refinancing transactions
should be expected over the coming years.
As a consequence of the increased focus on retail deposit
funding, the Group's warehouse capacity, which had been used to
fund buy-to-let mortgage originations, was rationalised, reducing
from GBP850.0 million at 30 September 2016 to GBP550.0 million at
the year end, and further, to GBP350.0 million shortly thereafter.
The remaining warehouse provides a standby capability and an
alternative to retail deposit funding.
The reduction in the use of securitisation and warehouse
facilities reduces the Group's requirement to provide credit
enhancement in these structures and releases working capital funds
to the Group, where it can be used more effectively.
While the Group has not issued new securitisation debt in the
year, it expects to do so in future, on an strategic basis when
market conditions are favourable.
Central bank facilities
In the previous year the Group first accessed the borrowing
facilities offered by the Bank of England, which provide flexible,
low-cost collateralised funding designed to reinforce the
transition of low base rates to households and businesses. The
Group drew down GBP108.8 million under the Funding for Lending
Scheme ('FLS') to support lending to SMEs, which increased to
GBP109.0 million at 30 September 2017. The terms of this facility
are such that neither the drawing or the liquidity provided appear
on the Group's balance sheet.
During the year the Group has made further use of Bank of
England facilities, most significantly through drawings on the Term
Funding Scheme ('TFS'), with mortgage loans offered as security.
The interest cost of TFS is very attractive compared with either
retail deposits or securitisation and repayment is due four years
after the drawing, in 2021. The Group uses the TFS to support new
lending, rather than for the repayment of other facilities and
total drawings are subject to a regulatory limit.
In common with many UK institutions, the Group has made
extensive use of this facility and drawings have increased to
GBP700.0 million at the end of the period (2016: GBPnil). Assets
already pre-positioned with the Bank of England potentially give
access to a further GBP114.3 million and the Group intends to
optimise its use of this facility until the end of the drawdown
window in February 2018.
Funding for Idem Capital assets
Idem Capital has continued its funding strategy of financing
smaller scale acquisitions from the Group's equity while keeping
under review the opportunities to access retail funding for assets
of appropriate quality and to introduce external funding when asset
volumes and types make that economically appropriate.
Since 2015, Idem Capital has had a non-recourse funding facility
with Citibank, which it uses to fund assets from time to time,
releasing Group working capital. During the year drawings of
GBP69.8 million were made on this facility.
Certain legacy assets, principally second charge mortgage
balances are also funded through pre-credit crisis securitisation
structures.
At 30 September 2017 the funding of the assets in the Idem
Capital segment was distributed as shown below.
2017 2016 2015
GBPm GBPm GBPm
Purchased assets by funding
source
External non-recourse
funding 270.8 414.5 449.2
Retail deposit funding 247.0 250.6 -
Funded through Group
resources 93.6 2.7 144.2
------ ------ ------
611.4 667.8 593.4
====== ====== ======
This demonstrates the flexibility in the Group's funding for its
debt purchase activities, and its ability to access third party and
retail funding for appropriate transactions. This is particularly
useful when bidding for performing portfolios, which the operation
has targeted.
The assets funded through the Group also provide an opportunity
to raise further liquidity, should it be needed.
Corporate funding
While the Group's working capital has primarily been provided by
equity since 2008, in recent years it has strategically expanded
its use of corporate debt funding, allowing it to diversify its
funding base and extend the tenor of its borrowings.
During the year, the Group paid down the GBP110.0 million
Corporate Bond which matured in April 2017. This means that all the
Group's working capital debt funding has now been raised since the
credit crisis.
The Group is rated by Fitch Ratings, and maintains its BBB-
senior debt rating, with Fitch confirming this rating with a stable
outlook on 13 April 2017. On 25 September 2017, Fitch stated that
the Group's reorganisation has no immediate rating implications.
The Group's GBP1.0 billion Euro Medium Term Note Programme
announced in January 2013 remains in place and continues to form
part of the Group's long-term funding strategy, although no
issuance was made in the period.
A3.3.2 Capital management
The Group has reviewed its capital management and maintenance
policies following its reorganisation. The primary reliance on
retail deposit funding in the new model fundamentally changes the
working capital cycle of the Group, reducing the variability in
working capital demand and hence enabling a reduction in working
capital levels relative to the size of the balance sheet.
The Group has continued to enjoy strong cash generation during
the year. Available cash balances were GBP305.5 million at the
year-end (30 September 2016: GBP383.1 million) (note 14) after
investments in loan assets, share buy-backs and the repayment of
the GBP110.0 million Corporate Bond. The Company sees opportunities
to deploy capital to support organic growth and invest in portfolio
purchases and potentially in further M&A opportunities, but
recognises also the opportunity to return more of this cash to its
shareholders.
Dividend and dividend policy
Following its review of capital, the Company has determined that
it is appropriate to increase its normal level of dividends and
will move from the previously announced policy of targeting a
dividend cover ratio of 3.00 times, to 2.75 times in 2017 and then
to 2.50 times in 2018, subject to the requirements of the business
and the availability of cash resources.
To provide greater transparency, the Company has also indicated
that in future its interim dividend per share will normally be 50%
of the previous final dividend, in the absence of any indicators
which might make such a level of payment inappropriate.
In determining the level of dividend for the year, the Board has
considered the dividend policy, but has also taken into account the
Group's strategy, capital requirements, principal risks the level
of available retained earnings in the Company, its cash resources
and the objective of enhancing shareholder value.
On this basis, the Board is proposing, subject to approval at
the Annual General Meeting on 15 February 2018, a final dividend of
11.0 pence per share which, when added to the interim dividend of
4.7 pence, gives a total dividend of 15.7 pence per share for the
year. This represents an increase of 16.3% from 2016, bringing the
dividend cover to 2.75 times (2016: 3.0 times).
Regulatory capital
The Group is subject to supervision by the PRA on a consolidated
basis, as a group containing an authorised bank. As part of this
supervision, the regulator will issue individual capital guidance
setting an amount of regulatory capital, defined under the
international Basel III rules, implemented through the Capital
Requirements Regulation and Directive ('CRD IV'), which the Group
is required to hold relative to its risk weighted assets in order
to safeguard depositors in the event of severe losses being
incurred by the Group.
The Group maintains extremely strong capital and leverage
ratios, with a capital ratio of 18.7% at 30 September 2017 (2016:
19.0%) and a UK leverage ratio at 6.6% (2016: 6.3%) (note 5)
leaving the Group's capital at 30 September 2017 comfortably in
excess of the regulatory requirement. The CET1 ratio, 15.9% at 30
September 2017, remained stable in the period (2016: 15.9%),
despite the effect of share buy-backs and dividends, as a result of
the Group's profit in the period and the actuarial gain on the
defined benefit pension plan. The Group's medium term CET1 target
is 13.0%.
The Group notes the consultation paper issued by the Basel
Committee on Banking Supervision ('BCBS') on 15 December 2015
regarding the proposed amendments to the Standardised Approach
('SA') for assessing the capital adequacy of institutions. The most
material proposal for the Group relates to a potential increase in
the risk weightings applicable to buy-to-let lending assets. The
Group considers that the proposed risk weightings do not properly
reflect the strong credit performance of the asset class in the UK
and has engaged with both the PRA and the BCBS as part of the
consultation process. The BCBS has also issued a consultation paper
in March 2016, proposing revisions to the Internal Ratings Basis
('IRB') for assessing capital, which is based on firms' own
internal calculations and subject to supervisory approval. The
proposals may serve to limit the comparative advantage available to
IRB users over SA users through the use of floors. Final
announcements on the results of these consultations are still
expected and the Group will be closely monitoring developments as
they progress.
The Group also notes the steps taken by the PRA towards using
its assessment of Pillar 2 capital to ameliorate the perceived
capital advantage of IRB banks over those using the SA, which they
regard as distortive to the market. The regulator published its
final policy statement on this in October 2017, and the Group is
considering its potential impact.
Notwithstanding the outcome of these consultations, the Group
has substantial performance data and excellent credit metrics to
support the adoption of an IRB approach for determining appropriate
risk weightings for its buy-to-let mortgage assets. Other UK
institutions currently using an IRB approach for their buy-to-let
portfolios achieve materially lower risk weightings than the 35%
required by the present SA, with PRA benchmark figures, most
recently updated in October 2017, being typically in the low to
mid-teen percentages.
In addition to the potential capital advantages from adopting
the IRB approach, the Group sees broader business benefits from
adopting the disciplines required by IRB as a core part of its risk
management structure and it has continued to progress a project to
prepare an application to the PRA to adopt an IRB in future. This
will build on the Group's existing core competencies in credit risk
and data handling and should lead to further enhancements in the
internal risk governance framework.
The Group expects to be in a position to apply formally for IRB
authorisation for its buy-to-let portfolio in early 2019. This will
be the first portfolio for which authorisation is sought, with
further asset classes being added on a phased basis to achieve the
coverage required by the IRB rules.
Gearing and share buy-backs
The Group's reorganisation during the year, coupled with the
strong capital base and low leverage in the Company's balance
sheet, provide the opportunity for the business to reduce its
over-reliance on equity capital, improving returns for
shareholders. The future requirement to raise debt for liquidity
purposes has been reduced by its access to retail deposit funding
and the Group is able to take a long--term view of opportunities
available to it in the corporate debt markets to optimise its
funding, working capital and regulatory capital position over
time.
At the same time the Company will carefully monitor any excess
equity position and consider whether any adjustment is required,
either through further changes in the dividend policy or through
share buy-backs.
The reversal of the trend above from equity toward debt is a
result of the raising of the 2016 Tier 2 Bond ahead of the
repayment of the GBP110.0 million Corporate Bond, leading to an
element of double funding across the previous year end.
In November 2014 the Group announced a share buy-back programme,
which had been extended to GBP150.0 million by November 2016, and
was subsequently extended to GBP165.0 million in July 2017.
The size of the programme is reviewed periodically to take
account of anticipated investment opportunities and the balance of
the Group's debt and equity capital resources. During the year the
Group bought back 15.3 million of its ordinary shares at a cost of
GBP65.5 million (note 25), these shares being held in treasury. The
Board intends to extend the programme by up to GBP50.0 million in
the financial year ending 30 September 2018. These shares will also
be initially held in treasury but may be cancelled
subsequently.
The Company currently has the necessary shareholder approval to
undertake such share buy-backs and will propose the appropriate
renewal of the relevant authority at its 2018 Annual General
Meeting, when a special resolution seeking authority for the
Company to purchase up to 26.5 million of its own shares (10% of
the issued share capital excluding treasury shares) will be put to
shareholders.
Capital Outlook
The Board keeps under review the appropriate level of capital
for the business to meet its operational requirements and strategic
development objectives. The strength of its business lines, the
diversification which has been achieved in the funding base in
recent years and the further opportunities for growth and
sustainability opened up by the group reorganisation, have now
created the foundations upon which to develop the Group's next
phase of growth.
MANAGEMENT REPORT
FINANCIAL REVIEW
The financial year ended 30 September 2017 saw the Group's
underlying profit increase by 1.0% to GBP145.2 million (30
September 2016: GBP143.8 million) while on the statutory basis
profit before tax increased by 1.1% to GBP144.8 million (30
September 2016: GBP143.2 million). Earnings per share increased by
6.4% to 43.1p (30 September 2016: 40.5p).
A3.4.1 Results for the year
CONSOLIDATED RESULTS
For the year ended 30 September 2017
2017 2016
GBPm GBPm
Interest receivable 409.2 411.4
Interest payable and
similar charges (176.6) (188.2)
-------- --------
Net interest income 232.6 223.2
Net leasing income 3.0 3.0
Other income 17.2 17.8
-------- --------
Total operating income 252.8 244.0
Operating expenses (102.3) (92.5)
Provisions for losses (5.3) (7.7)
-------- --------
145.2 143.8
Fair value net (losses) (0.4) (0.6)
-------- --------
Operating profit being
profit on ordinary activities
before taxation 144.8 143.2
Tax charge on profit
on ordinary activities (27.6) (27.2)
-------- --------
Profit on ordinary activities
after taxation 117.2 116.0
======== ========
2017 2016
Dividend - rate per
share for the year 15.7p 13.5p
Basic earnings per share 43.1p 40.5p
Diluted earnings per
share 41.9p 39.7p
======== ========
Total operating income increased by 3.6% to GBP252.8 million
(2016: GBP244.0 million). Within this, net interest income
increased by 4.2% to GBP232.6 million from the GBP223.2 million
recorded in the year ended 30 September 2016. The increase reflects
growth in the size of the average loan book, which rose by 5.1% to
GBP10,930.8 million (2016: GBP10,400.0 million).
Net interest margins ('NIM') in the year ended 30 September 2017
reduced marginally to 2.13% compared to the 2.15% in the previous
year, driven by increased funding costs from the GBP150.0 million
corporate bond issued in 2016, which attracted interest of GBP10.9
million in the year, reducing NIM by 0.10%. The Group expects NIM
to expand by between 0.05% and 0.10% in 2018.
Other operating income was GBP20.2 million for the year,
compared with GBP20.8 million in 2016. The reduction principally
results from lower levels of third party servicing income, where
previously serviced assets were acquired in the previous financial
year, partly offset by broker income from the Premier business
acquired on 30 September 2016.
Operating expenses increased by 10.6% to GBP102.3 million from
GBP92.5 million reported in the previous year, partly reflecting
the increase in the average number of employees to 1,317, a 5.4%
rise (2016: 1,249) and the acquisition of Premier. The year has
also seen significant investments in systems and personnel in order
to support the launch of new projects and the expansion of existing
business lines. This resulted in the overall cost:income ratio
increasing to 40.5% from 37.9% for the corresponding period last
year, although it remains significantly below the industry
average.
The Board remains focused on controlling operating costs through
the application of rigorous budgeting and monitoring procedures.
Costs of between GBP105.0 million and GBP115.0 million are
anticipated for the Group in 2018 and the Group expects the overall
cost:income ratio to improve over time as acquired and start-up
operations are integrated into the Group and it starts to see the
benefits of income growth from its new and expanded operations.
The charge of GBP5.3 million for loan impairment has decreased
from that for 2016 (2016: GBP7.7 million). As a percentage of
average loans to customers the impairment charge remains broadly
stable at 0.05% compared to 0.07% in 2016. The Group has seen
favourable trends in arrears performance over the period, both in
terms of new cases reducing and customers correcting past arrears,
whilst increasing property values have served to reduce overall
exposure to losses on enforcement of security. The loan books
continue to be carefully managed and the credit performance of the
buy-to-let book remains exemplary.
Yield curve movements during the period resulted in hedging
instrument fair value net losses of GBP0.4 million (2016: GBP0.6
million net losses), which do not affect cash flow. The fair value
movements of hedged assets or liabilities are expected to trend to
zero over time, as such this item represents a timing difference.
The Group remains economically and appropriately hedged.
Corporation tax has been charged at the rate of 19.1%, a broadly
similar level compared with 19.0% for the previous year. For the
next financial year, Paragon Bank is expected to reach the
threshold for the Bank Tax Surcharge and will pay an additional 8%
tax on the excess of its company profit over GBP25.0 million. This
is expected to increase the Group's overall tax charge.
Profits after taxation of GBP117.2 million (2016: GBP116.0
million) have been transferred to shareholders' funds, which
totalled GBP1,009.4 million at the year end (2016: GBP969.5
million), representing a tangible net asset value of GBP3.45 per
share (2016: GBP3.12) and an unadjusted net asset value of GBP3.84
per share (2016: GBP3.50).
3.4.2 Segmental results
Following the group reorganisation in September 2017, the Group
now analyses its results between three segments, which are the
principal divisions for which performance is monitored:
-- Mortgages, including the Group's buy-to-let, and
owner-occupied first and second charge lending and related
activities
-- Commercial Lending, including the Group's motor finance and
other equipment leasing activities, together with other offerings
targeted towards SME customers
-- Idem Capital, including loan assets acquired from third
parties and legacy assets which share certain credit
characteristics with them
The Group's central administration and funding costs,
principally the costs of service areas, establishment costs, and
bond interest have not been allocated.
Results for the year have been presented on the basis of the new
segments and comparative amounts restated accordingly.
The underlying operating profits of these business segments are
detailed fully in note 8 and are summarised below.
2017 2016
GBPm GBPm
Segmental profit
Mortgages 143.3 133.2
Commercial Lending 14.1 9.0
Idem Capital 75.9 79.0
------- -------
233.3 221.2
Unallocated central
costs (88.1) (77.4)
------- -------
145.2 143.8
======= =======
Mortgages
Trading activity during the year in the Mortgages division was
very strong, with the segmental profit at GBP143.3 million, up 7.6%
from the previous year (2016: GBP133.2 million). This increase
arose both from increases in the loan book and from improved
funding costs as the business made more use of retail funding.
Commercial Lending
Segmental profit in Commercial Lending increased 56.7% in the
year to GBP14.1 million (2016: GBP9.0 million) as the asset finance
operation acquired in 2016 contributed a full year's activity to
the results. The Premier brokerage business, acquired on 30
September 2016 also made its first contribution. Loan assets were
substantially increased, especially in motor and asset finance,
with the segment's loans to customers increasing 49.0% over the
year.
Idem Capital
The Idem Capital division's portfolios continued to perform well
in the year to 30 September 2017. However, the level of new
investment was offset by the scale of reductions in the brought
forward balance, reducing earnings marginally, which coupled with
the reduction in third party servicing income noted above, reduced
segment profit by 3.9% to GBP75.9 million (2016: GBP79.0
million).
A3.4.3 Assets and liabilities
SUMMARY BALANCE SHEET
30 September 2017
2017 2016
GBPm GBPm
Intangible assets 104.4 105.5
Investment in customer
loans 11,124.1 10,737.5
Derivative financial
assets 906.6 1,366.4
Free cash 305.5 383.1
Other cash 1,191.4 854.5
Other assets 50.2 71.4
--------- ---------
Total assets 13,682.2 13,518.4
========= =========
Equity 1,009.4 969.5
Retail deposits 3,615.4 1,873.9
Borrowings 8,927.2 10,502.6
Pension deficit 29.8 58.4
Other liabilities 100.4 114.0
--------- ---------
Total equity and liabilities 13,682.2 13,518.4
========= =========
The Group's loan assets include:
-- Buy-to-let and owner-occupied first mortgage assets in the Mortgages segment
-- Second charge mortgages, with new originations in Mortgages
and purchased and similar legacy assets in Idem Capital
-- Other unsecured consumer lending in Idem Capital
-- Asset finance and motor finance loans in the Commercial Lending segment
-- Development finance loans in the Commercial Lending segment
The allocation of these loan assets between segments is set out
below:
2017 2016
GBPm GBPm
Mortgages 9,953.9 9,694.7
Commercial Lending 558.8 375.0
Idem Capital 611.4 667.8
--------- ---------
11,124.1 10,737.5
========= =========
An analysis of the Group's financial assets by type is shown in
note 16. Movements in the Group's loan asset balances are discussed
in the lending review section.
Movements in derivative financial assets arise principally as a
result of the effect of changes in exchange rates on instruments
forming cash flow hedges for the Group's floating rate notes. These
movements do not impact on the Group's results.
Cash flows from the Group's securitisation vehicle companies and
the acquired portfolios remain strong. These, together with debt
raisings, financed further investments in loan portfolios, the
capital requirements of Paragon Bank and credit enhancement for
mortgage originations. Cash was also utilised in the share buy-back
programme, which commenced during December 2014 and where GBP166.2
million (including costs) had been deployed by 30 September 2017.
Free cash balances were GBP305.5 million at 30 September 2017
(2016: GBP383.1 million) following the repayment of the Group's
GBP110.0 million corporate bond in the year.
Movements in the Group's funding are discussed in the funding
review section.
The accounting value of the deficit in the Group's defined
benefit pension plan has reduced significantly over the year ended
30 September 2017. The triennial valuation of the Plan was
completed in the period and the actual experience of the scheme
membership over the three years ended 31 March 2016 was
incorporated into the valuation under the International Accounting
Standard ('IAS') 19. Gilt yields also increased over the year and
together these resulted in the deficit under IAS 19 falling to
GBP29.8 million (2016: GBP58.4 million). A corresponding actuarial
gain of GBP29.0 million before tax was recognised in other
comprehensive income (2016: loss of GBP37.2 million).
While the valuation under IAS 19 is that which is required to be
disclosed in the accounts, pension trustees generally use the
technical provisions basis as provided in the Pensions Act 2004 to
measure scheme liabilities. On this basis, the valuation at the
triennial valuation date was GBP18.0 million and this had reduced
to GBP14.9 million at 30 September 2017, representing an 87.0%
funding level.
MANAGEMENT REPORT
OPERATIONAL REVIEW
A3.5.1 Management and people
The Group has always recognised that its people are its most
important asset and are key to its future growth and development.
The learning and development of its employees, together with a
rigorous recruitment process are a key part of the Group's organic
growth strategy and underpins the strong progress it has made. It
retains its Gold Investor in People status, reflecting the quality
of its internal processes, and during the year has continued to
act, by invitation, as an Investor in People Champion, sharing its
experience with other businesses. This places it in the top 1% of
companies in the UK for people development.
The Group prides itself on the fact that its people remain with
it for a long time. Its annual employee attrition rate of 13.2% is
below the national average and 28.8% of its people have over ten
years service, with 9.3% having achieved over 20 years with the
Group. We believe this is due to providing quality development
opportunities and creating a place where people want to work, which
has meant that knowledge and experience have been retained in each
of our specialist areas. We believe our people are well positioned
to support the Group's future growth strategy.
The Group is proud to have signed the Women in Finance Charter,
sponsored by HM Treasury, during the year. The Charter's objectives
reflect the Group's own aspirations in the field of gender
diversity and the Group published its targets under the Charter
during the year.
The Group is making good progress and will issue its first
report under the Charter in January 2018. The Group notes the
publication of the Hampton-Alexander ('HA') review on gender
diversity during the year. The Group believes that its Women in
Finance objectives are consistent with the review's recommendation
and notes that its proportion of female senior managers at the year
end, as defined by HA, was 31.4% (2016: 29.2%).
The Group has calculated its gender pay gap at April 2017, as
required by law. This calculation shows that median female pay in
the Group was 30.4% less than the median male pay. This is broadly
in line with the results reported by the few financial services
companies to publish their results so far and narrower than the
33.7% gap for the sector reported by the Office of National
Statistics in their Annual Survey of Hours and Earnings published
in October 2017.
The Group will be analysing its gender pay gap data as part of
its Women in Finance initiative to determine if there are areas
where urgent action is required, but preliminary results suggest
where groups of similar positions exist, there is no evidence of
systematic gender bias on pay.
During the year, as part of the preparations for the Group
reorganisation, the Board, initially through the Nomination
Committee, gave in depth consideration to the appropriate Board and
governance structure for the reorganised Group. It concluded that
it was appropriate to invite two independent non--executive
directors of the Bank, Patrick Newberry and Finlay Williamson, to
join the Board and to appoint two additional non-executive
directors, particularly looking to increase the Board's experience
and skills in retail banking and risk, as well as improving the
Board's diversity.
As a result, Barbara Ridpath and Graeme Yorston, together with
the two Bank directors, joined the Board on 20 September 2017. The
four newly appointed directors bring a wealth of experience to the
Board, including retail banking experience.
Barbara brings listed PLC experience and a strong financial
background as well as experience in operational risk and financial
ethics, having worked for the Federal Reserve Bank of New York,
Standard & Poor's and JP Morgan. She is currently a Director of
St Paul's Institute which examines moral and ethical aspects of
finance and economics, and a non-executive director of ORX, a trade
association for operational risk professionals.
Graeme is a former Chief Executive of the Principality Building
Society, which operates in many of the same markets as the Group.
He has over 43 years experience in the financial services industry
and held a number of senior roles with Abbey National including
leading IT, change management and call centre activities. His
experience will enhance the Board's understanding of operational
and customer issues in retail banking.
In appointing Patrick Newberry and Finlay Williamson to the
Board, their experience of seeing the Bank through its early
development, the launch of its various product lines and the
establishment of its relationship with the regulator, is retained.
This will be of great value to the Board in its strategic
considerations for future developments. Patrick and Finlay also
have a broad knowledge of the Group's operations which will enable
them to contribute strongly to the Board immediately.
Before joining the Paragon Bank board, Patrick spent 25 years
with PricewaterhouseCoopers as a consulting and regulatory partner,
focusing on the financial services industry, adding to the Board's
regulatory experience. Finlay is a former Finance Director of
Virgin Money, having previously held a number of senior finance
roles in The Royal Bank of Scotland Group. He brings significant
experience of finance, management and accounting in the UK retail
banking industry to the Group.
The Group's succession planning strategy has also been an
important area of focus during the year, with all Board and
executive management roles together with their direct reports
identified from a leadership and specialist perspective. Immediate
successors are in place for these roles for the short term to
provide business continuity and longer term succession plans are
being developed for those with career aspirations and strong
potential. This area will remain a priority for the Board, with the
assistance of the Nomination Committee, during the forthcoming
year.
A3.5.2 Risk
The effective management of risk is crucial to the achievement
of the Group's strategic objectives. It operates a risk governance
framework, designed around a formal three lines of defence model
(business areas, Risk and Compliance function and Internal Audit)
supervised at Board level.
The Risk Management framework was reviewed in detail during the
year as part of the preparations for the Group's internal
reorganisation. In particular, the Board reviewed its procedure for
setting and managing risk appetites, together with the risk
appetites themselves.
The first line of defence has continued to exercise effective
control of the risks arising from the Group's operational
activities. Supported by the Risk and Compliance function, further
progress has been made in the year by business areas in embedding
the Group's risk management framework, including enhancements to
risk event reporting, risk and control self-assessments and the
development of key risk indicators.
The Group has continued to strengthen its second line risk
management capabilities including in areas such as cyber security
risk, credit risk modelling and data protection. The Risk and
Compliance division now includes dedicated functions responsible
for the oversight of Credit Risk, Property Risk, Compliance and
Conduct Risk, Operational Risk, IT and Cyber Security, and
Financial Crime. To progress its objective of obtaining regulatory
approval for the implementation of an IRB approach to credit risk,
the Risk and Compliance function also has a Director of IRB and
supporting specialist resource.
As part of the Group's reorganisation, the former Group and Bank
Risk and Compliance functions were integrated, helping to remove
unnecessary duplication and thereby maximise the effectiveness of
the second line of defence.
The principal challenges in the risk environment faced by the
Group during the year include:
-- The potential impact of the proposals on capital regulation from the BCBS
-- Execution and transitional risks arising from the recent major internal reorganisation
-- The impact of continuing uncertainty as to the terms on which
the UK will leave the EU in March 2019
-- The impact of fiscal changes on the demand for buy-to-let mortgages in the UK
-- Changes in the regulatory environment relating to the underwriting of buy-to-let mortgages
-- Continuing transitional risks arising from the integration
and expansion of the acquired Asset Finance business
-- Heightened cyber-security risks as a result of the increasing
sophistication and frequency of cyber-attacks affecting the
financial services sector
-- Major regulatory developments including the implementation of
the fourth Money Laundering Directive and the impending
implementation of the General Data Protection Regulation
('GDPR')
The Group continues to closely monitor its exposure to current
and emerging risks as they develop and considers itself well placed
to mitigate their impact.
A3.5.3 Regulation
The Bank is authorised by the PRA and regulated by the PRA and
the FCA. The Group is subject to consolidated supervision by the
PRA and a number of its subsidiaries are authorised and regulated
by the FCA. As a result, current and projected regulatory changes,
particularly revisions to the Basel supervisory regime, continue to
pose a significant risk for the Group. The governance and risk
management framework within the Group has therefore been developed
to ensure that the impacts of all new regulatory requirements are
clearly understood and mitigated as far as possible. Regular
reports on key regulatory developments are received at both
executive and board risk committees.
Whilst the Group is impacted by a broad range of prudential and
conduct regulations, given the nature of its operation, the
following are of particular note:
-- The PRA completed the implementation of major policy changes
to underwriting standards for buy-to-let mortgage contracts during
2017. These require firms to assess whether the rental income
derived from the mortgaged property is sufficient to support the
monthly interest cost of the loan payments using an interest
coverage ratio ('ICR') test. In addition, supplementary
underwriting requirements apply for "portfolio landlords" which the
PRA has defined as borrowers with four or more distinct, mortgaged,
buy-to-let properties. As a result of its extensive experience
within the buy-to-let sector and its historically conservative
approach to underwriting, the Group was able to begin operating in
line with the new requirements well ahead of the regulatory
deadline
-- In March 2017, the FCA issued a policy statement to complete
the consultation process regarding Payment Protection Insurance
('PPI') that it began in 2015. This included setting a deadline of
29 August 2019 by which consumers will need to make PPI complaints
and new rules and guidance on the handling of PPI complaints. The
Group has assessed the operational and financial implications
arising from the policy statement which it does not consider to be
material
-- The PRA has updated its supervisory statement setting out the
approach to strengthening individual accountability in banking
under the Senior Managers Regime ('SMR'). Whilst the Bank has fully
implemented the regime, the Group is conscious of its extension to
other Financial Services and Markets Acts firms with effect from
2018. It is therefore taking appropriate steps to ensure it is able
to comply with the requirements
-- In June 2017, the PRA published a policy statement on IRB
residential mortgage risk weights. This has been incorporated into
the Group's IRB project approach
-- In July 2017, the PRA published the results of its review of
consumer credit lending, expressing concern that firms' credit
models might not always fully consider a borrower's total
indebtedness nor how their ability to repay could be affected in
the future. The Group has reviewed its approach in this area and is
confident with the robustness of its assessment processes and
controls
-- The GDPR will come into force with effect from May 2018 and
represents the most significant revision to data protection
legislation for several decades. The Group is therefore taking
appropriate steps to ensure it will be compliant with the new
legislation by the required deadline
Whilst the Group along with the rest of the UK corporate sector
does not have clear visibility on potential regulatory changes that
may be introduced following the UK's decision to leave the EU, it
does not have any EU passporting issues that need to be
considered.
MANAGEMENT REPORT
CONCLUSION
In recent years Paragon's business model has undergone
significant change as it transitioned from a non-bank monoline
lender into a retail funded banking group. A diversification
strategy has led to the development of six new lending product
lines within three years and the formation of a bank to establish a
deposit funding franchise, which in 2017 saw balances exceed GBP3.6
billion. The transition of the model developed further this year
with the structural reorganisation, which effectively saw the Bank
re-positioned at the top of the Group subsuming virtually all the
business' assets and liabilities. This structure has provided
numerous immediate benefits to the operating model and will improve
funding efficiencies and capital mobility over time. The business
is now better positioned to exploit the increasing opportunities in
the UK retail banking market as it structurally shifts in favour of
specialist lenders which can display a greater understanding of the
markets, products and customers they serve.
In 2017 Paragon has, alongside this transition, witnessed strong
growth across all products with total lending increasing by 29% to
GBP1.9 billion. Buy-to-let lending benefitted from the increased
professionalisation of the sector, a trend that is expected to
continue following further regulatory change. Commercial Lending
also experienced strong growth following investment in technology
and distribution in the year. Notwithstanding this growth, and the
benign credit environment, the Group is maintaining a firm
discipline on risk and pricing, being cognizant of the potential
for more uncertain times ahead.
With a strong capital base, exemplary asset quality,
increasingly diversified funding, and a broadening product range
supported by a more financially efficient operating model, the
Group is well positioned to exploit the opportunities and manage
the challenges ahead.
PRINCIPAL RISKS
There are a number of potential risks and uncertainties to which
the Group is exposed and which could impact significantly on its
ability to conduct its business successfully. In the opinion of the
directors these have not changed materially from those described in
section A2.2 of the last annual report and accounts of the Company
for the year ended 30 September 2016. These are summarised
below.
Category Risk Description
------------- -------------- ---------------------------------------
Business Economic The Group could be materially
affected by a severe downturn
in the UK economy given its
income is wholly derived from
activities within the UK. This
is more difficult to forecast
given current uncertainties
on the terms on which the UK
will leave the EU in March 2019.
This could reduce demand for
the Group's loan products, increase
the number of customers that
default on their loans and cause
security asset values to fall.
------------- -------------- ---------------------------------------
Concentration The Group's business plans could
be particularly affected by
any downturn in the performance
of the UK private rented sector
and / or further regulatory
intervention to control buy-to-let
lending.
------------- -------------- ---------------------------------------
Transition Failure to manage major internal
reorganisations or integrate
acquired businesses safely and
effectively could adversely
affect the Group's business
plans and damage its reputation.
------------- -------------- ---------------------------------------
Credit Customer Failure to target and underwrite
credit decisions effectively
could result in customers becoming
less able to service debt, exposing
the Group to unexpected material
losses.
------------- -------------- ---------------------------------------
Counterparty Failure of an institution holding
the Group's cash deposits or
providing hedging facilities
for risk mitigation could expose
the Group to loss or liquidity
issues.
------------- -------------- ---------------------------------------
Conduct Fair outcomes Failure to deliver fair outcomes
for its customers could impact
on the Group's reputation and
its financial performance.
------------- -------------- ---------------------------------------
Operational People Failure to attract or retain
appropriately skilled key employees
at all levels could impact upon
the Group's ability to deliver
its business plans and strategic
objectives.
------------- -------------- ---------------------------------------
Systems The inability of the Group's
systems to support its business
operations effectively and/or
guard against cyber security
risks could result in reputational
damage and financial loss.
------------- -------------- ---------------------------------------
Regulation Given the highly regulated sectors
in which the Group operates,
compliance failures or failures
to respond effectively to new
and emerging regulatory and
legal developments could result
in reputational damage and financial
loss.
------------- -------------- ---------------------------------------
Liquidity Funding If access to funding became
and Capital restricted, either through market
movements or regulatory intervention,
this might result in the scaling
back or cessation of some business
lines.
------------- -------------- ---------------------------------------
Capital Proposals by the BCBS to change
capital requirements for lending
secured on residential property
could have adverse financial
implications for the Group.
------------- -------------- ---------------------------------------
Market Interest Reduction in margins between
rates market lending and borrowing
rates or mismatches in the Group
balance sheet could impact profits.
------------- -------------- ---------------------------------------
Pension Pensions The obligation to support the
Obligation Group's defined benefit pension
plan might deplete resources.
------------- -------------- ---------------------------------------
The Group has considered and responded to all of these risks,
mitigating the exposure as far as is practicable to ensure that its
risk profile remains within the Board's stated risk appetite.
STATEMENT OF DIRECTORS' RESPONSIBILITES
in relation to financial statements
The responsibility statement below has been prepared in
connection with the full annual accounts of the Company for the
year ended 30 September 2017. Certain parts of these accounts are
not presented within this announcement.
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations. The directors are required to prepare accounts for the
Group in accordance with IFRS and have also elected to prepare
company financial statements in accordance with IFRS. In respect of
the financial statements for the year ended 30 September 2017,
company law requires the directors to prepare such financial
statements in accordance with IFRS, the Companies Act 2006 and
Article 4 of the IAS Regulation.
International Accounting Standard 1 - 'Presentation of Financial
Statements' requires that financial statements present fairly for
each financial year the Company's financial position, financial
performance and cash flows. This requires the faithful
representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in
the International Accounting Standards Board's 'Framework for the
Preparation and Presentation of Financial Statements'. In virtually
all circumstances, a fair presentation will be achieved by
compliance with all applicable IFRS. Directors are also required
to:
-- Properly select and apply accounting policies
-- Make an assessment of the Group's and the Company's ability to continue as a going concern
-- Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information
-- Provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Company and the
Group's profit or loss for the year.
The directors are responsible for keeping adequate accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company, for safeguarding the assets, for
the Group's system of internal control, as described in B3.1, and
for taking reasonable steps for the prevention and detection of
fraud and other irregularities. They are also responsible for the
preparation of a strategic report, directors' report, directors'
remuneration report and corporate governance statement which comply
with the applicable requirements of the Companies Act 2006.
The directors are responsible for the maintenance and integrity
of the Company's website. Legislation in the UK governing the
preparation and dissemination of financial statements differs from
legislation in other jurisdictions.
The directors confirm that, to the best of their knowledge:
-- The financial statements, prepared in accordance with IFRS as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and of the Group taken as a whole
-- The Directors' Report, including those other sections of the
Annual Report incorporated by reference, comprises a management
report for the purposes of the Disclosure and Transparency Rules,
which includes a fair review of the development and performance of
the business and the position of the Company and the undertakings
included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they
face
-- The Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group's performance, business model and
strategy
Approved by the Board of Directors and signed on behalf of the
Board.
PANDORA SHARP
Company Secretary
23 November 2017
Board of Directors
R G Dench A K Fletcher P J Newberry
N S Terrington P J N Hartill B A Ridpath
R J Woodman F J Clutterbuck F F Williamson
J A Heron H R Tudor G H Yorston
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2017
2017 2017 2016 2016
Note GBPm GBPm GBPm GBPm
Interest receivable 9 409.2 411.4
Interest payable
and similar charges 10 (176.6) (188.2)
--------- ---------
Net interest income 232.6 223.2
Other leasing income 14.4 13.0
Related costs (11.4) (10.0)
------- -------
Net leasing income 3.0 3.0
Other income 11 17.2 17.8
------- -------
Other operating
income 20.2 20.8
--------- ---------
Total operating
income 252.8 244.0
Operating expenses (102.3) (92.5)
Provisions for
losses 17 (5.3) (7.7)
--------- ---------
Operating profit
before fair value
items 145.2 143.8
Fair value net
(losses) 12 (0.4) (0.6)
--------- ---------
Operating profit
being profit on
ordinary activities
before taxation 144.8 143.2
Tax charge on profit
on ordinary activities (27.6) (27.2)
--------- ---------
Profit on ordinary
activities after
taxation for the
financial year 117.2 116.0
========= =========
2017 2016
Note
Earnings per share
- basic 13 43.1p 40.5p
- diluted 13 41.9p 39.7p
========= =========
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2017
2017 2016
Note GBPm GBPm GBPm GBPm
Profit for the
year 117.2 116.0
-------- ---------
Other comprehensive
income
Items that will
not be reclassified
subsequently to
profit or loss
Actuarial gain
/ (loss) on pension
scheme 22 29.0 (37.2)
Tax thereon (5.5) 6.8
------- ---------
23.5 (30.4)
Items that may
be reclassified
subsequently to
profit or loss
Cash flow hedge
gains taken to
equity 0.5 5.0
Tax thereon (0.1) (1.0)
------- ---------
0.4 4.0
-------- ---------
Other comprehensive
income for the
year net of tax 23.9 (26.4)
-------- ---------
Total comprehensive
income for the
year 141.1 89.6
======== =========
CONSOLIDATED BALANCE SHEET
30 September 2017
2017 2016 2015
Note GBPm GBPm GBPm
Assets
Cash - central
banks 14 615.0 315.0 286.0
Cash - retail banks 14 881.9 922.6 770.0
Short term investments 15 - 7.1 41.1
Loans to customers 16 11,115.4 10,750.0 10,067.6
Investments in
structured entities - - 18.1
Derivative financial
assets 18 906.6 1,366.4 660.1
Sundry assets 12.7 12.7 6.2
Property, plant
and equipment 46.2 39.2 22.1
Intangible assets 19 104.4 105.4 7.7
---------- --------- ---------
Total assets 13,682.2 13,518.4 11,878.9
========== ========= =========
Liabilities
Short term bank
borrowings 0.6 1.2 0.7
Retail deposits 20 3,611.9 1,874.7 708.7
Derivative financial
liabilities 18 7.1 15.8 6.7
Asset backed loan
notes 21 6,475.8 8,374.1 8,274.6
Secured bank borrowings 21 1,306.0 1,573.0 1,425.4
Retail bond issuance 295.7 295.3 294.9
Corporate bond
issuance 149.1 259.0 110.0
Central bank facilities 21 700.0 - -
Sundry liabilities 74.6 78.7 43.1
Current tax liabilities 17.4 16.7 12.5
Deferred tax liabilities 4.8 2.0 11.3
Retirement benefit
obligations 22 29.8 58.4 21.5
---------- --------- ---------
Total liabilities 12,672.8 12,548.9 10,909.4
========== ========= =========
Called up share
capital 23 281.5 295.9 309.3
Reserves 24 811.0 736.1 760.2
Own shares 25 (83.1) (62.5) (100.0)
---------- --------- ---------
Total equity 1,009.4 969.5 969.5
========== ========= =========
Total liabilities
and equity 13,682.2 13,518.4 11,878.9
========== ========= =========
Approved by the Board of Directors on 23 November 2017.
Signed on behalf of the Board of Directors
N S Terrington R J Woodman
Chief Executive Chief Financial Officer
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2017
2017 2016
Note GBPm GBPm
Net cash generated by
operating activities 27 1,474.7 865.2
Net cash generated /
(utilised) by investing
activities 28 3.2 (278.6)
Net cash (utilised)
by financing activities 29 (1,218.0) (405.5)
---------- ----------
Net increase in cash
and cash equivalents 259.9 181.1
Opening cash and
cash equivalents 1,236.4 1,055.3
---------- ----------
Closing cash and cash
equivalents 1,496.3 1,236.4
========== ==========
Represented by balances
within:
Cash 1,496.9 1,237.6
Short term bank borrowings (0.6) (1.2)
---------- ----------
1,496.3 1,236.4
========== ==========
CONSOLIDATED STATEMENT OF MOVEMENT IN EQUITY
For the year ended 30 September 2017
Year ended 30 September 2017
Share Share Capital Merger Cash flow Profit and Own shares Total
capital premium redemption reserve hedging loss equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
year - - - - - 117.2 - 117.2
Other
comprehensive
income - - - - 0.4 23.5 - 23.9
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Total
comprehensive
income - - - - 0.4 140.7 - 141.1
Transactions
with owners
Dividends paid
(note 26) - - - - - (38.0) - (38.0)
Shares
cancelled (15.0) - 15.0 - - (45.1) 45.1 -
Own shares
purchased - - - - - - (69.7) (69.7)
Shares issued
to ESOP - - - - - - - -
Exercise of
share awards 0.6 0.9 - - - (4.0) 4.0 1.5
Charge for
share based
remuneration - - - - - 4.2 - 4.2
Tax on share
based
remuneration - - - - - 0.8 - 0.8
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net movement
in equity in
the year (14.4) 0.9 15.0 - 0.4 58.6 (20.6) 39.9
Opening equity 295.9 64.6 13.7 (70.2) 2.1 725.9 (62.5) 969.5
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Closing Equity 281.5 65.5 28.7 (70.2) 2.5 784.5 (83.1) 1,009.4
=========== =========== =========== =========== ========== =========== =========== ===========
Year ended 30 September 2016
Share Share Capital Merger Cash flow Profit and Own shares Total
capital premium redemption reserve hedging loss equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
year - - - - - 116.0 - 116.0
Other
comprehensive
income - - - - 4.0 (30.4) - (26.4)
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Total
comprehensive
income - - - - 4.0 85.6 - 89.6
Transactions
with owners
Dividends paid
(note 26) - - - - - (33.9) - (33.9)
Shares
cancelled (13.7) - 13.7 - - (94.0) 94.0 -
Own shares
purchased - - - - - - (59.9) (59.9)
Shares issued
to ESOP 0.3 - - - - - (0.3) -
Exercise of
share awards - - - - - (3.7) 3.7 -
Charge for
share based
remuneration - - - - - 4.4 - 4.4
Tax on share
based
remuneration - - - - - (0.2) - (0.2)
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net movement
in equity in
the year (13.4) - 13.7 - 4.0 (41.8) 37.5 -
Opening equity 309.3 64.6 - (70.2) (1.9) 767.7 (100.0) 969.5
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Closing Equity 295.9 64.6 13.7 (70.2) 2.1 725.9 (62.5) 969.5
=========== =========== =========== =========== ========== =========== =========== ===========
NOTES TO THE FINANCIAL INFORMATION
For the year ended 30 September 2017
1. GENERAL INFORMATION
The financial information set out in the announcement does not
constitute the Company's statutory accounts for the years ended 30
September 2015, 30 September 2016 or 30 September 2017, but is
derived from those statutory accounts, which have been reported on
by the Company's auditors. Statutory accounts for the years ended
30 September 2015 and 30 September 2016 have been delivered to the
Registrar of Companies and those for the year ended 30 September
2017 will be delivered to the Registrar following the Company's
Annual General Meeting. The reports of the auditors in each case
were unqualified, did not draw attention to any matters by way of
emphasis and did not contain an adverse statement under sections
498(2) or 498(3) of the Companies Act 2006.
Sections of this preliminary announcement, including but not
limited to the Management Report, may contain forward-looking
statements with respect to certain of the plans and current goals
and expectations relating to the future financial condition,
business performance and results of the Group. These have been made
by the directors in good faith using information available up to
the date on which they approved this report. By their nature, all
forward-looking statements involve risk and uncertainty because
they relate to future events and circumstances that are beyond the
control of the Group and depend upon circumstances that may or may
not occur in the future. There are a number of factors that could
cause actual future financial conditions, business performance,
results or developments to differ materially from the plans, goals
and expectations expressed or implied by these forward-looking
statements and forecasts. Nothing in this document should be
construed as a profit forecast.
Copies of the Annual Report and Accounts for the year ended 30
September 2017 will be distributed to shareholders in due course.
Copies of this announcement can be obtained from the Company
Secretary, Paragon Banking Group PLC at 51 Homer Road, Solihull,
West Midlands, B91 3QJ and on the Group's website at
www.paragonbankinggroup.co.uk.
2. Change of Presentation
During September 2017, the Group underwent an internal
reorganisation, as a result of which the majority of the Group's
activity is now undertaken through its banking subsidiary, Paragon
Bank PLC ('The Bank') and other entities falling within the scope
of banking regulation. Following this reorganisation, the directors
concluded that the financial statements of the Group should be
presented in a way which enhances comparability with other banking
entities.
The changes made affect presentation only and the Group's
accounting policies and its reported assets, liabilities, equity,
profits and cash flows in preceding years remain as previously
disclosed.
The new Group structure also affects the segments reported by
the Group under International Financial Reporting Standard 8 -
'Operating Segments' and in these financial statements new
segments, reflecting the new organisational structure, have been
adopted, as described in note 8. As required by IFRS 8, comparative
disclosures on the basis of the new segments have been
provided.
3. ACCOUNTING POLICIES
The annual financial statements of the Group for the year ended
30 September 2017 have been prepared in accordance with
International Financial Reporting Standards ('IFRS') as adopted for
use in the European Union. Accordingly, the preliminary financial
information has been prepared in accordance with the recognition
and measurement criteria of IFRS. Except as noted below, the
particular accounting policies adopted are those described in the
Annual Report and Accounts of the Group for the year ended 30
September 2016.
The critical accounting estimates and judgements affecting the
condensed financial information are the same as those described in
note 6 to the accounts of the Group for the year ended 30 September
2016.
New and revised reporting standards
No new or revised reporting standards significantly affecting
the Group's accounting have been issued since the approval of the
Group's financial statements for the year ended 30 September
2016.
The Group's IFRS 9 project, described in note 2 of those
financial statements, continues to make progress towards the
Group's implementation date for the standard of 1 October 2018. A
more detailed report on progress will be given in the Annual Report
and Accounts for the year ending 30 September 2017.
Going concern
The business activities of the Group, its current operations and
those factors likely to affect its future results and development,
together with a description of its financial position and funding
position, are described in the Management Report. The principal
risks and uncertainties affecting the Group are described
above.
Note 6 to the accounts for the year ended 30 September 2016
includes an analysis of the Group's working and regulatory capital
position and policies, while note 7 includes a detailed description
of its funding structures, its use of financial instruments, its
financial risk management objectives and policies and its exposure
to credit, interest rate and liquidity risk. Critical accounting
estimates affecting the results and financial position disclosed in
that annual report are discussed in note 5. The position and
polices described in these notes remain materially unchanged to the
date of this preliminary announcement.
The Group has a formalised process of budgeting, reporting and
review. The Group's planning procedures forecast its profitability,
capital position, funding requirement and cash flows. Detailed
annual plans are produced for two year periods with longer term
forecasts covering a five year period, which include detailed
income forecasts. These plans provide information to the directors
which is used to ensure the adequacy of resources available for the
Group to meet its business objectives, both on a short term and
strategic basis.
The Group's securitisation funding structures ensure that both a
substantial proportion of its originated loan portfolio and a
significant amount of its acquired Idem Capital assets are
match-funded. Repayment of the securitisation borrowings is
restricted to funds generated by the underlying assets and there is
limited recourse to the Group's general funds. Recent and current
loan originations utilising the Group's available warehouse
facilities are refinanced through securitisation or retail deposits
from time to time.
The Group's retail deposits of GBP3,615.4 million (note 20),
accepted through Paragon Bank are repayable within five years, with
61.3% of this balance (GBP2,215.7 million) payable within twelve
months of the balance sheet date. The liquidity exposure
represented by these deposits is monitored; a process supervised by
the Asset and Liability Committee. The Group is required to hold
liquid assets in Paragon Bank to mitigate this liquidity risk. At
30 September 2017 Paragon Bank held GBP615.0 million of balance
sheet assets for liquidity purposes, in the form of central bank
deposits (note 21). A further GBP109.0 million of liquidity was
provided by the Bank of England FLS, bringing the total to GBP724.0
million.
Paragon Bank manages its liquidity in line with the Board's risk
appetite and the requirements of the PRA, which are formally
documented in the Board's approved Individual Liquidity Adequacy
Assessment Process ('ILAAP'). The Bank maintains a liquidity
framework that includes a short to medium term cash flow
requirement analysis, a longer term funding plan and access to the
Bank of England's liquidity insurance facilities, where an
additional GBP84.1 million has been pre-positioned.
The earliest maturity of any of the Group's working capital debt
is in December 2020, when the oldest of the Group's retail bond
issues matures.
The Group's cash analysis continues to show strong free cash
balances, even after allowing for significant discretionary cash
flows, and its securitisation investments produce significant cash
flows.
The Group has demonstrated its ability to raise retail and
corporate bond debt when required through its Euro Medium Term Note
Programme and other programmes. The Group's access to debt is also
enhanced by its corporate BBB- rating, reaffirmed by Fitch Ratings
in the year, and its status as an issuer is evidenced by the BB+
rating of its GBP150.0m Tier-2 bond issue.
At 30 September 2017, the Group had free cash balances of
GBP305.5 million immediately available for use (note 14).
In order to assess the appropriateness of the going concern
basis the directors considered the Group's financial position, the
cash flow requirements laid out in its forecasts, its access to
funding, the assumptions underlying the forecasts and the potential
risks affecting them.
After performing this assessment, the directors concluded that
it was appropriate for them to continue to adopt the going concern
basis in preparing the Annual Report and Accounts.
4. Fair values of financial assets and financial liabilities
IFRS 7 - 'Financial Instruments: Disclosures' requires that
where assets are measured at fair value these measurements should
be classified using a fair value hierarchy reflecting the inputs
used, and defines three levels.
-- Level 1 measurements are unadjusted market prices
-- Level 2 measurements are derived from observable data, such as market prices or rates
-- Level 3 measurements rely on significant inputs which are not derived from observable data
As quoted prices are not available for level 2 and 3
measurements, the valuation is derived from cash flow models based,
where possible, on independently sourced parameters. The accuracy
of the calculation would therefore be affected by unexpected market
movements or other variances in the operation of the models or the
assumptions used.
The Group had no financial assets or liabilities in the year
ended 30 September 2017 or the year ended 30 September 2016 valued
using level 3 measurements.
The Group has not reclassified any of its measurements during
the year.
The methods by which fair value is established for each class of
financial assets and liabilities is set out below.
a) Assets and liabilities carried at fair value
Derivative financial assets and liabilities
Derivative financial instruments are stated at their fair values
in the accounts. The Group uses a number of techniques to determine
the fair values of its derivative assets and liabilities, for which
observable prices in active markets are not available. These are
principally present value calculations based on estimated future
cash flows arising from the instruments, discounted using a risk
adjusted interest rate. The principal inputs to these valuation
models are LIBOR benchmark interest rates for the currencies in
which the instruments are denominated, sterling, euros and dollars.
The cross currency basis swaps have a notional principal related to
the outstanding currency borrowings and therefore the estimated
rate of repayment of these notes also affects the valuation of the
swaps. In order to determine the fair values the management applies
valuation adjustments to observed data where that data would not
fully reflect the attributes of the instrument being valued, such
as particular contractual features or the identity of the
counterparty. The management reviews the models used on an ongoing
basis to ensure that the valuations produced are reasonable and
reflect all relevant factors. These valuations are based on market
information and they are therefore classified as level 2
measurements.
Short term investments
The short term investments described in note 15 are freely
traded securities for which a market price quotation is available
and are classified as level 1 measurements.
b) Assets and liabilities carried at amortised cost
Cash, bank loans and securitisation borrowings
The fair values of cash and cash equivalents, bank loans and
overdrafts and asset backed loan notes, which are carried at
amortised cost are considered to be not materially different from
their book values. In arriving at that conclusion market inputs
have been considered but because all the assets mature within three
months of the year end and the interest rates charged on financial
liabilities reset to market rates on a quarterly basis, little
difference arises. This also applies to the parent company's loans
to its subsidiaries.
While the Group's asset backed loan notes are listed, the quoted
prices for an individual note may not be indicative of the fair
value of the issue as a whole, due to the specialised nature of the
market in such instruments and the limited number of investors
participating in it and an adjustment is required. As these
valuation exercises are not wholly market based they are considered
to be level 2 measurements.
Corporate debt
The Group's retail and corporate bonds are listed on the London
Stock Exchange and there is presently a reasonably liquid market in
the instruments. It is therefore appropriate to consider that the
market price of these borrowings constitutes a fair value. As this
valuation is based on a market price, it is considered to be a
level 1 measurement.
Retail deposits
To assess the likely fair value of the Group's retail deposit
liabilities, the directors have considered the estimated cash flows
expected to arise based on a mixture of market based inputs, such
as rates and pricing and non-market based inputs such as redemption
rates. Given the mixture of observable and non-observable inputs,
these are considered to be level 2 measurements.
Loan assets
To assess the likely fair value of the Group's loan assets in
the absence of a liquid market, the directors have considered the
estimated cash flows expected to arise from the Group's investments
in its loans to customers based on a mixture of market based
inputs, such as rates and pricing and non-market based inputs such
as redemption rates. Given the mixture of observable and
non-observable inputs these are considered to be level 2
measurements.
Sundry assets and liabilities
Fair values of financial assets and liabilities disclosed as
sundry assets and sundry liabilities are not considered to be
materially different to their carrying values.
The fair values for financial assets and liabilities held at
amortised cost, other than those where carrying values are so low
that any difference would be immaterial, determined in accordance
with the methodologies set out above is summarised below.
2017 2017 2016 2016
Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
Financial assets
Loans and receivables
Loans to customers 11,124.1 11,191.9 10,737.5 10,754.4
Cash 1,496.9 1,496.9 1,237.6 1,237.6
--------- --------- --------- ---------
12,621.0 12,688.8 11,975.1 11,992.0
========= ========= ========= =========
Financial liabilities
Other liabilities
Asset backed loan
notes 6,475.8 6,475.8 8,374.1 8,374.1
Corporate and retail
bonds 444.8 480.4 554.3 573.3
Retail deposits 3,615.4 3,615.1 1,873.9 1,887.2
Secured bank borrowings 1,306.0 1,306.0 1,573.0 1,573.0
--------- --------- --------- ---------
11,842.0 11,877.3 12,375.3 12,407.6
========= ========= ========= =========
5. Capital management
(a) Dividend cover
The Board reviewed its dividend policy following the Group's
reorganisation in September 2017, concluding that the changes made
would make the Group's use of working capital more efficient and
that there was, therefore, less need to retain earnings to support
future growth. It therefore determined that the targeted dividend
cover ratio (on the basis set out below) would be reduced from 3.00
times, initially to 2.75 times for the current year and then to
2.50 times. The Company considers it has access to sufficient cash
resources to pay dividends at this level and that its distributable
reserves are abundant for this purpose.
For the purposes of dividend policy, the Group defines dividend
cover based on earnings and dividend per share. This is the most
common measure used by financial analysts. The expected level of
dividend cover in respect of the year, subject to the approval of
the final dividend at the Annual General Meeting, is shown
below.
Note 2017 2016
Earnings per share (p) 13 43.1 40.5
Proposed dividend per share
in respect of the year
(p) 26 15.7 13.5
----- -----
Dividend cover (times) 2.75 3.00
===== =====
(b) Return on tangible equity ('RoTE')
RoTE is a measure of an entity's profitability used by
investors. RoTE is defined by the Group by comparing the profit
after tax for the year, adjusted for amortisation charged on
intangible assets, to the average of the opening and closing equity
positions, excluding intangible assets and goodwill.
The Group's consolidated RoTE for the year ended 30 September
2017 is derived as follows:
Note 2017 2016
GBPm GBPm
Profit for the year 117.1 116.0
Amortisation of intangible
assets 1.6 1.6
-------- --------
Adjusted profit 118.7 117.6
-------- --------
Divided by
Opening equity 969.5 969.5
Opening intangible assets 19 (105.4) (7.7)
-------- --------
Opening tangible equity 864.1 961.8
-------- --------
Closing equity 1,009.4 969.5
Closing intangible assets 19 (104.4) (105.4)
-------- --------
Closing tangible equity 905.0 864.1
-------- --------
Average tangible equity 884.5 913.0
-------- --------
Return on Tangible Equity 13.4% 12.9%
======== ========
This table is not subject to audit
(c) Gearing
The Board of Directors regularly review the proportion of
working capital represented by debt and equity. Net debt is
calculated as total debt, other than securitised and warehouse
debt, valued at principal value, less free cash up to a maximum of
the total debt. Adjusted equity comprises all components of equity
(share capital, share premium, capital redemption reserve, retained
earnings, and revaluation surplus) other than amounts recognised in
equity relating to cash flow hedges.
The debt and equity amounts at 30 September 2017 and at 30
September 2016 were as follows:
Note 2017 2016
GBPm GBPm
Debt
Corporate bonds 150.0 260.0
Retail bonds 297.5 297.5
Bank overdraft 0.6 1.2
Less: Applicable free
cash 14 (305.5) (383.1)
-------- --------
Net debt 142.6 175.6
-------- --------
Equity
Total equity 1,009.4 969.5
Less: cash flow hedging
reserve (2.5) (2.1)
-------- --------
Adjusted equity 1,006.9 967.4
-------- --------
Total working capital 1,149.5 1,143.0
======== ========
Debt 12.4% 15.4%
Equity 87.6% 84.6%
-------- --------
Total working capital 100.0% 100.0%
======== ========
The movements in the proportion of working capital represented
by debt and equity during the year ended 30 September 2017,
including the scheduled repayment of the GBP110.0m corporate bond
in the year, resulted primarily from the operation of the policy
described above.
Regulatory capital
The Group is subject to supervision by the PRA on a consolidated
basis, as a group containing an authorised bank. As part of this
supervision the regulator will issue individual capital guidance
setting an amount of regulatory capital, defined under the
international Basel III rules, implemented through the Capital
Requirements Regulation and Directive ('CRD IV'), which the Group
is required to hold relative to its risk weighted assets in order
to safeguard depositors against the risk of losses being incurred
by the Group.
The Group's regulatory capital is monitored by the Board of
Directors, its Risk and Compliance Committee and the Asset and
Liability Committee, who ensure that appropriate action is taken to
ensure compliance with the regulator's requirements. The future
regulatory capital requirement is also considered as part of the
Group's forecasting and strategic planning process.
The tables below demonstrate that at 30 September 2017 the
Group's regulatory capital of GBP1,030.5m (2016: GBP1,005.6m) was
comfortably in excess of that required by the regulator.
The Group's regulatory capital differs from its equity as
certain adjustments are required by the regulator. A reconciliation
of the Group's equity to its regulatory capital determined in
accordance with CRD IV at 30 September 2017 is set out below.
Note 2017 2016
GBPm GBPm
Total equity 1,009.4 969.5
Deductions
Proposed final dividend 26 (28.9) (25.5)
Intangible assets 19 (104.4) (105.4)
-------- --------
Common Equity Tier
1 ('CET1') capital 876.1 838.6
Other tier 1 capital - -
-------- --------
Total Tier 1 capital 876.1 838.6
-------- --------
Corporate bond 150.0 260.0
Less: amortisation
adjustment - (97.8)
-------- --------
150.0 162.2
Collectively assessed
credit impairment
allowances 4.4 4.8
-------- --------
Total Tier 2 capital 154.4 167.0
-------- --------
Total regulatory capital 1,030.5 1,005.6
======== ========
When tier 2 capital instruments have less than five years to
maturity the amount eligible as regulatory capital reduces by 20%
per annum. As the Group's GBP110.0m Corporate Bond matured in 2017,
this adjustment was required in respect of this instrument at 30
September 2016. No such adjustment is required in respect of the
Corporate Bond issued in the year ended 30 September 2016, which
matures in 2026.
The total exposure amount calculated under the CRD IV framework
against which this capital is held, and the proportion of these
assets it represents, are calculated as shown below.
2017 2016
GBPm GBPm
Credit risk
Balance sheet assets 4,907.7 4,728.4
Off balance sheet 68.3 51.5
-------- --------
Total credit risk 4,976.0 4,779.9
Operational risk 464.9 445.7
Market risk - -
Other 67.8 61.9
-------- --------
Total exposure amount 5,508.7 5,287.5
======== ========
% %
Solvency ratios
CET1 15.9 15.9
Total regulatory capital 18.7 19.0
======== ========
This table is not subject to Audit
The table below shows the calculation of the UK leverage ratio,
based on the consolidated balance sheet assets adjusted as shown.
The PRA has proposed a minimum UK leverage ratio of 3.258% for UK
firms.
Note 2017 2016
GBPm GBPm
Total balance sheet
assets 13,682.2 13,518.4
Less: Derivative assets 18 (906.6) (1,366.4)
Central bank deposits 14 (615.0) (315.0)
CRDs (1.6) (0.6)
--------- ----------
On-balance sheet items 12,159.0 11,836.4
Less: Intangible assets 19 (104.4) (105.4)
--------- ----------
Total on balance sheet
exposures 12,054.6 11,731.0
--------- ----------
Derivative assets 18 906.6 1,366.4
Potential future exposure
on derivatives 191.3 68.6
--------- ----------
Total derivative exposures 1,097.9 1,435.0
--------- ----------
Post offer pipeline at gross
notional amount 417.9 273.8
Adjustment to convert to
credit equivalent amounts (208.9) (136.9)
--------- ----------
Off balance sheet
items 209.0 136.9
--------- ----------
Tier 1 capital 876.1 838.6
Total leverage exposure 13,361.5 13,302.9
UK leverage ratio 6.6% 6.3%
========= ==========
This table is not subject to audit
This leverage ratio is prescribed by the PRA and differs from
the Basel and the CRR ratio due to the exclusion of central bank
deposits from exposures.
6. Credit risk
The Group's business objectives rely on maintaining a
high-quality customer base and place strong emphasis on good credit
management, both at the time of acquiring or underwriting a new
loan, where strict lending criteria are applied, and throughout the
loan's life.
The Group's credit risk is primarily attributable to its loans
to customers. There are no significant concentrations of credit
risk to individual counterparties due to the large number of
customers included in the portfolios.
The Group's loan assets at 30 September 2017 are analysed as
follows:
2017 2017 2016 2016
GBPm % GBPm %
Buy-to-let mortgages 9,836.5 88.4% 9,621.2 89.6%
Owner occupied mortgages 19.0 0.2% 19.4 0.2%
--------- ------- --------- -------
Total first residential
mortgages 9,855.5 88.6% 9,640.6 89.8%
Second charge mortgage
loans 490.7 4.4% 526.8 4.9%
--------- ------- --------- -------
Loans secured on residential
property 10,346.2 93.0% 10,167.4 94.7%
Development finance 42.3 0.4% 9.1 0.1%
Commercial mortgages 2.7 - 2.9 -
--------- ------- --------- -------
Loans secured on property 10,391.2 93.4% 10,179.4 94.8%
Motor finance loans 163.0 1.5% 95.3 0.9%
Other consumer loans 219.1 2.0% 195.1 1.8%
Asset finance loans 325.0 2.9% 250.4 2.3%
Factoring and discounting
balances 23.8 0.2% 16.9 0.2%
Other loans 2.0 - 0.4 -
--------- ------- --------- -------
Total loans to customers 11,124.1 100.0% 10,737.5 100.0%
========= ======= ========= =======
An analysis of the indexed loan to value ratio ('LTV') for those
loan accounts secured on property by value at 30 September 2017 is
set out below. For acquired accounts the effect of any discount on
purchase is allowed for.
2017 2017 2016 2016
First Secured First Secured
Mortgages Loans Mortgages Loans
% % % %
Loan to value ratio
Less than 70% 62.1 56.7 60.7 50.9
70% to 80% 25.0 17.5 23.4 17.8
80% to 90% 9.5 11.5 11.3 13.0
90% to 100% 1.3 7.1 2.2 8.9
Over 100% 2.1 7.2 2.4 9.4
----------- -------- ----------- --------
100.0 100.0 100.0 100.0
=========== ======== =========== ========
Average loan to value
ratio 66.3 70.0 67.1 72.7
=========== ======== =========== ========
Of which:
Buy-to-let 66.4 67.2
Owner-occupied 30.9 27.5
=========== ===========
The regionally indexed LTVs shown above are affected by changes
in house prices, with the Nationwide house price index, for the UK
as a whole, registering an annual increase of 2.0% in the year
ended 30 September 2017 (2016: 5.3%).
The number of accounts in arrears by asset class, based on the
most commonly quoted definition of arrears for the type of asset,
at 30 September 2017 and 30 September 2016, compared to the
industry averages at those dates published by UK Finance (formerly
the CML) ('UKF') and the FLA, was:
2017 2016
% %
First mortgages
Accounts more than three months
in arrears
Buy-to-let accounts including
receiver of rent cases 0.08 0.11
Buy-to-let accounts excluding
receiver of rent cases 0.02 0.02
Owner-occupied accounts 3.55 3.23
UKF data for mortgage accounts
more than three months in arrears
Buy-to-let accounts including
receiver of rent cases 0.45 0.52
Buy-to-let accounts excluding
receiver of rent cases 0.41 0.47
Owner-occupied accounts 0.95 1.03
All mortgages 0.86 0.94
------ --------
Second charge mortgage loans
Accounts more than 2 months in
arrears
All accounts 17.55 17.15
Post-2010 originations 0.06 0.00
Legacy cases 16.75 16.33
Purchased assets 19.69 17.86
FLA data for secured loans 10.70 12.40
------ --------
Car loans
Accounts more than 2 months in
arrears 0.67 0.30
FLA data for point of sale hire
purchase 1.70 1.50
------ --------
Asset finance loans
Accounts more than 2 months in
arrears 0.97 0.82
FLA data for business lease /
hire purchase loans 0.60 0.60
------ --------
Other loans
Accounts more than 2 months in
arrears 96.03 96.35
====== ========
No published industry data for asset classes comparable to the
Group's other books has been identified. Where revised data at 30
September 2016 has been published by the FLA or UKF, the
comparative industry figures above have been amended.
Arrears information is not given for development finance or
factoring activities as the structure of the products means that
such a measure is not relevant.
The Group calculates its headline arrears measure for buy-to-let
mortgages, shown above, based on the numbers of accounts three
months or more in arrears, including purchased Idem Capital assets,
but excluding those cases in possession and receiver of rent cases
designated for sale. This is consistent with the methodology used
by the UKF in compiling its statistics for the buy-to-let mortgage
market as a whole.
The number of accounts in arrears will be higher for legacy
books than for comparable active ones, as performing accounts pay
off their balances, leaving arrears accounts representing a greater
proportion of the total.
The figures shown above for secured loans and other loans
include purchased portfolios which generally include a high
proportion of cases in arrears at the time of purchase and where
this level of performance is allowed for in the discount to current
balance represented by the purchase price.
The payment status of the carrying balances of the Group's live
loan assets, before provision for impairment, at 30 September 2017
and at 30 September 2016 split between those accounts considered as
performing and those included in the population for impairment
testing, is shown below. Balances for immaterial asset classes are
not shown. Asset finance loans below includes other related loan
balances. Fully provided non-live accounts are excluded from the
tables below
Days past due is not a relevant measure for the development
finance or invoice discounting businesses, due to their particular
contractual arrangements.
First Mortgages
2017 2016
GBPm GBPm
Not past due 9,724.2 9,528.1
Arrears less
than 3 months 112.6 82.1
Performing accounts 9,836.8 9,610.2
-------- --------
Arrears 3 to
6 months 1.1 2.4
Arrears 6 to
12 months 1.9 2.8
Arrears over
12 months 7.7 11.0
Possessions and similar
cases 22.5 31.1
-------- --------
Impairment population 33.2 47.3
-------- --------
Total gross balances 9,870.0 9,657.5
Impairment provision
on live cases (12.7) (16.4)
Timing adjustments (1.8) (0.5)
-------- --------
Carrying balance 9,855.5 9,640.6
======== ========
Consumer and Asset Finance
Second Car Asset Total
charge loans finance
mortgage loans
loans
GBPm GBPm GBPm GBPm
30 September
2017
Not past due 400.8 158.0 315.3 874.1
Arrears less
than 2 months 20.5 5.0 10.0 35.5
---------- ------- --------- ------
Performing accounts 421.3 163.0 325.3 909.6
---------- ------- --------- ------
Arrears 2 to
6 months 14.9 0.7 0.5 16.1
Arrears 6 to
9 months 7.1 0.2 0.7 8.0
Arrears 9 to
12 months 5.4 0.1 - 5.5
Arrears over
12 months 46.2 0.3 0.1 46.6
Specifically impaired
asset finance cases - - 2.7 2.7
---------- ------- --------- ------
Impairment population 73.6 1.3 4.0 78.9
---------- ------- --------- ------
Total gross balances 494.9 164.3 329.3 988.5
Impairment provision
on live cases (2.1) (1.2) (3.1) (6.4)
Timing adjustments (2.1) (0.1) (1.2) (3.4)
---------- ------- --------- ------
Carrying balance 490.7 163.0 325.0 978.7
========== ======= ========= ======
30 September
2016
Not past due 415.0 92.7 251.6 759.3
Arrears less
than 2 months 33.3 3.0 1.5 37.8
---------- ------- --------- ------
Performing accounts 448.3 95.7 253.1 797.1
---------- ------- --------- ------
Arrears 2 to
6 months 20.3 0.2 1.0 21.5
Arrears 6 to
9 months 8.3 - 0.3 8.6
Arrears 9 to
12 months 7.4 - - 7.4
Arrears over
12 months 51.0 0.2 0.4 51.6
Specifically impaired
asset finance cases - - 3.3 3.3
---------- ------- --------- ------
Impairment population 87.0 0.4 5.0 92.4
---------- ------- --------- ------
Total gross balances 535.3 96.1 258.1 889.5
Impairment provision
on live cases (3.4) (0.6) (0.5) (4.5)
Timing adjustments (5.1) (0.2) (3.9) (9.2)
---------- ------- --------- ------
Carrying balance 526.8 95.3 253.7 875.8
========== ======= ========= ======
Arrears in the tables above are based on the contractual payment
status of the customers concerned. Where assets have been purchased
by the Idem Capital loan investment business, customers may already
have been in arrears at the time of acquisition and an appropriate
adjustment made to the consideration paid.
In the debt purchase industry, ERC is commonly used as a measure
of the value of a portfolio. This is defined as the sum of the
undiscounted cash flows expected to be received over a specified
future period. In the Group's view, this measure may be suitable
for heavily discounted, unsecured, distressed portfolios, but is
less applicable for the types of portfolio in which the Group has
invested, where cash flows are higher on acquisition, loans may be
secured on property and customers may not be in default. In such
cases, the IAS 39 amortised cost balance, at which these assets are
carried in the Group balance sheet, provides a better indication of
value.
However, to aid comparability the 84 and 120 month ERC values
for the Group's purchased assets, are set out below. These are
derived using the same models and assumptions used in the EIR
calculations, but the differing bases of calculation lead to
different outcomes.
2017 2017 2017 2016 2016 2016
Carrying 84 month 120 Carrying 84 month 120
value ERC month value ERC month
ERC ERC
GBPm GBPm GBPm GBPm GBPm GBPm
Loans to
customers 503.5 608.9 688.8 533.9 651.3 740.7
========= ========= ======= ========= ========= =======
Amounts shown as loans to customers above include loans
disclosed as first mortgages and other loans (note 16).
7. Acqusitions
During the year ended 30 September 2016, the Group acquired two
businesses, Paragon Asset Finance ('PAF') on 3 November 2015 and
Premier Asset Finance ('Premier') on 30 September 2016.
No adjustments have been made in the year to the fair values at
acquisition for PAF reported in the financial statements for the
year ended 30 September 2016 and these values are now therefore
final.
Following the agreement of the completion accounts for Premier
during the year the cash consideration payable was reduced by
GBP0.3m and the goodwill balance has been adjusted accordingly. No
other fair value balances at acquisition have been revised.
8. SEGMENTAL INFORMATION
Following the reorganisation announced in the year, the Group
now analyses its operations, both for internal management reporting
and external financial reporting, on the basis of the markets from
which its assets are generated. The segments used are described
below:
-- Mortgages, including the Group's buy-to-let, and
owner-occupied first and second charge lending and related
activities
-- Commercial Lending, including the Group's motor finance and
other equipment leasing activities, together with other offerings
targeted towards SME customers
-- Idem Capital, including loan assets acquired from third
parties and legacy assets which share certain credit
characteristics with them
Dedicated financing and administration costs of each of these
businesses are allocated to the segment. Shared central costs are
not allocated between segments, nor is income from central cash
balances or the carrying cost of unallocated savings balances.
Loans to customers and operating lease assets are allocated to
segments as are dedicated securitisation funding arrangements and
their related cross currency basis swaps and cash balances.
Retail deposits and their related costs are allocated to the
segments based on the utilisation of those deposits. Retail
deposits raised in advance of lending are not allocated.
Other assets and liabilities are not allocated between
segments.
The costs arising in the year ended 30 September 2016 from the
PAF and Premier acquisitions of GBP3.1m have not been allocated, as
they are not directly related to customer financing activity.
All of the Group's operations are conducted in the UK, all
revenues arise from external customers and there are no
inter-segment revenues. No customer contributes more than 10% of
the revenue of the Group.
Financial information about these business segments, prepared on
the same basis as used in the consolidated accounts of the Group,
is shown below.
Year ended 30 September 2017
Mortgages Commercial Idem Total
Lending Capital Segments
GBPm GBPm GBPm GBPm
Interest receivable 274.7 33.8 98.9 407.4
Interest payable (123.6) (10.6) (11.4) (145.6)
---------- ----------- --------- ----------
Net interest income 151.1 23.2 87.5 261.8
Other operating
income 9.6 9.9 0.7 20.2
---------- ----------- --------- ----------
Total operating
income 160.7 33.1 88.2 282.0
Direct costs (13.7) (18.9) (10.8) (43.4)
Provisions for
losses (3.7) (0.1) (1.5) (5.3)
---------- ----------- --------- ----------
143.3 14.1 75.9 233.3
========== =========== ========= ==========
Year ended 30 September 2016
Mortgages Commercial Idem Total
Lending Capital Segments
GBPm GBPm GBPm GBPm
Interest receivable 282.2 25.9 101.0 409.1
Interest payable (139.5) (8.3) (13.2) (161.0)
---------- ----------- --------- ----------
Net interest
income 142.7 17.6 87.8 248.1
Other operating
income 7.7 8.4 4.7 20.8
---------- ----------- --------- ----------
Total operating
income 150.4 26.0 92.5 268.9
Direct costs (12.4) (16.2) (11.4) (40.0)
Provisions for
losses (4.8) (0.8) (2.1) (7.7)
---------- ----------- --------- ----------
133.2 9.0 79.0 221.2
========== =========== ========= ==========
The assets and liabilities attributable to each of the segments
at 30 September 2017 and 30 September 2016 on the basis described
above were:
Mortgages Commercial Idem Total
Lending Capital Segments
GBPm GBPm GBPm GBPm
30 September
2017
Assets
Loans to customers 9,953.9 558.8 611.4 11,124.1
Operating lease
assets - 23.4 - 23.4
Cross currency
basis swaps 896.3 - - 896.3
Securitisation
Cash 543.0 - 31.0 574.0
---------- ----------- --------- ----------
11,393.2 582.2 642.4 12,617.8
---------- ----------- --------- ----------
Segment liabilities
Allocated deposits 3,401.2 686.9 249.8 4,337.9
Securitisation
funding 7,597.1 - 184.7 7,781.8
---------- ----------- --------- ----------
10,998.3 686.9 434.5 12,119.7
========== =========== ========= ==========
Mortgages Commercial Idem Total
Lending Capital Segments
GBPm GBPm GBPm GBPm
30 September
2016
Assets
Loans to customers 9,694.7 375.0 667.8 10,737.5
Operating lease
assets - 16.0 - 16.0
Cross currency
basis swaps 1,364.8 - - 1,364.8
Securitisation
Cash 460.3 - 76.8 537.1
---------- ----------- --------- ----------
11,519.8 391.0 744.6 12,655.4
---------- ----------- --------- ----------
Segment liabilities
Allocated deposits 1,091.1 494.9 254.6 1,840.6
Securitisation
funding 9,668.6 - 278.5 9,947.1
10,759.7 494.9 533.1 11,787.7
========== =========== ========= ==========
An analysis of the Group's financial assets by type and segment
is shown in note 16. All of the assets shown above were located in
the UK.
The additions to non-current assets, excluding financial assets,
in the year which are included in segmental assets above are
investments of GBP12.9m (2016: GBP8.7m) in assets held for leasing
under operating leases, included in the Commercial Lending segment.
All other such additions were not allocated to segments.
The segmental assets and liabilities may be reconciled to the
consolidated balance sheet as shown below.
2017 2016
GBPm GBPm
Total segment assets 12,617.8 12,655.4
Unallocated assets
Central cash and investments 922.9 707.6
Unallocated derivatives 10.3 1.6
Operational property,
plant and equipment 22.8 23.2
Intangible assets 104.4 105.4
Other 4.0 25.2
--------- ---------
Total assets 13,682.2 13,518.4
========= =========
2017 2016
GBPm GBPm
Total segment liabilities 12,119.7 11,787.7
Unallocated liabilities
Unallocated retail deposits (722.5) 33.3
Derivative financial instruments 7.1 15.8
Central borrowings 1,145.4 555.5
Tax liabilities 22.3 18.7
Retirement benefit obligations 29.8 58.4
Other 71.1 79.5
--------- ---------
Total liabilities 12,672.9 12,548.9
========= =========
9. Interest receivable
2017 2016
GBPm GBPm
Interest receivable
in respect of
Loans and receivables 375.1 377.8
Finance leases 28.8 22.6
Factoring income 2.2 3.0
------ ------
Interest on loans
to customers 406.1 403.4
Other interest receivable 3.1 5.6
Income from structured
entities - 2.4
------ ------
Total interest on
financial assets 409.2 411.4
====== ======
10. Interest payable and similar charges
Note 2017 2016
GBPm GBPm
On retail deposits 47.9 29.5
On asset backed loan
notes 70.2 103.4
On corporate bonds 13.1 4.8
On retail bonds 18.6 18.5
On central bank facilities 1.1 -
On bank loans and
overdrafts 22.7 29.7
------ ------
Total interest on
financial liabilities 173.6 185.9
On pension scheme
deficit 22 1.3 0.8
Discounting on contingent 0.3 -
consideration
Other finance costs 1.4 1.5
------ ------
176.6 188.2
====== ======
11. OTHER INCOME
2017 2016
GBPm GBPm
Loan account fee income 9.0 7.7
Broker commissions 3.6 1.3
Third party servicing 3.3 7.4
Other income 1.3 1.4
----- -----
17.2 17.8
===== =====
12. FAIR VALUE NET (losses)
The fair value net (loss) represents the accounting volatility
on derivative instruments which are matching risk exposure on an
economic basis generated by the requirements of IAS 39. Some
accounting volatility arises on these items due to accounting
ineffectiveness on designated hedges, or because hedge accounting
has not been adopted or is not achievable on certain items. The
losses are primarily due to timing differences in income
recognition between the derivative instruments and the economically
hedged assets and liabilities. Such differences will reverse over
time and have no impact on the cash flows of the Group.
13. Earnings per share
Earnings per ordinary share is calculated as follows:
2017 2016
Profit for the year (GBPm) 117.2 116.0
-------- --------
Basic weighted average number
of ordinary shares ranking for
dividend during the year (million) 271.6 286.5
Dilutive effect of the weighted
average number of share options
and incentive plans in issue during
the year (million) 8.0 5.5
-------- --------
Diluted weighted average number
of ordinary shares ranking for
dividend during the year (million) 279.6 292.0
======== ========
Earnings per ordinary share -
basic 43.1p 40.5p
- diluted 41.9p 39.7p
======== ========
14. Cash and CASH EQUIVALENTS
2017 2016 2015
GBPm GBPm GBPm
Balances with central
banks 615.0 315.0 286.0
Balances with other
banks 881.9 922.6 770.0
-------- -------- --------
1,496.9 1,237.6 1,056.0
======== ======== ========
Only 'Free Cash' is unrestrictedly available for the Group's
general purposes. Cash received in respect of loan assets funded
through warehouse facilities and securitisations is not immediately
available, due to the terms of those arrangements.
Balances with central banks form part of the liquidity buffer of
Paragon Bank PLC and are therefore not available for the Group's
general purposes.
Cash held by the Trustees of the Paragon Employee Share
Ownership Plans may only be used to invest in the shares of the
Company, pursuant to the aims of those plans.
The total consolidated 'Cash and Cash Equivalents' balance may
be analysed as shown below:
2017 2016 2015
GBPm GBPm GBPm
Free cash 305.5 383.1 237.2
Securitisation cash 574.0 537.1 530.9
Liquidity buffer 615.0 315.0 286.0
ESOP cash 2.4 2.4 1.9
-------- -------- --------
1,496.9 1,237.6 1,056.0
======== ======== ========
15. SHORT TERM INVESTMENTS
This amount represented fixed rate securities issued by the UK
Government for which a liquid market exists and which were held as
part of the liquidity requirement of Paragon Bank PLC. As such they
were designated as 'Available for Sale', as defined by IAS 39 -
'Financial Instruments: Recognition and Measurement' and
consequently shown at fair value which corresponded to their market
value. The Bank's liquidity requirements are currently met through
central bank deposits and liquidity facilities and therefore it is
no longer necessary to hold treasury bills.
There were no securities held at 30 September 2017. The total
nominal value of the securities at 30 September 2016 was GBP7.0m,
the weighted average coupon was 1.75% and their carrying value was
GBP7.1m.
16. Loans to Customers
Note 2017 2016 2015
GBPm GBPm GBPm
Loans and receivables 10,636.1 10,391.8 10,019.0
Finance lease receivables 488.0 345.7 43.4
--------- --------- ---------
Loans to customers 11,124.1 10,737.5 10,062.4
Fair value adjustments
from portfolio hedging (8.7) 12.5 5.2
--------- --------- ---------
11,115.4 10,750.0 10,067.6
========= ========= =========
The Group's loan assets at 30 September 2017, analysed between
the segments described in note 8 are as follows:
Mortgages Commercial Idem
Finance Capital Total
GBPm GBPm GBPm GBPm
At 30 September
2017
First mortgages 9,855.5 - - 9,855.5
Consumer loans 98.4 - 611.4 709.8
Motor finance - 163.0 - 163.0
Asset finance - 325.0 - 325.0
Development finance - 42.3 - 42.3
Other loans - 28.5 - 28.5
---------- ----------- --------- ---------
Loans to customers 9,953.9 558.8 611.4 11,124.1
========== =========== ========= =========
At 30 September
2016
First mortgages 9,640.6 - - 9,640.6
Consumer loans 54.1 - 667.7 721.8
Motor finance 95.3 0.1 95.4
Asset finance - 250.4 - 250.4
Development finance - 9.1 - 9.1
Other loans - 20.2 - 20.2
---------- ----------- --------- ---------
Loans to customers 9,694.7 375.0 667.8 10,737.5
========== =========== ========= =========
17. IMPAIRMENT PROVISIONS ON LOANS TO CUSTOMERS
The following amounts in respect of impairment provisions, net
of allowances for recoveries of written off assets, have been
deducted from the appropriate assets in the balance sheet.
First Other Finance Total
mortgages loans leases
and
receivables
GBPm GBPm GBPm GBPm
At 1 October 2015 86.0 24.4 0.6 111.0
Amounts provided in
the period 4.9 2.7 1.9 9.5
Amounts written off (2.1) (4.5) (1.3) (7.9)
----------- ------------- -------- -------
At 30 September 2016 88.8 22.6 1.2 112.6
Amounts provided in
the period 3.8 2.3 2.2 8.3
Amounts written off (3.5) (6.6) (0.2) (10.3)
----------- ------------- -------- -------
At 30 September 2017 89.1 18.3 3.2 110.6
=========== ============= ======== =======
Of the above balances, the following provisions were held in
respect of realised losses not charged off, which remain on the
balance sheet and provided for in full.
First Other Finance Total
mortgages loans leases
and
receivables
GBPm GBPm GBPm GBPm
At 30 September 2017 76.4 0.3 0.3 77.0
At 30 September 2016 72.4 0.1 0.1 72.6
=========== ============= ======== ======
The amounts charged to the profit and loss account, net of
recoveries of previously provided amounts are set out below.
First Other Finance Total
mortgages loans leases
and
receivables
GBPm GBPm GBPm GBPm
Year ended 30 September
2017
Amounts provided in
the year 3.8 2.3 2.2 8.3
Recovery of amounts
previously provided (0.1) (0.7) (2.2) (3.0)
----------- ------------- -------- ------
Net impairment for
year 3.7 1.6 - 5.3
=========== ============= ======== ======
Year ended 30 September
2016
Amounts provided in
the year 4.9 2.7 1.9 9.5
Recovery of amounts
previously provided (0.1) (0.1) (1.6) (1.8)
----------- ------------- -------- ------
Net impairment for
year 4.8 2.6 0.3 7.7
=========== ============= ======== ======
18. Derivative Financial Assets and Liabilities
Note 2017 2016 2015
GBPm GBPm GBPm
Derivative financial
assets 906.6 1,366.4 660.1
Derivative financial
liabilities (7.1) (15.8) (6.7)
------ -------- ------
899.5 1,350.6 653.4
====== ======== ======
Of which:
Foreign exchange
basis swaps 896.3 1,364.8 659.8
Other derivatives 3.2 (14.2) (6.4)
------ -------- ------
899.5 1,350.6 653.4
====== ======== ======
The Group's securitisation borrowings are denominated in
sterling, euros and US dollars. All currency borrowings are swapped
at inception so that they have the effect of sterling borrowings.
These swaps provide an effective hedge against exchange rate
movements, but the requirement to carry them at fair value leads,
when exchange rates have moved significantly since the issue of the
notes, to large balances for the swaps being carried in the balance
sheet. This is currently the case with both euro and US dollar
swaps, although the debit balance is compensated for by
retranslating the borrowings at the current exchange rate.
19. INTangible assets
2017 2016 2015
GBPm GBPm GBPm
Goodwill 98.1 98.4 1.6
Computer software 2.0 2.1 1.6
Other intangible assets 4.3 4.9 4.5
------ ------ -----
104.4 105.4 7.7
====== ====== =====
Other intangible assets comprise brands and the benefit of
business networks recognised on the acquisition of subsidiary
companies.
20. Retail deposits
The Group's retail deposits, held by Paragon Bank PLC, were
received from customers in the UK and are denominated in sterling.
The deposits comprise principally term deposits and 120 day notice
accounts. The method of interest calculation on these deposits is
analysed as follows:
2017 2016 2015
GBPm GBPm GBPm
Fixed rate 2,675.9 1,332.5 508.3
Variable rates 939.5 541.4 200.4
-------- -------- ------
3,615.4 1,873.9 708.7
======== ======== ======
The weighted average interest rate on retail deposits at 30
September 2017, analysed by charging method, was:
2017 2016 2015
% % %
Fixed rate 1.89 2.11 2.33
Variable rates 1.21 1.65 1.62
===== ===== =====
The contractual maturity of these deposits is analysed
below.
2017 2016 2015
GBPm GBPm GBPm
Amounts repayable
In less than three
months 211.4 55.7 9.1
In more than three
months but not more
than one year 1,399.6 690.3 242.6
In more than one year,
but not more than
two years 770.0 572.9 181.7
In more than two years,
but not more than
five years 629.7 283.9 188.1
---------- -------- --------
Total term deposits 3,010.7 1,602.8 621.5
Repayable on demand 604.7 271.1 87.2
---------- -------- --------
3,615.4 1,873.9 708.7
Fair value adjustments
for portfolio hedging (3.5) 0.8 -
---------- -------- --------
3,611.9 1,874.7 708.7
========== ======== ========
21. BORROWINGS
All borrowings described in the Group Accounts for the year
ended 30 September 2016 remained in place throughout the period,
except as noted below.
During the period the Group accessed further facilities under
the Bank of England's Sterling Monetary Framework.
Drawings under the Term Funding Scheme have a maturity of four
years and bear interest at bank base rate. The average remaining
maturity of the Group's drawings is 47 months and the drawings are
secured against a designated pool of Paragon Bank mortgage assets.
Drawings under the TFS as at 30 September 2017 were GBP700.0m
(2016: GBPnil).
On 20 October 2015, a Group company, Idem Luxembourg (No. 8)
entered into an agreement under which GBP117.3m of sterling
floating rate notes have been issued to Citibank NA on a limited
recourse basis. These notes bear interest at a rate of one month
LIBOR plus 3.50% and are secured on financial assets. A further
GBP69.8m of notes was issued under the facility after the end of
the period. This issue was used to refinance existing Idem Capital
unsecured loan assets.
Of the Group's borrowings at 30 September 2016, the mortgage
backed floating rate notes issued by Paragon Mortgages (No. 18) PLC
were repaid in December 2016, those issued by Paragon Mortgages
(No. 19) PLC were repaid in May 2017 and those issued by Paragon
Mortgages (No.7) PLC were repaid in August 2017. The assets were
financed through warehouse facilities and retail deposits. The
asset backed loan notes issued by Paragon Personal and Auto Finance
(No. 3) PLC were repaid in January 2017, following the purchase of
its loan assets by other group companies, principally Paragon
Bank.
During the period, the warehouse facility in Paragon Fourth
Funding was not renewed. This has reduced the Group's available
warehouse capacity by GBP300.0m.
The Group's GBP110.0m corporate bond was repaid, in accordance
with its terms of issue, in April 2017.
22. RETIREMENT BENEFIT OBLIGATIONS
The defined benefit obligation takes into account the results of
the statutory funding valuation as at 31 March 2016, which results
in a reduction in the value of the defined benefit obligation at 30
September 2017. Since the last IAS 19 actuarial valuation at 30
September 2016 there have also been movements in financial
conditions, requiring an adjustment to the actuarial assumptions
underlying the calculation of the defined benefit obligation at 30
September 2017. In particular, over the period since the 30
September 2016 actuarial valuation, the discount rate has increased
by 0.3% per annum, whereas expectations of long term inflation have
increased by 0.1% per annum.
The net effect of these changes has resulted in a decrease in
the value of the defined benefit obligation at 30 September 2017.
The impact of allowing for the results of the 31 March 2016
statutory funding valuation and the change in actuarial assumptions
has been recognised as an actuarial gain in other comprehensive
income.
The movements in the deficit on the defined benefit plan during
the year ended 30 September 2017 are summarised below.
Year to Year to
30 September 30 September
2017 2016
GBPm GBPm
Opening pension
deficit 58.4 21.5
Service cost 2.4 1.7
Net funding cost 1.3 0.8
Administrative expenses 0.4 0.4
Employer contributions (3.7) (3.2)
Amounts posted to
other comprehensive
income
Return on plan assets
not included in
interest (7.4) (7.7)
Actuarial (gain) (6.7) -
arising from demographic
assumptions
Actuarial (gain) (4.2) -
arising from experience
adjustments
Actuarial (gain)/loss
from changes in
financial assumptions (10.7) 44.9
------------- -------------
Closing pension
deficit 29.8 58.4
============= =============
23. Called-up share capital
The share capital of the Company consists of a single class of
GBP1 ordinary shares.
Movements in the issued share capital in the year were:
2017 2016
Number Number
Ordinary shares
At 1 October 2016 295,852,094 309,349,316
Shares issued 637,607 218,872
Shares cancelled (15,000,000) (13,716,094)
------------- -------------
At 30 September 2017 281,489,701 295,852,094
============= =============
During the year, the Company issued 637,607 shares (2016:
55,827) to satisfy options granted under sharesave schemes for a
consideration of GBP1,575,925 (2016: GBP68,070). In the year ended
30 September 2016, the Company had also issued 163,045 shares at
par to the trustees of its Employee Share Ownership Plan ('ESOP')
Trust in order that they could fulfil their obligations under the
Group's share based award arrangements.
On 1 June 2017 15,000,000 shares held in treasury were cancelled
by the Company. (2016: 13,716,094 shares).
24. RESERVES
2017 2016 2015
GBPm GBPm GBPm
Share premium account 65.5 64.6 64.6
Capital redemption
reserve 28.7 13.7 -
Merger reserve (70.2) (70.2) (70.2)
Cash flow hedging
reserve 2.5 2.1 (1.9)
Profit and loss
account 784.5 725.9 767.7
------- ------- -------
811.0 736.1 760.2
======= ======= =======
25. own shares
2017 2016
GBPm GBPm
Treasury shares
At 1 October 2016 46.2 89.2
Shares purchased 65.5 51.0
Shares cancelled (45.1) (94.0)
------- -------
At 30 September 2017 66.6 46.2
------- -------
ESOP shares
At 1 October 2016 16.3 10.8
Shares purchased 4.2 8.9
Shares subscribed
for - 0.3
Options exercised (4.0) (3.7)
------- -------
At 30 September 2017 16.5 16.3
------- -------
Balance at 30 September
2017 83.1 62.5
======= =======
Balance at 1 October
2016 62.5 100.0
======= =======
At 30 September 2017, the number of the Company's own shares
held in treasury was 15,693,643 (2016: 15,348,714). These shares
had a nominal value of GBP15,693,643 (2016: GBP15,348,714). These
shares do not qualify for dividends.
The ESOP shares are held in trust for the benefit of employees
exercising their options under the Company's share option schemes
and awards under the Paragon Performance Share Plan, Matching Share
Plan and Deferred Bonus Plan. The trustees' costs are included in
the operating expenses of the Group.
At 30 September 2017, the trusts held 3,180,661 ordinary shares
(2016: 3,594,175) with a nominal value of GBP3,180,661 (2016:
GBP3,594,175) and a market value of GBP13,975,824 (2016:
GBP11,267,738). Options, or other share-based awards, were
outstanding against all of these shares at 30 September 2017 (2016:
all). The dividends on all of these shares have been waived (2016:
all).
26. equity Dividend
Amounts recognised as distributions to equity shareholders in
the Group and the Company in the period:
2017 2016 2017 2016
Per Per GBPm GBPm
share share
Equity dividends on
ordinary shares
Final dividend for
the year ended 30
September 2016 9.2p 7.4p 25.5 21.7
Interim dividend for
the year ended 30
September 2017 4.7p 4.3p 12.5 12.2
------- ------- ------- -------
13.9p 11.7p 38.0 33.9
======= ======= ======= =======
Amounts paid and proposed in respect of the year:
2017 2016 2017 2016
Per Per GBPm GBPm
share share
Interim dividend for
the year ended 30
September 2017 4.7p 4.3p 12.5 12.2
Proposed final dividend
for the year ended
30 September 2017 11.0p 9.2p 28.9 25.5
-------- ------- ------- -------
15.7p 13.5p 41.4 37.7
======== ======= ======= =======
The proposed final dividend for the year ended 30 September 2017
will be paid on 19 February 2018, subject to approval at the Annual
General Meeting, with a record date of 5 January 2018. The dividend
will be recognised in the accounts when it is paid.
27. net cash flow from operating activities
2017 2016
GBPm GBPm
Profit before tax 144.8 143.2
Non-cash items included in profit
and other adjustments:
Depreciation of operating property,
plant and equipment 1.9 1.9
Profit on disposal of operating
property, plant and equipment (0.1) (0.1)
Amortisation of intangible assets 1.6 1.6
Foreign exchange movement on borrowings (468.9) 699.9
Other non-cash movements on borrowings 6.4 14.3
Impairment losses on loans to
customers 5.3 7.7
Charge for share based remuneration 4.2 4.4
Net (increase) / decrease in operating
assets:
Operating lease assets (7.4) (5.4)
Loans to customers (391.9) (443.0)
Derivative financial instruments 459.8 (706.3)
Fair value of portfolio hedges 21.2 (7.3)
Other receivables - (2.1)
Net decrease / (increase) in operating
liabilities:
Retail deposits 1,741.5 1,165.2
Derivative financial instruments (8.7) 9.1
Fair value of portfolio hedges (4.3) 0.8
Other liabilities (1.8) 4.9
-------- --------
Cash generated by operations 1,503.6 888.8
Income taxes (paid) (28.9) (23.6)
-------- --------
1,474.7 865.2
======== ========
Cash flows relating to plant and equipment held for leasing
under operating leases are classified as operating cash flows.
28. net cash flow from investing activities
2017 2016
GBPm GBPm
Proceeds from sales
of operating property,
plant and equipment 0.3 0.4
Purchases of operating
property, plant and
equipment (1.7) (1.5)
Purchases of intangible
assets (0.9) (1.4)
Decrease in short
term investments 7.1 34.0
Acquisitions (Note
7) (1.6) (310.1)
-------- ----------
Net cash generated
/ (utilised) by investing
activities 3.2 (278.6)
======== ==========
29. net cash flow from financing activities
2017 2016
GBPm GBPm
Shares issued 1.5 -
Dividends paid (note
26) (38.0) (33.9)
Issue of asset backed
floating rate notes 69.8 531.0
Repayment of asset
backed floating rate
notes (1,503.0) (1,137.2)
Issue of corporate
bonds - 149.0
Repayment of corporate (110.0) -
bonds
Movement on central 700.0 -
bank facilities
Movement on other
bank facilities (268.6) 145.5
Purchase of shares
(note 25) (69.7) (59.9)
------------ ------------
Net cash (utilised)
by financing activities (1,218.0) (405.5)
============ ============
30. RELATED PARTY TRANSACTIONS
In the year ended 30 September 2017, the Group has continued the
related party relationships described in note 66 on page 291 of the
Annual Report and Accounts of the Group for the financial year
ended 30 September 2016. Related party transactions in the period
comprise the compensation of the Group's key management personnel,
transactions with the Group Pension Plan and fees paid to a
non-executive director in respect of his appointment as a director
of the Corporate Trustee of the Group Pension Plan. There have been
no changes in these relationships which could have a material
effect on the financial position or performance of the Group in the
period.
Save for the transactions referred to above, there have been no
related party transactions in the year end 30 September 2017.
ADDITIONAL FINANCIAL INFORMATION
For the year ended 30 September 2017
A. income statement ratios
The average net interest margin is calculated as follows:
Note 2017 2016
GBPm GBPm
Opening loans to customers 16 10,737.5 10,062.4
Closing loans to customers 16 11,124.1 10,737.5
--------- ---------
Average loans to customers 10,930.8 10,400.0
--------- ---------
Net interest 232.6 223.2
Net interest margin 2.13% 2.15%
========= =========
Impairment provision 17 5.3 7.7
Impairment as a percentage of
average loan balance 0.05% 0.07%
========= =========
B. COST:INCOME RATIO
Cost:income ratio is derived as follows:
Note 2017 2016
GBPm GBPm
Cost - operating expenses 102.3 92.5
Total operating income 252.8 244.0
------
Cost / Income 40.5% 37.9%
====== ======
C. Net asset value
Note 2017 2016
Total equity (GBPm) 1,009.4 969.5
-------- --------
Outstanding issued shares
(m) 23 281.5 295.8
Treasury shares (m) 25 (15.7) (15.3)
Shares held by ESOP schemes
(m) 25 (3.2) (3.6)
-------- --------
262.6 276.9
-------- --------
Net asset value per GBP1 GBP3.84 GBP3.50
ordinary share
======== ========
Tangible equity (GBPm) 5 905.0 864.1
-------- --------
Tangible net asset value GBP3.45 GBP3.12
per GBP1 ordinary share
======== ========
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR OKNDKDBDKCDB
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November 23, 2017 02:01 ET (07:01 GMT)
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