Paragon Banking Group H1 Earnings Call Highlights

Paragon Banking Group LON: PAG reported what Chief Executive Nigel Terrington called “another strong financial and operational performance” for the first half of 2026, citing resilient margins, loan growth, tight cost control and strong capital generation despite market volatility.

The specialist lender posted underlying operating profit of GBP 146 million, with underlying earnings per share up 2.9% and return on tangible equity of 17.4%. Terrington said the results reflected “the resilience of our business model and the strength of our franchises” in an environment marked by heightened uncertainty and financial market volatility.

Group-wide loan growth was 3.8% in the period. Terrington said that figure should be viewed in the context of runoff in the legacy buy-to-let portfolio, with underlying buy-to-let loan growth of 6.7%. Commercial lending grew 9.2%, supporting the group’s strategy of asset diversification and contributing to net interest margin performance.

Margins Beat Expectations, Though Funding Pressure Remains

Chief Financial Officer Richard Woodman said net interest income increased 2.2% year over year, adding that while deposit pricing pressures continued, first-half performance exceeded Paragon’s expectations. Group net interest margin declined to 308 basis points from 313 basis points a year earlier, but Woodman said the result was stronger than anticipated.

Assuming deposit markets remain at current competitive levels, Woodman said Paragon expects the full-year NIM outturn to be around 300 basis points, at the top end of the range indicated at the start of the year. Terrington later said the company had upgraded its NIM guidance despite the competitive landscape.

Executives highlighted the importance of funding diversification. Woodman said the deposit spread benefit seen when rates were at their peak had “nearly fully unwound,” while Terrington said Paragon’s ability to use options such as repo funding, covered bonds, savings platforms and wholesale sources gave the group more control over pricing.

Terrington said some current deposit pricing in the market “doesn’t make sense,” particularly compared with alternatives such as repo finance and covered bonds. “Hence why we choose to have optionality,” he said.

Costs Remain Tightly Managed

Paragon reported a cost-income ratio of 35.5%, which Terrington described as market-leading. Woodman said operating efficiency remained a focus, with the cost-to-asset ratio improving by one basis point compared with the first half of 2025.

Costs increased year over year due to the inclusion of Spring, the October pay round and Paragon’s ongoing digitalization program. However, Woodman said the group was cautious about capitalizing technology spending, arguing that high levels of capitalization can overstate short-term results and create future overhangs.

Terrington said Paragon’s technology investments were improving customer experience and productivity. He said 94% of the group’s core systems are now cloud-based and that a digital mortgage origination platform had improved speed to market, repricing capabilities, underwriting processes and conversion rates. He also said Microsoft Copilot is available to all colleagues, with AI training and guardrails in place.

Impairments Driven by Development Finance Cohort

Bad debts were higher than in the first half of last year but down about 20% from the second half, Woodman said. The charges mainly related to a cohort of development finance loans previously identified by the company. He said GBP 4.5 million of the charge reflected assumptions for a longer realization process.

The pre-September 2022 development finance cohort generated GBP 13.4 million of charges during the period. Woodman said most material changes came from that cohort, while the broader portfolio had a cost of risk of 10 basis points across GBP 16.3 billion of lending.

Terrington said the overall credit environment had been benign and that Paragon’s loan portfolios were performing well, with low arrears and no emerging signs of stress in forward-looking indicators. He added that the development finance issues continued to reflect the 2022 cohort and that the rest of the portfolio was performing well.

Woodman also said Paragon made no change to its provisioning for motor finance commissions, citing continuing legal challenges to the FCA scheme and uncertainty over timing and outcomes.

Capital Generation Supports Buyback

Paragon announced a further GBP 50 million share buyback alongside the results. Terrington said the group had generated 2.4% of CET1 capital on an annualized basis so far in 2026, supporting loan growth and the buyback.

The company also issued its inaugural AT1 bond in March, which executives said optimized the capital stack and left capital ratios comfortably above regulatory requirements. Woodman said CET1, Tier 1 and total capital ratios were all above required levels.

Terrington said Paragon had generated an average of 2.2% CET1 annually over the past decade, supporting growth, dividends, acquisitions and GBP 683 million of buybacks. He said the company expects to generate about 1% surplus CET1 each year after covering growth and dividends, based on past growth and returns.

“Beyond that, we have no ambition to hold on to excess capital,” Terrington said. “We are committed to employing our capital to support growth organically or inorganically. Otherwise, we’ll return it.”

Woodman said Paragon had reduced its share count by 122 million shares since beginning buybacks in 2015, representing around 40% of the shares issued at that time.

Management Sees Acquisition Opportunities but Stresses Discipline

Terrington said Paragon sees itself as a potential consolidator as the banking sector undergoes consolidation, particularly among smaller banks facing high fixed regulatory costs. He said commercial lending was the most likely area for opportunities, given Paragon’s balance sheet mix and diversification goals.

However, he emphasized that acquisitions must make “compelling strategic and financial sense” for shareholders. On potential motor finance targets, Terrington said uncertainty around commission remediation made it difficult to value such businesses until legal and regulatory outcomes are clearer.

Paragon reaffirmed guidance for commercial lending new business of GBP 1.2 billion to GBP 1.4 billion in 2026. Terrington said structured lending had been strong, with new facilities up 20% and drawn balances up 30%, while SME arrears stood at 54 basis points and impairments were negligible.

In buy-to-let, Terrington said the group remained focused on professional landlords. The buy-to-let loan book grew 3.1% in the first half, or 6.7% on an underlying basis, and Paragon retained GBP 1.2 billion of fixed-rate maturities over the past 12 months, representing about 80% of those maturities.

Terrington said the company is assuming no help from improvements in the U.K. economy or interest rates. Even so, he said Paragon would continue pursuing disciplined growth, protecting margins, investing in technology and managing capital actively. The group reconfirmed guidance for return on tangible equity in the middle of its 15% to 20% target range.

About Paragon Banking Group LON: PAG

Paragon is a specialist banking group. It offers a range of savings accounts and provide finance for landlords and small and medium-sized businesses (‘SMEs') and residential property developers in the UK. Founded in 1985 and listed on the London Stock Exchange, it is a FTSE-250 company. Headquartered in Solihull, it employs more than 1,400 people. Its operations are organised into two lending divisions and lending is funded largely by retail deposits.

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