May 24, 2018 / 7:23 AM / 25 days ago

British lender Paragon flags subdued mortgage market despite higher first-half profit

(Reuters) - Britain’s Paragon Banking Group (PARA.L) cautioned on Thursday that the domestic mortgage market remains subdued, even as a surge in lending volumes helped the lender post a 4.7 percent rise in profit for the first half of the year.

Shares of the company, which is transitioning to being a broader retail bank from a buy-to-let lender, fell as much as 8 percent on Thursday.

Paragon said the UK housing and mortgage market remains “finely balanced” with “subdued” activity and historically low levels of growth in house prices.

The Royal Institution of Chartered Surveyors’ (RICS) house price balance — a closely-watched gauge of British house prices — fell to its lowest level since 2012 in April.

The UK housing market is “just very dull and hasn’t shown any growth in recent years”, Chief Executive Nigel Terrington said, adding that the number of amateur landlords looking to buy new homes, typically those who buy one or two properties, has fallen due to tax changes and an increase in stamp duty.

However, with professional landlords accounting for 86 percent of the company’s buy-to-let lending pipeline, the company remains well poised in the market, Terrington said.

New buy-to-let lending business - used by homeowners and landlords to fund purchases of property which they then rent out - rose over 20 percent to 670.5 million pounds in the first six months ended March 31.

With no new regulations introduced in the last six months, the buy-to-let market is slowly stabilising, although new house purchase funding activity is lower than that seen in previous years, the company said.

“It is extremely hard to fault Paragon’s prudent but purposeful transformation from a buy-to-let ‘pure play’ into a more broad-based specialist lender. That said, in buy-to-let, it still boasts a notably robust pipeline,” Investec analysts said in a note.

    “However, with Paragon shares already at a 10-year high ... we think it may struggle to make any further material near-term progress from here,” said Investec, which rates the stock a ‘hold’.

    The pipeline for new buy-to-let lending rose to 787.6 million pounds, up 6.1 percent from a year earlier.

    Commercial lending volume rose 49 percent in the first half to 269.3 million pounds, while mortgage lending increased nearly 23 percent to 721 million pounds.

    The company raised its outlook for commercial lending for the full year to over 600 million pounds from a prior estimate of 500 million pounds on expectations of strong lending volumes throughout the year.

    Mortgage volumes for the year are expected to be over 1.6 billion pounds, the company said.

    The company’s pre-tax profit rose to 77.2 million pounds from 69.4 million pounds a year ago.

    Paragon, founded in 1985 and with more than 12 billion pounds of assets under management, is one of a slew of new or niche banks that are bidding to poach market share from Lloyds (LLOY.L), RBS (RBS.L), Barclays (BARC.L) and HSBC (HSBA.L) which dominate British retail banking.

    ($1 = 0.7467 pounds)

    Reporting by Sangameswaran S in Bengaluru; Editing by Arun Koyyur and Adrian Croft

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