REG - Paragon Grp Co PLC - Final Results <Origin Href="QuoteRef">PARA.L</Origin> - Part 4
23/11/2016 07:06
- Part 4: For the preceding part double click ID:nRSW8891Pc
£m
Current liabilities
Corporate bonds 110.0 - -
Retail deposits 22 1,017.1 338.9 53.3
Bank loans and overdrafts 1.2 0.7 1.1
1,128.3 339.6 54.4
Non-current liabilities
Asset backed loan notes 8,374.1 8,274.6 8,115.0
Corporate bond 149.0 110.0 110.0
Retail bonds 295.3 294.9 183.2
Retail deposits 22 856.8 369.8 6.8
Fair value adjustments from portfolio hedging 0.8 - -
Bank loans and overdrafts 1,573.0 1,425.4 1,397.9
Derivative financial instruments 15 15.8 6.7 1.1
11,264.8 10,481.4 9,814.0
22. Retail deposits
The Group's retail deposits, held by Paragon Bank PLC, were received from customers in the United Kingdom 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:
2016 2015 2014
£m £m £m
Fixed rate 1,332.5 508.3 39.8
Variable rates 541.4 200.4 20.3
1,873.9 708.7 60.1
The weighted average interest rate on retail deposits at 30 September 2015, analysed by charging method, was:
2016 2015 2014
% % %
Fixed rate 2.11 2.33 1.90
Variable rates 1.65 1.62 1.85
The contractual maturity of these deposits is analysed below.
2016 2015 2014
£m £m £m
Amounts repayable
In less than three months 55.7 9.1 -
In more than three months but not more than one year 690.3 242.6 52.8
In more than one year, but not more than two years 572.9 181.7 6.8
In more than two years, but not more than five years 283.9 188.1 -
Total term deposits 1,602.8 621.5 59.6
Repayable on demand 271.1 87.2 0.5
1,873.9 708.7 60.1
Total falling due in less than one year (note 21) 1,017.1 338.9 53.3
Total falling due in more than one year (note 21) 856.8 369.8 6.8
1,873.9 708.7 60.1
The fair value of the deposits is not considered to be significantly different from their carrying value.
23. BORROWINGS
All borrowings described in the Group Accounts for the year ended 30 September 2015 remained in place throughout the
period, except as described below.
On 20 October 2015, a Group company, Idem Luxembourg (No. 8) entered into an agreement under which £117.3m 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%. The Group investment in this company to support these notes was £84.9m. The facility was used to
refinance existing Idem Capital borrowings and to refinance further existing Idem Capital unsecured loan assets and is
secured on those assets. During the period two further tranches of £4.1m and £70.8m of notes were issued under the
facility. Both of these issues were used to fund the purchase of loan balances from third parties.
On 19 November 2015, a Group company, Paragon Mortgages (No. 24) PLC, issued E125.0m of euro mortgage backed floating rate
notes and £253.0m of sterling mortgage backed floating rate notes to external investors at par. The euro notes were class
A1 notes, rated AAA by Fitch and Aaa by Moody's and bearing interest at 1.10% above EURIBOR. £208.3m of the sterling notes
were class A2 notes, rated AAA by Fitch and Aaa by Moody's, £19.3m were class B notes, rated AA by Fitch and Aa2 by Moody's
and £25.4m were class C notes rated A by Fitch and A1 by Moody's. The interest margins above LIBOR on the sterling notes
were 1.50% on the A2 notes, 2.45% on the B notes and 3.20% on the C notes. Cross-currency basis swaps were entered into at
the time of the transaction, effectively translating the euro notes into a LIBOR linked sterling liability. The average
interest margin on the transaction, taking swap costs into account was 1.75% and the proceeds were used to pay down
existing warehouse debt. The Group retained £8.8m of class Z notes and also invested £8.7m in the first loss fund, bringing
its total investment to £17.5m, or 5.0% of the issued notes.
As with the Group's existing securitisation borrowings, these financings are structured so that payments of interest and
principal are limited to cash generated from the funded assets and there is no recourse to other Group funds. Therefore the
issue of these new borrowings do not impact on the liquidity risk of the Group.
During the year the £100.0m Paragon Sixth Funding Limited committed sterling warehouse facility was terminated.
On 9 September 2016 the Company issued £150.0m of 7.25% Fixed Rate Reset Callable Subordinated Tier 2 Notes at par to
provide long term capital for the Group. These bonds bear interest at a fixed rate of 7.25% per annum until 9 September
2021, after which interest will be payable at a fixed rate which is 6.731% over the sterling 5-year mid-market swap rate at
that time. These bonds are unsecured and subordinated to any other creditors of the Company. At issue the Notes were rated
BB+ by Fitch. At 30 September 2016 £149.0m (2015: £nil 2014: £nil) was included within the financial liabilities of the
Company and the Group in respect of these bonds.
On 11 February 2013 the Company inaugurated a £1,000.0m Euro Medium Term Note Programme under which it may issue retail
bonds, or other notes, within a twelve month period. The prospectus was updated, renewing the programme for a further
twelve month period on 22 January 2016.
Repayments made in respect of the Group's borrowings are shown in note 28.
24. RETIREMENT BENEFIT OBLIGATIONS
The defined benefit obligation at 30 September 2016 has been calculated using the latest actuarial valuation. There have
been movements in financial market conditions since 30 September 2015 requiring an adjustment to the actuarial assumptions
underlying the calculation of the defined benefit obligation. In particular, over the period since the 30 September 2015
actuarial valuation, the discount rate has decreased by 1.5% per annum, whereas expectations of long term inflation have
decreased by 0.05% per annum. The net effect of these changes has resulted in an increase in the value of the defined
benefit obligation at 30 September 2016. The impact of the change in actuarial assumptions has been recognised as an
actuarial loss in other comprehensive income.
The defined benefit plan assets have been updated to reflect their market value at 30 September 2016. In particular, over
the period since 30 September 2015 the Plan assets have achieved returns in excess of the assumptions made at 30 September
2015. The difference between the expected and actual return on assets 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 2016 are summarised below.
Year to Year to
30 September2016 30 September 2015
£m £m
Opening pension deficit 21.5 17.3
Service cost 1.7 1.7
Net funding cost 0.8 0.7
Administrative expenses 0.4 0.7
Employer contributions (3.2) (3.2)
Amounts posted to other comprehensive income
Return on plan assets not included in interest (7.7) 1.8
Actuarial loss from changes in financial assumptions 44.9 2.5
Closing pension deficit 58.4 21.5
25. conduct
Over recent years, in common with other financial services firms, the Group has followed guidance issued by the FCA in
respect of redress to customers in respect of the misselling of payment protection insurance ('PPI'), though the sums
involved have not been material.
In November 2014 the UK Supreme Court handed down its decision in Plevin v Paragon Personal Finance Limited ('Plevin'),
which addressed potential liability in respect of PPI claims under section 140 of the Consumer Credit Act 1974, where
commission charged to the customer was particularly high. On 2 October 2015 the FCA published a statement outlining
proposed rules addressing the handling of PPI cases in the light of the Plevin decision and including a deadline beyond
which no further new PPI claims would be required to be considered.
A balance of £1.9m is recognised in other liabilities in respect of such claims and other section 140 related issues.
The Group has reviewed its current exposure to such matters in the light of the Court's judgement in Plevin and the FCA
proposals and its current expectation is that it will suffer no material additional costs from such claims. However, this
assessment is based on our current interpretation of both the Plevin judgement and the draft rules, which may be revised
before they are expected to be finalised and brought into force at the end of December 2016, while interpretations may
develop as both the judgement and the rules are implemented. Therefore, it is possible that the maximum possible liability
may be greater.
26. net cash flow from operating activities
2016 2015
£m £m
Profit before tax 143.2 134.2
Non-cash items included in profit and other adjustments:
Depreciation of operating property, plant and equipment 1.9 1.5
Profit on disposal of operating property, plant and equipment (0.1) -
Amortisation of intangible assets 1.6 1.4
Foreign exchange movement on borrowings 699.9 (30.8)
Other non-cash movements on borrowings 14.3 4.8
Impairment losses on loans to customers 7.7 5.6
Charge for share based remuneration 4.4 4.5
Net (increase) / decrease in operating assets:
Operating lease assets (5.4) -
Loans to customers (443.0) (810.9)
Derivative financial instruments (706.3) 33.8
Fair value of portfolio hedges (7.3) (4.7)
Other receivables (2.1) 0.4
Net decrease / (increase) in operating liabilities:
Retail deposits 1,165.2 648.6
Derivative financial instruments 9.1 5.6
Fair value of portfolio hedges 0.8 -
Other liabilities 4.9 2.7
Cash generated / (utilised) by operations 888.8 (3.3)
Income taxes (paid) (23.6) (22.6)
865.2 (25.9)
Cash flows relating to plant and equipment held for leasing under operating leases are classified as operating cash flows.
27. net cash flow from investing activities
2016 2015
£m £m
Proceeds from sales of operating property, plant and equipment 0.4 -
Purchases of operating property, plant and equipment (1.5) (0.7)
Purchases of intangible assets (1.4) (1.2)
Decrease/(increase) in short term investments 34.0 (1.7)
Acquisition (note 6) (310.1) -
Net cash (utilised) by investing activities (278.6) (3.6)
28. net cash flow from financing activities
2016 2015
£m £m
Shares issued (note 18) - 1.5
Dividends paid (note 20) (33.9) (29.1)
Issue of asset backed floating rate notes 531.0 823.8
Repayment of asset backed floating rate notes (1,137.2) (638.3)
Issue of retail bonds - 111.3
Issue of corporate bonds 149.0 -
Movement on bank facilities 145.5 24.8
Purchase of shares (59.9) (56.9)
Net cash (utilised) / generated by financing activities (405.5) 237.1
29. RELATED PARTY TRANSACTIONS
In the year ended 30 September 2015, the Group has continued the related party relationships described in note 62 on page
229 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 ended 30 September
2016.
30. income statement ratios
The average net interest margin is calculated as follows:
2016 2015
£m £m
Opening loans to customers 10,062.4 9,255.9
Closing loans to customers 10,737.5 10,062.4
Average loans to customers 10,400.0 9,659.2
Net interest 223.2 197.4
Net interest margin 2.15% 2.04%
Impairment provision 7.7 5.6
Impairment as a percentage of average loan balance 0.07% 0.06%
31. COST:INCOME RATIO
Cost:income ratio is derived as follows:
2016 2015
£m £m
Cost - operating expenses 92.5 71.2
Total operating income 244.0 211.5
Cost / Income 37.9% 33.7%
Underlying cost:income ratio excluding the impact of acquisition costs is derived as follows:
2016 2015
£m £m
Cost - operating expenses 92.5 71.2
Acquisition related costs (2.7) -
89.8 71.2
Total operating income 244.0 211.5
Acquisition related charges in income 0.4 -
244.4 211.5
Cost / Income 36.7% 33.7%
Cost:income ratio excluding the impact of the acquired business is derived as follows:
2016 2015
£m £m
Cost - operating expenses 92.5 71.2
Operating expenses of PBAF (18.2) -
74.3 71.2
Total operating income 244.0 211.5
Operating income of PBAF (24.9) -
219.1 211.5
Cost / Income 33.9% 33.7%
32. UNDERLYING PROFIT
Underlying profit is determined by excluding from the operating result one off costs relating to the acquisitions in the
period, and fair value accounting adjustments arising from the Group's hedging arrangements.
Note 2016 2015
£m £m
Paragon Mortgages
Profit before tax for the period 8 89.5 93.6
Less: Acquisition related costs - -
Less: Fair value (losses) / gains 0.4 0.4
89.9 94.0
Idem Capital
Profit before tax for the period 8 45.4 49.3
Less: Acquisition related costs - -
Less: Fair value (losses) / gains - -
45.4 49.3
Paragon Bank
Profit / (loss) before tax for the period 8 8.3 (8.7)
Less: Acquisition related costs 3.1 -
Less: Fair value (losses) / gains 0.2 0.1
11.6 (8.6)
Total
Profit before tax for the period 8 143.2 134.2
Less: Acquisition related costs 3.1 -
Less: Fair value (losses) / gains 0.6 0.5
146.9 134.7
33. UNDERLYING RETURN ON TANGIBLE EQUITY (EXCLUDING ACQUISITION COSTS)
The underlying RoTE excluding acquisition costs is calculated as follows:
Note 2016 2015
£m £m
Profit for the year 116.0 107.1
Amortisation of intangible assets 1.6 1.4
117.6 108.5
Acquisition costs 3.1 -
Tax on allowable costs at effective rate (0.2) -
Adjusted profit after tax 120.5 108.5
Average tangible equity 3 913.0 950.5
Underlying Return on Tangible Equity excluding acquisition costs 13.2% 11.4%
34. net asset value
Note 2016 2015
£m £m
Total equity (£m) 969.5 969.5
Outstanding issued shares (m) 18 295.8 309.3
Treasury shares (m) (15.3) (12.4)
Shares held by ESOP schemes (m) (3.6) (1.6)
276.9 295.3
Net asset value per £1 ordinary share £3.50 £3.28
Tangible equity (£m) 3 864.1 961.8
Tangible net asset value per £1 ordinary share £3.12 £3.26
The Paragon Group of Companies PLC
STATEMENT OF DIRECTORS' RESPONSIBILITIES
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 2016. 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 International
Financial Reporting Standards ('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 2016, company law requires the directors to
prepare such financial statements in accordance with International Financial Reporting Standards, 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 International Financial Reporting Standards. Directors are
also required to:
· properly select and apply accounting policies;
· make an assessment of the ability 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; and
· provide additional disclosures when compliance with the specific requirements in International Financial Reporting
Standards 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 proper accounting records which disclose with reasonable accuracy at any time the
financial position of the Company, for safeguarding the assets, for taking reasonable steps for the prevention and
detection of fraud and other irregularities and 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 United Kingdom
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 International Financial Reporting Standards 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; and
· 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 2016
Board of Directors
R G Dench J A Heron F J Clutterbuck
N S Terrington A K Fletcher H R Tudor
R J Woodman P J N Hartill
The Paragon Group of Companies PLC
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks to which the Group is exposed and which could impact significantly on its ability to conduct its
business successfully are summarised below.
Category Risk Description
Economic A downturn in the UK's economic performance in light of the Brexit referendum decision to leave the European Union could impact demand for loans, customers' ability to re-pay outstanding balances and security values
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 integrate acquired businesses safely and effectively could adversely affect the Group's business plans and damage its reputation
Customer Failure to target and underwrite lending effectively could result in customers becoming less able to service debt, exposing the Group to credit 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
Fair outcomes Failure to deliver appropriate customer outcomes could impact on the Group's reputation and its financial performance
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
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 and financial losses.
Regulation Given the highly regulated sectors in which the Group operates, compliance failures or failures to respond effectively to new and emerging regulatory developments could result in reputational damage and financial loss
Funding Increased volatility in wholesale markets could reduce the Group's funding and liquidity options, restricting its ability to lend.
Capital Proposals by the BCBS to change to the capital requirements for lending secured on residential property could have adverse financial implications for the Group
Interest rates Reduction in margins between market lending and borrowing rates or mismatches in the Group balance sheet could impact profits
Pensions The obligation to support the Group's defined benefit pensions plan might deplete resources
The Group has considered and responded to all of these risks, undertaking mitigating actions where required to ensure that
exposures are maintained within risk appetite as far as is practicable.
This information is provided by RNS
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