REG - Paragon Grp Co PLC - Half-year Report <Origin Href="QuoteRef">PARA.L</Origin> - Part 2
24/05/2016 07:06
- Part 2: For the preceding part double click ID:nRSX0658Za
a review of the available funding one facility, for £100.0 million, was closed in the period, having become
redundant through the increased focus on retail deposit funding. This mix of funding sources supports the Group's growth
plans in the buy-to-let market.
In the longer term these mortgage loans are funded through the securitisation markets. The Group's 62nd transaction,
Paragon Mortgages (No. 24) PLC ('PM24'), for £350.1 million, completed during the period. It priced in difficult market
conditions, reflecting an anticipation of increased issuance resulting from several very large portfolio acquisition
transactions expected to be refinanced through the securitisation market. This expectation has led to higher margins being
demanded by investors on new issues. The Group's warehouse capacity and Paragon Bank funding channel provide the Group with
options regarding the timing of its next securitisation transaction.
During the period the mortgage assets held by Paragon Mortgages (No. 17) PLC were sold to Paragon Bank and are now financed
with retail deposits.
Alternative markets for Paragon Mortgages funding to the traditional sterling investor base will continue to be rigorously
assessed, including the potential for US dollar issuance alongside the euro issuance which has been a feature of the
Group's transactions since its Paragon Mortgages (No. 22) PLC securitisation.
Idem Capital funding
Idem Capital has continued with its funding strategy of financing smaller scale acquisitions from the Group's equity while
keeping under review the opportunities to introduce external funding when asset volumes make that economically
appropriate.
In October 2015, an Idem Capital special purpose vehicle company ('SPV') entered into an agreement to issue £117.3 million
of sterling floating rate notes to Citibank NA. These notes bear interest at a rate of one month LIBOR plus 3.5% and the
funds raised were used to re-finance existing Idem Capital unsecured loan assets, previously funded intra-group and through
an existing SPV, and are secured on those assets. The transaction raised net new funding of £65.5 million. This agreement
was extended by £4.1 million in the period and a further £70.8 million was raised through this arrangement after the period
end.
Later in the period other Idem Capital borrowings were repaid following the sale of the underlying assets to Paragon Bank,
reducing funding costs, and the Bank joined with Idem Capital in a portfolio purchase transaction. As a result of these
transactions, at 31 March 2016 the funding of the Group's debt purchase assets was distributed as shown below.
31 March 2016 31 March 2015 30 September 2015
£m £m £m
External funding 195.6 302.2 275.6
Retail funding 286.7 - -
Group resources 111.2 87.0 157.3
593.5 389.2 432.9
This demonstrates increased flexibility in the Group's funding for its debt purchase activities, broadening its sources of
finance and demonstrating its ability to access third party funding on a more regular basis. The participation of Paragon
Bank in transactions offers greater flexibility in terms of deal size and asset class, where increasingly the focus will
move to more strongly performing portfolios.
Paragon Bank funding
The Bank currently targets the UK savings market. It accepts deposits through the internet, which are processed by a highly
automated system with significant scope for future expansion. By 31 March 2016 Paragon Bank held deposits of £1,426.4
million (30 September 2015: £708.7 million).
Savings balances at the period end are analysed below.
Average interest rate Average initial balance Proportion of deposits
31.03.16 30.09.15 31.03.16 30.09.15 31.03.16 30.09.15
% % £000 £000 % %
Fixed rate deposits 2.31% 2.33% 33 34 62.4% 71.7%
Variable rate deposits 1.67% 1.62% 16 16 37.6% 28.3%
All balances 2.07% 2.13% 26 28 100.0% 100.0%
The average initial term of fixed rate deposits at 31 March 2016 was 24 months (30 September 2015: 29 months).
During the period savings deposits were used to finance a large part of the cash requirement for the asset finance
acquisition and were also used to refinance loan assets originally funded within the Paragon Mortgages and Idem Capital
divisions. With the Bank expected to contribute increasingly to the Group's originations, the scale of its deposit-taking
activities is expected to expand materially over the next few years.
Paragon Bank has also concluded arrangements to pre-position its acquired buy-to-let mortgages with the Bank of England,
giving it access to standby funding. In addition the Bank anticipates making its first drawings under the Finance for
Lending scheme during the coming quarter.
Corporate funding
While the Group's working capital has been primarily provided by equity since 2008, in recent years it has expanded its use
of corporate debt funding, allowing it to diversify its funding base and extend the tenor of its borrowings.
The Group is rated by Fitch Ratings, which has ascribed it a BBB- rating and confirmed that rating with a stable outlook on
5 May 2016. With a strategy to increase holding company leverage levels over time, the rating will support long dated
corporate debt issuance in both scale and pricing terms.
Further information on all of the above borrowings is given in note 26.
CAPITAL MANAGEMENT
The Group continues to be strongly cash generative with free cash balances of £152.7 million at 31 March 2016 (30 September
2015: £199.9 million) (note 19) after investing cash in developing business streams across each of its three divisions. The
Company sees opportunities going forward to deploy capital to support organic growth and invest in portfolio purchases and
potentially in M&A opportunities.
Dividend and dividend policy
In pursuance of its dividend policy and in view of the strong position of the Group and its confidence in the prospects for
the business, the Board proposes an interim dividend of 4.3p per share (2015 H1: 3.6p) payable to shareholders on the
register on 1 July 2016. This represents an increase of 19.4% from 2015. The Group's dividend policy is to achieve a
dividend cover ratio of three times by the current financial year.
Regulatory capital
PRA supervision of the Group imposes consolidated capital adequacy rules upon it. The Group maintains extremely strong
capital and leverage ratios, with a CET1 ratio of 16.1% at 31 March 2016 (30 September 2015: 19.1%) and a leverage ratio at
6.7% (30 September 2015: 7.7%) (note 4d), leaving the Group's capital at 31 March 2016 comfortably in excess of the
regulatory requirement. The reduction in the CET1 ratio and leverage percentage during the period are principally effects
of the asset finance acquisition and the Group's share buy-back programme.
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 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.
Notwithstanding the outcome of these consultations, the Group has a wealth of data and excellent credit metrics to support
the use of an IRB approach for assessing the appropriate buy-to-let risk weightings. Other UK institutions that currently
use the IRB approach for their buy-to-let portfolios achieve materially lower risk weightings than the 35% required by the
present SA, with figures reported by the PRA in July 2015 as being typically in the low to mid-teen percentages.
In addition to the potential risk weighting 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.
The Group will be closely monitoring developments in both of these consultations as they progress and is conducting
investigatory and preparatory work so that it can progress an IRB application, if appropriate, once the regulatory position
has been clarified.
Gearing and share buy-backs
In view of the strong capital base and low leverage in the Company's balance sheet, the Board has determined that the
Group's debt and equity capital resources should be rebalanced to deliver returns at a higher rate to shareholders. To
enhance this strategy the Group regularly reviews the opportunities available to add incremental long-dated debt to the
Group balance sheet.
In November 2014 the Group announced a share buy-back programme, initially for up to £50.0 million and extended to £100.0
million in 2015, to be reviewed periodically to take account of anticipated investment opportunities and the balance of the
Group's debt and equity capital resources. During the period the Group bought back a further 10.5 million of its ordinary
shares at a cost of £33.8 million, which are held in treasury (note 23). This brings the total number of shares acquired to
22.3 million at a cost of £83.5 million. This programme will continue during the second half year with these shares also
being held in treasury.
The Company currently has the necessary shareholder approval to undertake such share buy-backs under an authority granted
at its 2016 Annual General Meeting, when a special resolution seeking authority for the Company to purchase up to 29.6
million of its own shares (10% of the issued share capital excluding treasury shares) was approved by shareholders.
The share buy-back programme, together with the issue of debt, has reduced the amount of the Group's central funding
represented by equity at 31 March 2016 to 79.0% from 91.5% twelve months earlier (note 4c), with this trend expected to
continue.
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 the Paragon Mortgages and Idem Capital businesses, the diversification
which has been achieved in the funding base in recent years and the further opportunities for growth and sustainability
provided by Paragon Bank, have now created the foundations on which to develop the Group's next phase of growth.
INTERIM MANAGEMENT REPORT
OPERATIONS REPORT
MANAGEMENT AND PEOPLE
The Group has always recognised that its people are key to its future growth and development. The training and development
of employees together with a rigorous recruitment and selection process are a key part of the Group's organic growth
strategy and underpin the strong progress made.
The Living Wage is an important part of the Group's values and people strategy and the Group supports the principle
espoused by the Living Wage Foundation of it being good for business, good for the individual and good for society. The
Group's pay levels meet the requirements of the National Living Wage and it continues to work with its supply chain in
order to adopt the UK Living Wage Foundation standard by the end of the current financial year.
During the period the Group exceeded 1,250 employees as its operations expanded to welcome new colleagues within the
acquired asset finance business, following its acquisition in November. Since acquisition a programme of rolling out the
Group's standards in training and development to the new employees has been developed while existing employees learn from
their skills and experience in asset finance, to further develop our future growth plans.
The Group prides itself on the high retention rate in its workforce. Its annual employee attrition rate of 12% is below the
national average and 32% of its people have been with Paragon for more than ten years, with 10% having achieved over 20
years' service. We believe this is due to providing quality development opportunities and creating a place at which people
want to work, which has in turn meant that knowledge and experience have been retained in each of our specialist areas. The
Group has continued to add to the team over the past six months with an excellent set of people at all levels of the
organisation, increasing numbers by 1.5% over the period, excluding the impact of the asset finance acquisition. In
February 2016 the Group's Investors in People status was reaccredited with the Gold Standard, putting it in the top 1% of
employers in the UK. We believe our people are well positioned to support the Group's future growth strategy.
During the period an internal mentoring programme, accredited by the Chartered Management Institute, was launched, helping
to support succession planning strategy and develop future leaders. Further work has continued with local secondary
schools, colleges and universities, with industrial placements and apprenticeships becoming a feature for some of the
Group's specialist areas. Regulatory training programmes have been launched to ensure employees remain competent to deliver
good customer outcomes and there are over 100 employees completing professional qualifications at any one time across the
Group.
The health and wellbeing of the Group's employees is an important element of its people strategy. During the period the
Group began offering lifestyle assessments and new discounted gym memberships, while updating its employee assistance
programme with external occupational health support. The Group also ran its first annual health awareness week in April
2016.
RISK
The Group's risk governance framework is based upon a formal three lines of defence model which is being embedded in all
areas. Credit, Asset and Liability and Operational Risk and Compliance committees, formed of senior management, report to
the board level Risk and Compliance Committee, the membership of which comprises the Chairman and the independent
non-executive directors of the Company.
In the last six months the Group has strengthened its risk resource in areas such as operational risk and credit risk.
These appointments have been made to ensure that subject matter experts are in place ahead of planned future growth to help
shape policy and process.
The Group's governance structure provides an effective basis for the management of risk within which:
· The first line of defence, comprising executive directors, managers and employees, holds primary responsibility for
designing, operating and monitoring risk management and control processes
· The second line of defence is provided by the Risk and Compliance division, the Risk and Compliance Committee and its
supporting sub-committees
· The third line of defence is provided by the Group Internal Audit function and the Audit Committee which are
responsible for reviewing the effectiveness of the first and second lines of defence
The principal changes in the risk environment faced by the Group over the six month period are;
· Impact of the forthcoming EU referendum on the UK economy and capital markets
· Execution risk on the asset finance transaction as the business is integrated into the Group.
· New operational risks arising from the acquired operations
· Potential impact of changes in the regulatory and fiscal environment for buy-to-let mortgages in the UK, in particular
for the Group's future advances and redemption levels.
· Impact of new proposals on capital regulation from the BCBS
The Group is carefully monitoring these risks as they develop and considers itself well place to mitigate their impact.
A summary of the principal risks and uncertainties faced by the Group is given on page 79.
REGULATION
In March 2015 the Mortgage Credit Directive Order introduced legislation to move second charge mortgages from the FCA's
consumer credit regime to its residential mortgage regime and to implement a new regulatory regime, to be overseen by the
FCA, in relation to consumer buy-to-let mortgage contracts. Having decided to continue offering such loans, the Group put
in place the necessary processes and procedures to comply with both regimes from their implementation date of March 2016
and was granted the appropriate permissions by the FCA before this date. The changes involved did not have a material
impact on the operation of any of the Group's business lines.
During the period the Financial Policy Committee of the Bank of England ('FPC') was granted powers to regulate
owner-occupied mortgage lending. The FPC has also requested the power to regulate buy-to-let mortgage lending by reference
to loan-to-value, debt to income and ICRs. The UK Government is currently consulting on this request. The PRA published a
consultation paper during March 2016 which sets out a regulatory approach in relation to underwriting standards for
buy-to-let mortgages, designed to address the risk of lenders relaxing underwriting standards to achieve higher lending
volumes. The Group has, or will, respond to both of these consultation documents, whilst at the same time taking steps to
determine what amendments to policy or process, if any, the proposed changes may require.
Paragon Bank is authorised by the PRA and regulated by the PRA and the FCA. The Group is subject to consolidated
supervision by the PRA. The current and projected rate of regulatory change, driven by domestic and European policy, is
significant, as further aspects of the Basel III supervisory regime are rolled out and the BCBS consults on further
changes. The governance and control structure within Paragon Bank and the wider Group has been established and developed to
ensure that the impacts of new requirements on the business are clearly understood and planned for. Regular reports on key
regulatory developments are therefore received at both executive and board risk committees.
Current BCSB consultations on regulatory capital requirements and their potential impact on the Group are discussed under
'Capital Management' above.
INTERIM MANAGEMENT REPORT
CONCLUSION
This has been another outstanding performance by the Group, with strong profit growth complemented by significant progress
in our lending activity and further development in our diversification strategy.
The Group's progress was evident across each of its operating divisions. Paragon Bank reported its maiden profit, achieving
this in less than two years after launch, whilst also completing the acquisition of Five Arrows providing an entry platform
to the SME asset finance sector. Idem Capital saw extensive acquisition activity supporting further growth in the consumer
finance loan book, particularly through co-investment opportunities with Paragon Bank. Finally buy-to-let, whilst
maintaining our disciplined approach to credit and pricing, witnessed strong new lending levels influenced in part by the
increase in Stamp Duty, pulling forward some business into the first half of the year. Strong tenant demand is set to
continue to drive the need for rented property in the UK for the foreseeable future. Whilst there is some uncertainty over
the longer term growth prospects in buy-to-let, we expect the tax and regulatory changes to provide relative benefits for
the Group's specialist lending focus, in particular, the more complex requirements of professional landlords.
Paragon operates with a strong capital base and an enviable credit record. Its leading position in the specialist
buy-to-let market is now being complemented by a broader and more diversified series of business lines, including SME
lending. This leaves the Group well placed to continue to develop and deliver increasingly broad product offerings for our
customers, which in turn supports improving returns for our shareholders.
The Paragon Group of Companies PLC
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors confirm that, to the best of their knowledge:
· the condensed financial statements have been prepared in accordance with International Accounting Standard 34 -
'Interim Financial Reporting';
· the Interim Management Report includes a fair review of the information required by Section 4.2.7R of the Disclosure
and Transparency Rules, issued by the UK Listing Authority (an indication of important events that have occurred during the
first six months of the current financial year and their impact on the condensed financial statements and a description of
the principal risks and uncertainties for the remaining six months of the financial year); and
· the Interim Management Report includes a fair review of the information required by Section 4.2.8R of the Disclosure
and Transparency Rules, issued by the UK Listing Authority (disclosure of related party transactions that have taken place
in the first six months of the financial year and that have materially affected the financial position or the performance
of the enterprise during that period; and any changes in the related party transactions described in the last annual report
which could do so).
Approved by the Board of Directors and signed on behalf of the Board.
PANDORA SHARP
Company Secretary
24 May 2016
Board of Directors
Robert G Dench John A Heron Peter J N Hartill
Nigel S Terrington Fiona J Clutterbuck Hugo R Tudor
Richard J Woodman Alan K Fletcher
The Paragon Group of Companies PLC
CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
For the six months ended 31 March 2016 (Unaudited)
Note Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Interest receivable 203.4 164.7 341.0
Interest payable and similar charges (93.6) (67.5) (143.6)
Net interest income 109.8 97.2 197.4
Other operating income 8 12.5 6.8 14.1
Total operating income 122.3 104.0 211.5
Operating expenses (49.4) (36.6) (71.2)
Provisions for losses (3.5) (3.5) (5.6)
Operating profit before fair value items 69.4 63.9 134.7
Fair value net gains /(losses) 10 0.1 (1.3) (0.5)
Operating profit being profit on ordinary activities before taxation 69.5 62.6 134.2
Tax charge on profit on ordinary activities 12 (13.6) (12.8) (27.1)
Profit on ordinary activities after taxation 55.9 49.8 107.1
Note Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
Basic earnings per share 13 19.1p 16.3p 35.5p
Diluted earnings per share 13 18.8p 16.0p 34.8p
Dividend - rate per share for the period 22 4.3p 3.6p 11.0p
The results for the periods shown above relate entirely to continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Six months ended 31 March 2016 (Unaudited)
Note Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Profit for the period 55.9 49.8 107.1
Other comprehensive income / (expenditure)
Items that will not be reclassified subsequently to profit or loss
Actuarial (loss) on pension plan 27 (2.7) (8.8) (4.3)
Tax thereon 0.5 1.8 0.9
(2.2) (7.0) (3.4)
Items that may be reclassified subsequently to profit or loss
Cash flow hedge gains / (losses) taken to equity 1.5 (2.5) (3.1)
Tax thereon (0.3) 0.5 0.6
1.2 (2.0) (2.5)
Other comprehensive (expenditure) for the period net of tax (1.0) (9.0) (5.9)
Total comprehensive income for the period 54.9 40.8 101.2
CONSOLIDATED BALANCE SHEET
31 March 2016 (Unaudited)
31 March 2016 31 March 2015 30 September 2015 30 September 2014
Note £m £m £m £m
Assets employed
Non-current assets
Intangible assets 14 87.0 7.6 7.7 7.9
Property, plant and equipment 36.7 22.8 22.1 22.9
Financial assets 15 11,800.3 10,300.2 10,745.8 9,969.6
11,924.0 10,330.6 10,775.6 10,000.4
Current assets
Other receivables 9.5 6.1 6.2 6.5
Short term investments 18 17.3 48.5 41.1 39.4
Cash and cash equivalents 19 895.3 812.6 1,056.0 848.8
922.1 867.2 1,103.3 894.7
Total assets 12,846.1 11,197.8 11,878.9 10,895.1
Financed by
Equity shareholders' funds
Called-up share capital 20 309.6 308.9 309.3 307.3
Reserves 21 793.4 709.0 760.2 688.0
Share capital and reserves 1,103.0 1,017.9 1,069.5 995.3
Own shares 23 (138.6) (65.4) (100.0) (48.2)
Total equity 964.4 952.5 969.5 947.1
Current liabilities
Financial liabilities 24 809.5 101.3 339.6 54.4
Current tax liabilities 16.7 11.4 12.5 11.9
Other liabilities 63.3 36.2 43.0 40.1
889.5 148.9 395.1 106.4
Non-current liabilities
Financial liabilities 24 10,958.4 10,061.5 10,481.4 9,814.0
Retirement benefit obligations 27 24.0 26.0 21.5 17.3
Deferred tax 8.1 8.7 11.3 10.1
Other liabilities 1.7 0.2 0.1 0.2
10,992.2 10,096.4 10,514.3 9,841.6
Total liabilities 11,881.7 10,245.3 10,909.4 9,948.0
12,846.1 11,197.8 11,878.9 10,895.1
The condensed financial statements for the half year were approved by the Board of Directors on 24 May 2016.
CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 31 March 2016 (Unaudited)
Note Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Net cash flow generated / (utilised) by operating activities 28 243.1 (47.5) (25.9)
Net cash (utilised) by investing activities 29 (285.9) (10.2) (3.6)
Net cash (utilised) / generated by financing activities 30 (118.2) 22.4 237.1
Net (decrease) / increase in cash and cash equivalents (161.0) (35.3) 207.6
Opening cash and cash equivalents 1,055.3 847.7 847.7
Closing cash and cash equivalents 894.3 812.4 1,055.3
Represented by balances within
Cash and cash equivalents 19 895.3 812.6 1,056.0
Financial liabilities (1.0) (0.2) (0.7)
894.3 812.4 1,055.3
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
Six months ended 31 March 2016 (Unaudited)
Note Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Total comprehensive income for the period 54.9 40.8 101.2
Dividends paid 22 (21.7) (18.3) (29.1)
Net movement in own shares (38.6) (17.2) (51.8)
Deficit on transactions in own shares (1.3) (3.9) (3.6)
Charge for share based remuneration 2.1 2.6 4.5
Tax on share based remuneration (0.5) 1.4 1.2
Total movements in equity in the period (5.1) 5.4 22.4
Opening equity 969.5 947.1 947.1
Closing equity 964.4 952.5 969.5
SELECTED NOTES TO THE ACCOUNTS
For the six months ended 31 March 2016 (Unaudited)
1. GENERAL INFORMATION
The condensed financial statements are prepared for The Paragon Group of Companies PLC and its subsidiary companies ('the
Group') on a consolidated basis.
The condensed financial statements for the six months ended 31 March 2016 and for the six months ended 31 March 2015 have
not been audited, as defined in section 434 of the Companies Act 2006.
The figures shown above for the years ended 30 September 2015 and 30 September 2014 are not statutory accounts. A copy of
the statutory accounts for each year has been delivered to the Registrar of Companies. The auditors reported on those
statutory accounts and their reports 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.
A copy of the half-yearly financial report will be posted to those shareholders who have requested to receive one and
additional copies can be obtained from the Company Secretary, The Paragon Group of Companies PLC, 51 Homer Road, Solihull,
West Midlands, B91 3QJ.
This half-yearly financial report is also available on the Group's website at www.paragon-group.co.uk.
2. ACCOUNTING POLICIES
The condensed financial statements are presented in accordance with the requirements of International Accounting Standard
34 - 'Interim Financial Reporting'.
The Group prepares its annual financial statements in accordance with International Financial Reporting Standards as
endorsed by the European Union. The condensed financial statements have been prepared on the basis of the accounting
policies set out in the Annual Report and Accounts of the Group for the year ended 30 September 2015, which are expected to
be used in the preparation of the financial statements of the Group for the year ending 30 September 2016.
Going concern basis
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 Interim
Management Report on pages 4 to 32. The principal risks and uncertainties affecting the Group in the forthcoming six months
are described on page 79.
Note 6 to the accounts for the year ended 30 September 2015 includes an analysis of the Group's working 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. Note 5 to
those accounts discusses critical accounting estimates affecting the results and financial position disclosed therein. The
position and policies described in these notes remain materially unchanged to the date of this half-yearly report, except
for the acquisition of PBAF, described in note 5 and the changes in funding described in note 26.
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 plans are produced for a rolling 24 month
period with longer term forecasts covering a 5 year period. 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 from time to time.
The Group's retail deposits of £1,426.4m (note 25), accepted through Paragon Bank are repayable within five years, with
56.7% of this balance (£808.5m) 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 Committees of the Group and Paragon Bank.
The Group is required to hold liquid assets in Paragon Bank to mitigate this liquidity risk. At 31 March 2016 Paragon Bank
held £121.4m in liquid assets, £17.3m of short term investments (note 18) and £104.1m of cash (note 19).
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.
The earliest maturity of any of the Group's working capital debt is in April 2017, when the £110.0m corporate bond is
repayable. The outstanding principal balance of the Group's retail bonds at 31 March 2016 was £297.5m, none of which is
repayable before December 2020.
The Group has concluded, based on its cash forecasts described above, that it will be able to refinance the £110.0m
borrowing on its due date. This analysis was based on the current strong free cash balances, the levels of cash flows being
generated by its securitisation investments, the Group's ability to raise retail bond debt under the programme renewed in
January 2016, and its history of raising new corporate debt when required through this and other programmes. It also noted
that the cash forecast contained significant major discretionary cash flows.
At 31 March 2016 the Group had free cash balances of £152.7m immediately available for use (note 19).
As described in note 4 the Group's capital base is subject to consolidated supervision by the PRA. Its capital at 31 March
2016 was in excess of regulatory requirements and its forecasts show this continuing to be the case.
Accounting standards require the directors to assess the Group's ability to continue to adopt the going concern basis of
accounting. In performing this assessment, the directors consider all available information about the future, the possible
outcomes of events and changes in conditions and the realistically possible responses to such events and conditions that
would be available to them, having regard to those aspects of the 'Guidance on Risk Management, Internal Control and
Related Financial and Business Reporting' published by the Financial Reporting Council in September 2014 applicable to
half-yearly reporting.
After performing this assessment the directors concluded that it was appropriate for them to continue to adopt the going
concern basis in preparing the half-yearly report.
3. Fair values of financial assets and financial liabilities
Fair values have been determined for all derivatives, listed securities and any other financial assets and liabilities for
which an active and liquid market exists.
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
management apply 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. Management reviews
the models used on an ongoing basis to ensure that the valuations produced are reasonable and reflect all relevant
factors.
For assets and liabilities carried at fair value, IFRS 7 requires that the 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, while level 3 measurements rely on
significant inputs which are not derived from observable data. As described above the valuations of the Group's derivatives
are based on market information and they are therefore classified as level 2 measurements. Details of these assets are
given in note 17. The short term investments described in note 18 are freely traded securities for which a market price
quotation is available and are classified as level 1 measurements. The Group had no financial assets or liabilities in the
six months ended 31 March 2016 or the year ended 30 September 2015 valued using level 3 measurements.
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 period end and the interest rates
charged on financial liabilities reset to market rates on a quarterly basis, little difference arises. 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.
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. On this basis they have concluded that the carrying value of these liabilities, determined on the
amortised cost basis, is not significantly different from their fair value derived on a discounted cash flow basis. Given
the mixture of observable and non-observable inputs, these are considered to be level 2 measurements as the observable
inputs are the most significant.
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. On this basis they
have concluded that the carrying value of these assets, determined on the amortised cost basis, is not significantly
different from the fair value of the assets derived on a discounted cash flow basis. Given the mixture of observable and
non-observable inputs these are considered to be level 2 measurements as the observable inputs are the most significant.
4. Capital management
The Group's objectives in managing capital are:
· To ensure that the Group has sufficient capital to meet its operational requirements and strategic objectives;
· To safeguard the Group's ability to continue as a going concern, so that it can continue to provide returns to
shareholders and benefits for other stakeholders;
· To provide an adequate return to shareholders by pricing products and services commensurately with the level of risk;
and
· To ensure that sufficient regulatory capital is available to meet any externally imposed requirements.
The Group sets the amount of capital in proportion to risk, availability and cost. The Group manages the capital structure
and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying
assets, having particular regard to the relative costs and availability of debt and equity finance at any given time. In
order to maintain or adjust the capital structure the Group may adjust the amount of dividends paid to shareholders, return
capital to shareholders, issue new shares, issue or redeem other capital instruments, such as retail or corporate bonds, or
sell assets to reduce debt.
The Group is subject to regulatory capital rules imposed by the Prudential Regulation Authority ('PRA') on a consolidated
basis as a group containing an authorised bank. This is discussed further below.
(a) Dividend policy
The Group's dividend policy, announced in 2012 has been to target a dividend cover ratio of between 3.0 and 3.5 times by
the end of this financial year. The dividend cover ratio had reached 3.2 times in respect of the year ended 30 September
2015 and the Group stated its aim to reach the bottom of the target range at the end of the current year. The Group
considers that it has sufficient cash resources available to pay dividends at this level, and that the parent company has
abundant distributable reserves for this purpose.
The Group's intention is that this policy should apply in the medium term, subject to any changes in the Group's capital
position caused by regulatory changes or through major corporate transactions, when the policy would be amended. Before the
payment of any dividend the continuing appropriateness of the policy, the availability of free cash resources and the
distributable reserves position of the parent company are reviewed.
(b) Return on tangible equity
Return on tangible equity ('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 period, adjusted for amortisation charged on intangible assets, to the
average of the opening and closing equity positions, excluding intangible assets and goodwill.
The Groups consolidated annualised RoTE for the six months ended 31 March 2016 is derived as follows
31 March 2016 31 March 2015 30 September2015 30 September 2014
£m £m £m £m
Profit for the Period 55.9 49.8 107.1 97.2
Amortisation of intangible assets 0.7 0.7 1.4 1.3
Adjusted Profit 56.6 50.5 108.5 98.5
Divided by
Opening equity 969.5 947.1 947.1 873.3
Opening intangible assets (7.7) (7.9) (7.9) (8.5)
Opening tangible equity 961.8 939.2 939.2 864.8
Closing equity 964.4 952.5 969.5 947.1
Closing intangible assets (87.0) (7.6) (7.7) (7.9)
Closing tangible equity 877.4 944.9 961.8 939.2
Average tangible equity 919.6 942.0 950.5 902.0
Return on tangible equity 12.7% 11.0% 11.4% 10.9%
(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 (i.e. share capital, share premium, minority
interest, retained earnings, and revaluation surplus) other than amounts recognised in equity relating to cash flow
hedges.
The debt and equity amounts at 31 March 2016 were as follows:
Note 31 March2016 31 March2015 30 September 2015 30 September 2014
£m £m £m £m
Debt
Corporate bond 110.0 110.0 110.0 110.0
Retail bonds 297.5 185.0 297.5 185.0
Bank overdraft 1.0 0.2 0.7 1.1
Less: Applicable free cash 19 (152.7) (206.7) (199.9) (177.3)
Net debt 255.8 88.5 208.3 118.8
Equity
Total equity 964.4 952.5 969.5 947.1
Less: cash flow hedging reserve 21 0.7 1.4 1.9 (0.6)
Adjusted equity 965.1 953.9 971.4 946.5
Total working capital 1,220.9 1,042.4 1,179.7 1,065.3
Debt 21.0% 8.5% 17.7% 11.2%
Equity 79.0% 91.5% 82.3% 88.8%
Total working capital 100.0% 100.0% 100.0% 100.0%
The movements in the proportion of working capital represented by debt and equity during the period resulted primarily from
the operation of the policy described above.
(d) 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 issues 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.
At 31 March 2016 the Group's regulatory capital of £891.9m (31 March 2015: £981.9m, 30 September 2015: £976.3m) 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 31 March 2016 is set
out below.
Note 31 March2016 31 March2015 30 September 2015 30 September 2014
£m £m £m £m
Total equity 964.4 952.5 969.5 947.1
Deductions
Proposed dividend 22 (12.2) (10.9) (21.8) (18.3)
Intangible assets 14 (87.0) (7.6) (7.7) (7.9)
Deferred tax adjustment * - (0.5) (0.3) (0.5)
Common Equity Tier 1 ('CET1') capital 865.2 933.5 939.7 920.4
Other tier 1 capital - - - -
Total Tier 1 capital 865.2 933.5 939.7 920.4
Corporate bond 24 110.0 110.0 110.0 110.0
Less: amortisation adjustment † (86.8) (64.8) (75.8) (53.8)
23.2 45.2 34.2 56.2
Collectively assessed credit impairment allowances 3.5 3.2 2.4 4.5
Total Tier 2 capital 26.7 48.4 36.6 60.7
Total regulatory capital 891.9 981.9 976.3 981.1
* Deferred tax assets in subsidiary companies are required to be deducted from regulatory capital. This balance is
offset against the deferred tax liability in the consolidated accounts.
† When tier 2 capital instruments have less than five years to maturity the amount eligible as regulatory capital
reduces by 20% per annum on a straight line basis. The Group's £110.0m Corporate Bond matures in 2017 and therefore such an
amortisation adjustment is required.
The total risk exposure calculated under the CRD IV framework, against which this capital is held, and the proportion of
this exposure it represents, are calculated as shown below.
31 March2016 31 March2015 30 September 2015
£m £m £m
Credit risk
Balance sheet assets 4,860.9 4,231.8 4,426.8
Off balance sheet 65.7 110.3 88.7
Total credit risk 4,926.6 4,342.1 4,515.5
Operational risk 409.7 337.1 363.6
Market risk - - -
- More to follow, for following part double click ID:nRSX0658ZcRecent news on Paragon Banking
See all newsREG - Paragon Banking Grp - Director/PDMR Shareholding
AnnouncementREG - Paragon Banking Grp - Director/PDMR Shareholding
AnnouncementREG - Paragon Banking Grp - Director/PDMR Shareholding
AnnouncementREG - Paragon Banking Grp - Transaction in Own Shares
AnnouncementREG - Paragon Banking Grp - Director/PDMR Shareholding
Announcement