REG - Paragon Grp Co PLC - Half-year Report <Origin Href="QuoteRef">PARA.L</Origin> - Part 4
24/05/2016 07:06
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exercised (1.6) (5.9) (6.1)
At 31 March 2016 15.6 8.7 10.8
Total at 31 March 2016 138.6 65.4 100.0
Total at 1 October 2015 100.0 48.2 48.2
Number of shares held
Treasury 22,941,909 4,763,900 12,401,400
ESOP 3,224,335 879,075 1,562,571
Balance at 31 March 2016 26,166,244 5,642,975 13,963,971
24. FINANCIAL LIABILITIES
Note 31 March2016 31 March2015 30 September 2015 30 September 2014
£m £m £m £m
Current liabilities
Retail deposits 25 808.5 101.1 338.9 53.3
Bank loans and overdrafts 1.0 0.2 0.7 1.1
809.5 101.3 339.6 54.4
Non-current liabilities
Asset backed loan notes 8,414.7 8,461.7 8,274.6 8,115.0
Corporate bond 110.0 110.0 110.0 110.0
Retail bonds 295.0 183.2 294.9 183.2
Retail deposits 25 617.9 63.9 369.8 6.8
Bank loans and overdrafts 1,510.6 1,237.7 1,425.4 1,397.9
Derivative financial liabilities 17 10.2 5.0 6.7 1.1
10,958.4 10,061.5 10,481.4 9,814.0
Details of changes in the Group's borrowings since the year end are given in note 26 below.
25. 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:
31 March2016 31 March2015 30 September 2015 30 September 2014
£m £m £m £m
Fixed rate 891.3 116.1 508.3 39.8
Variable rates 535.1 48.9 200.4 20.3
1,426.4 165.0 708.7 60.1
The weighted average interest rate on retail deposits, analysed by charging method, was:
31 March2016 31 March2015 30 September 2015 30 September 2014
% % % %
Fixed rate 2.31 2.08 2.33 1.90
Variable rates 1.67 1.70 1.62 1.85
The contractual maturity of these deposits is analysed below.
31 March2016 31 March2015 30 September 2015 30 September 2014
£m £m £m £m
Amounts repayable
In less than three months 13.4 1.9 9.1 -
In more than three months but not more than one year 532.2 98.4 242.6 52.8
In more than one year, but not more than two years 381.5 31.0 181.7 6.8
In more than two years, but not more than five years 236.4 32.9 188.1 -
Total term deposits 1,163.5 164.2 621.5 59.6
Repayable on demand 262.9 0.8 87.2 0.5
1,426.4 165.0 708.7 60.1
Total falling due in less than one year (note 24) 808.5 101.1 338.9 53.3
Total falling due in more than one year (note 24) 617.9 63.9 369.8 6.8
1,426.4 165.0 708.7 60.1
26. BORROWINGS
All borrowings described in the Group Accounts for the year ended 30 September 2015 remained in place throughout the
period, except as noted 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 a further £4.1m of notes were issued and a further £70.8m of notes was issued
under the facility after the end of the period. 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.
During the period the £100.0m warehouse facility provided to Paragon Sixth Funding Limited by Natixis was terminated.
Of the Group's borrowings at 30 September 2015, the notes issued by Idem First Finance Limited were repaid in October 2015
while those issued by Idem Capital Securities (No. 1) were repaid in January 2016. The assets financed by these borrowings
were refinanced through Idem Luxembourg (No. 8) or through Paragon Bank retail deposits.
The mortgage backed floating rate notes issued by Paragon Mortgages (No. 17) PLC were repaid in January 2016, following the
purchase of its mortgage assets by Paragon Bank.
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 30.
27. RETIREMENT BENEFIT OBLIGATIONS
The defined benefit obligation at 31 March 2016 has been calculated on a year-to-date basis, using the latest actuarial
valuation for IAS 19 purposes at 30 September 2015. There have been movements in financial market conditions since that
date, requiring an adjustment to the actuarial assumptions underlying the calculation of the defined benefit obligation at
31 March 2016. In particular, over the period since the 30 September 2015 actuarial valuation, the discount rate has
decreased by 0.3% per annum, whereas expectations of long term inflation have decreased by 0.15% per annum. The net effect
of these changes has resulted in an increase in the value of the defined benefit obligation at 31 March 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 31 March 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 six month period ended 31 March 2016 are summarised
below.
Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Opening pension deficit 21.5 17.3 17.3
Service cost 0.8 0.8 1.7
Net funding cost 0.4 0.4 0.7
Administrative expenses 0.2 0.3 0.7
Employer contributions (1.6) (1.6) (3.2)
Amounts posted to other comprehensive income
Return on plan assets not included in interest (2.0) (5.8) 1.8
Actuarial loss from changes in financial assumptions 4.7 14.6 2.5
Closing pension deficit 24.0 26.0 21.5
28. NET CASH FLOW FROM OPERATING ACTIVITIES
Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Profit before tax 69.5 62.6 134.2
Non-cash items included in profit and other adjustments
Depreciation of property, plant and equipment 2.2 0.8 1.5
Profit on disposal of property plant and equipment (0.7) - -
Amortisation of intangible assets 0.7 0.7 1.4
Foreign exchange movements on borrowings 277.2 119.6 (30.8)
Other non-cash movements on borrowings 7.3 2.3 4.8
Impairment losses on loans to customers 3.5 3.5 5.6
Charge for share based remuneration 2.1 2.6 4.5
Net (increase) / decrease in operating assets
Loans to customers (554.4) (214.3) (810.9)
Derivative financial instruments (279.8) (117.0) 33.8
Fair value of portfolio hedges (2.1) (2.8) (4.7)
Other receivables 0.9 0.8 0.4
Net (decrease) / increase in operating liabilities
Retail deposits 717.7 104.8 648.6
Derivative financial instruments 3.5 3.9 5.6
Other liabilities 5.2 (4.0) 2.7
Cash generated / (utilised) by operations 252.8 (36.5) (3.3)
Income taxes (paid) (9.7) (11.0) (22.6)
Net cash flow generated / (utilised) by operating activities 243.1 (47.5) (25.9)
29. NET CASH FLOW USED IN INVESTING ACTIVITIES
Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Proceeds from sales of property, plant and equipment 0.9 - -
Purchases of property, plant and equipment (4.6) (0.7) (0.7)
Purchases of intangible assets (0.7) (0.4) (1.2)
Decrease / (increase) in short term investments 23.8 (9.1) (1.7)
Acquisition of subsidiary (note 5) (305.3) - -
Net cash (utilised) by investing activities (285.9) (10.2) (3.6)
30. NET CASH FLOW FROM FINANCING ACTIVITIES
Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Shares issued 0.1 1.2 1.5
Dividends paid (note 22) (21.7) (18.3) (29.1)
Issue of asset backed floating rate notes 460.3 533.4 823.8
Repayment of asset backed floating rate notes (601.3) (308.7) (638.3)
Issue of retail bonds - - 111.3
Movement on bank facilities 84.4 (162.9) 24.8
Purchase of shares (note 23) (40.0) (22.3) (56.9)
Net cash (utilised) / generated by financing activities (118.2) 22.4 237.1
31. RELATED PARTY TRANSACTIONS
In the six months ended 31 March 2016, 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 2015. 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 six months ended 31 March
2016.
32. INCOME STATEMENT RATIOS
The average net interest margin is calculated as follows:
Six months to Six months to Year to
31 March2016 31 March2015 30 September 2015
£m £m £m
Opening loans to customers (note 15) 10,062.4 9,255.9 9,255.9
Closing loans to customers (note 15) 10,853.1 9,468.3 10,062.4
Average loans to customers 10,457.8 9,362.1 9,659.2
Net interest 109.8 97.2 197.4
Annualised net interest margin 2.11% 2.09% 2.04%
Impairment provision 3.5 3.5 5.6
Impairment as a percentage of average loan balance (annualised) 0.07% 0.07% 0.06%
33. CONTINGENT LIABILITIES
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.
The Group has reviewed its current exposure to PPI and related claims 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 finalisation, while interpretations may develop as both the judgement and the rules are implemented.
Therefore, it is possible that the maximum liability may be greater, but it is impracticable to evaluate the potential
impact at this stage.
INDEPENDENT REVIEW REPORT
TO THE PARAGON GROUP OF COMPANIES PLC
Introduction
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report
for the six months ended 31 March 2016 which comprises the income statement, the statement of comprehensive income, the
balance sheet, the cash flow statement, the statement of movements in equity and related notes 1 to 33. We have read the
other information contained in the half-yearly financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with the terms of our engagement to assist the company in meeting
the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Conduct Authority ('the UK
FCA'). Our review has been undertaken so that we might state to the company those matters we are required to state to it in
this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the Company for our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are
responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.
As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by
the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in
accordance with IAS 34 Interim Financial Reporting as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the
half-yearly financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of
Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board
for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible
for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less
in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently
does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an
audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial
statements in the half-yearly financial report for the six months ended 31 March 2016 is not prepared, in all material
respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.
Andrew Walker
for and on behalf of KPMG LLP
Chartered Accountants
One Snowhill
Snow Hill Queensway
Birmingham
B4 6GH
24 May 2016
The Paragon Group of Companies PLC
PRINCIPAL RISKS AND UNCERTAINTIES
There are a number of potential risk and uncertainties which could have a material impact on the Group's performance over
the remaining six months of the financial year and could cause actual results to differ materially from expected and
historical results. 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 2015.These are summarised below.
Category Risk Description
Economic A severe downturn in the UK would impact on demand for loans, customer ability to pay and security values
Concentration The Group is particularly exposed to the performance of the UK private rented sector, through its buy-to-let activities
Competition Operating in actively competitive markets, profitability or market share could be eroded by competitor activity
Customer Lending may be incorrectly targeted or customers may become less able to service debt, exposing the Group to loss
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 would impact on the Group's reputation and its financial performance
People Failure to retain appropriately skilled employees would impact upon the Group's ability to deliver its business plans
Systems Substantial IT systems are required to support the operations of the Group and guard against cyber risks. Failure in these systems might result in loss
Regulation The Group operates in sectors which are highly regulated and are becoming more so. Compliance failures would risk financial and reputational damage
Funding Inability to raise new funds could restrict lending, while changes in the retail savings market could impact the liquidity of Paragon Bank
Interest rates Reduction in margins between market lending and borrowing rates or mismatches in the Group balance sheet would impact profit
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, mitigating the exposure as far as practicable.
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