In an unscheduled trading update, challenger bank Paragon has surprised investors with its announcement that the premium for which it sold off assets will add seven pence per share on final earnings. Share prices in the FTSE 250 lender also jumped by over 4%. This so-called “reverse profit warning” comes as welcome news to the bank’s many shareholders. According to Paragon, it capitalised on “strong market conditions” by using loan sales to push up profits, which “remain in line with the Board’s expectations.”

A Focus on Buy-to-Let Investors

A key part of Paragon’s success is the bank’s strong buy-to-let pipeline. They specialise in buy-to-let mortgages, catering to professional landlords. Around 90% of Paragon’s applications come from established landlords, though the bank also deals with first-time rental units as well. Thanks to an influx of these investors, the Paragon’s buy-to-let pipeline is expected to be 25% higher by the end of this year than last year.

According to Ian Gordon, a banking analyst at Investec, Paragon’s recent “reverse profit warning” is set to “nail the bear case predicated on the false premise that buy-to-let volumes are slowing.” The jump in share prices proves that UK investors are interested in the buy-to-let market and that growth within the sector shows no sign of slowing.

The Future of Paragon

Paragon plans to transfer the rest of the assets in its Idem arm to the main bank. These assets will help the bank reach its goal of using a growing retail deposit base to fund loans at an affordable rate. Currently, the bank’s retail deposit base has reached £5 billion, though this number is expected to continue growing.

Nigel Terrington, Paragon chief executive, holds high hopes for the bank’s future. According to Terrington: “The Idem Capital transaction and Titlestone acquisition in the final quarter of 2018 demonstrate the group’s ability to refocus capital to support its growth businesses and enhance value for shareholders.

“In spite of the prevailing macro uncertainties we are well placed to benefit from scale economies in the commercial lending division, and the group continues to cement its position as a leading lender to professional landlords in the UK, underpinned by its 22-year history in this market. We look to the future with confidence.”

In a surprise announcement, challenger bank Paragon has told investors that their shares have risen in value. Thanks in part to its strong buy-to-let pipeline, Paragon has seen share prices jump significantly. The bank intends to continue the trend by attracting new investors with more affordable prices.

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