Paragon wants to be a bank

Buy to let lender Paragon Mortgages is in talks with private bank Hampshire Trust in a bid to make a grab for the firm’s retail banking licence.

Paragon suffered badly in the years after the credit crunch as banks restricted lending on the money markets to retail banks taking deposits from savers as security for loans.

This effectively froze Paragon out of the market and forced the lender to close for new business for two years.

Now, Paragon is a thriving providing investment loans to professional landlords for houses in multiple occupation (HMOs), blocks of flats, loans to property companies and large portfolios.

A retail banking licence would let the company raise finance for mortgages at cheaper rates on the money markets and boost business even more.

Full year profits for the year ending September 2012 were up 22.5% a record pre-tax profit of £95.5 million, an increase of £80.8 million the previous year.

The final dividend paid 4.5p per share, up from 2.65p last year, while an earlier interim payment of 1.5p pushed the total return to 6p for the year.

Paragon confirms the discussions with Hampshire Trust but explained the move was far from a sealed deal.

Hampshire Trust is keeping quiet about the talks.

Shares prices, which have risen by over 60% since May, increased 1.3% to 243.4 pence with the news.

However, some City analysts list the company as a ‘sell’ because of poor returns.

“Paragon is a high risk business that has become effectively if not technically insolvent twice,” said James Hamilton of Numis.

“Paragon is highly leveraged and despite this it generates a low return on equity. The underlying return is now just under 9% which we believe is dramatically below the cost of equity.”

 

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