OREANDA-NEWS. Fitch Ratings has affirmed The Paragon Group of Companies PLC's (Paragon) Long-term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. Fitch has also affirmed the 'BBB-' senior unsecured rating of the GBP112.5m retail bond issued in 2015 under the group's GBP1bn Euro Medium Term Note programme, and withdrawn the 'BBB-(EXP)' rating previously assigned to prospective wholesale issuance under the same programme, as none is expected in the immediate term.

KEY RATING DRIVERS
IDR
Paragon's asset quality metrics remain very strong, with the impairment charge for the year ending 30 September 2015 amounting to only 0.06% of the average loan book. Buy-to-let mortgages continue to account for the largest share of the portfolio, but the group has broadened its revenue sources via its acquisition completed in November 2015 of Five Arrows Leasing Group Ltd, the organic development of car and personal finance activities within Paragon Bank and the addition of further purchased loan portfolios within Idem Capital.

The buy-to-let sector faces challenges to its ongoing rate of growth following the announcement of the phasing out of higher rate tax relief for unincorporated landlords and the introduction of a 3% stamp duty surcharge on the purchase of second homes. However, housing supply issues continue to underpin strong tenancy demand in the private rental sector.

The growth of Paragon's retail deposit base in 2015-16 has enhanced the diversification of its funding, reducing reliance on the securitisation markets, although they remain important to the group. Utilisation of these deposits has also increased the proportion of business conducted within Paragon Bank, and so subject to full Prudential Regulation Authority (PRA) supervision. The group has been governed by PRA capital requirements on a consolidated basis since the establishment of Paragon Bank in 2014 and capital ratios remain sound, with a pro forma (for the acquisition of Five Arrows Leasing) CET1 ratio at 30 September 2015 of 16.6%.

The Stable Outlook reflects Fitch's expectation of a continued prudent approach to new business on the part of Paragon's experienced management team, prioritising the company's long-term health over more volatile short-term gains.

RATING SENSITIVITIES
IDR
The IDR could be downgraded in the event of a material weakening of Paragon's asset quality, particularly within the core buy-to-let mortgage book. A significant reduction in the group's liquidity, either through withdrawal of warehouse funding lines or difficulty in retaining deposits, could also have a negative impact on the IDR.

An upgrade is not expected in the short term in view of the group's still principally buy-to-let focused business profile, but the IDR could benefit over time from management's strategy to broaden earnings, if achieved while maintaining a robust balance sheet profile and continued diversification of the funding platform.

The long-term senior unsecured debt rating is primarily sensitive to movements in the IDR.