Buy to let lender Paragon Mortgages has made a move to do a deal with private bank Hampshire Trust over the firm’s retail banking licence.
Taking n the licence would give Paragon access to interbank money markets that are mostly closed to non-deposit taking financial firms.
This caused Paragon massive problems in the credit crunch as the firm could not raise funding for new landlord loans and had to close for new business for two years.
Since then, Paragon has picked up funding from Australia that has let the company offer investment loans to professional landlords for houses in multiple occupation (HMOs), blocks of flats, loans to property companies and large portfolios.
Business is so good that Paragon posted a 22.5% rise in annual profits and boasts a thick loan.
Executives at Paragon covet a retail banking licence that would grant them access to the money markets as they had to seek a rescue from an Australian firm to provide finance for landlord customers.
Now, Paragon borrows in funds and then securitises the loans to raise more finance for mortgages.
A banking licence would let the firm use cash taken on deposit as security and allow them to borrow at cheaper rates.
Paragon executives confirm the talks but explained any deal is far from sealed.
Shares in the company are up 1.3% at 243.4 pence with the news.
Paragon’s latest annual figures posted a record pre-tax profit of £95.5 million for the firm, up from £80.8 million in the previous year.
The final dividend paid 4.5p per share, up from 2.65p last year, which gives an annual return of 6p when added to an interim payment earlier in the year.
However, the City warns Paragon provides a weak return for investors.
“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.”