Paragon Banking Group PLC ($PAG)

So good morning, and welcome to Paragon's 2026 Interim Results Presentation. We will shortly run through the financial and operational performance before providing you with our perspective on the outlook. We'll also spend some time focusing on our capital management strategy. And of course, we will be -- we will leave plenty of time for your questions. But before we get into the detail, let me spend a few minutes running through our key highlights. The first half of 2026 produced another strong financial and operational performance, reflecting the resilience of our business model and the strength of our franchises. Underlying operating profit stood at GBP 146 million with earnings per share up by 2.9% and a return on tangible equity at 17.4%. These outturns were a product of good loan book growth, tight cost control, delivering a market-leading cost income ratio and a resilient net interest margin, all delivered against the backdrop of heightened uncertainty and volatility in financial markets. Group-wide loan growth of 3.8% needs to be considered in the context of the buy-to-let book happen to carry the runoff legacy portfolio, resulting in underlying buy-to-let loan growth of 6.7%. Commercial loan book growth stood at an impressive 9.2%, reflecting the continuing asset diversification strategy itself supporting continuing improvements in NIM. We have continued to focus on costs, where technology investments in recent years have delivered productivity benefits underpinning the market-leading cost income ratio of 35.5%. Our high quality loan book, 99% of which is secured ensures we operate with low impairments and remains well protected even in these more volatile times. So a combination of good loan book growth, highly resilient margins, tight cost control and a high-quality customer base all combined to deliver strong levels of profitability and an excellent return on capital. We've been operating in uncertain times for a sustained period. In fact, in many ways, it's the new normal. But we have done -- what we have done is adapt, reprioritize and become more agile. And consequently, despite the uncertain times, we've built a strong and resilient business with strong franchises in our chosen specialist markets, and we therefore remain confident in the outlook. These 2 charts clearly show the successful outcome of our strategic objective of delivering strong and sustainable returns to shareholders with low volatility. We have achieved a 10-year compound annual growth rate in earnings of 11.4%. And an underlying return on tangible equity comfortably and consistently in the middle of our target range and at the higher end of returns achieved by the U.K. banking sector as a whole. We have achieved this by delivering low volatility in a highly volatile world. And that requires a disciplined approach to the way we run our business. And this approach runs across all aspects of what we do and is significantly important in delivering our future strategy and plans. Let me now turn to our capital management strategy upfront, as this is significant in how we deliver value for our shareholders. We have consistently generated strong internal levels of capital, averaging 2.2% per annum over the last 10 years, supporting our loan book growth, the 40% dividend payout ratio, 4 acquisitions that we've made in the period and GBP 683 million of buybacks. In 2026, to date, we have internally generated 2.4% of CET1 as measured on an annualized basis, supporting the loan book growth and a further GBP 50 million share buyback announced today. We've also issued our inaugural AT1 bond in March, thereby optimizing the capital stack, leaving us with strong capital ratios comfortably above our regulatory requirements. So taking into account the capital generated from our 15% to 20% return on tangible equity, and applying the loan book growth we delivered over the last 10 years, it's not unreasonable to assume we will generate a 1% CET1 surplus each year after covering growth in dividends. In terms of future capital deployment, we expect to continue delivering good loan book growth, but always, as you would expect on a disciplined basis. In addition, we also see increasing opportunities to grow our business through acquisition, particularly as part of our diversification strategy. However, beyond that, we have no ambition to hold on to excess capital. So we are committed to employing our capital to support growth organically or inorganically. Otherwise, we'll return it. One way or another, it will not stay idle. So let me now hand over to Richard to go through the financials in more detail.

Thank you, Nigel. Good morning. I'll start with a high-level overview of our income statement. Net interest was up 2.2% year-on-year, and whilst deposit pricing pressures continue to exist, we've outperformed our own expectations for H1. Cost efficiency remains front of mind with the increasing costs relative to the same period last year reflecting spring, which wasn't a figure at all in H1 '25, the October pay around and also our ongoing digitalization program. Bad debts are up compared to H1 last year, but down around 20% on H2's level. The charge is chiefly related to the cohort of development finance loans that we called out last year. These continue to form the bulk of the provision with GBP 4.5 million of the charge in the period, reflecting extended realization process assumptions. Overall, underlying profits were down 2.5% at GBP 145.7 million. The position on Motor Finance commissions is now all up in the air, given the legal challenges being made to the FCA scheme. And these will no doubt take some time to resolve. Against this backdrop, we've made no change to our provisioning in the period. Finally, for this page, our underlying earnings per share continues to benefit from the share buyback with a level up 2.9% from the H1 '25 position. If we look at NIM in a little more detail, you'll see that asset side spreads have held up well as base rates have fallen, with a spread on mortgages continuing to benefit from the runoff of the old legacy book. The continued growth in the higher-margin commercial lending segment alongside the back book, front book mortgages benefit combines to support our structural asset side NIM benefit. Despite our continued strong asset margins, overall group NIM was -- has declined from 313 basis points in H1 last year to 308 basis points in the first half of this year. As I said, this is a stronger H1 performance than we previously expected. And on the assumption that deposit markets remain at their current competitive level, we'd expect the year-end outturn to be around 300 basis points. This is at the top end of the range that we pointed out at the start of the year. I'll cover deposit spreads in a little bit more detail on my next slide. As noted on the slide, the deposit spread benefit we enjoyed when rates were at their peak has nearly fully unwound in aggregate, with fixed rate deposits now swapping back to a premium to Sony and the benefit having tightened on variable rates as base rates have fallen and the market has maintained its competitive nature. Spring has grown to GBP 1 billion in its first year, and we expect to be adding further functionality over the coming year, including a cashless or option. Another element of our funding mix has been our positioning on deposit platforms. Over the past few months. We've been running a couple of these down as we bring others online. Managing this timing difference between platform inflows and outflows has been made far more straightforward by accessing the sterling monetary framework to repay options. These are straightforward to use, economically priced and lean on our Gilt holdings and material levels of preplaced collateral and as detailed on the slide. As noted on the OpEx side, we continue to be laser-focused on operating efficiency, and we're pleased with the H1 outcome. Whilst cost to income represents the metric the industry is most familiar with, the pure efficiency measure is the cost of asset ratio. And there, we saw a 1 basis point improvement in H1 '26 compared to H1 '25. The cost-to-income chart shows the build of our cost by type detailed in the proportion reflected by our tech spend as we progress our digitalization plans. We also show you the value of our capitalized software balances in the chart below. In a fast-moving world of rapid technological advancements, our general view is that high levels of capitalization can over flatter short-term results and generate potential overhangs for the future. Hence, very modest balances we carry at Paragon despite the ongoing multiyear digitalization process. Moving on to our economic slide. This looks very different to the way our multiple economic scenarios, which are originally shaping up in February. Further growth, stronger property market and the conditions to start moving our scenario weightings back to more normalized levels, where each turn on their heads by the war in the Middle East and the ongoing repercussions. You'll see from the chart that a major driver for impairments on our model books continues to be the house price outlook. In particular, the house price declines embedded in our severe scenario. The relative strength of the housing market is also a factor for assessing the provision requirements for our non-model books, where they impact time sale assumptions and project value assessments for our development finance portfolio in particular. This moves us neatly on to look at H1's impairments. The main feature for the period is covered in the bottom right chart, where the pre-September '22 development finance cohort generated GBP 13.4 million of charges in the period. As I said earlier, GBP 4.5 million of this relates to additional interest that is now assumed to be charged on those accounts of the future realization period for the finalization of projects and their sales being extended. The cost of risk for the GBP 16.3 billion wider portfolio was just 10 basis points. This is the sum of the 2 lines shown in the red circle on the screen. The overlay we held at 30th September in respect to potential volatility on the pre-September '22 development finance cohort has been absorbed in the year. And the other overlay we held in respect of haircuts being applied to larger and more seasoned buy-to-let properties has now been embedded in our core IFRS 9 model, meaning the need for additional overlays outside the models has disappeared. For the capital bridge, the first column on the slide shows the 1.2% CET1 generation in the period, which equates to 2.4% annualized that Nigel mentioned earlier. The main use of capital generated in the period was on capital distributions, the buyback, foreseeable distributions or dividend, sorry, and the coupon on the AT1 issue with only a modest amount required for growth. Against the backdrop of overall balance sheet growth, the portfolio risk weight fell in the half year as the highest risk-weighted asset development finance saw net repayments, which in turn restricted the amount of capital needed to support the balance sheet. The chart also shows the impact of the first half's 81 issue on our Tier 1 ratio. Each of our CET1, Tier 1 and total capital ratios are running above our regulatory requirements. Despite reducing from its year-end '25 position in the capital bridge, the risk weight across the portfolio was exactly unchanged from its position last year's interim. We've made further progress on our IRB accreditation with the PRA during the half. As I've commented on before, though, the timing of any eventual accreditation remains the gift to the regulators and will be determined by their final requirements and the considerations as to when we meet their new materially compliant threshold. So therefore, remains a possibility that the group move on to a 3.1 basis before a formal RB accreditation is received. Will this be the case, our latest estimate for the Basel III impact on CET1 is 95 basis points, and that's based on the March 31 balance sheet. But this leaves us with plenty of capital to meet our plans. This would see us with a strong capital position as an above 3.1 environment, we'd be happy to take our CET1 level down to around 12%, particularly following the issuance of our AT1 instrument, which bolsters overall Tier 1 resources. When looking at your models, it's worth noting that any inorganic or faster organic growth, we should be expected to deliver something that beats the return you'd get on the buyback. So managing a forecast CET1 for a stand on that basis, should give you the best basis to work out our future earning profile for the longer term. The chart on capital management looks at our capital generation of CET1 over recent years. It excludes fair values as they tend to 0 over time. And it also shows how it's being utilized through both growth and dividends. The trend is clear, but each year, generating strong surplus that has been utilized in our share buyback. This core generation of excess capital provides an underpin for supporting our longer-term earnings growth that exceeds the rate of underlying profits. As a reminder, by following the strategy, we've reduced our share count by 120 million shares since 2025 -- sorry, since 2015 when we started the share buyback. So around 40% of the issues -- of the shares issued at that time. As Nigel said, we remain committed to returning excess capital to shareholders. And as you've heard, we've announced another GBP 50 million buyback this morning with today's results. Thank you all very much. I'll now hand you back to Nigel.

Great. Thank you, Richard. So far, we've shared with you our strong underlying performance for the first half of '26 and how this reflects favorably against our longer-term strategic priorities. I will now turn to the trading environment and how we are navigating this period. The geopolitical situation has been disruptive. And whilst the primary impacts for banks at least to date appear to have been somewhat muted, we must remain guarded around the secondary effects. The financial markets, particularly gilts and therefore, swaps have seen significant volatility across the yield curve. This has required dynamic management of new product and pipeline pricing, running at 6x above normal levels. And it's particularly pleasing to see that we have delivered robust new business levels, good customer retention and margins ahead of guidance. You'll remember, our approach is always to prioritize margin and risk over growth. The credit environment has been benign for an extended period and our loan portfolios are performing well. Arrears levels remain low and our forward-looking lead indicators across the portfolios point to no emerging signs of stress. Nevertheless, we must not be complacent, and we continue to monitor customers' financial health closely. The development finance provisions continue to reflect the 2022 cohort, and the remainder of the portfolio is performing well. The environment has been competitive, particularly in funding. Here, our strategy to diversify has successfully mitigated these pressures. Loan book spreads have been resilient, and the growing diversification in our lending book has seen the wider margin commercial lending business continuing to grow well, all supporting NIM outperformance. The rate of pre-provision profit growth in our Commercial division has been materially faster than mortgages over the last 5 years, and we expect that to continue. Commercial margins are typically 3x larger than mortgage margins. So the structural importance of the asset spreads is clear. During the period across all of our divisions, we have continued to innovate, launching new products and adding features that extend propositions targeting new distribution and new customer segments. 2026 has also seen further progress in our liability diversification plans, including wholesale, where we have been somewhat underweight by comparison to others in the broader banking sector. Here, we have been making increased use of the cost-effective repo arrangements and we can also access our covered 1 program when it makes sense to do so. Looking forward, we are exploring opportunities to enter the SME sector more broadly and the corporate deposit markets. We already have extensive saving product ranges across numerous brands, and we make good use of third-party platform relationships. A year ago, we launched Spring and balances at the end of March exceeded GBP 1 billion. We are building on the success of Springs initial launch phase with a range of additional products to be launched in the future. We have also recently entered the SME savings sector through platform relationships, and we plan to expand this in the second half of the year. Richard spoke earlier about margins, but the important point to note here is that liability diversification provides us with optionality. And that gives us greater control over pricing. We can dial up and dial down our presence in different markets across different brands. whether directly or indirectly via platforms or using wholesale options. With only one funding source, the market will dictate your pricing. So the more you can diversify your funding sources, the greater the opportunity that exists to optimize prices and, therefore, returns. Diversification may accelerate through acquisition opportunities. Over the last couple of years, it's become clear that the consolidation talked about for some time has finally started to happen. Given our diversification and growth priorities, we see ourselves as a consolidator. But importantly, as you'd expect, we will not do things unless they make compelling strategic and financial sense for our shareholders. You're aware that we have been running a major series of replatforming programs over recent years, aimed at improving customer experience and productivity. By the end of this year, we will have only one major replatform into complete. These system changes are making a real difference. 94% of our core systems are now cloud based. A bespoke digital mortgage origination platform has accelerated speed to market, including repricing capabilities, as you've heard, boosted customer experiences, transformed the underwriting processes and is improving our conversion rates. And of course, Spring, our outstanding new savings account was developed using advanced technology to deliver a best-in-class product. We've also been making extensive use of machine learning AI in a number of our business lines for some time. But clearly, Gen AI has become an increasing focus, and we are actively stepping up our activities in many of our business areas. Microsoft CoPilot is now available to all colleagues and we're providing AI training to optimize its use naturally with appropriate guardrails. But more broadly, we are using Gen AI to beat unstructured text as well as system coding, cybersecurity, complaint handling and bulk documentation analysis. These are genuinely exciting times and I would expect improvements in productivity and customer experience to emerge as this technology becomes increasingly adopted across the group. Our replatform in strategy is achieving improved customer experiences as well as the benefits of efficiencies, the business with our cost/income ratio standing at the market leading 35.5% and our head count 7% below where it was 3 years ago. So turning now to our lending divisions. As a specialist buy-to-let lender, we are focused on supporting professional landlords, typically with multiple property portfolios frequently with complex property requirements and often with bespoke borrowing arrangements, which can require extensive personalization. In this regard, we've introduced a number of customer-centric innovative products and process improvements during the first half further strengthening the depth of customer relationships. The professional landlord is in the ascendancy in the private rented sector. And as always, scale will provide benefits in dealing with increased legislation and regulation. At the beginning of May, the renters right at came into force. And whilst it's clearly too early to draw any conclusions, we know our landlords are well prepared. Credit quality in our buy-to-let customer base is outstanding with good LTVs, strong affordability, modest arrears and negligible impairments. Our buy-to-let loan book grew by 3.1% in the first half of 2026 although as mentioned, the underlying growth was 6.7%. Whilst much focus is always on the new lending volumes, we have had great success in improving our customer retention levels with GBP 1.2 billion, some 80% of fixed rate maturities over the last 12 months, extending their borrowing with us, helping to deepen the customer relationships and extend its duration. The environment is clearly unhelpful for mortgage activity. And although we expect full year volumes to be towards the lower end of guidance, this will be compensated by improved customer retention, leading to good loan book growth and a further strengthening of the franchise. Housebuilding in the U.K. has been running at disappointing levels in recent years, affected by the broader economic uncertainties, high build cost inflation, affordability constraints and the continuing challenges from the planning and regulatory environment. Despite these headwinds, we've made good levels of new lending. Our development finance business is an award-winning market leader in finance in small and medium-sized housebuilders with a franchise built on the strength of a relationship-driven model supported by teams of highly experienced property professionals and in the first half of 2026, over 65% of our new facilities were to existing customers. Richard covered the impairment charge in detail earlier, but what is clear is that the lending outside of the 2022 cohort is performing very well, exactly as we would expect it to be. Alongside the strength of our core propositions, we have also extended our product range, building a strong capability in build-to-rent, care home development finance, and more recently light industrial. But of course, we would like to see more tangible and effective government action on both planning and regulation to get the industry anywhere near close to building the levels required to meet the country's housing needs. For SME lending, the vast majority of which is asset-backed has seen strong and consistent growth in recent years. Despite the market happened to unwind the effects of COVID lending facilities where for several years, the majority of the U.K.'s SME loan stock was government backed. Our success in this area can be attributed to the depth of experience in specialist asset-backed markets, combined with the application of new and advanced technology, delivering an improved customer experience and better productivity. Technology not only allows us to improve our new application processes and deliver significantly more customer data, but we can now access customer cash flow data in real time, enabling us to monitor performance closely and identify issues at an early stage. Indeed, arrears in SME lending stand at only 54 basis points, in fact, on a par with buy-to-let. And similarly, impairments are negligible. In SME, we've also been extending the breadth of the asset classes we can finance, including increased activity in the sustainability space and additional facilities provided alongside the government growth guarantee scheme. Other product initiatives should be expected in the second half. Despite the market issues due to the FCA motor commissions remediation scheme, our motor division continued to deliver robust growth through its specialist asset class focus. It's far from clear when we will see a conclusion to this. And whilst we are well provisioned and operationally prepared, what the industry really needs is a resolution to this long-running scar on the landscape. Structured lending has been strong with new facilities increasing by 20% and drawn balances by 30%. Credit quality across both our motor finance and structured lending divisions has been exemplary. For Commercial Lending division as a whole, we continue to guide to GBP 1.2 billion to GBP 1.4 billion of new lending in 2026. So in conclusion, we are assuming that there will be no assistance from an improvement in the U.K. economy, nor on interest rates, even if there is a resolution to hostilities in the Middle East. We therefore believe we are adopting the right strategy, pursuing disciplined growth and protecting margins, focusing on our franchisees and continuing to build on our technology successes, thereby enhancing customer experiences and improving productivity. Our diversification strategy will continue, having added a number of new product lines and recruited teams into our commercial division supporting organic growth at enhanced margins. We will also continue to explore opportunities to grow and develop at the business through acquisitions. Today, we have upgraded annum guidance despite the competitive landscape and upgraded our cost guidance despite the inflationary backdrop whilst delivering robust new lending levels and strong loan book growth despite the weaker environment. We have a clear focus on capital management with strong internal capital generation, consistently delivered over many years providing the opportunity to support growth organically or inorganically, and a commitment to repatriate surplus capital to shareholders. Our core objective is to deliver strong and sustainable returns to our shareholders. And we reconfirm our guidance of being in the middle of a 15% to 20% return on tangible equity. So thank you, ladies and gentlemen, and we are now happy to take your questions.

Sanjena, I think you're first.

Sanjena Dadawala from UBS. Two from me, please. First, if I could ask about the NIM trajectory deposit spreads down to 0 and guidance implies NIM just above 290 basis points in the second half. So what's driving that sharp decline half-on-half? And how should we think about FY '27 in that context? And second, on impairments, the workout of the troubled development finance loans is taking longer than expected, and there are more cases going into arrears. And I also saw the breakdown table shows the charge on the rest of the development finance book also higher. And I think there's new data on the provision coverage is at 24%. Just like how are things expected to play out from here? Is that provision cover enough? It's just been worse than we expected.

Sure. Happy to take both. In terms of the NIM trajectory, we started the half at 313 and we've ended up just 1 basis point or 2 over 3 in terms of the exit NIM. So the sort of trajectory that we're looking at in H2 is not that dissimilar to the one we've seen in H1. I think the -- if you look at the scale of, in particular, the growth in rep [indiscernible] I think that's unlikely to repeat in the same scale in H2, which may mean something of the same -- sorry, a slightly smaller benefit, but also, we're still expecting the faster runoff of that development finance book. One of the things that we have seen so far is that it's taken longer to unwind, sort of links to your second question as well. But the quid pro quo of having those loans around for longer is that you earn more is the highest yielding asset that we've got. So I think if you're looking at that overall guide for the market, does that imply somewhere down the low 290s at the end of the period. If you're at exactly 300, yes, but we sit around. So it could be around that sort of level. On Development Finance, in terms of the -- in terms of the provision that's come through, I'd say all of the material change has been in that pre-September '22 cohort, so GBP 13.4 million of the total charge. The other charges probably up a tiny bit, but that probably just goes to our reassessment and where we see just like through the cycle charges on a bigger balance. But I wouldn't say there's anything particularly to call out there. Anything that has come through, if you like, new in the period has been relatively modest in the stream of the losses are being provided relative to the changes we saw in that portfolio last year.

Can I add something about on the deposit side. I find it a bit odd that you do -- people are raising money with easy access or easy access products anywhere from 50 basis points plus, and there's a lot of them at that level, 50 basis points above base rates [indiscernible]. When we can issue kind of repay finance at 15 over and we can issue covered bonds at around, I don't know, the market is up 40-50 over. I kind of find it on you, who can do capital market 3, 5-year money at a lower price than easy access. It kind of doesn't -- it just doesn't feel rational to me. So when I kind of look at it and go, well, where is this pricing going to settle down that? And clearly, it's kind of like it's moved a lot. But some of it just doesn't make sense. -- understand these brands, you need to support your brand, you need to support your market positions. But just the logic of the mass just doesn't make sense. Hence, why we choose to have optionality. We choose to have choices. We choose to have those levers. So we can choose where to play, not be beholden to a market that sets the price for us. Sorry, that's round over at that point. Ben, you're up next.

First 1 on your comment around consolidation. You've been pretty open historically about the potential for you to perform M&A if you can find an attractive asset, which is look strategically good. Are we far enough now down the line of motor finance that you consider a target that had a motor back book if it was provisioned -- if it had fully provisioned its commission exposure? And then the second question is around capital. I think you said that you're happy to run down your CET1 ratio to 12%. Is that true in both a pre and a post IRB world? And if it's only in a pre-IRB world, why?

You do that. Well, let me just deal with the first one. I mean, I think the thing on notice is still up in the air. So the court process will run its course. That's expected to be October maybe November. You then go to get the judgment handed down. So maybe quarter 1, 2027. The range of potential outcomes is enormous as in you've got competing interests there. You've got the CMC agenda, which wants to increase interest rates, increase the penalty interest rate increased to change the thresholds and you've then got the lenders who kind of want something completely different in the opposite direction and maybe the whole thing even thrown out. So you've got a range from somewhere north of the current indicated numbers to 0. With that level of uncertainty, it makes it very difficult to put a value on a mortgage business -- sorry, a mortgage, a motor finance business, and whether it is a portfolio or -- but you have to understand where the remediation cost could land. So it's just very difficult. I'm afraid, Ben. Sorry, but we book -- that doesn't stop our interests in consolidation generally.

Yes. So specifically, we're calling out 12 as a number in a basel 3.1 environment. If you think -- we -- the bulk of the balance sheet is buy-to-let that is poorly treated in the Basel 3.1 we've had those conversations before you compare that back in terms of the performance of the book, where we've got 7% growth year-on-year for the new book. We've got 18 basis points of areas within the new book. You've got wide margins. The performance has just been exceptional. At that point, it's very asset actually were quite happy being at the bottom end of any normal range because of that quality. And effectively, you're looking through to a risk weight that is suggesting that it isn't commensurate with the risk that we see within the book. So we're happy to operate more towards the bottom of the range. In terms of IRB, there's a very different metric there. You have as well as your risk weight levels you have your an expected loss multiple that linked effectively to your risk weight relative to your IFRS 9 provisions, but also a very different profile than in terms of your pillar to whereas types a much bigger add-on because under IRB, you have the position where you get geographical concentration risk that gets dragged into your mortgage book, whereas at the moment, that doesn't exist for standardized. So just in terms of making sure your overall capital stack works, I would expect our CET1 target to be higher under IRB than standardized. How much of that is going to be will in large part depend on the feedback we get from the regulators.

And whilst having a ramp, geographical concentration risks, add-ons 1.4% -- 1.4%. SP1 It's well in that number. But it's like for most of the U.K. banking sector, we lend or operate in the U.K. But the argument that we hold more capital than if we've chosen to be an internationally based operation. So if we have operations in Australia, America, South America, it doesn't matter where the capital all is lower. I just don't get it. Like I don't get the deposit pricing, just doesn't make sense. Anyway, we'll see what comes. But again, I'm not holding out too much hope. There's a question up there first.

It's Kimber from Edison. Just 1 question. You -- and I think it relates a bit to a previous question, but if you could elaborate a little bit more on sort of on consolidation, just a wider, how do you see it? How do you see the sort of playing out what's going on at the moment? And what are you interested in? You mentioned it as part of your sort of diversification strategy? And I think in terms of how we would look at your capital built these kind of things as well. So if you could just elaborate a little bit on how you see that.

Okay. Sure. So yes, we -- when I look and see what's happened and how NIM. So you've seen some kind of consolidation happening. It's largely been focused to date on the high street challenges, should we call them. The kind of the Virgins, the TSBs, the co-op [indiscernible], they've all been consolidated up pretty much to the clearers. And so the gap now between kind of the clearers who are kind of a bigger is huge. So you've got clearers and then you've got specialists. And post the financial crisis, there was an encouragement to kind of create banks go out and multiply within the bank. There were 40 new banks created in that period. And I think in many ways, there's a lot of people doing pretty similar things. So for me, it feels like there is -- a lot of people suffer from the diseconomies of scale. Regulation is a high fixed cost operating model, whether you have GBP 1 billion in assets or GBP 20 billion, you still need a board, you still need compliance, you still need oversight. You still need all the controls. You can't turn on and say, we're a small bank. We're not going to do consumer duty. So you have to do it. It's an entry ticket. So the smaller ones will probably struggle a bit. And therefore -- and if there's differentiation in terms of they've got something unique, I think there's a lot that are not, there's a lot that look a little bit too semi. So I think there will be consolidation that will take place for a variety of reasons, whether it's uncertainty over the conduct rules, us rules, motor commissions, MREL. It's -- some of those clouds have been clearing. There's one cloud that hasn't yet. But the consequence of it -- the consequence, I think, is there is a better framework within the environment to allow it to happen. So for us, looking at us specifically, we -- if you look at our balance sheet mix, you might regard us as overweight mortgages underweight everything else. We do a little bit in retail in consumer, motors, but very, very small. Most of it is the other is in commercial. And commercial is a very broad touch. It's all manner of products, all manner of divisions within -- even within -- so I'd probably regard that as the most likely area that we will see the opportunities emerge. But as always, the one thing you can't do is ever put it in your business plan. You can't rely on them. If you can't force anyone to sell to you. So you've got to spend a lot of time, which we do, looking at a range of opportunities but it's not always easy to find the right opportunity. And if it doesn't, it doesn't matter because, as I said to you earlier, our capital deployment strategy is to support our organic growth. If inorganic comes along, if it doesn't, we'll give it back.

It's Abid Hussain from Panmure Liberum. I've got one question, possibly 2, if I can come back to the question yourself. So the first question is on funding. Just wondering what else can you do from this point onwards to diversify sources of funding? And then just secondly, if I can come back to the question on M&A. So it seems like you're interested in potential books across the commercial space. Any more sort of color on what sort of an ideal book might look like? Would you be interested in tech platforms, for example -- just any more color on that would be great.

So in terms of the diversification of funding, we've already done a lot. Then it's about optimizing what you're doing. So we have a covered bond program. We've done 1 issue, okay? So there's more to come. We've got a whole range of repo lines. We have used them, but not extensively. So just look at those on the wholesale side. Within the -- we've pretty much got good market coverage in the Paragon branded offering. But what we haven't really extended is some of the opportunities on the platform side. So what we then can extend to is corporate deposits. So these are kind of maybe larger corporates, but then we also have the opportunities on the SME deposits. These are very big markets in their own right. So they become another opportunity. So the SME market, I would break into 2. One is there are platforms that specialize in doing SME deposits. And then there is an opportunity to do it in our own name rather than the third party. So as you can see there, and I haven't touched on securitization. I mean, that feels like a distance. We do use securitizations, but it tends to be to create collateral for alternative funding, things like repo lines. But when we look at that, there's better -- more use of what we're doing -- and then there's a whole series of markets we haven't even tapped into yet. So there's a lot more to come on the liability side than we've done to date. And in terms of M&A, I kind of -- I'm not sure there's much to add apart from just the fintech side where kind of valuations are clearly very high relative to a classic bank model, and we are more of a classic bank model despite the fact we make extensive use of technology, we've never been tempted to call ourselves a fintech. But the -- when I look at the valuation models of some of the kind of the fintechs, maybe one day at some point in the future. it will be proven that they're right. But all of their values in the terminal, all of the value is about excessive growth at some point in the demand distant future. The potential is potentially -- could be big, but your value in all of that to come in to you today. And for a bank, to pay significant amounts of goodwill has a pretty severe capital treatment. It's every pound of goodwill is straight off your capital to deliver profitability, maybe good profitability many years into the future. It doesn't work that well, frankly, under a bank model. So I wouldn't say no, but I think you might have got a direction of where my thinking is. Does that cover your point? Okay. Is there any more questions from the room? Jonathan?

Jonathan Pierce from Jefferies. Just want to come back to the funding question. I completely agree with you, Nigel, that some of the pricing out there nonsensical. I just don't understand why certainly sustainably, you look to raise deposits at some plus 40 to 50 when the ILTR is there. And I think you're doing the right thing deploying ILTR in reasonable size. My question is your usage of ILTR I presume there's some STR in there as well, but it looks to be about 1% of the total industry's usage at the moment, which is a little ahead of your share of M4 but not by very much. How much further are you prepared to tap that, if deposit pricing does remain this competitive at your end of the deposit market. I mean it just strikes me that you can move from GBP 1.7 billion up to say, I don't know, GBP 2.5 billion to GBP 3 billion, still wouldn't be excessive relative to raising deposits at 40 plus 50 over and that's going to save you 15 basis points of NIM. So interested in how far you think you can push I LTR, please. And also maybe you can frame the answer in the context of the comment you made in the release around retail funding longer term being about 90% of the total funding base, we're already below that now at about 86%. What's more important, keeping the retail funding at 90 or pricing economically?

So I think there's probably a number of points in there. There's a kind of a longer-term strategic objective, and that's where probably more than 90% is through the cycle, that's where we would see the norm operating. But in any point in the cycle, you may deviate from the mean. So -- and I think you're in that phase at the moment. And we will, therefore, be comfortable -- we have been comfortable, more than comfortable in increasing our use of repo -- let's call it, nonretail sources because there's a variety of those. We're also -- I kind of like -- I wouldn't say it's lucky, but we have the benefit of substantial amounts of pledged capital that we can lean on. There's what -- GBP 8.5 billion of capital that is pledged or capable of being pledged. That's a lot of funding, lots of funding capacity that we have. If you use all of that, then you don't have any to deal with ebbs and flows in liquidity if you used all of it. So it's unlikely you want to use all of it. However, there is more capacity than we are currently using. And in terms of -- we haven't found any resistance from the Bank of England to the use of ILTR. In fact, I'd say there's positive encouragement to use the Bank of England's various schemes. So this capacity, there's flexibility. I said the 90% is kind of a longer-term measure. But through the cycle, you'd be prepared to move away from that 90%. Nothing more from the room Okay. What about online?

Okay. I've got a couple here. The first one is from Rob Noble at Deutsche. I think we've answered quite a few of the questions that have come through on the web. I'm just going to go with the ones that we haven't already answered in the room. So first one from Rob is, can you share anything on the planning assumption for cost of risk when rating a development finance loan?

The planning assumptions, I think we can't -- we can't give you kind of like what we've got in our plan for obvious reasons. But in terms of through the cycle type of number that we would assume, I appreciate you're not exactly bang in the middle of the cycle at the moment. But again, I think you have to be a bit careful about that. I'm sure we've got a few competitors that would love to know the number. .

Somewhere between 50 and 100 basis points, I would say, is the through the cycle range -- that gives you a .

the finance -- that's not a portfolio as a whole.

Which will give you -- clearly, quite a lot of range in terms of the pricing model. So I'd rather not sell more than that. .

Okay. Going on to the next one is sort of looking at 2 coming through from Ed Firth and also, I think, similar questions from John Cronin. So if I go with that, have you had any sort of feedback from the Bank of England about the seeing the CET down 1% with Basel III and then presumably jumping if you get and is your impression that you're any closer to approval now. And then are you tempted to give up on IRB and go for the new foundation proposal? And [indiscernible] IRB. .

I can definitely say we're closer on IRB than we were 6 months ago. just want .

SP1 I'm much close to dying as well. .

Look -- so look, we continue to have good engagement with the PRA, but it's a very complex process. And still, there are a lot of the incumbent IRB banks that haven't had their models signed off. So there is a price as we're going through, and we'll deal with that in due course. I think in terms of the -- we have nothing that from the PRA, particularly about the move from a current standardized, the 3.1 to IRB move, they see that we've got adequate capital. I think if we were in a position that we were saying we didn't have enough capital. I'm sure that we'll be having some very interesting conversations, but that's not the case. So that would just be an element that they're dealing with. Foundation IRB in terms of your probability of default, that's going to need to be the same sort of work you're doing anyway. And from an LGD perspective, which is the other element of the piece, they're going to be prudent on that. So from that perspective, you would expect anybody who ends up using that would end up probably with a higher LGD than ideally data that we would have would suggest. So it wouldn't be your first political .

Okay. And then this one is from John on the IRB accreditation work, our buy-to-let and Development Finance books substantially advanced or is it very much by to that first development finance leader?

SP1 In terms of the engagement with the PRA, it's very much buy-to-let led, but we've been running with what we see as being credible slotting models for development finance for some years now. So we're ready to go, but any actual formal application will follow another action.

Okay. And this is the final one, of course, at the moment. This is going back to Ed. If you look at the deposit spread chart on Slide 10, it looks like the first half spread is a bit better than the second half of '25. Is that a post-Iran trend? And what are you seeing at the front end and that area specifically. .

I think some of that is just down to product mix. And in part, that will be because driven by some of the changes we've had with platforms where we've for the ones that we've exited, they've been more variable rate heavy. So I think that's probably the driver of that position. But I'll pick up separately with that give a bit more detail.

Thanks very much. That's, I think, everything that's come through on the web.

Okay. So thank you very much this morning for your attention. For the analysts amongst you, Richard is available today, tomorrow and the next day or just those 2 days.

That's enough.

And happy to have discussions with you to kind of help you work through everything. So thank you very much, this morning. We are genuinely delighted with these results. I think it continues to show a very disciplined business who is able to deal with undoubted uncertainty and volatility that exists out there and continue to build on the strength that we've got. And importantly, decent growth is coming through. Margins have been very well protected in a very competitive environment. Things that we can control, like costs, very much tightly controlled. Despite good investments, high levels of investment in technology, where we're not like deferring the problem for future years through capitalization. And importantly, internal capital generation is really strong, 2.2% average over 10 years, 2.4% average over 5 years, 2.4% this year, and it's going to throw off about a 1% surplus, which we have to do something with. We grow organically, inorganically, if those opportunities can come around. And if we don't, we'll give it back. So the 17.4% middle of the range, return on equity is kind of the core underpin to that. But it's that ability to have the options, whether it's the options on the liability side, it's the options -- increasing options that we're creating on the asset side plus the options that we've got in how we deploy our capital. If there's one thing my colleagues will -- if you said to them what what would be the abiding one word memory of me, the optionality, just give me choices, and I think that's what you need for a business like us. Okay. So thank you very much. As I said, Richard is available. And if not, we'll see you in 6 months.