Should investors pass on Lloyds shares for this lesser known bank?

Paragon Banking Group (LSE:PAG) is a UK-focused specialist bank, listed on the FTSE 250. Unlike high street giants, its roots are in specialist lending, particularly buy-to-let mortgages for professional landlords. Today, I’m wondering whether it’s a reasonable alternative to Lloyds (LSE:LLOY) shares, which have surged over the past year.

Over the past decade, Paragon has diversified. it now offers a broad range of savings products to retail customers and provides commercial lending to SMEs, including asset finance, structured lending, and property development finance. The group’s business model is built on deep sector expertise and a focus on underserved niches, funding its lending through online personal savings as well as central bank funding.

Is it cheap?

At first glance, it looks relatively good value. Earnings per share (EPS) are expected to rise from 85.2p in 2024 to 114.6p by 2027, a compound annual growth rate of about 10%. That’s pretty strong for a financial business.

As such, the company’s price-to-earnings (P/E) ratio is projected to fall from 9.6 times in 2025 and fall to 7.9 times by 2027, indicating that the market isn’t pricing in aggressive growth but does see solid earnings stability.

The price-to-book ratio (P/B) is forecast to remain between 1.2 times and 1.06 times during the forecasting period. This suggests the stock is trading close to its book value and is a sign of reasonable valuation.

However, Paragon stands out for its consistent and growing dividend. The dividend per share is projected to increase from 40.4p in 2024 to nearly 50p by 2027. This supports a forward yield in the 4.7%–5.5% range, with a payout ratio around 43% of earnings.

This is enabled by improving revenue over time. Net sales are forecast to grow steadily from £496m in 2024 to £540m in 2027, supporting the sustainability of both earnings and dividends.

How does Paragon compare to Lloyds?

I mentioned Lloyds at the start and the table above table highlights Paragon’s more conservative payout and lower valuation in the near term, while Lloyds’ yield becomes more attractive as earnings grow. In fact, Lloyds, despite being a more mature institution, actually offers stronger earnings growth. It’s cheaper at the end of the forecasting period.

Personally, I don’t believe Paragon’s valuation multiples suggest it’s undervalued compared to Lloyds. It actually appears a more conservative option, given the Lloyds growth trajectory. As such, I won’t be adding Paragon to my portfolio in the near term and I don’t think it’s the best one for investors to consider. It’s certainly an interesting prospect, but I’m already well exposed to banks through the likes of Lloyds and would suggest that the high street bank is worth a closer look for anyone looking at the financials sector.