Strong trading at Provident Financial

Provident Financial (PFG) supplies non-standard loans to people unable to gain credit from a mainstream lender but, despite that, the quality of its loan book remains impressive. This is mainly because demand for credit has grown as high-street banks pull back from making unsecured loans, thus allowing Provident to be very selective about who it lends money to. Even so, the ongoing squeeze on disposable income has meant that lending to existing customers with good payment records has been relatively subdued in the seasonally quieter third quarter. However, a range of incentives for agents who deliver high-quality growth, together with seasonal demand, are expected to boost receivables in the fourth quarter.

The credit card business, Vanquis Bank, saw customer numbers in the third quarter to the end of September 2012 rise to 834,000, representing a year-on-year growth rate of 26.6 per cent. Competition in this area has been increasing, but Provident still reckons it will achieve over 300,000 new accounts this year. Even so, credit quality remains good, with delinquency levels at record lows. There have been no problems funding the loan book now that Vanquis is a licensed deposit taker and retail deposits of £295m equate to around half the bank's receivables.

Shore Capital says..

Hold. Home credit performed a little weaker than we expected, although this was countered by further solid growth at Vanquis. However, competitive pressure is starting to build and the company is having to invest heavily in marketing and advertising to continue delivering strong top-line momentum. Around £3m has been allocated to a credit card pilot scheme in Poland, with encouraging early results. However, a decision to initiate a full roll-out would probably mean a two-year loss period before it builds sufficient scale to be profitable. Expect 2012 adjusted pre-tax profits of £178m and EPS of 100p (from £162m and 162p for 2011).

Numis says..

Hold. Vanquis is likely to maintain the current impressive growth rate, and there is plenty of room for expansion, with Vanquis accounting for just 1 per cent of the UK credit card market. And the home credit side boasts a dominant market position, which can only become stronger as the economic situation improves. Profits for the current year are expected to be £189m, producing EPS of 106.8p, rising to £213.5m and 120.9p, respectively, next year. However, given a rating of 13 times forecast earnings, we are moving our recommendation from add to hold.