With the main banks still proving picky about the customers they are prepared to lend to, demand for sub-prime credit in the UK remains healthy - that's likely to mean good news for Provident Financial (PFG) when it announces its full-year results on 25 February. Known to generations of borrowers as the 'Provvy', the 134-year-old lender consistently churned out solid earnings growth throughout the economic downturn and sector analysts expect that performance to continue. Yet the shares look undemandingly rated and, unlike many of its conventional banking cousins, it also pays a hefty dividend.
- Credit card business growing fast
- Online instalment credit unit launched
- Cutting costs
- Fat dividend yield
- Home collected credit still facing pressure
- Ongoing regulatory risks
A particularly strong growth story can be found at the Provvy's core credit card unit, Vanquis Bank. Last month management revealed that demand there was still strong and that the UK customer base jumped 22.2 per cent in 2013 to just under 1.1m. Vanquis's average receivables - essentially, the loan book - had soared by around 37 per cent year on year, too, yet delinquency levels (bad debts) have "remained stable at record lows". That growth is translating into impressive earnings progress, and at the half-year stage Vanquis's pre-tax profit jumped 70.7 per cent year on year to £50.2m and the division now generates around 70 per cent of group profits. Management is also rolling out Vanquis into Poland, where it estimates there's an addressable market of 5m-10m customers.
It's a more subdued story at the home collected credit arm, though. This business - which saw pre-tax profit slip by a quarter at the half-year stage to £36.1m - has been in gradual decline for some years, and last month the group reported that customer numbers had fallen 17.3 per cent during 2013 with year-end receivables down 15 per cent year on year. Management put that down to low customer confidence amidst "continued pressure on disposable incomes from the persistent rise in food and utility prices". Still, with economic conditions improving - the IMF expects the UK's economy to grow 2.4 per cent in 2014 - those pressures could abate. Self-help measures should also contribute and management cut £10m of costs at the division during the second half, with £18m of savings targeted for 2014. Such measures will "ultimately lead to a more profitable business but with a smaller loan book", reckon analysts at broker Shore Capital.
PROVIDENT FINANCIAL (PFG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,670p | MARKET VALUE: | £2.3bn | |
| TOUCH: | 1,669-1,672p | 12-MONTH HIGH: | 1,799p | LOW: 1,406p |
| FORWARD DIVIDEND YIELD: | 5.4% | FORWARD PE RATIO: | 13 | |
| NET ASSET VALUE: | 263p | |||
| Year to 31 Dec | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|
| 2010 | 142 | 78.6 | 63.5 |
| 2011 | 162 | 89.6 | 69.0 |
| 2012 | 181 | 102 | 77.2 |
| 2013* | 199 | 113 | 84.0 |
| 2014* | 222 | 127 | 89.5 |
| % change | +12 | +12 | +7 |
*JPMorgan Cazenove estimates, adjusted PTP and EPS figures Normal market size:1,500 Matched bargain trading Beta: 0.73 | |||
The Provvy's growth profile should also receive a boost from October's launch of Satsuma, its online instalment credit offering. Management reckons Satsuma can snatch market share from payday lenders, which are now facing tighter regulation. Specifically, from April payday lenders will be regulated by the Financial Conduct Authority (FCA) and a last-minute amendment to the Banking Reform Bill late last year placed an obligation on the FCA to cap the total cost of credit being charged by such lenders. The Provvy reckons that Satsuma's offering differs from conventional payday lending because loans are repaid on a weekly basis and there are no extra charges for late payment. Management hopes to turn Satsuma into a top three player in the rapidly growing online credit market within three to five years.
But while it's the payday operations that are currently under most regulatory pressure, the high interest rates associated with all sub-prime lending is likely to keep the Provvy's sector firmly on the political and regulatory agenda. Certainly, the rationale for charging more than at the banks is understandable - sub-prime customers are more likely to default and the extra expense of managing that requires the cost of credit to be higher. But it's nonetheless the case that some of society's poorest are being charged apparently eye-watering rates of interest - Satsuma's representative APR is almost 794 per cent, for example - and that will inevitably continue to attract criticism.
