Provident Financial deserves credit

Provident Financial is the oldest UK-listed sub-prime lender, founded in 1880 in West Yorkshire. The company has changed with the times and rather than door-step lending, credit cards are now the group's key profit driver. Last year credit card arm Vanquis Bank grew profit before tax by more than a fifth to £186m, accounting for more than half of the group total. During the first half of this year, Vanquis's profit increased another 13 per cent to £100m. That was despite new customer account bookings coming in 32,000 lower in the half at 184,000. Management expects bookings to pick up during the second half as it will spend more on direct mail marketing during the latter part of the year. The picture already began to improve during the second quarter, with account bookings down 9,000 compared with a shortfall of 23,000 during the first three months of the year.

As well as continuing to grow Vanquis, management is trying to create a more diversified home lending business. Part of this strategy means repositioning its home credit division away from a pure door-step lending model, towards digital loans. Agents for the Provident home credit business now use collection and payment apps in order to improve efficiency. This allowed Provident to reduce headcount by 500 last year.

What's more, management is trying to improve the credit quality of its home credit business. As well as tightening its credit standards by being more selective in the individuals it lends to, the business last year sold some delinquent low-value customer balances to third-party debt purchasers. While this meant revenue for the home credit business fell 5 per cent to £255m during the first half of the year, costs were also down 11 per cent. This was thanks to the technological improvements in loan collection as well as lower agent commission.

The home credit division has also seen start-up losses from two digital ventures shrink. Online lender Satsuma added 3,000 more customers during the first half of the year to 48,000 and grew its loan book by £1m to £12.6m. A mobile app is in the works for the third quarter of the year, capitalising on the fact that more than three-quarters of customer applications are made from a hand-held device. Meanwhile, improvements are also being made to fledgling lending brand glo, which makes larger, longer-term loans for big-ticket items such as cars or home improvements. Customer numbers more than doubled during the first half to 5,000. The business is in pilot mode, with management responsibility planned to be transferred to Vanquis by the end of the year.

All in all, the repositioning of home credit seems to be working. Reduced start-up costs for glo and Satsuma as well as other efficiency improvements helped the home credit business boost first-half pre-tax profit by 15 per cent to £44m.

The success of sub-prime lenders depends on the economy being at the right point in the credit cycle. A reduction in confidence post-referendum is a potential risk to consumers' willingness to spend. It is still early days but banking data shows demand for consumer credit is still forthcoming. In July consumer appetite for loans, overdrafts and credit card spending grew more than 6 per cent on an annual basis, according to the British Bankers' Association.