What's new:
■ Default levels at record low
■ Vanquis Bank cleared to take retail deposits
■ Tight lending criteria
Provident Financial is the UK's leading provider of non-standard loans, and despite the tough economic climate, the group continues to make solid progress. Much of this is thanks to a decision to restrict new lending primarily to existing customers, which has helped to push down default levels. Inevitably though, this has restricted the growth of the loan book to just 2 per cent in the first quarter of the year, not only as a result of tight underwriting standards but also due to the continued squeeze on customers' disposable income. There has been some lending to new customers, but the much tighter lending criteria mean that four out of five applications are rejected.
The group has always maintained a good relationship with its main lenders, but in order to reduce the cost of raising funds, Provident has succeeded in securing an agreement with the Financial Services Authority (FSA) whereby Vanquis Bank, which handles the group's credit card operation, will be able to accept retail deposits later this year. However, any benefits will be offset in the short term by additional compliance costs of around £2m relating to the implementation of the EU's consumer credit directive.
Numis Securities says...
Add. Once the economic recovery begins, we expect to see both the home credit division and Vanquis Bank deliver strong and sustained growth. Earnings per share growth of 10.4 per cent is expected this year, accelerating to 20.3 per cent in 2012. Moreover, as Vanquis starts to take in retail deposits, interest costs are set to fall significantly. We also expect the company to maintain its attractive dividend policy, and forecast double-digit growth in the payout over the next three years. Expect pre-tax profits of £156.8m and EPS of 87.2p in 2011, rising to £186.2m and 104.9p, respectively, in 2012.
Evolution says...
Add. Deposit taking at Vanquis is expected to grow so that by 2013 Provident Financial will have fulfilled its aim of funding itself through a relatively even mix of bank facilities, deposits and bonds. Current trading suggests that the cautious stance on the home credit side and higher operating costs will leave the division showing little profits growth in the first half. However, Vanquis is expected to perform strongly, posting underlying growth in pre-tax profits in the first half of around 20.6 per cent and a similar performance expected in the second half. Expect full-year pre-tax profits of £156m and EPS of 84p.
