Provident Financial (PFG) has been around for over 130 years, more recently lending money to people with blemished credit credentials, or those who have been cold-shouldered by high street banks keen to reduce their exposure to unsecured personal borrowing while they deal with an already toxic loan book. And for the Provvy, the business model has worked well. In fact, the group now has 2.7m customers who have taken out small loans or who own a Provident Financial Vanquis credit card.
- Attractive yield
- Vanquis profits up 61.3 per cent
- Vanquis customer numbers up 30 per cent
- Impairment levels steady
- Premium rating
- Political attacks on non-standard lenders
And it is the credit card side of the business that has been providing the explosive growth seen recently. Most credit card customers have been turned down by mainstream lenders, but the group has its own strict lending criteria. Indeed, out of 1.6m applications processed in 2012, only 375,000 were accepted. Despite this strict vetting, Vanquis customer numbers grew by 30.1 per cent last year in the UK to 899,000, and year-end receivables (the amount owed to Vanquis by borrowers) jumped 41.5 per cent to £641.5m.
So, even though impairments rose from £76.9m to £95.9m, the risk-adjusted margin - that's revenue less impairment as a percentage of average receivables - was barely changed at 34.8 per cent. Vanquis is also a licensed deposit taker, and deposits last year rose from 31 per cent of receivables to 51 per cent. This trend is expected to continue, reducing the overall funding rate by one percentage point this year. In fact, following an agreement with the Financial Services Authority, the group will be able to finance up to 90 per cent of Vanquis receivables from deposits. Of course, wholesale funding is currently easily available and very cheap, but it wasn't in 2008 when the lack of it put many financial outfits reliant on wholesale money (such as Northern Rock) out of business.
| PROVIDENT FINANCIAL (PFG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,598p | MARKET VALUE: | £2.22bn | |
| TOUCH: | 1,597-1,600p | 12-MONTH HIGH: | 1,663p | LOW: 1,064p |
| DIVIDEND YIELD: | 5.8% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 271p | |||
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 0.87 | 142 | 76.7 | 63.5 |
| 2011 | 0.91 | 162 | 89.6 | 69.0 |
| 2012 | 0.98 | 197 | 110 | 77.2 |
| 2013* | 0.98 | 203 | 116 | 83.5 |
| 2014* | 1.06 | 227 | 131 | 93.2 |
| % change | - | +3 | +5 | +8 |
Normal market size: 2,000 Matched bargain trading Beta:0.63 *Numis Securities, underlying forecasts not comparable with prior periods | ||||
Last year, Provident paid its customers between 2.21 per cent and 4.65 per cent on one-to-five year fixed-rate retail deposits. Against this, Provident expects repayments of £182 on a £100 loan repayable over 12 months. That's an interest rate on an annual percentage basis of 272.2 per cent. Such high charges brings into question the group's exposure to potential legislation to control so-called unscrupulous pay-day lenders, of which Provident Financial is not one. The fact that Provident does not indulge in less savoury practices, such as relying on rollover loans as a source of revenue, and does not offer the sort of 'over the phone' propositions that have got such bad press, works in its favour. Nevertheless, were political sentiment to shift further against the sector there is a danger of more non-standard loan providers being tarred with the same brush.
However, the Provvy's whole approach sets it apart from the less-scrupulous lenders, because on the consumer credit side (doorstep loans if you like) rather than signing up more customers, the emphasis recently has been on targeting existing customers in order to extend its loan book, and with whom the collection agents have already established a rapport. It's also worth noting that agents are paid commission on repayments and not on loans advanced, so there is no incentive to push potential customers into borrowing sums they clearly can't afford to repay. Group finances are in pretty good shape too, generating solid cash flow and paying an attractive dividend covered 1.32 times by underlying net earnings and comfortably above the 1.25 times targeted cover. Moreover, the group has consistently beaten its internal target rate of a 30 per cent return on equity, last year achieving a return of 48 per cent.
