Provident Financial delivers strong growth

A third-quarter trading update from Provident Financial (PFG) has revealed that the non-standard lender is experiencing mixed fortunes. For while the credit card operation trading as Vanquis Bank continues to deliver strong growth and margins, the consumer credit division experienced a much tougher time.

Weakness in so-called doorstep lending came as a result of the ongoing squeeze on disposable incomes, with the typical customer also more likely to be employed on a part-time or casual basis. Provident has maintained tight underwriting standards, concentrating on lending to existing higher quality customers, but even so, the annualised ratio of impairments to revenue worsened from 36.8 per cent in June to 38.1 per cent at the end of September. It also led to an 8.7 per cent drop in customer numbers in the third quarter, while average receivables showed a year-on-year decline of 5.5 per cent.

However, the underserved non-standard credit card market helped to boost demand for the group’s Vanquis Bank credit card, with customer numbers there up 26 per cent to 1.05m year-on-year. And new accounts for the whole of 2013 are now expected to beat the 375,000 booked in 2012. Meanwhile, the group’s fledgling operation in Poland attracted 23,000 customers by the end of September and receivables of £4.6m.

Numis says…

Add. Provident Financial continues to build for the future, notably with new products to harvest rejected Vanquis customers, while the Polish operation’s development is set to accelerate. We expect to see Vanquis profits grow this year by 51 per cent. So, despite the sluggish home consumer credit division, we are still forecasting 12 per cent underlying EPS growth this year, along with a sector topping 42 per cent return on equity and a 5.2 per cent yield. Accordingly, we expect 2013 pre-tax profits of £202m and EPS of 115.4p, rising to £222.8m and 127p, respectively, next year.

Shore Capital says…

Buy. We are forecasting adjusted pre-tax profits of £200m and EPS of 111.3p for this year, and upgrade our advice from hold to buy. What’s more, our current estimates do not include the potential upside as the Polish operation starts to develop, while no account has yet been taken of the planned roll-out of the group’s online direct repayment lending initiative. Even without the considerable development potential that these two initiatives could deliver, our sum-of-the-parts valuation of 1,715p suggests a potential 10 per cent upside on the current share price.