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Provident Financial tightens up

Improving impairment rates suggest the lender is tightening credit issuance standards
February 28, 2020

Provident Financial (PFG) has proposed a bumper increase in its final dividend, after a busy year marked by a distracting hostile takeover bid, a revamped strategy and a stabilisation in adjusted pre-tax profits. To chief executive Malcolm le May, these signs reflect the high-cost credit provider’s adaptation to “changing customer needs and the evolving regulatory environment”.

IC TIP: Hold at 437p

The clearest evidence of this is an improved impairment rate in credit card arm Vanquis and car finance division Moneybarn, both of which have undergone tighter underwriting standards. Losses at the consumer credit division – which encompasses the Provident home credit and Satsuma Loans brands – also nearly halved to £20.8m.

However, investors need to ask how reliable these businesses truly are. Earlier this month, data from the Financial Ombudsman Service (FOS) showed that complaints involving so-called instalment loans – a speciality of Satsuma – rose by 250 per cent in the three months to December. The FOS upheld three-quarters of these affordability complaints.

Last week, Moneybarn was fined £2.77m by the Financial Conduct Authority (FCA) for “not treating customers fairly when they fell behind with loan repayments”. Although this relates to activity that took place between 2014 and 2017, Moneybarn’s failure to dispute the FCA’s findings suggests management was more eager to qualify for a penalty discount than to defend relatively recent lending practices.

Analysts at Numis forecast earnings of 47.7p a share in 2020, rising to 49.2p next year.

PROVIDENT FINANCIAL (PFG) 
ORD PRICE:437pMARKET VALUE:£1.11bn
TOUCH:436-437p12-MONTH HIGH:620pLOW: 349p
DIVIDEND YIELD:5.7%PE RATIO:13
NET ASSET VALUE:292pLEVERAGE4.5
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)*Dividend per share (p)*
20151.1127499.478.2
20161.1834411986.4
20171.20-123-53.5nil
2018 (restated)1.0997.327.310.0
20191.0012933.325.0
% change-9+32+22+150
Ex-div:2 Apr   
Payment:22 May   
*Adjusted for 17-for-24 rights issue in April 2018