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Provident: hope is fading

The sub-prime lender incurred a £40m impairment for disruption to its home credit business, while growth at Vanquis slowed
July 25, 2017

Change is not always easy, as Provident Financial (PFG) has found to its chagrin. Despite previously flagging the disruption to its home credit business during the first half of the year, shares in the sub-prime lender still dipped on the release of these results. The switch in the doorstep lending division to full-time employees from a self-employed agent model pushed vacancy rates to double the normal level. This led to a 4 per cent decline in average receivables. A £40m impairment, coupled with associated redundancy, training and retention costs cut pre-tax profit for the home credit division by 86 per cent to just £6.3m.

IC TIP: Hold at 2,254p

Chief executive Peter Crook says the problems associated with this business and the reduction in earnings are “temporary in nature” and expects it to recover during the third quarter. Elsewhere, the Vanquis Bank credit card business put in a better performance. Customer numbers increased 14 per cent to 1.6m, pushing average receivables up to £1.4bn.

New customer bookings for credit cards were up more than a quarter to 234,000, following a weaker start to 2016. The alternative lender launched its Chrome card for 'nearer prime' customers (ie, with better credit quality than sub-prime), as well as a service allowing customers to check their likelihood of acceptance without affecting their credit score. However, higher investment meant the annualised return on assets here declined to 12.8 per cent, from 14.2 per cent the previous year. Mr Crook says this was part of a conscious trade-off for better growth and lower returns. Pre-tax profits at Vanquis were up very slightly to £100m.

Demand for motor finance kept apace, with new Moneybarn business up 15 per cent. Customer numbers stood at 46,000 at the end of June, compared with 36,000 the same time in 2016. However, default rates also increased, with management attributing this to the rise in new business being written. The annualised risk-adjusted margin dropped slightly to 23.4 per cent, from 24.1 per cent. Online lender Satsuma broke even in May and management expects a small full-year profit contribution.

Analysts at Peel Hunt expect adjusted pre-tax profit of £293m for the full year, giving EPS of 150p (from £334m and 176p in 2016).

PROVIDENT FINANCIAL (PFG)  
ORD PRICE:2,254pMARKET VALUE:£3.34bn
TOUCH:2,254-2,257p12-MONTH HIGH:3,402pLOW: 2,189p
DIVIDEND YIELD:6.0%PE RATIO:16
NET ASSET VALUE: 494pLEVERAGE:4.6
Half-year to 30 JunTotal operating income (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20165721658643.2
20176199046.243.2
% change+8-45-46-
Ex-div:26 Oct   
Payment:30 Nov