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Provident Financial on the ropes

The market is beginning to price in the possibility of insolvency at the Bradford-based consumer lender
Provident Financial on the ropes

On the surface, shares in Provident Financial (PFG) look cheap. Analysts’ adjusted earnings forecasts range from 21p to 55p a share for 2020, which equates to a forward earnings multiple of between three and seven. Total shareholder equity was £741m at the end of December, 80 per cent above the group’s current market capitalisation. And, while trading was choppy even in a pre-coronavirus world, the sub-prime lender still posted a return on equity of 19.1 per cent in 2018 and 18.2 per cent in 2019.

IC TIP: Sell at 161p
Tip style
Risk rating
Medium Term
Bull points

Shares trade far below book value

State support for borrowers

Bear points

High-cost lending too risky

Loan losses set to spike

Debt collection issues

Loan demand likely to vanish

Past performance must now be discounted, as should market expectations. Just ask Provident: on 27 March, noting the impact that widespread social lockdown and massive economic pain will have on credit issuance and collections, the bank’s management pulled its forward guidance for 2020.

This should not be a surprise. Provident is a high-margin, high-risk lender to people who struggle to access mainstream credit. With a customer base of 2.3m, its three principal product lines are home-collected unsecured loans, high-interest credit cards and car finance. In good times, this is a high-wire act. Last year, impairments came to 11.5 per cent of assets, or 15.6 per cent of average loans, according to calculations by analysts at stockbroker Numis.

In bad times, impairments are likely to be a lot worse. Following government social-distancing guidelines, Provident’s home-collected credit division has stopped face-to-face visits, and is now attempting to switch three-quarters of its collections activity to non-cash payment methods. One wonders how easy this will be for Provident and its customers, almost all of whom currently have bigger things to worry about.

Forbearance and longer payment plans could allow some loans to be restructured and paid later in the year. But in many cases this will be challenging, while pressure on near-term income generation will be further squeezed by the Financial Conduct Authority’s expectation that lenders offer a three-month payment holiday on loans and credit cards.

At the same time, tighter underwriting standards and a customer base in lockdown means the supply and demand for new credit has likely vanished. Even when social distancing measures are lifted, profound economic uncertainty will complicate most unsecured lending. Consumer confidence will be depressed, while the market for high-interest car finance is unlikely to return in a hurry. Provident’s loan book will therefore contract alongside rising impairments, destroying equity alongside profits.

Provident Financial (PFG)   
TOUCH:161-162p12-MONTH HIGH:562pLOW:138p
Year to 31 DecTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
% change+4+8+9+15
Normal market size:3,000   
*Canaccord Genuity forecasts, adjusted PTP and EPS figures
†Reflects withdrawal of 16p final dividend