Cautious Provident in line for ‘excellent’ results

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DOORSTEP lender Provident Financial said it was on course to report “excellent” annual results, thanks to its policy of cherry-picking lower-risk customers amid the toughest consumer climate for years.

The Bradford-based group lends sums of £400 to £500 to households who cannot borrow from high street banks, and turns away four in five potential customers.

Provident said the squeeze on consumers from higher fuel bills, weak wage growth and pricier food was dampening demand for credit. Anxious to avoid a spike in defaults, its lending agents are becoming more cautious, it added, doing less business with new, riskier customers.

Consumer price inflation surged to a three-year high of 5.2 per cent in September, recent figures showed, although is expected to moderate next year.

“As far as we can see I think we are looking to continue tight lending criteria and relatively slow growth in home credit,” said chief executive Peter Crook.

“We don’t want to chase high rates of growth at the expense of the quality of the loan book. We could bring in new customers but we’re choosing quite deliberately not to do that.

“We’re sticking to primarily lending to people we’ve done business with before.”

The lender said customer numbers in its core consumer credit division were down 2.2 per cent year-on-year in the nine months to the end of September. However, average receivables were up 3.7 per cent as it continued growing its loan book. “We’re not going backwards like one or two of the retailers are,” said Mr Crook.

The company typically lends to households through face-to-face meetings, collecting payments via home visits, ensuring its agents can keep a close eye on customers’ situations. Loans typically have a six to 12-month duration.

“We would have to have an absolute meltdown in the price of food and oil and gas to cause customers to default (significantly),” said Mr Crook. The division’s bad debts rate in Provident’s third quarter – July to September – was in line with the 31.2 per cent rate seen in its second quarter, he added.

In contrast with the subdued growth at its home credit division, Provident’s Vanquis Bank credit card arm reported strong growth.

Customer numbers rose to 31.5 per cent to 659,000 as the lender ploughed investment into a “customer acquisition programme”. Combined with increasing credit lines to customers, average receivables grew 35 per cent in the nine months to the end of September.

Provident said Vanquis’s risk-adjusted margin is about 35 per cent, beating its 30 per cent target.

The company added Vanquis has not sacrificed quality for growth, maintaining “consistently tight underwriting”. As a result, its bad debt levels are at an all-time low for the business.

Vanquis started taking deposits in July, and has so far collected about £50m of one and two-year fixed rate deposits with rates of 3.2 per cent and four per cent respectively. It said during a single week in September, it took applications for about £30m of deposits.

Provident expects to raise between £100m and £125m in deposits by the end of the year, and aims to fund 80 per cent of its credit card lending with deposits by the end of 2012.

This week the group opened a call centre at its Bradford head office to support Vanquis’s growth. So far, 13 staff are working in the call centre, with this number expected to grow to 250 in time.

“The sound quality of the receivables book, strong margins and continued investment by Vanquis Bank in developing its customer base, leave the business well positioned to deliver excellent results for the year,” said the company.

Provident’s shares were XXX

“Credit quality in both businesses remains extremely sound, fully justifying the group’s cautious approach to lending at a time when customers’ real incomes are under pressure from inflation and there are risks surrounding the future direction of the employment market,” said Mr Crook.

Gary Greenwood, analyst at Shore Capital stockbrokers, said: “Overall we view this as a supportive trading update. We remain buyers of the stock, highlighting the strong momentum in Vanquis Bank, the controlled performance in the consumer credit division and the attractive 2011 forecast dividend yield of 6.3 per cent, which we expect to grow by nine per cent in 2012.”

Analysts at stockbroker Charles Stanley Securities added: “The third quarter interim management statement reports consumer credit trading in-line with plan and Vanquis ‘positioned to deliver excellent results’. This argues for held or higher estimates based on the Vanquis performance.”