Canaccord downgrades Provident Financial to 'sell'

Canaccord Genuity cut its stance on shares of doorstep lender Provident Financial on Tuesday to ‘sell’ from ‘speculative buy’ and reduced its price target to 264p from 290p as it highlighted caution regarding claims.

Canaccord said it was unusual that PFG had not issued a trading update in respect of FY20, with the results delayed until April. In the absence of clarity on the company’s actual fourth-quarter performance, Canaccord said the target price cut was justified by a number of factors.

It pointed to downside risk to Vanquis Bank FY21 and FY22 forecasts. "The third ongoing UK national lockdown since mid-December is likely to have pushed out our expectation for a recovery in new customer bookings and average receivables balances," it said.

The broker also said growing claims problems at the consumer credit division (CCD) are likely to compound scale issues.

"It is unlikely that CCD will ever return to meaningful profitability, in our view," it said, adding that the outlook is further hampered by what appears to be a growing claims issue.

"We expect the Financial Ombudsman Service (FOS) data for Q4'20, to be released this month, to show that consumer complaints in the Home Credit sector (+174% Q/Q in Q3'20) and against CCD specifically (+85% H/H in H1'20) remain elevated.

"The uphold rate against CCD also shows a concerning trend, having increased from 38% in H1’18, to 47% in H1’19, to 74% in H1’20."

Canaccord said it’s unclear at the moment what level of provisioning is required. It expects more detail on this concurrent with results, but at this stage it flags the "potential liability".

At 1300 GMT, the shares were down 4.9% at 272.40p.