RBC downgrades Provident Financial after consumer credit division warning

RBC Capital Markets cut its stance on Provident Financial to 'sector perform' from 'outperform' and slashed the price target to 2,650p from 3,400p following the subprime lender's warning over its consumer credit division last week, which sent the shares sharply lower.

"Provident’s profit warning came 11 weeks after its Capital Markets Day and just over five weeks after its Q1/17 IMS. As such, we view it as a self-inflicted wound for management and believe it will take (at least) several quarters for management to rebuild credibility and assure the market that its plans are working."

In addition, RBC said considerable execution risk remains, highlighting the fact that profit warnings are rarely a one-off event. It also said no material de-rating of the business has yet occurred and that impairments could come in above its expectations despite management noting there has been no change to underlying credit quality.

The bank cut its adjusted diluted earnings per share estimate for 2017 to 150.90p from 178.30p, for 2018 to 187.50p from 206.80p and for 2019 to 224.60p from 240.90p.

Still, it maintained that there are a number of positives that help offset the above negatives, such as the fact that the performance of Provident’s other divisions is unaffected, the company’s balance sheet remains strong, and a dividend yield of 5.5% and a more reasonable valuation which provides support to the share price at current levels.

At 0910 BST, the shares were down 1.6% to 2,400p.