FCA poses 'more risks' to Provident Financial, Berenberg slashes target

Provident Financial is planning a £330m rights issue after reaching a resolution with the Financial Conduct Authority over its ROP product but Berenberg has downgraded its rating to 'sell' from 'hold' as it sees various risks hanging over profits

The German bank sees the risks emanating from the regulatory environment, margin pressure from the core Vanquis banking arm and execution risk from the recovery plan for the home credit business.

Several major pieces of thematic work by the City watchdog are due to be updated in coming months, which Berenberg says are "potentially detrimental to the consumer credit lenders". These include the FCA's expected reports on persistent debt in the credit card market, affordability assessments in consumer credit, high cost credit including home credit, and remuneration and incentives for staff.

This is not to mention the regulator has already said that the initial review of the vehicle finance market has uncovered potential issues about affordability for borrowers with lower credit scores.

"Although it is unlikely that any of the new regulation will be catastrophic, we do think that it has the potential to reduce both profitability and growth," analysts said.

Furthermore, as the business is targeting lower growth of 5-10% pa and return on assets of circa 10%, "it will command a lower valuation than it has done in the past".

Analysts slashed their price target to 550p from 950p.