Provident Financial rallies on Jefferies upgrade

"Balance sheet strength will help PFG to weather the recession, and it will emerge into a larger non-prime lending market with fewer competitors and with funding flexibility to take market share," the bank said.

Although it forecasts an adjusted pre-tax loss of £55m for this year, Jefferies expects the Common Equity Tier 1 to remain over 30% and for profitability to return in 2021 as the economy recovers.

Even on its conservative forecasts, Jefferies reckons CET1 will remain over 27% in 2022.

The bank argued that recession will likely push more people into Provident’s target market.

"Broadly speaking, PFG's customers come from the lowest 20% of earners, a target market of around 10.7m people, who have disposable incomes below about £20,000," it said.

"Incomes are very likely to fall, and the experience of the last several recessions has been that those immediately above the bottom 20% see the biggest impact (and saw a reduction in disposable income in 2018/19 - source, ONS). While the effect is hard to quantify, it seems probable that PFG's target market will grow."

Jefferies cut its price target on the shares to 250p from 470p.

At 1450 BST, the stock was up 5% at 197.38p.