Provident Financial struggles with home credit business as FCA resolution eyed

Provident's struggles to "reconnect" with many customers of its doorstep credit arm after changing the business model last year saw even fewer lost customers and agents coming back on board in the fourth quarter and resulted in a higher impairment charge. A full-year pre-exceptional loss of roughly £115m is now expected, at the higher end of its previous guidance range of £80-120m, with management now proposing a restructuring of central office functions in order to trim costs further.

While improvement were reported for home credit's customer service and operational performance since August and that active customer numbers had rebounded to 530,000 from 500,000 in September, this was down from the 800,000s seen before the troublesome change of operational model. Receivables for the division closed the year at £350m, a drop from £560m a year ago.

But the Vanquis Bank arm, which provides bank accounts and credit for people turned down by high street banks, and vehicle finance Moneybarn were both said to have traded "satisfactorily" through the quarter, though both are in "dialogue" with the Financial Conduct Authority over their respective investigations reported last year.

Interim executive chairman Malcolm Le May, who was promoted from a non-executive role after Manjit Wolstenholme passed away in November. Wolstenholme, previously also a non-executive, had taken on a temporary executive role after chief executive Peter Crook resigned following two profit warnings over the summer.

Le May said progress had been made in the search for a new permanent group CEO and that Provident's priorities for 2018 "are to rebuild trust with our customers, regulators, shareholders and employees".

The Satsuma short-term loans business is set to report a £5m loss for the year due to higher impairments, though while the flow of new customer growth from home credit into Satsuma has slowed, fourth quarter new business volumes grew around 40% year on year to 79,000 and up from 71,000 in September.

Vanquis' 20% reduction in fourth quarter new customer bookings came as underwriting was tightened during the third quarter of the year and saw new booking volumes fall roughly 10%, while volumes from its Argos partnership shrank to 1,000 in the quarter compared with 15,000 the year before. Argos also informed Vanquis that it will exit the partnership when the contract expires in early 2018.

Full year growth in Vanquis new customer bookings was therefore pushed below 8% to 437,000, while total customer numbers for the year of 1.71m were up 11% year on year as the division developed its credit card proposition and distribution, including the launch of the Chrome 'near prime' card.

Delinquency levels remained "broadly stable" in the fourth quarter, though the annualised risk-adjusted margin fell to 30% in December from 30.7% last September and 32.3 in December 2016, as management had guided. This reflects a reduction in the revenue yield from a further decline in the penetration of the repayment option plan (ROP), where sales have been suspended amid the FCA probe.

Moneybarn saw new business volumes roughly 30% higher in the quarter compared to a relatively weak 2016, as a wider product offer and more distribution channels offset the tightening of underwriting on higher risk categories of business during previous quarters. Customer numbers were up 22% at 50,000 and receivables ended the year 26% higher at £376m.

Moneybarn's annualised risk-adjusted margin fell to 21.8% in December from 22.7% in September and 24.1% in December 2016 reflecting "additional impairment associated with the step-up in new business volumes over the last year and the flow through of impairment from higher risk categories of business prior to the tightening of underwriting in the second quarter".

Cash on hand was £34m at year-end, with £66m headroom on debt facilities but loans worth £35m needing to be repaid in the first quarter.

Provident shares were down more than 4% to 881.6p after two hours of trading on Tuesday, taking them back to where they were around the start of December. Last August, they hit a 20-year low of 426.6p.

As Vanquis is now in discussions with the FCA over the ROP product, "a large bridge looks like it will be crossed at some point relatively soon", said analysts at Canaccord Genuity, though home credit receivables and active customers were ahead of its estimates of £300m and 0.4-0.5m respectively.

"Combined with plans to right-size the business's centralised support functions, we would argue Home Credit's prospects are much improved. While the business may never return to its former glory, we believe it should start to accrete value to the wider investment case rather than detract from it. In addition, while Satsuma is set for another small loss in 2017, it remains progressive."

Broker Numis, which has forecast a potential £108m cost from the ROP probe, said trading update "showed clear signs of recovery within home credit with collection having improved to 78% from 57% in August and the loan book a little ahead of its forecast £341m.

The cost reduction plan is expect to help return the doorstep lending business to operating profit this year "with all the pain associated with the disconnected customers being fully provided for at the year end".

Home credit's rival Morses only has capacity to take a maximum of less than 3% of Provident's HCC business, Numis believes, predicting the business "can be turned around and very high returns restored even if the business is much smaller", noting that "scale and returns are not strongly linked".