Provident Financial holds dividend as first-half profits plunge

Attempting to allay the market's worries after several Bank of England warnings in recent months about its concerns for consumer credit, the FTSE 100 company assured that it will "continue to exercise strong discipline around credit and has not observed changes in customer behaviour in relation to either demand for credit or credit performance in any of its businesses".

While its home credit business suffered disruption from July's move to a new model, which involves employing full-time customer experience managers to serve customers rather than using self-employed agents, the other three parts of the business --Vanquis Bank, Moneybarn and Satsuma -- all have continued to experience "strong demand", the company said, thanks to a combination of product innovation and enhanced distribution, all the while imposing unchanged credit standards.

"These three businesses are trading in line with current market expectations and are well set to deliver profitable growth through the remainder of 2017," Provident said.

As a show of management's confidence, the interim dividend per share was held at 43.2p as it was a year ago.

In the first six months of the year, revenue rose 8% to £619.4m with adjusted profit before tax falling 22.6% to £115.3m and adjusted basic earnings per share by the same degree to 60.3p.

Statutory PBT reduced by 45.6% to £90.0m and EPS by 46.3% to 46.2p.

Annualised return on assets shrank to 13.1% from 15.7% a year before, which was said to be primarily due to the impact of trading disruption in home credit and the investment to support medium-term growth in Vanquis Bank.

Consumer credit made "very good progress" in developing the further lending and digital capability at Satsuma, but with the new model disruption saw adjusted PBT down 85% to £6.3m and annualised return on assets tumbling to 15.8% from 22.3%, with impairment up 64%.

The new model saw a higher number agents leave than expected while also measures of agent's effectiveness were reduced during the transition, which increased impairments by approximately £40m reflecting operational disruption rather than credit quality.

Vanquis saw a 27% uplift in first half new customer bookings as the credit card proposition continued to expand, with ccustomer numbers and receivables growth of 13.6% and 15.3% respectively. Vanquis adjusted PBT was just above flat at £100.1m after the cost associated with the step-up in new business volumes and additional year-on-year investment of £10m to push for growth.

Vanquis' risk adjusted margin fell to 31.4% from 32.4% due to lower repayment option plan sales, with management guiding to 30% for 2017 as a whole.

The smaller Moneybarn car finance business -- a sector of acute concern to those worried about a possible consumer credit bubble -- delivered significant growth in new business volumes of 15% and adjusted profit before tax up 24.3% to £16.9m, while annualised return on assets was only down very slightly at 12.8%. There was a 90% increase in impairments however.

Shares in Provident jagged up and down when trading began on Tuesday before resting 2.3% lower by 1100 BST.

Analyst James Hamilton at broker Numis said Provident was a "high-margin, high ROE, short duration, low risk lender that has remained consistently profitable for over 135 years", but said the interim numbers fell short of his forecasts all operating divisions and showed early signs of a deterioration in credit quality.

"Provident is valued at a substantial premium to the specialist lenders trading at 14x current year underlying earnings which we expect to downgrade," he said.

Steve Clayton, a fund manager at Hargreaves Lansdown, said he had maintained his sizeable position in Provident as he was confident the earlier profit warning was a "stumble not a fall".

He said the results show the impact of the botched transition to a new model in the consumer credit division, partially offset by growth at Moneybarn and Vanquis.

"Management has been changed in the troubled division, but crucially, with the new operating model now in place, the costs of the stumble are no greater than first warned. It’s too early to say that all will be rosy going forward, but the group’s message on credit quality across the business is reassuring. Vanquis Bank, which generates the lion’s share of the group’s income, is growing strongly, as is Moneybarn," he added.

But Clayton warned Provident "may not be out of the woods yet and it will be some time before the new system can be said to have bedded down and delivered the hoped-for improvements".