Provident Financial warns on profits as households struggle

Group adjusted profit before tax is now expected to be at the lower end of the £151-166m range of analyst forecasts as impairments being increased to reflect a continued increase in the use of payment arrangements at its Vanquis Bank credit cards arm.

Payment arrangements, which are put in place to ease the burden for customers who are struggling to pay their debts, have been increasing amid higher levels of enhanced forbearance measures, as Provident reported in its October trading statement. This industrywide trend has continued into the fourth quarter.

Vanquis, which parted company with managing director Chris Sweeney in November, saw fourth-quarter new account bookings fall 18% year-on-year to 76,000, meaning for 2018 as a whole they were down 16% to 366,000, with total customer numbers ending the year up 3.1% at 1.77m.

In response to recommended measures on persistent debt from the FCA's Credit Card Market Study, Vanquis increased the required minimum payments due from customers in the fourth quarter and, also in line with the rest of the industry, has put in place enhanced forbearance procedures.

"We have been progressively tightening our underwriting standards throughout the group in anticipation of the current uncertain UK economic environment we are facing. We will continue to monitor underwriting standards in light of any changes in customer behaviour," said chief executive Malcolm Le May.

Analysts at Shore Capital noted that Vanquis’ impairments are impacted relatively more than prime lenders because of the high discount rate that Vanquis applies in its effective interest rate calculations. They said the new regulation on affordability testing would lead to a slowdown in receivables growth in 2019.

The home credit division, CCD, which gained full authorisation by the FCA in early November, kept new customer recruitment on track during the peak fourth quarter, ending the year with 560,000 active customers and receivables of roughly £290m, marginally ahead of internal expectations and stable with June 2018. Back-book collections continued to perform worse than expected, though this part of the business is now only worth £20m.

Action to reduce the cost base saw the number of field operatives cut from around 2,300 at the end of September to around 2,100 at the end of December, while investment has continued in field management.

The Moneybarn car finance arm was reported to have grown new business volumes 21% in the fourth quarter compared with the same period last year, lifting customer numbers to 62,000 at the end of the year, up 24%, with receivables showing a similar level of growth.

Directors now expect the FCA investigation into Moneybarn to complete before the end of June. A financial provision has already been set aside to cover any associated costs.

A "modest" dividend is planned.

Shares in Provident fell 18% to 528.8p in early trading on Tuesday, wiping out all the gains made since October.

Shore Capital said the different working parts combined to imply a group adjusted PBT forecast of circa £151m for 2018, versus current consensus of £159m and its previous forecast of £162m.

For 2019, ShoreCap predicted the range would be around £162-177m, compared to the current consensus of £212m.

This translates to EPS of circa 47p in 2018 and 48-53p in 2019, with the return to dividend cover of 1.4 tines in 2019 the analysts expect a proportionate reduction in DPS for 2019 to around 34-38p.