Provident Financial (lon:pfg)
Provident - Overreaction To Nothing?


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Title: Provident - Overreaction To Nothing?
Company: PFG - Provident Financial
Share Price Then: 523p
Author: Ian Smith
Date: Tue 15 Jan 2019
Comments: I can’t really see the reason for today's 20% drop apart from a prediction of profits at the lower end of expectation.

For those who haven’t been following Provident, originally a doorstep lender, they changed from using self employed agents to employed agents to sell door step loans and introduced tighter controls on lending to people who had a loan, paid it off and then immediately took out a new one.

Of course nobody is going to say that there was a big problem with the self employed agents building a book of customers who were effectively always in debt and encouraged to borrow than they could afford.

The group has moved adding the Vanquish credit card and on-line loans for cars Moneybarn and general purpose Satsuma.

For the consumer credit division the trading update reported
…..where the CEM typically did not originate the credit following the change in operating model, remains significantly lower than historic levels and has not shown any improvement,…

When provident went from self employed agents to employed agents who are managed according to the latest standards it was inevitable that the customers who were paying off loans only to take out new ones would start to be lost and default.

The priority for these customers was to keep Provident happy over all parties as they needed new loans, once the probability of getting new loans disappeared then so did the importance of making the repayment.

….the number of CEMs has shown a further reduction from around 2,300 at the end of September to around 2,100 at the end of December….

Is slightly more worrying as having agents out in the field selling loans is vital, but this could be a temporary issue as I suspect that some who used to be self employed became employed and found that they are worse off as they are no longer paid commission and their repeat borrowers have been excluded by the new credit worthiness checks.

If some element of performance related pay is reintroduced some may come back.

The longer term loans service, Satsuma appears to be performing as expected and had no new issues.

Moneybarn, the car loan division has some historic issues with offering loans that probably shouldn't have been offered on affordability grounds.

Vanquish offered an insurance type product called ROP which allowed payment holidays and protection against defaults being passed on to credit reference agencies. Unlike PPI there were no issues with it being hidden but it was expensive and the cost was added to the account balance possibly incurring interest.

Neither Moneybarn or Vanquish have had new problems or the old ones costing more to fix than expected.
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Previous Commentaries On Provident Financial
Date Share Price Author Commentary
Wed 06 Sep 2017803pIan Smith

Provident – Massively Over Discounted?

Provident were recently hammered twice for two reasons, in July major issues with a new system for payment collection and new loan issuing, they moved from a self employed agent model to a managed employee model.

The FCA is unhappy about the Repayment Option Plan offered on the Vanquis Credit Card.

In August the loan collection and new loan issue was found to be much larger than thought and the share price tumbled to around 800p-900p, So it does sound like it is time to burn the share certificates for heating but I suspect that the market has massively over reacted.

Collection is down massively, from 90% to 57%, clearly this is a massive short term loss, but the re-payments are still due and eventually they will be collected. The reduction in new loans is an issue, but it is unclear how many of these would have been new customers and now many would have been effective roll overs.

The Repayment Option Plan was profitable, but unlike PPI there was an opt in process and as I understand it the card statement included its cost every month as a line item. The FCA’s primary objection seem to be the cost, not the concept so this along with the fact that cost was clearly identified may limit the scope of any compensation package.

I have seen suggestions that Morses, a similar business, will profit from Provident’s grief but I suspect that they will have to move to an employed model to conform to regulatory requirements in the near future.

Provident also have the advantage of being able to move people to their Vanquish Credit card, they also have a more normal loans division as well as specialised car finance.

It would be interesting to see what would happen if Vanquish was tweaked to produce weekly statements and most of the home loan customers offered one. Would the reps then need to visit new customers only?
Mon 31 Jul 20172076pIan Smith

Provident Financial Is It Too Early To Pile In?

Three out of four parts of the Provident Group reported good or excellent results, Vanquish (credit cards), Moneybarn (car finance) and Satsuma (short term loans) divisions all performed well.

The Home Loans division got its self into a bit of mess by replacing the self employed door to door seller of loans/collectors of payment with employed people doing the same thing.

The rationale behind the move is sound, a better customer experience by being able to tell employees what to do and when rather than let a self employed person make the decision on their own.

Unfortunately not all of the agents liked the idea of becoming an employee and gave up their ‘rounds’ and as there weren’t enough employed people to cover them payments were not collected and new loans made.

It is not clear how much in uncollected repayments there is and how much of that will be collectable.

This lead to an extra £40m of impairments compared to the previous year, and this is what spooked the market especially as it was only going to be £15m.

Despite this the division was still profitable and whilst there may be some customers who have been lost it is not clear how many.

The dividend has been retained and with debt at about half of its maximum level according to its covenants there is very little to be negative about! The only real question is has the share price reached its trough?