Provident Financial announce 1st half rise in profits of 4%
Provident Financial, best known for its doorstep lending activities, reported an increase in profits of 3.5% to £53.1m in the six months trading period to the end of June. Provident Financial has 2.1 million customers, or 4.3% of the UK population, with 20 per cent holding one of their credit cards. Half of their customers are in receipt of some form of state benefit which helps to provide some financial stability at a time of rising unemployment. Bad debts remained at a stable level of 31% of the portfolio. Provident stated that it has plenty of lending capacity remaining within its overall £280m on its committed funding lines, along with £60m of capital.
Although sensitive to further rise in bad debts, analyst Noble & Co. has raised the rating of the stock to "buy". Fellow analysts, Credit Suisse Group AG raised its outlook to "outperform" from "underperform" on the results.
The company expects to continue to deliver strong performance despite the ravages of the current market. It specialises in small loans to consumers through door to door sales people.
The results have impressed the city but not Barnardo's, the children's charity. It has called for an investigation by the Office of Fair Trading into its lending activities which can see some rates as high as 545%. Numis Securities, a city analyst firm, stated that Provident Financial was "probably the most profitable bank in the world". Shares have outperformed the FTSE 100 since October 2008 but are still 10% down on their 52 week high experienced in December 2008. Over a longer period, shares have dropped just 4% since December 2007 compared with a 55% fall in the FTSE-350 Banks Index.
Friends Provident, or "the Provvy" as it is colloquially known, defends its actions by claiming that it played a valuable and important role in allowing people to improve their living standards whilst keeping some from the clutches of loan sharks.
As general lending by banks has dried up due to the recent credit crunch, Provident Financial has seen a surge in loan applications. Whilst it has always been seen as a sub prime lender, more and more people rejected by the banks have been making applications to borrow from the lender. Interest rates are high with a typical 23 week charge of 545% being common. Loans for longer periods were cheaper at 365% for a 31 week loan and 254% for a one year loan. Amounts borrowed on these terms are typically small, repaid weekly and range up to £1,000. Poor credit quality customers can expect to pay £500 for a £300 loan.
With the number of prospective borrowers set to increase in the coming year the outlook for Provident Financial couldn't be better. The two major competitors, Cattles and London Scottish Bank, are both struggling with significant rises in bad debts as a consequence of rising unemployment and the recession. Provident Financial has a competitive advantage in that it has developed a strong collections infrastructure over the past years. Nonetheless, it runs a high arrears book of around 40% of revenue – a number that has remained constant through their 129 year history.
Provident Financial defends its interest charges citing the high cost of collecting debt. It says that it has to pay 11,500 agents for an average 57 collection visits to borrowers homes.
The company also offers credit cards to poor quality credits through its Vanquis Bank brand. These allow customers to start rebuilding a good credit history by being able to borrow small amounts on credit card like terms with interest rates of up to 50% APR.
The high rate doorstep loan business is to be investigated by the Office of Fair Trading. A report is expected to be published in Spring 2010. Despite Barnardo's reservations the Consumer Credit Counselling Service said that doorstep lending facilities offered a vital service to those unable to access normal bank facilities. The Consumer Credit Counselling service provides free help and advice to those with financial problems and says that borrowers tend to be happy with the service they receive despite the triple digit interest rates.
Alternative lending could be sourced from the co-operatively run Credit Unions. However, these tend to operate through trade unions and in the workplace making access to them difficult for many.
Many believe that the time is right for the government to step in and offer a 'peoples bank' in order to compete with high rate doorstep lenders and loan sharks. Although with a pressure on public finances and a reluctance to get involved in the minutiae of the industry, such an approach is not expected soon.