Share watch: Provident faces challenges after falling out of fashion
Given all that has happened in the financial service business over the last decade, the very mention of 'subprime' will have most people reaching for their Nurofen. It conjures the worst images of distressed working-class people grimly forced to beggar themselves to meet the demands of the moneylenders. But, of course, we don't live in an ideal world and there will always be those who lack resources and need urgent cash wherever they can get it (and often irrespective of cost).
One of those subprime lenders is the well-known Provident Financial. But it has proved in recent months that the moneylenders too can get it badly wrong.
Provident's recent story of botched reorganisation, a poor grasp of what technology can achieve and its lack of appreciation that it is in a 'people business' has provided another cautionary tale for the financial sector.
Provident is the leading subprime lender in the UK, a market with three million customers. It enjoys a 60pc market share, providing home collected loans, online credit, car finance and credit cards.
It was set up in Victorian Britain by the wonderfully named Joshua Waddilove, as the Provident Clothing and Supply Company. Originally it provided vouchers that could be exchanged in local shops for goods and food.
Later it expanded into offering short-term (high cost) finance to low-income families without access to high street banks. Because it was consistently profitable, it has been listed on the London Stock Exchange since 1962. To the surprise of many, two years ago it vaulted into the FTSE 100.
Following the global financial crisis, personal borrowers faced a credit crunch in which big banks tightened their belts and pulled risky lending.
This proved a godsend for subprime lenders like Provident. In the four years up to 2010, Provident's home loan business increased 20pc. But the benefits were short-term. Market place changes brought a rise of other online lenders. Provident's business collapsed, falling from 1.9 million customers in 2011 to 800,000 last year.
Recently, however, the company decided to restructure its doorstep business. It replaced its 4,500 part-time agents (who visited borrowers in the local communities to deliver and collect money and were arbiters on who could afford to repay a loan) with 2,500 full-time salaried staff, aided by a computer system. The computer could not do what the foot soldiers could achieve and as a consequence the company's debt collections slowed and a process that had worked seamlessly for more than 130 years ran into trouble.
Fortunately Provident saw growth in its credit card business which offset some of these problems. The company's credit card business Vanquis was set up 15 years ago and remained a small operation prior to the financial crisis. Shortly afterwards it took off. Credit card customers jumped from 300,000 in 2007 to 1.6 million early this year. The company specialises in prepaid credit cards for those who struggle getting a card from companies like Mastercard. Provident credit cards have been very lucrative, generating a profit of £200m (€223m) last year. However the business is having problems. Recently it was forced to exit its highly profitable insurance business after investigation by UK authorities. This worries investors who fear significant compensation claims.
The company's stated strategy is to invest in businesses which generate high returns to support high dividends to its shareholders. Investors were not going to argue with this and the share price quadrupled from early 2009 to the end of last year.
It also became a magnet for UK equity funds including the 'star' manager Neil Woodford, who holds 18pc of the shares. It is also a top-five stock for Investco with a key holding of 30pc. Neither will appreciate a recent profit warning which saw the share price fall and Provident fall out of the FTSE 100. Today the share trades at £8.59 (€9.59), a long way from £30 (€33) a few months ago. The prospect of large holdings being offloaded is a challenge for the company, and I think I'd avoid them.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.