Provident Financial

“Provident shares down 66% yesterday”.

Reading the front page of the City A. M. newspaper last Wednesday, August 23, my attention was grabbed by a red circle in the centre of the main story containing the phrase above. 66% down is a huge move!

I started reading to find out what happened: the company said home credit profits would be wiped out, dividends suspended, it was being investigated by regulators, and the CEO resigned with immediate effect. For 2017, the company stated that it expects to post a loss of £80 to £120 million in the home credit segment, after it had already lowered its profit guidance to £60 million in June.

Some investors and analysts believe all the above is due to bad management, and that the company will get back on track and endure for decades to come. I do love a discount, so I decided to do some research, first by reading its Financial Times profile and latest interim results for the six months ended June 30, and then its 2016 annual report.


Provident Financial (PFG) is a UK based non-standard lender (just another term for subprime) established in 1880 with a market capitalisation of £1.36 billion (in May 2017 it was above £4.82 billion), a dividend rate of 14.69% (before it was scrapped), a debt to total capital ratio of 72.54%, and a price to cash-flow ratio of 5.85, according to the FT profile. Not exactly my preference when it comes to debt ratios, but this is a lending company, not an operational company like the ones I have already analysed, and while banks are usually leveraged 10x or more in relation to their equity, PFG is leveraged 2.64x.

The company is listed on the FTSE 100, employs 3,712 and has 2.5 million clients. Its main divisions are:

  • Vanquis Bank, a provider of credit cards with limits from £250 to £4,000 to 1.6 million clients, operating since 2003;
  • Consumer Credit Division (CCD), which includes: Provident, a provider of home credit loans from £100 to £2,000 to 731,000 clients operating since 1880; and Satsuma, a provider of online instalment loans from £100 to £1,000 to 66,000 clients, operating since 2013;
  • Moneybarn, a provider of non-standard vehicle finance offering loans from £4,000 to £25,000 to 46,000 clients, operating since 1992.

PFG chart


2017 Interim Results


  1. Only 28 pages to read!;
  2. Vanquis Bank, Moneybarn and Satsuma continue to experience strong growth (page 1);
  3. 27% increase in new customer bookings for Vanquis Bank, 13.6% increase in customer numbers, and 15.3% increase in receivables against unchanged credit standards (page 1);
  4. Vanquis Bank adjusted profit before tax flat at £100.1 million, stated after the cost  of the step-up in new business and investment of £10 million to increase medium term growth (page 1);
  5. CCD’s new operating model delivers complete ownership and management of the customer relationship, offering a compelling strategic rationale. It involves employing full-time Customer Experience Managers (CEMs) to serve customers instead of using self-employed agents (page 1 and 3);
  6. Moneybarn increased new business volumes by 15% and receivables were £343.8 million, growing 30% year-on-year (page 1 and 4);
  7. Moneybarn adjusted profit before tax up 24.3% to £16.9 million from £13.6 million, and return on assets flat at 12.8% (page 1);
  8. Enough headroom to fund contractual maturities and projected growth in the business until the seasonal peak in 2018 (page 2);
  9. Gearing of 2.7x from 2.3x in 2016, compared with a banking covenant limit of 5x (page 2);
  10. I’m kind of glad the CEO left. It is superficial of me, considering I don’t know anything about him except that he severely mismanaged CCD’s transition to the new operating model, but I would find it hard to invest money in a company that has someone named Peter Crook for a boss. The name just gives me chills (page 2);
  11. The focus for the third quarter is on customer service, embedding the new model and improving collections, ahead of the seasonally busy fourth quarter (page 2);
  12. At Satsuma, credit issued increased by 40%, customer numbers increased from 48,000 to 66,000 and receivables increased from £12.6 million to £25.2 million. Start-up costs decreased by about £2 million, and it remains on track to deliver a small profit for 2017 (page 4);
  13. Vanquis Bank has continued to apply the tight credit standards put in place during the financial crisis (page 6);
  14. CCD’s interest costs were 19.1% lower and average receivables increased 3.6%. The funding rate for the business decreased from 7.1% to 5.6% in the first half of 2017 due to a reduction in borrowing costs (page 8);
  15. Central costs have remained flat at £8 million (page 10);
  16. The group’s funding rate was 4.7%, down from 5.7% (page 11);
  17. The group’s credit rating from Fitch Ratings remains unchanged at BBB with a stable outlook (page 11);
  18. The group operates a defined benefit pension plan which was closed to new members in January 2003, and has a benefit asset of £85 million, down from £100.8 million year-on-year. I consider it a Pro because it’s closed and is more than fully funded (page 22).


  1. The first highlight says that the dividend would be maintained, which is not true anymore, according to their notice from August 22 (page 1);
  2. First half adjusted profit before tax down by 22.6% to £115.3 million (from £148.9 million in the first half of 2016) and adjusted basic EPS down 22.6% to 60.3p as a result of the migration of the home credit business to a new operating model (page 1);
  3. First half statutory profit before tax down 45.6% to £90 million (from £165.4 million in the first half of 2016) and EPS down 46.3% to 46.2p (from 86p in 2016) (page 1);
  4. Return on assets down to 13.1% from 15.7%, primarily due to trading disruption in home credit and the investment to support medium term growth in Vanquis Bank (page 1);
  5. Vanquis Bank return on assets down to 12.8% from 14.2% last year (page 1);
  6. CCD had higher than expected agent attrition and reduced agent effectiveness during the transition to the new operating model, which increased impairments by £40 million (page 1);
  7. CCD adjusted profit before tax down to £6.3 million from £43.5 million, and return on assets down to 15.8% from 22.3% (page 1);
  8. An exceptional charge of £21.6 million was recognised for redundancy, retention and training costs due to the migration to the new operating model in the home credit business (page 4);
  9. Profit attributable to equity shareholders decreased to £67 million in the first half of 2017, from £124.2 million in the first half of 2016 (page 13);
  10. Total equity decreased to £731.6 million from £790.1 million at yearend 2016 (page 14);
  11. Net cash generated by operating activities decreased to £45.5 million in the first half on 2017, from £101.3 million in the first half of 2016 (page 16).

After reading the interim results and finding 18 Pros and only 11 Cons, I’m starting to agree with the investors from the City A. M. article. Most of the Cons relate to decreasing profits, return on assets, equity and cashflow, all derived from the mismanaged transition of the home credit division to its new operating model. Steps are already being taken to address these issues, such as hiring new executives to focus on the implementation of the model, on reestablishing good relations with employees and clients, and focusing on collections in the third quarter. But before taking action, I needed to research PFG a bit more…

2016 Annual Report


  1. Vanquis Bank adjusted profit before tax of £204.5 million in 2016;
  2. Provident adjusted profit before tax of £115.2 million in 2016;
  3. Moneybarn adjusted profit before tax of £31.1 million;
  4. Total adjusted profit before tax of £334.1 million, up 14.1% from 2015 and increasing every year since 2012 (page 8);
  5. Dividend per share of 134.6p, up 12.1% from 2015 and increasing every year since 2012, when it was 77.2p, an increase of 74.35% in 5 years (page 8);
  6. Adjusted basic earnings per share of 177.5p, up 9.2% from 2015 and increasing every year since 2012, when it earned 100.4p, an increase of 76.79% (page 8);
  7. The company has a target of maintaining an annual dividend cover of at least 1.25x and maximum gearing of 3.5x (page 10 and 11);
  8. Business model/cycle explained succinctly and step by step:
    1. Secure longer-term, lower rate funding;
    2. Develop tailored products to meet customers’ needs;
    3. Attract target customers;
    4. Assess affordability and credit worthiness;
    5. Lend responsibly;
    6. Collect payments due;
    7. Manage arrears and customer difficulties;
    8. Pay for funds and generate surplus capital to deploy (page 13);
  9. 89% or more in customer satisfaction in each division (page 14);
  10. Moneybarn increased profits 46% in 2016. Since its acquisition in August 2014, its size has more than doubled while maintaining its margins (page 15);
  11. Return on equity of 45%! in 2016, down slightly from 46% in 2015, due to the effect of the bank corporation tax surcharge. ROE has been between 45% and 49% over the past five years (page 19);
  12. Four key strategic objectives:
    1. Growing high-return businesses in non-standard markets;
    2. Generating high shareholder returns;
    3. Maintaining a secure funding and capital structure;
    4. Acting responsibly and with integrity in all we do (page 18);
  13. Average adjusted equity of £568.7 million (after subtracting a pension asset of £72.4 million and a proposed final dividend of £132.9 million from shareholder’s equity of £790.1 million) and adjusted profit after tax of £256.7 million, for a ROE of £256.7/£568.7=45.14%. If I just use ending equity, I get a ROE of £256.7/£790.1=32.49% (still excellent) (page 54);
  14. The group funds its receivables book with 20% equity and 80% debt (page 56);
  15. Net profit for 2016 attributable to equity shareholders of £262.9 million, up 20.5% from £218.2 million in 2015 (page 122);
  16. Cash on hand of £223.7 million, up from £153.4 million in 2015 (page 160);
  17. 147.8 million shares issued and fully paid at the end of 2016 (page 165).


  1. 184 pages!? Why me??;
  2. Return on assets flat at 15.3% (although it is a good return, and if the company earns this on all assets, its return on equity must be extraordinary) (page 8);
  3. Vanquis Bank pays an 8% bank corporation tax surcharge on profits over £25 million effective since 1 January 2016, which caused adjusted basic earnings per share to grow less than pre-tax profits (page 15);
  4. Statement saying that the home credit business is pursuing “plans to better serve its customers by migrating to a more efficient field organisation structure during 2017”, referring to the mismanaged operating model change during the first semester of 2017 (page 15);
  5. Gearing of 2.3x in 2016, up slightly from 2.2x in 2015 (but way down from 3.2x in 2012) (page 22);
  6. £250 million senior bond matures in October 2019, and while the annual report says the company has sufficient headroom until then, the 2017 interim report says that headroom will cover contractual maturities and projected growth only until the 2018 seasonal peak. This is a concerning development since PFG is basically saying that, right now, they don’t have enough funding to cover the senior bond in 2019. Their stated strategic objective, however, is just to maintain enough funding to cover at least the next 12 months (page 22);
  7. CCD customers have been falling, from 1,827,000 in 2012 to 862,000 in 2016, and receivables have fallen from £870 million in 2012 to £585 million in 2016, although profit before tax has been rising since 2013 (page 40);
  8. Impairment of £345.7 million on £2,306.8 million of customer receivables, a 15% impairment rate for 2016, down from 15.7% in 2015 (page 148);
  9. £270.2 million issued in retail bonds. The nearest maturing bond amounts to £120 million with a 7% interest rate on 4 October 2017, but I think they have more than enough cash to redeem it (page 162).


This is a very good company, with excellent returns on assets and equity, and rising earnings and dividends for the last five years. After reading all the above last Wednesday and Thursday, I thought the problems it is facing are temporary and should be fixed in short order, and placed PFG in the ‘Yes’ tray.

I felt compelled to invest in this company…

2 thoughts on “Provident Financial

  1. Pingback: My first investment – Investing: Move by Move

  2. Pingback: PFG 2017 Annual Report and Rights Issue – Investing: Move by Move

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