UK subprime lender Provident Financial Plc crashed the most on record, its stock plunging over 73%, on what analysts called a "quadruple whammy": a profit warning forecasting a full-year loss, scrapping its dividend, a regulator probe into its Vanquis Bank unit, and the departure of CEO, the aptly named, Peter Crook. “This is without doubt a disaster,” said Shore Capital's Gary Greenwood. “Future profit performance will depend on management’s ability to rescue the situation, which is highly uncertain. We expect that further heads will roll.”
As a result, shares of the Bradford, UK-based company dropped more than 73% to 521 pence in London morning trade. The stock is down 82% this year, wiping more than 3 billion pounds from its market value.
In what may be the beginning (of the end) of yet another subprime bubble bursting (we have lost count which one this is), in its second profit warning in two months, the subrime lender said it now expects a "pre-exceptional loss" for the home credit business of between 80 million pounds ($103 million) and 120 million pounds, after previously predicting a 60 million-pound profit. The company also cited further deterioration at its home credit business after a botched roll-out of new technology this year, when it scrapped a more-than-century-old model of self-employed door-to-door agents. Crook, who was CEO for a decade, said in June that many of its 4,500 salesmen and debt collectors quit or stopped working as hard when they were informed they would be replaced by a smaller number of iPad-toting full-time staff, according to Bloomberg.
Meanwhile, the company said the U.K. Financial Conduct Authority is investigating the Vanquis Bank credit-card unit, and the regulator had previously ordered Provident to stop offering a particular repayment product, the company said Tuesday. Provident scrapped its interim dividend and said a full-year payout is also unlikely. Manjit Wolstenholme will temporarily run the firm as executive chairman. Provident said Tuesday that the FCA ordered the company to stop offering "repayment option plans" in April 2016. The products had been contributing about 70 million pounds in revenue a year.
“Given that the FCA investigation has the potential to be material to the company, investors are likely to take the view that this investigation should have been disclosed when it was known,” RBC Capital Markets analyst Peter Lenardos said in a note. “The shares are not investible until greater clarity is received, which may not be until next year,” he said, calling the probe, loss, dividend suspension and CEO’s departure a “quadruple whammy.”
As Bloomberg reports, While Provident didn’t make any mention of the broader U.K. economic environment or Brexit, its profit warning comes as the Bank of England cautions that the nation’s consumer credit market is overheating after years of low interest rates and low defaults bred complacency. Crook had previously said Provident’s business model was more resilient to an economic downturn than the big banks; he was wrong.
Meanwhile, as revenue from its old sales force continues to decline, its new technology isn’t panning out either.
The routing and scheduling software designed to help the 2,500 full-time digital-savvy staff replacing the door-to-door salesmen “has presented some early issues, primarily relating to the integrity of data,” Provident said, while “the prescriptive nature of the new operating model has not allowed sufficient local autonomy to prioritize resource allocation.”
Debt collection performance has fallen to 57 percent this year from 90 percent at the end of 2016, according to the statement. Likewise, weekly sales were running at about 9 million pounds lower in the same period.
Putting the company's operations in context, Provident serves 2.4 million British customers, many of them unemployed or on welfare. Extending credit to the working class had been good to Provident: its stock had tripled over a decade that saw other British banks collapse or get bailed out in the financial crisis; of course, it has given up most of it back now that the time has come to collect that money.
Ironically, Provident was started in 1880 by Joshua Waddilove, a philanthropist and social reformer who saw extending door-to-door credit as a way to alleviate poverty.
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Meanwhile, one look at the sellside commentary this morning reveals that virtually everyone thinks this particular subprime lender is about to be New Centuried:
RBC (Peter K Lenardos)
- Expect ongoing substantial losses for shares and “would not be buyers at any price”
- Recent share correction was making RBC warm to Provident; today’s announcement means “shares are not investible until greater clarity is received, which may not be until next year at the earliest”
SHORE CAPITAL (Gary Greenwood)
- Dividend withdrawal and CEO resignation is a “disaster,” and company’s ability to rescue the situation is “highly uncertain at present, making accurate forecasting extremely difficult”
- Sees risk the FCA decides to review sales of Repayment Option Plan product in the period prior to that announced
- Cannot rule out the need for equity issuance and expects “further heads will roll” after CEO departure
- Suspends recommendation (previously buy)
JEFFERIES (Phil Dobbin)
- “Clearly awful news” which will deeply impact the share price
- FCA review adds more uncertainty on top of profit warning for home credit business
- Notes that home credit is a short duration business and will need to see momentum turning soon
LIBERUM (Portia Patel)
- Notes 2016 NAV was 541p and given the uncertainty ahead and suspension of dividends, expects a realistic trading range to be 1x-2x NAV (541p – 1082p)