UK’s Provident – from subprime star to losses

Missteps, along with FCA probes, triggers 68% slide in stock price

WHEN it comes to subprime lending in the UK, sometimes the old ways were the best ways.

That’s the hard lesson stockholders in Provident Financial Plc learned as the British lender – a onetime darling of the FTSE 100 – struggles to recover from a botched attempt to modernise business practices that could have come from a Dickens novel. The company’s missteps, along with two probes by the Financial Conduct Authority (FCA), have triggered a 68% slide in Provident’s stock price over the last 12 months.

Now, as Provident plans to raise £300mil (US$423mil) in a share sale early next month, another challenge looms. The FCA is examining “areas of concern” in the home credit industry, one of Provident’s three main business lines, where agents go door to door to make loans to people with poor credit histories.

The agency plans to release its findings in May. If it chooses to cap interest rates and fees – as it did for the payday lending industry in 2015 – that could be bad news for Provident. The 138-year-old lender, which has 2.5 million customers in its various businesses, has long dominated the home credit market.

On Tuesday, Chris Woolard, the FCA’s director of strategy and competition, signalled a broader crackdown on the subprime lending industry, which he said is charging too much in fees and interest. “We see a case for intervention in a number of markets, and we are prepared to propose new rules where necessary,” Woolard said in a speech in Glasgow.

Revolving credit

Provident charges annual interest rates as high as 1,558% on 13-week loans of £400, according to a report from Citizens Advice, an advocacy group funded by the UK government. The home-credit industry originates about £1.3bil a year in loans, according to the FCA.

“There is a big downside to the nature of these loans,” says Joe Lane, a senior policy researcher at Citizens Advice. “They are set up as installment loans, but in reality they turn into expensive revolving credit facilities, and if people are repeatedly refinancing loans they are paying high costs.”

Recording conversations

Provident, which declined to make its executives available for interviews, said in its 2017 annual report that the FCA may introduce stricter rules to lower costs for home-credit borrowers. The company said it’s working closely with regulators to ensure that it lends responsibly. Provident is even recording conversations between its lending agents and borrowers and plans to share the audio with the FCA, according to a person familiar with its operations.

For new investors, the prospect of reaping rich returns in Britain’s yield-driven subprime lending industry may be dimming. “The costs of regulation are going up,” says Gary Greenwood, an analyst at Shore Capital Group Ltd, who rates Provident a “hold”. “In theory, you end up with customers that perform better. At the moment, you see rising costs but you don’t see the benefits.”

Founded in northern England’s textile belt in the 1880s, Provident has long been a fixture in the country’s industrial heartland. It distrib- uted small loans as vouchers called “Provy cheques” that borrowers could redeem for food, shoes, and other goods at local shops. Provident used thousands of self-employed agents to peddle “doorstep loans” to households that couldn’t get credit anywhere else.

The agents, who tended to be women, sized up borrowers by visiting their homes, checking out their living conditions, and looking them in the eye before approving small loans. They typically earned 10% commissions, and they had the discretion to let customers slide a week or two when times got tough, or squeeze a little more when borrowers received windfalls, according to John van Kuffeler, who served as the CEO and then chairman of Provident from 1991 to 2013. The agents delivered big profits for Provident – in 2016, the unit produced £115mil in pre-tax income on £519mil in revenue.

“There is a relationship between the agent and the customer,” said van Kuffeler, now the chairman of Non-Standard Finance Plc, which competes with Provident. “They know and understand each other’s needs.”

By the early 2000s, Provident diversified with a push into credit cards for “near-prime” customers. Soon enough, that leapfrogged the old home-credit business, and Provident’s shares quadrupled in value between 2010 and 2015. With its market capitalisation hitting a peak of £5bil in 2015, the subprime lender entered one of Britain’s most elite clubs: the FTSE 100 equity benchmark.

Eager to build on the momentum, then-CEO Peter Crook overhauled the home credit division last year by replacing the 4,500 freelance agents at the heart of the business with 2,500 “customer experience managers.” These salaried employees would wield digital tablets loaded with apps instructing them how to manage collections and pursue leads for new business. The technology was also meant to help “enhance regulatory standards.”

Vanquis, Moneybarn

But disrupting the relationship between lenders and borrowers was a mistake. Not long after the agents disappeared from their weekly rounds last summer, more than 170,000 of Provident’s clients stopped paying their bills. Then came the news that Provident was facing an FCA probe into its credit card unit, Vanquis Bank, and another into its subprime auto lending arm, Moneybarn. Crook stepped down in August, and the company’s shares plunged 66% in a single trading day. In November, Manjit Wolstenholme, Provident’s 53-year-old chairman and acting CEO, suffered a fatal heart attack.

Provident’s home credit unit wound up losing almost £119mil in 2017. In February, new CEO Malcolm Le May unveiled a plan called “Rebuilding” and vowed to stabilise the company. Le May settled the FCA’s investigation into Vanquis Bank’s failure to inform 1.2 million customers they had been paying hidden charges going back to 2003.

Next, he said the company planned to raise £300mil in an equity offering, which has the support of its two biggest investors: Woodford Investment Management Ltd and Invesco Ltd. More than half the fresh capital would go toward paying refunds to Vanquis customers and a £2mil fine to the FCA. Another £20mil was set aside to address the agency’s pending examination of its auto-lending subsidiary.

As for the home credit unit, Le May hired a new management team and brought back some of the agents cut loose last year. But the company is largely sticking with the new tech-driven approach. “It will be a smaller business in the future, but we are at a turning point,” Le May said on an earnings call on Feb 27.

If the FCA does reform the home credit market, its past moves could indicate what’s in store for Provident’s door-to-door lending. The FCA’s caps on payday lenders lowered the average cost of a typical payday loan to £60 from £100 and slashed default rates by a third. Leading player Wonga Group Ltd saw its sales plunge 64% in 2015.

“This was a sea change,” said Citizens Advice’s Lane. “Now we would like to see the FCA extend the same type of protections to home credit borrowers.” — Bloomberg