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Profiting from Others' Travails
08/12/2009 1:17 pm EST
The low-income UK lender is cashing in on the miseries of rivals and clients, while paying a generous dividend, writes Peter Shearlock in The IRS Report.
When many of your competitors either go bust or pull out of the market, either you will succumb to the same pressures or you will prosper as never before. For Provident Financial (LSE: PFG), a lender of small loans to more than two million low-income customers, the latter outcome is more probable.
Provident’s home credit business has nearly 12,000 agents who go door to door every week. Its Vanquis Bank operation makes more traditional advances via credit cards, but again starting at very low levels—typically around £250. With competitors such as London Scottish Bank and Cattles either in administration or struggling to survive, both of Provident’s businesses have been able to pick and choose to whom they lend.
Neither side is going aggressively for new customers in the current climate. The home credit side has deliberately put a brake on new customer acquisition while Vanquis has been turning down 83% of new applicants. But Provident is able to control credit quality better than before, so it should be able to weather the recession without a big increase in loan write-offs.
One other factor marks Provident apart from most of the other players in the “nonstandard” lending market: It has a strong balance sheet. It has committed facilities from other banks of £1.2 billion, providing head room of more than £280 million on current lending. No facilities are due for renewal this year, and the business has some £60 million of excess capital above what it needs for regulatory purposes.
The key attraction of the shares right now is the dividend. The interim payment was held and a repeat final dividend would give a yield of 7.8%. Profits grew by 12% in 2008, and this week’s interim statement showed a further 3.5% growth in the six months to [the end of] June. Profits will continue to grow through 2009—a remarkable achievement in the current climate.
There is one cloud on the horizon. The [UK’s] Office of Fair Trading has announced an investigation into “high cost consumer credit”, the outcome of which will be known in the spring of next year. The OFT is not expected to come up with anything too radical, particularly since many of the issues were dealt with in a Competition Commission inquiry in 2006. But dealing with the OFT’s investigators will clearly take management time and incur added costs at Provident.
The inquiry may [hold down] the shares in the short term. But two factors should keep interest in them alive. First, there is a big, and safe, yield. Second, there will be a dramatic growth spurt once the management decides its current safety-first policies can be relaxed. Operating in what is now an underserved marketplace, Provident has an exciting future. (The shares closed at 835 pence in London Tuesday—Editor.)
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