Provident Financial PLC, the UK’s biggest sub-prime doorstep lender and a FTSE 100 company, issued its second profits warning on Tuesday, just 3 months after its first. The company stated that while the interim dividends would not be paid out, the full year’s dividend also may be withheld. Provident also revealed that the UK Financial Conduct Authority (FCA) was investigating its Vanquis Bank credit card division for financial misconduct. The CEO of Provident Financial, Peter Cook, also resigned. Ms. Manjit Wolstenholme, has been placed as executive chairman. Ms. Wolstenholme, upon assuming office, made the following statement,
“I am very disappointed to have to announce the rapid deterioration in the outlook of the home credit business. Protecting the group’s capital base through withdrawing the interim dividend and in all likelihood the full-year dividend is the appropriate response to maintain the highly valuable franchises of Vanquis Bank, Moneybarn and Satsuma. My immediate priority is to lead the turnaround of the home credit business.”
Provident Financial PLC was established in 1880 to provide affordable home credit to poor families in Britain. Self-employed agents were sent door to door to sell loans and often to act as debt collectors. Currently, Provident has 2.4 million customers, most of whom are unemployed or on welfare.
The company recently ran into trouble after its technology based sales revamp for its home credit business flopped in June this year. Many of the 4,500 self-employed salesmen and debt collectors quit or worked less after they were informed that they were going to be replaced by 2,500 full-time employees called “Customer Experience Managers” who would use iPads with a new software to cut costs.
Prior to this move, the company had issued a £60 million profit. However, post the technology “upgrade” in the home credit business, the unit’s debt collection rate dropped to 57% (versus 90% last year). Sales also dropped by £9 million per week compared to the previous year. Thus, the company was forced to announce its first profits warning in June.
Provident’s subsidiary, Vanquis Bank, whose investigation was also a part of the announcement, contributes £70 million to the company’s annual revenue. The FCA is investigating the unit’s sales of its Repayment Option Plans. Vanquis will not pay any dividends to its parent company, Provident, until the investigation is concluded.
Provident now expects a huge loss in the home credit business of between £80 million ($103 million) and £120 million ($153 million). The home credit business was the mainstay of the company, contributing £115.2 million (33.5%) of the group’s total profits.
At the time of the announcement, share prices plunged by 57%. However, by the end of day, the share prices had dropped 68% to 559.5 pence, the biggest drop on record. The company’s stock has dropped 80% this year, losing more than £3 billion of its market value. Provident’s 8% notes, due in October 2019, worth £250 million, dropped to 80p, the lowest since the notes were issued in 2009.
For investors, this has been good news and bad news. Hedge funds partners, Lansdowne Partners LP and AQR Capital Management, gambled that Provident stocks would fall and so took short positions; their gamble has paid off. Unfortunately for shareholders Invesco (with 29% shares) and Neil Woodford (18% shares), this is a disaster.
Analysts are calling the string of bad news – the investigation, the profit warning, the CEO resignation and dividend suspension – a “quadruple whammy”, and predict that Provident’s shares will not be re-investible till the crisis is averted, which may take “a prolonged period of time”.