Berenberg lifts target on Provident Financial but stays at hold

Berenberg hiked its target price for Provident Financial on Tuesday but stuck to a 'hold' recommendation on the shares, warning clients that it was impossible to anticipate the conclusion of the regulator's investigation into the door-step lender.

"We do not think it is possible to usefully forecast the conclusion of the FCA investigation, and it is this variable that will be the key driver of the stock price over the medium term, in our view. We therefore retain our Hold recommendation," analysts Donald Tait and Robert Chantry said in a research note sent to clients.

Furthermore, the broker explained how "the FCA has stated publically its commitment to helping potentially vulnerable borrowers and we think this may have further ramifications for earnings and returns."

The potential for increased regulatory capital requirements as a result of the investigation into Provident's repayment option plan was still a worry as well, potentially curtailing its ability to pay any redress fine.

On a more a positive note, the broker did expect the company home credit unit to recover, albeit not to the same size as before.

If home credit recovered as it expected, and assuming a CET 1 ratio of 20%, then the broker estimated that the lender could handle fines or redress provisions of about £300m.

Berenberg lifted its target price from 610p to 950p and reiterated a recommendation to 'hold'.

"Following the circa 50% price rise since the second warning, the shares are now priced in line with peers. We set our price target at 950p (which includes a deduction of £280m, or 190p per share, for potential ROP redress)."