Provident Financial Q3 good but home credit business still weak

FTSE 250 doorstep lender Provident Financial said on Friday that Vanquis and Moneybarn continued to trade well in the third quarter, but collections in the home credit business remained weak.

In an update for the 1 July to 18 October, the company said it has continued to make "sound" progress on delivering its operational objectives for the year.

Vanquis Bank delivered good growth, notwithstanding that credit standards have been tightened over the last 18 months, and is on track for full-year profits in line with the group's internal plan. New customer bookings of 103,000 were broadly the same as last year.

Meanwhile, car finance business Moneybarn delivered "strong" new business volumes and a stable delinquency performance against significantly tightened underwriting standards. Third-quarter new business volume showed year-on-year growth of 16% and customer numbers were up 22% on September 2017 at 59,000.

However, it was a less rosy picture for the home credit business following the implementation of its recovery plan and the rollout of the new operating model, with collections still around 10% below historic levels. Active home credit customer numbers ended the third quarter at 449,000, down from 464,000 at June 2018, reflecting the continued focus on collections performance rather than new customer recruitment.

Chief executive officer Malcolm Le May said: "I am pleased to report further good progress against the 2018 goals we set out at the start of the year. The implementation of the home credit operational recovery plan is substantially complete and the authorisation process close to conclusion. The repayment option plan refund programme is progressing well and should be substantially completed in early 2019 and the dialogue with the FCA on their investigation at Moneybarn continues in a constructive manner.

"The growth and operating performance of Vanquis Bank and Moneybarn are both good and in line with management's plans. The home credit business is still experiencing the drag on collections performance from those customers who were active during the poorly executed migration to the new operating model in the third quarter of 2017. Importantly, customers who have taken credit from us since then are performing in line with historic levels."

It emerged back in December of last year that the Financial Conduct Authority had launched an investigation into Moneybarn relating to the processes applied to customer affordability assessments for vehicle finance and the treatment of customers in financial difficulties.

At 1120 BST, the shares were down 1.3% to 546.70p.

Shore Capital analyst Gary Greenwood said that while the continued delay in improvement in collections in the home credit business is disappointing, this is largely a back-book issue that should resolve itself in due course.

"Importantly, the back book accounts for around one third of gross receivables for the business, but these balances are now largely written down thus limiting the risk of a further drag on financial performance from higher impairments. However, where there will be an ongoing impact is from the book being smaller than expected and this therefore impacting negatively on revenue performance next year and this could therefore delay the return to full year profitability until 2020F."

Meanwhile, Numis said the update showed a "solid" third-quarter performance.

"Eventually, Provident will cure the home credit business, generating attractive returns in this high margin business, where its smaller competitors already make amongst the highest RoAs available to UK lenders. With returns from new business delivering comparable results to the 2016 cohort, we see recovery as a when not an if.

"Nevertheless, the ultimate scale of the business will depend on returning pre-crisis customers to regular paying status and, consequently, we continue to see forecast risk."