UK lender Provident plunges on profit warning, CEO goes

[NEW YORK] Provident Financial had almost £2 billion (S$3.51 billion) wiped off its market value after its second profit warning in quick succession prompted the departure of CEO Peter Crook and suspension of its dividend.

The British sub-prime lender's earnings have been hit by unresolved problems at its door-to-door lending business, with the group's woes compounded by its additional disclosure on Tuesday that it has halted sales of one of its products pending an investigation by Britain's financial watchdog.

Shares in Provident tumbled by as much as 75 per cent, the biggest fall on Europe's Stoxx index. By 1416 GMT, the shares were down 67.7 per cent at 564 pence.

Provident first warned about problems at its door-to-door lending operation in late June, but said on Tuesday the situation had deteriorated and the business was now set to lose between £80 million and £120 million this year.

Founded in 1880, Provident has been trying to reorganise a door-to-door lending business that has traditionally relied on self-employed agents offering high-interest loans of about £100-£1,000 and collecting repayment through weekly visits. But it has been unable to recruit enough people for its plan to replace the 5,000 or so external agents with 2,500 direct employees.

The number of existing agents applying for the new roles fell short of expectations.

"We didn't get it right," Mr Crook said in June, citing inadequate staff-retention incentives among the factors.

That has resulted in lower sales and a debt-collection backlog, scuppering hopes that Provident, which provided loans through the Wall Street crash of 1929 and both World Wars, would benefit from a growing consumer base as real wages came under threat from Britain's exit from the European Union.

"Reversing everything is not currently being contemplated," Finance Director Andrew Fisher told analysts. "It's about recovering from a very poorly executed transition, that's what we are focused on."

Mr Crook, who had been CEO for more than 10 years, had decided to step down with immediate effect, the company said. Mr Crook did not respond immediately to a request for comment via LinkedIn.

Manjit Wolstenholme, who Provident appointed as executive chairman on Tuesday, said her priority was turning round the group and protecting its franchises, dismissing suggestions the home credit arm could be sold.

The division's rate of collection of outstanding debt has dropped to 57 per cent from 90 per cent in 2016, with weekly sales down by about £9 million.

Mr Fisher said there was no indication of any underlying credit quality issues as of June 30.

Analysts said competitors would be interested in parts of Provident's business, though there was no consensus on the value of the home credit operation.

"If you're a potential acquirer, would you look at a business that's losing £100 million each year and doesn't have a proven model?" said Peel Hunt analyst Stuart Duncan.

The slump in Provident's share price proved lucrative for some hedge funds, which had been building short positions in recent days. The biggest shorts were held by AQR Capital, Lansdowne Partners and Systematica, filings showed.

Lansdowne Partners potentially made about US$32 million from its investment in Provident between Monday's close and 0900 GMT on Tuesday, during which time the price slumped to 745 pence from 1,745 pence. Lansdowne declined to comment Provident's two biggest shareholders are Invesco Asset Management and Woodford Investment Management, which between them own about 40 per cent of the group.

Invesco declined to comment. "I am hugely disappointed by what has happened to the consumer credit division but I continue to believe that it will, ultimately get back on track. This business has been around for more than a century and I believe it will be around for many decades to come," Neil Woodford, head of investment at Woodford Investment Management, told Reuters via email.

Woodford added that with some stabilisation in the consumer credit division with a smaller customer base, the group should deliver pretax profit of more than £300 million in 2019.

Against the backdrop of broader public and political criticism of the high-interest lending sector in general, Provident must also contend with lost income resulting from the Financial Conduct Authority (FCA) investigation disclosed on Tuesday.

The FCA is looking at the Repayment Option Plan (ROP) offered by Provident's Vanquis Bank. The ROP allows customers, for example, to take a break from monthly debt repayments, but the service comes with a fee.

ROP contributes £70 million to Provident's annual gross revenue before impairments and costs.

The company said it had agreed with the FCA to suspend all new sales of ROP last year and to contact existing costumers.

Vanquis Bank also agreed with the Prudential Regulation Authority, pending the outcome of the FCA investigation, not to pay dividends to its parent company or conduct some transactions without regulatory consent.

Provident said it would withdraw the interim dividend it announced in July and that it was unlikely to pay a full-year dividend, which Mr Fisher estimated would save £200 million.

This, coupled with normal banking headroom, meant the business should have adequate funds to ride out the turnaround, he said.

Analysts were less bullish.

"The shares are not investable until greater clarity is received, which may not be until next year at the earliest," RBC analysts wrote.

REUTERS