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Provident Financial’s rise looked inexorable after the British subprime lender was catapulted into the FTSE 100 at the end of 2015, fuelled by a surge of demand for credit after the financial crisis. But less than two years later, the group — along with Royal Mail — was on Wednesday night ejected from the UK’s blue-chip index. Shares in Provident plunged 65 per cent on Tuesday last week, when it scrapped its interim dividend and issued a second profit warning in three months, following a botched attempt to reorganise its doorstep lending business. The turmoil prompted chief executive Peter Crook to step down with immediate effect. The reversal of fortune for Provident has been dramatic. Dubbed the “Provvy”, the lender — which provides door-to-door loans and credit cards — claims it has posted a profit every year since it was listed on the UK stock market in 1962. Its growth — particularly in credit cards — was turbocharged following the credit crunch, when the biggest British banks were forced to rein in riskier lending. From the start of 2009 to the end of 2016, Provident’s share price quadrupled. But its traditional home credit division is expected to report its first annual loss for this year and Provident’s share price is back to 2010 levels. Launched in 1880, the Provident has long offered short-term finance to less creditworthy borrowers, using agents to deliver and collect money in person. In its original guise, the Provident Clothing and Supply Co provided loans in the form of vouchers for working class families in Bradford, in the north of England, to exchange in local shops for food and goods. Share on Twitter (opens new window) Share on Facebook (opens new window) Share this chart The company expanded across the UK by providing small loans — typically less than £100 — to people with poor credit histories who would otherwise struggle to borrow from high street banks. A key part of its appeal was its fleet of part-time staff — predominantly women — who visited borrowers in their local communities to deliver and collect loans. “Many of these women worked part-time. They had other incomes and liked the flexibility of the jobs,” says Gary Greenwood, an analyst at Shore Capital. “They would turn up at a doorstep, have a chat — they were almost seen as agony aunts as well as lenders and collectors.” Provident was helped by the fact that subprime borrowers had few other places to turn to access credit, especially after the financial crisis, when the big banks tightened their belts. Company figures show that just 27 per cent of Provident’s doorstep borrowers had an overdraft in 2010 — the peak of the doorstep business — while 19 per cent owned a credit card and 12 per cent a mortgage. Between 2007 and 2010, the number of Provident’s home credit borrowers increased by 20 per cent. Few traditional high street lenders were providing basic accounts for people with poor credit histories at that time — banks were only obliged to provide these to all customers after 2010. Mr Crook said at that time that Provident’s “target market is growing as the temporary, part-time and casual labour market is growing and banks continue to restrict credit which will allow us to grow our customer base”. Share on Twitter (opens new window) Share on Facebook (opens new window) Share this chart The home credit division was a steady business. However, it began to lose customers from 2010 amid the rise of online lenders such as payday loans company, Wonga, which offered faster access to finance. Provident’s home credit business had 1.9m customers in 2010, which dropped to 862,000 last year. But the slowdown in that business was more than offset by Provident’s rapidly growing credit card business under the Vanquis Bank brand — a trend that persuaded high-profile fund managers Invesco Perpetual and Neil Woodford’s asset management group to invest in the company. “In 2008, Vanquis was a small product within the group,” says Mr Greenwood. “But then banks withdrew from the subprime market in the aftermath of the financial crisis, leaving only three players, including Vanquis.” RECOMMENDED John Gapper: A digital door opens for the direct seller Provident Financial seeks stability after revamp brings chaos The number of Vanquis credit card customers soared from 300,000 in 2007 to 1.5m last year. Vanquis made a small loss in 2007; in 2016, it posted a £200m profit. More recently Vanquis has reported its own problems. Last week it revealed it was banning the sale of a highly profitable insurance product as it was being investigated by the Financial Conduct Authority. A costly compensation scheme is on the cards. That has compounded problems in Provident’s doorstep business, which has suffered from a restructuring this year that replaced its 4,500 self-employed collection agents with 2,500 staff. The company has admitted the move hit recruitment and morale. Debt collections slowed and a stream of staff left, many to join rivals Morses Club and Non-Standard Finance, according to James Hamilton, an analyst at Numis. Profit in the home credit business in the first half of the year fell by 85 per cent to £6.3m. Some investors say the troubles make Provident’s shares attractively undervalued. Mr Woodford said in a statement last week that while there was uncertainty, “if we assume some stabilisation in the consumer credit division with a smaller customer base, along with other conservatively struck assumptions about the rest of the business, the group should deliver pre-tax profit in excess of £300m in 2019”. Provident has already taken steps to buttress its business, with the appointment of Chris Gillespie, who returns to run the doorstep lending division. Mr Hamilton believes the company can recover. “They’ve been doing this for 135 years. This is an operational problem, not a structural problem,” he says.
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