Provident Financial (PFG): A very profitable subprime lending company run by a “Crook” ?

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Provident Financial is a UK-based “financial service provider”. What makes Provident “special” is that the company is extremely profitable:

Market Cap 4,2 bn GBP
P/E 16,1
P/B 5,7
ROE 47%

Among its shareholders there are many “famous” investors for instance Marathon AM, Neil Woodford and  Tweedy Brown.Stock analysts are quite bullish, according to Bloomberg 9 out of 12 have the company as “buy”, although the target price at 31,00 is only a few percent higher than the current price.

The stock has done pretty well over the last years, “the great financial crisis” had almost no impact on the share price:

provident

 

So what do they actually do and why are they so succesful ?

Provident is what one would call a “subprime lender”: they give loans to people who otherwise would not get loans anywhere.

For this service, they charge rates which in many other countries would not be allowed. This is what they state in their annual report as average annualized rates charged within their business lines:

Vanquis Bank 39,9% APR

Provident: Representative APR of 399.7%.

Satsuma (Online) Representative APR of 1,575%.

GLO guarantor Representative APR of 49.5%.

Money Barn (longer term) Representative APR of 33.9%

Provident itself is what in the UK is a so-called “doorstep lender”. Agents actually bring the money in cash to their clients and collect weekly. Interestingly, the agents are paid for what they collect, not for the amounts of loans they extend.The biggest business however is now Vanquis Bank which is effectively a “subprime Credit Card” company.

For the whole company, the average interest rate is ~ 46% p.a. (Interest income 1,1 bn vs. Asset of 2,4 bn = 1,1/2,4= 46%.

As default rates seem to be not too high, this enables Provident to earn margins of around 20% despite relatively high cost and, with the relatively low asset based translates into high ROEs.

The moral aspect

In Germany, such a business could not exist as “usury” is prohibited by law. The UK doesn’t have such laws, so companies like Provident are more or less free to charge as much as they want and can.

What bothers me about a “consumer subprime business” is that in my opinion, most clients would most likely be better of without such loans. A consumption loan rarely improves the longer term prospects of people and I guess many just don’t understand what they are actually doing.

If one googles Provident, there is no lack of discussion around this topic, for instance here:

To all those who do not like provident, just don’t use them. They offer a monetary service at high interest because they will lend to ANYBODY. Even previous customers who did not pay!! This is why it is high interest! And it is fixed interest not cumulative so what you owe is fixed and doesnt increase. Also no charges are made for missed payments unlike many bank loans. I would say having companies like provident is a blessing for many many people. If these companies did not exist the void left would be filled by illegal loan sharks – then many people would be in real real trouble dealing with cumulative interest, extra charges, threats and violence.

Regarding provident preying on the vulnerable, I personally do not take advantage of customers and am always straight and fair and honest with them. But yes, i agree provident as a company – and also some agents – do sometimes take advantage of vulnerable people but we live in a capitalist society and unfortunately this means vulnerable people will be taken advantage of if a company can get away with it. Its not nice but thats the truth. Big Banks and many other businesses will lie and cheat and pull the wool over your eyes to get a sale or a loan or persuade you their product is better than others just because, for example, a famous footballer pretends to like it. Are they not taking advantage of vulnerable people? In ultra capitalist britain, I think most commercial operations are looking to take advantage of you. My advice is to get clued up about these things so you will not get taken advantage of – maybe moneysavingexpert.com is a good place to sta

Other critical articles can be found here, here and here.

So the business is clearly not illegal in the UK but in my opinion at least questionable from an ethical standpoint. I know that Provident has been doing this for a long time and there seem to be even worse loan sharks in the UK, but in my opinion such businesses, which take systematically advantage of the customers  will face more headwinds in the future.

Comparison to Silver Chef

Silver Chef also provides loans at relatively high rates but to businesses which in my opinion is a big difference as it enables people to start a business and stand on their own feet. SilverChef also doesn’t require any personal guarantees.

Management: An actual “crook” runs the company

Funnily enough, they have a CEO with the name “Peter Stuart Crook”, who in  my opinion looks like a great guy to be casted a loan shark in a Guy Ritchie gangster movie:

 

crook2

According to his Linkedin profile, he started as an accounted and then came via Barclaycard and became CEO in 2006.

In 2015, he paid himself a very decent 8,5 mn GBP salary. He owns 18 mn GBP in shares, which sounds like a lot but is effectively only 2 salaries. His move into credit cards was clearly very profitable for Provident as they “doorstep lending business” seems to be on decline as there is more and more regulatory pressure on the sector.

Summary:

Provident has shown over many years that they can profitably run a subprime lending business in the UK which charges extremely high interest rates.

It has been a great investment for shareholders and the stock is owned by numerous “famous” investors and has made its CEO very wealthy.

However for me, despite I do like financial companies, I don’t want to invest into a company which in my opinion runs an ethical questionable business. Some might argue that Lloyds Banking is not much different but I think that there is still a big difference between a well run main street bank and an aggressive subprime lender.

I do belive that in the long run, a company which takes advantage of clients has a higher probability to get into troubles than one which actually benefits the customer.

Additionally, Provident has already a significant market share in the UK (20%) and the business will not translate well into other jurisdictions, so future growth might not be as good as past growth. Plus, the shares are not cheap.

 

36 comments

  • “Provident Financial’s executive chairman dies”

  • It reminds me of AEA, company that did the same and got killed by the regulators in the USA.

  • Profit waring at Provident, stock -20%:

    http://www.bbc.com/news/business-40354328

    Shares in Provident Financial plummeted by up to 19% early on Wednesday, after it warned a shake-up of its doorstep lending division would dent profits much more than previously forecast.

    The sub-prime lender is replacing self-employed debt collection agents with ones employed by the company.

    However, it has not had enough applications from existing agents and it has about 450 vacancies.

    As a result, debt collection has been “weaker” and sales have fallen.

    “The business has experienced higher operational disruption than planned due to reduced agent effectiveness through the period of transition,” Provident Financial said in a statement.

    Recent vacancy levels have been 12%, it added, more than double the rate anticipated.

    “We didn’t get it right. The incentives we had in place and the other management actions and communications that were there, were not sufficient to retain the number of agents that we anticipated,” chief executive Peter Crook told analysts during a conference call with analysts.
    “Collections deteriorated”

    In April, the company said it expected the shortfall in contributions to profits, mainly because of weaker debt collection, to be about £15m in the first six months of the year.

    However, recent collections performance has deteriorated, particularly in May, and so the shortfall is now expected to be up to £40m.

    Sales to existing customers and customer retention had also been hit, and so credit issued in the first five months of 2017 was £37m lower than last year.

    Provident Financial said debt collections were “stabilising” in June because most of the new doorstep collection jobs had now been filled, and would begin to “normalise” from July onwards.

    The disruption to the consumer credit division is likely to see pre-exceptional profits fall to about £60m this year, compared with £115m in 2016, the company predicted.
    “Strategic rationale”

    Mr Crook said he was “disappointed” about the “higher than expected operational disruption”.

    He added: “Nonetheless, the strategic rationale for the change remains strong and I am confident that it will deliver the substantial benefits previously communicated.”

    FTSE 100 member Provident Financial also owns Vanquis Bank, and consumer credit brand Satsuma Loans. It also owns Moneybarn, which specialises in sub-prime car loans. They are all trading “in line with internal plans”.

  • I have looked at the spin-off IPF (part of Provident before) and went a tour with agent to make loans and collect unpaid loans. The scene could be staged but the trip was very worthwhile. First, most agents are customers before and they know customers personally. Secondly, these are un-banked people so alternatives are limited and PFG or IPF provides a much more regulated service (no one will bang on your door to intimidate to collect). Thirdly, our finance people like to think of APR but for customers they know exactly what they need to pay (for IPF, for example, I lend you 100 and I am expecting 170 in weekly installments in 14 months). They don’t think of APR but instead focus on weekly payments. PFG’s APR is not as high as you mentioned (I remember I calculated it is 45% for Vanquis, 103% for CCD, 30% for Moneybarn). You have to split these into APR and service fees (remember somebody has to go to your home EVERY WEEK). For IPF, life is actually much tougher, Poland now only allows 10% APR which is ridiculous (but adding services fees, the revenue yield or APR is 77%). I think customers generally come back. During my field trip, a retired women is taking her second loans. I asked her what that is for and she wouldn’t tell. Comparing to others, I would say the process is very friendly. Also there is a social element to it as agents generally know customers personally so they might chat for a few minutes while collecting money. P-to-P lending is difficult to replace the model – there is a reason for home visit to verify income, know the customer and collect the money. PFG and IPF is doing digital lending now with lower APR as there is no home visit service element. But this aims for higher income people. For lower incomers, this might be too risky.

    If you are in doubt, why not go on a trip with an agent and talk to customers (instead of projecting your own prejudgement on it)?

    • #steve,
      thanks for the comment. As an arm chair investor, unfortunately I cannot do “On premise” research. This is in my opinion both, a disadvantage and an advantage. A disadvnatage as I might get additional insight, an advantage because I will be more objective. So far, I think for me the advantage has outweighed the disadvantage.

      As I said, for other investors it might be a great fit and maybe PFG will be a fantastic investment. If I don’t like it, that says nothing. I have rejected a couple of quite good investments over the past 6 years 😉

      The APRs are by the way “cut & paste” from the PFG annual repoort, not my calculation.

      • I personally made a few dozens field collections visits, with different field agents in Poland, Romania and Bulgaria.
        The best agents on the field (both IPF and PFG) are actually middle aged women, mothers with families.

        Obviously they somehow are able to estimate & control the risks of non-payment BEFORE making the decision to approve & service the loan to their clients.

        It is hard to imagine thousands of middle-aged women doing things like violence, abuse etc. to collect their money from customers (and, in reality, this is not the case).
        People receiving those loans are poor, but they know exactly what their weekly (and total) payments are.
        In my (humble) opinion it is hard to say that there are no real benefits to the customer – my simlpe argument is that the business has been around for the last 130 years:) at least.

        • Thank again. However especially in financial Services a Lot of Person based models are struggling, such as insurance agents and branch banking. And just as an example: banca Monte di Pasci managed to bankrupt itself after more than 500 years of existence. Just the age of a Company is not a very good Investment criteria imo.

        • IPF today down 44%. It seems that Poland thinks their interest rates are too high….

        • Recent years the (British) Provident delivered excellent results. Regulatory risks are serious of cource.

          The same could not be said for the spinoff (International Personal Finance). Their (relatively) new CEO in my opinion shows weak strategy & execution. The Polish regulatory pressures is a problem well known for a few years now. They wasted their time doing acquisitions & ill targeted restructurings in Poland, Romania etc.
          🙂

        • New day recently issued £400m of notes. How do you view their business? Will the agency model be faded out as millennials grow old?

    • How you calculated that?

  • There rates and whom they lend to, is one aspect, another aspect with worries me: is “doorstep lender” only a euphemism for aggressive sale tactics? I wonder how good are the interests of the agents are aligned with that of the company. Is it possible that a lot of growth stems from customers paying credits with new credits? How much of a Ponzi is this company?

  • Hallo MMI,

    ist credit acceptance aus den USA ähnlich provident? Soweit ich mich erinnern kann, basiert ihr Geschäftsmodell, dass sie Auto-Kredite an Menschen vergeben, die eigentlich nicht kreditwürdig sind. Auch hier sind sehr viele namhafte Fonds ( RV Capital, Baupost, Ennismore usw.) investiert.

    • #Musti,
      answer in English:

      To soem extent Credit Acceptance is similar (Subprime, high APR). However, according to some investors there is one major difference which could be summarized as follows: “No car, no job”.

      In the US, public transportation is more or less non-existent. So if you don’t have a car, you cannot go to work. CACC claims that it basically enables people to get to work. So one could argue that those loans are more “productive” than consumer loans for large TV screens.

      I have never verified this, but to be honest, I am not a fan of US subprime either……

      mmi

  • It’s a tough line to draw (for me) since I own a couple of gambling stocks, but I agree with the author that PE is beyond some kind of line. My rationale is that while there are some gambling addicts there are a ton of casual gamblers, while I don’t think anyone not in a distressed financial situation casually borrowing £100 at the rates above.

    Great writeup though!

  • MMI: reading comments here make it obvious to me that this is a reflection of where investments are going since the year 2,000: votes on subjective morality.

    You may want to update the INVESTMENT PHILOSOPHY page with no-go sectors: sub-prime lending, defense?, tobacco?, spirits?, Israel? (some people avoid that, seriously), pharma with super high prices?, etc…

    That will give clarity to your readership of your moral standing and allow them to position themselves accordingly.

    Best,

    Tony

    • I strongly disaggree with your comment.

      This is not about “ESG” or “Moral” style of investing. I belive that especially today companies in the long run need to deliver “real value” to the customer. A defense company can deliver “real value” to a Government if they produce superior equipment at reasonable prices. The same goes for any luxury company who sells high margin products if it makes the customers happy.

      In the pharmaceutical industry we see already the pendelum swinging back against those who just increase prices or game the system with not adding value.

      Lending out money at 400% or 50% p.a. in my opinion is however definitely not beneficial to the customer, especially as it seems to be purely for consumption and targeted towards people who don’t have a lot of financial skill. I do think that among other issues, in the future, these kind of businesses will be more likely disrupted by Peer-to-peer platforms than “normal” banks. Those “profit pools” are not that difficult to disrupt.

      And a small hint: The blog is for free and no one forces you to read it. If you don’t like it, don’t read it.

      • I see it more as a question of sustainibility (Nachhaltigkeit) of the business modell: Will the customer gladly like to come back again after this experience or will he take another provider if he has the (economic) freedom to choose?
        As far as I understand his blog MMI prefers business with a high level of sustainibility, with recurring customers. These customersprefer providers that helps themself. The highwayman-version of business usually dont fit in this scheme.

  • I didn’t think that there are companies that charge higher rates than CACC. Now I know better 🙂

  • I side with the author that Provident has fairly unethical practices. They prey on people who desperately need money and phrase their advertising in such a manner that alludes to it being cheap to the financially uneducated layman (“borrow £100 and pay £3.60 a week” = 299% APR). Their loan sizes are small to target for this. The clients often have little choice other than similar payday lenders. Collectors can be rude, intimidating, and aggressive. The financial ramifications for the borrower are likely not realised until later.

    It is dissimilar to McDonalds, Cinemas, Harrods etc. People understand the value of those goods and have reasonable options and basis for comparison. The lending of Provident is predatory and potentially life ruining.

    However, it creates somewhat of a grey area of where one should draw the line for not investing based on ethics.

    BATS will happily sell billions cigarettes that kill people, BAE will happily sell fighter jets that kill people, WMH will happily leave many in financial ruin when they gamble away their losses (and also discriminate on their client base to do so), hell even IG Group will try and get unwitting punters to spreadbet on various instruments by offering a variety of signup incentives. Then a lighter shade of grey: is an e-coli outbreak in a restaurant chain irresponsible management? Are relatively poor working conditions (I’m not even talking sweatshops, but Amazon has seldom had great employee reviews) acceptable? Does one agree with the net carbon output of whatever-tech-company-is-flavour-of-the-month?

    I tend to be of the opinion that if the British Government is content with the laws as they are for these companies to operate, then I am content to invest, at the right price of course. Perhaps this is unsatisfactory, even to myself, but one could spend the rest of their lives investigating the ins and outs of a businesses practices, wrestling with themselves on where to draw said line, and leave no time left to get on with life.

  • I follow the company for a few years now. Excellent strategy & execution.
    Mr. Crook is doing a great job.

    The same however could not be said for the spinoff (International Personal Finance).

    At Provident, there have been a few setbacs, of cource, over the years, but overall the returns to shareholders are very good.
    Btw I dare to disagree with your moral /ethical issues here:)
    PF sell money with 300-400% margin.
    McDonalds franchisors, as well as millions other businesses are selling potatoes (and other stuff) with 300-400% margin too, but nobody seem to care too much:)

    For some reason money is special, potatoes are not.

    • As I mentioned in the other post. It is not about the margins but about the fact that they sell their product many times more expensive to people who most likely don’t understand it and what would be illegal in many other countries. But it seems that in the UK no one has a problem with this.

  • I’ve enjoyed your blog for some time now, nice work. You started posting on a few Australian stocks a while back and was curious if you had come across LendLease (LLC:AU for Bloomberg)? Not sure if it would qualify as a value stock for you, but maybe as a special situation given the U.S. political environment? Infrastructure spending seems to be an area of common ground and Donald Trump has a unique history with this firm. I tried to go through all Trump’s past construction projects to determine patterns and notable relationships with developers.

    I have no relationship with Trump, but it would seem that he would remain loyal to companies or people who performed well for him historically. With that being the case, I would further think these same people or companies would profit from infrastructure spending when he holds office. Anyway, from my research the company with the most repeat construction/development/engineering contracts with Trump has been the LendLease Group. I’ll leave the valuation determination to you, if you’re interested, but macro picture and catalyst seem to be in place for this…

    Looking forward to your thoughts.

    Mack Research

  • For the same reason, we should not allow vulnerable people to go to cinemas (quite overpriced), buy IT licenses (also high margins), or shop at Harrod’s !

    • For me personally there is a difference between people voluntarily buying luxury goods compared to selling 300% p.a. loans to financially illiterate people. I am aware that not everyone is sharing this point of view.

      Not high margins are the problem if the product creates a certain value for the buyer. I don’t think that 50%+ consumer loan create a lot of value for customers.

      • Value is also a matter of perception. You only need to educate well enough these vulnerable people on the fact that overpriced products bring you value, and then no problem. Some people will take such consumer credits precisely to buy overpriced products that they do not need, but with fantastic marketing they see lots of value on them…

        • Clearly “value” is always relative. But again, in my opinion the huge fat “profit pool” of this kind of business in my opinion is not safe. A loan is a loan and at some point in time someone might offer this at a lower rate or the regulator will step in further.

          Let’s see, but morality aside, I don’t think that Provident’s stock offers great value. Of course I could be totally wrong.

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