A debt collector with a conscience? A sub-prime doorstepping loan provider
where 95% of customers are very satisfied with their service and the company
makes money? Analysts agree that the business model works?
Andrew Fisher, FD of 129 year-old
Financial, can boast this of the company, and more. In a world where
providing unsecured loans is anathema in the current economic climate, the
company finds itself one of the darlings of the analyst community and set to
make a cool £130m profit for the December 2008 year end.
But if it is performing so well then surely it’s putting the heat on its
staggering 1.7m customer base?
Not so, argues Fisher. This FTSE 250 business doesn’t operate in the way the
public would expect doorsteppers to ‘95% of our customers are satisfied or very
satisfied with the service we provide – that is a multiple of most lending
institutions,’ Fisher says. ‘So why is that? The reason is that the product we
serve our customers with, the credit we issue, the nature of that product is
extremely well suited to their circumstances. And what that really means is it
is very flexible and delivered by an agent who has a relationship and an
understanding and a forward looking view of that customer’s circumstances, which
you cannot gain without face-to-face contact with the customer.’
Agents of change
Agents are crucial to
business model. There are more than 11,000 of them across the country,
supervised in local offices by 1,500 managers who keep an eye on their progress.
These agents are typically female and work part-time.
They visit customers, who are also usually female, to agree loans of around
£300-£400 across a 57-week plan. A fixed service charge upfront is allocated and
a fixed amount the customer has to repay. ‘That amount cannot go up,’ says
‘We understand that because the circumstances of our customers are inherently
volatile that these can change and there may be weeks when they cannot make the
payment for good reason.
‘One of the agents’ principle roles is to understand those reasons and to
manage that risk. Therefore, if you take one of our core products, a 57-week
loan, on average, that will be repaid over 61-62 weeks but with the full
knowledge and visibility of the agents and an understanding of the
circumstances. If you think about a regular bank that issues a loan to you, you
miss a payment, they have no means of trying to get you on the phone, of
establishing what has gone on.’
Fisher paints a convincing picture. But how did he get his head around the
controversial nature of the business’ offering before he joined?
‘Anybody who joins the business and this is including me you go on a
journey which is getting comfortable and understanding what the business does.
‘We explicitly make sure that they have had sufficient exposure to the
business, whether that is going out with an agent, visiting a branch, talking to
people internally to make sure that they understand the business and that they
are comfortable with the business. To a man they are and the reason they are is
the home credit business fulfils a very valuable role in the communities to
which it lends money.
‘The controversy, or the image of the business, is the reason it gets tainted
from time-to-time by relatively ill-informed comment is because we lend to
relatively poor people.’
At the crossroads
Things haven’t always been hunky dory for
current management team, led by chief executive Peter Crook, has been in place
for a couple of years, with Fisher leaving Premier Farnell as FD to take up the
same role at Provident in May 2006.
At that time the business was at a ‘crossroads’, says Fisher. It had built up
a successful international business using the home credit model overseas, and
the UK core was not required to fund that arm anymore.
UK had been underserved and underinvested in what was a static market. Its
investment in a motor insurance arm was not working out, and money was also
being poured into its credit card operation Vanquis.
Analysts were less than impressed as the business missed profit forecasts
Crooks’ financial services background, plus Fisher’s understanding of the
importance of marketing and the sales channel for Provident has since proved a
hit. Vanquis has turned from an £18m loss to a predicted £8m profit for 2008 and
its international arm divested.
‘The difference between the business declining 3% per annum and growing at,
let’s say, 3%-4% per annum, the delta in terms of shareholder value is several
hundred million pounds. So there was the prize, there was the opportunity and I
could relate to that.’
Position of dominance
The analysts are now very happy bunnies indeed. Two-thirds of them were
neutral, with the other third negative on the recommendations for the company.
Now, of 15 sales-side analysts, ten are positive and four neutral. One is
‘That is around having a clear strategy and delivering against market
Provident has also proved dominant in the market, holding 60% against the
And its main UK rival, Cattles, has enough to worry about without considering
how to eat into its rival’s market share.
Lending more for longer, Cattles has been hit hard by the credit crunch. It
is axing 1,000 jobs, restricting its lending and faces renegotiating half a
billion pounds in bank facilities in the summer.
The real threat to Provident’s success is success itself. It seems the
business has even managed to overcome this.
In 2004 the Office of Fair Trading warned the home credit industry’s major
players about their uncompetitive practices, such as customers’ ability to
compare loan prices before deciding on a deal.
The Competition Commission also ran a huge investigation into the industry
through to 2006. ‘No stones left unturned,’ comments Fisher.
But the only disagreement between Provident and the commission’s findings was
around the profitability of the business.
‘[It found] the product was well suited to the customer. Customer
satisfaction is high. And the relationship between the agents and the customer
was professional and appropriate.
‘It is virtually an endorsement of the role of the business in extending
credit to its customer base. Where we sought to differ was on the question of
profitability. And there was no conclusion.’
So Provident has fended off the regulators and competition. How does it now
fight the economic circumstances its customers find themselves in?
‘It’s all about risk,’ says Fisher. ‘Understanding it and managing it.
‘The board meet weekly to discuss the latest collection figures. These are
not month old figures, these are from the previous week, collated, up-to-date
‘We have very detailed MI every week. So the executives the chief
executive, myself and managing director Chris Gillespie sit down every Monday
morning and we go through that data. Every week we have the hand on the tiller.
Our agents visit one in 20 homes in the UK every week. Every collection is
recorded for the weekly MI.’
When Fisher arrived in the business it re-forecast twice a year. Now it takes
stock every month. ‘That is not unusual,’ says Fisher, but is a big change from
where it was. Vanquis is turning down 70% of applications, tightening its
underwriting for the last year and a half.
‘If we don’t lend responsibly we don’t get the money back. It’s as simple as
that. Maintaining that balance between growth and capacity is very important.’
The analysts’ view
It is clear that the business continues to benefit from strong demand as the
economic environment deteriorates and competition withdraws from the market.
The key limiting factor in the growth of the consumer credit business are the
self-employed agents who issue and collect the loans, also the time the company
is most exposed to risk is with a new agent.
The company is therefore encouraging some of its agents to become more full time
handling 300 clients as opposed to the average of 140.
Secondly following the recent demise of London Scottish Bank, it is likely some
of their agents will look to join Provident Financial bringing their established
This statement may sound strange for a sub-prime lender but Provident doubled
its profitability through the last recession. Key is the fact that the bottom
30% of UK households by income receive over half of their cash income in state
benefits. With an average loan (around £400), very low customer income
volatility and huge margins for impairment protection, we think it is easy to
see why Provident is largely impervious to recession.
Clients seem to be happy to pay for this service-intensive form of borrowing.
Recommendation (core): BUY
The average duration of the group’s loan book is under a year, whereas the
average maturity on its funding is closer to three years. Currently we do not
envisage the group encountering difficulties in refinancing a sufficient amount
of its existing debt comfortably to meet our estimates.
[The group] has £385m headroom on its existing committed facilities of £1bn and
does not need to refinance outstanding loans until 2010.
Take a look at my portfolio. It’s everything from tax to treasury, to accounting
to the whole of the legal function to investor relations, so it is a pretty full
A fundamental and early part of the FD’s job was to get a handle on what
the realistic expectations for the business were. On 4 July 2006, after having
been here six weeks, I took down the expectations in the market by was £12m in
2006 and something in excess of
£20m for 2007.
We have got to a point where we have injected realism into the budgeting
process, so we are setting realistic expectations. We have got the finance
community under broader management of the business buying into those budgets
that are aligned with external expectations, so we have a pretty good chance we
are going to hit them and we have got fast reliable financial information going
Provident’s data management systems…
There was previously there was nothing wrong with the data, it was there, it was
just hard to get at. It was hard to change things. So in itself [the new system]
didn’t improve the data, it improved the speed at which you can get to the
data, it is has improved the way you can view or access the data and it
improves the speed at which you can change things within the system.
I spent 15 years at Price Waterhouse (appointed its youngest partner in 1990)
and 11 and a bit years at Premier Farnell I was looking after the work with
three chief executives and three chairmen. Then I thought to myself, maybe now
is the time to start to look around to see whether there is a possibility to fit
a third career into my short life. So I ended up accepting the job at Provident
Financial. I never looked back to be honest.
What would life have been like if I had stayed to be a partner through to the
age of 55 or 60 in Price Waterhouse? I’m sure it would have been alright, but
would it have been as exciting, or would it have been as stimulating? Probably
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