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 Provident 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 Provident’s 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 Fisher.
‘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 Provident. The 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 ‘fairly consistently’.
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 negative.
‘That is around having a clear strategy and delivering against market expectation.’
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 and accurate.
‘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 customers.
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 portfolio.
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 through.
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 not.
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