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RNS Number : 4978T
Provident Financial PLC
13 October 2017
Provident Financial plc
Trading Statement
13 October 2017
Provident Financial plc, the leading UK non-standard lender,
makes the following Trading Statement today covering the period
from 1 July 2017 to 12 October 2017.
Summary
-- A home credit business recovery plan has been developed under
new leadership to re-establish relationships with customers,
stabilise the operation of the business and improve collections
performance. Progress to date is in line with the recovery plan and
is consistent with the guidance provided on 22 August 2017 of a
pre-exceptional loss for the Consumer Credit Division (CCD) in a
range of between GBP80m and GBP120m for 2017 as a whole.
-- Vanquis Bank has delivered further good growth through the
third quarter of the year against credit standards that have
recently been tightened, recognising the uncertainties faced by the
UK economy.
-- Satsuma has continued to make further good progress.
-- Moneybarn has continued to enjoy a good flow of new business
volumes with margins continuing to reflect the additional
impairment on business written prior to the tightening of
underwriting in the second quarter.
-- Cash resources and funding capacity amounted to GBP236m
following repayment of the 2012 retail bonds on the maturity date
of 4 October 2017.
-- Vanquis Bank continues to work with the Financial Conduct
Authority (FCA) in relation to the investigation into the Repayment
Option Plan (ROP).
-- The Board confirms that a full-year dividend will not be paid.
-- The search for a new Chief Executive is underway.
Commenting on the group's performance, Manjit Wolstenholme,
Executive Chairman, said:
"Since the last update, we have moved quickly to appoint new
leadership in home credit who have a deep understanding of the
business and recognise the importance of the relationship between
our front-line staff and our customers. A recovery plan has been
developed and a number of actions have already been implemented to
restructure the field organisation in order to provide the
foundation for delivering the necessary improvement in customer
service and financial performance.
Vanquis Bank continues to work with the FCA in relation to the
investigation into ROP.
The board has appointed an independent agency to conduct a
search for a new Chief Executive."
CCD
Home credit
The home credit business, which currently has approximately
500,000 active field customers, implemented a new operating model
on 6 July 2017. The new model involved employing 2,500 full-time
Customer Experience Managers (CEMs) in place of 4,500 self-employed
agents, streamlining field management from 800 to 400 employees and
introducing additional technology, including routing and scheduling
software.
As reported on 22 August 2017, the implementation of the new
operating model resulted in a significant amount of unforeseen
disruption. The implementation of the new model proved too
prescriptive in the way the workforce was managed, removing the
ability of local management to prioritise and allocate resources.
In addition, the re-design of territories and CEM rounds resulted
in both discontinuity and disruption to customer relationships.
There were also problems with the operation and flexibility of the
routing and scheduling software due to data integrity issues which
adversely impacted customer relationships. This combination of
factors resulted in the significant deterioration in trading
performance reported in our trading statement on 22 August.
The leadership team in CCD was changed in late August. Chris
Gillespie returned to the group as Managing Director of the home
credit business having previously held this role until 2013. He has
a deep understanding of the home credit business and is familiar
with many of the people that work for Provident. He is being
supported by Luke Enock, who, as well as continuing to lead
Satsuma, has been appointed Deputy Managing Director of the home
credit business where his strong analytical and credit skills are
highly relevant to the recovery of the business.
A recovery plan has now been developed which retains the
employed operating model in the UK which in due course should allow
the business to own and manage all aspects of the customer journey
and exercise greater control over customer interactions. The
primary focus of the recovery plan is to re-establish relationships
with customers, stabilise the operation of the business and improve
collections performance. A number of important actions have already
been implemented to support these objectives. These involve moving
away from the overly prescriptive routing and scheduling of
customer interactions which were embedded in the new operating
model and restoring the ability of local management to prioritise
and allocate resources to meet customer needs. A key feature of
this is increasing field management resource in order to restore
appropriate spans of control which had been heavily diluted on
implementation of the new operating model. The specific measures
include:
-- Moving from two UK divisions to four through the recruitment
of two additional general managers and increasing the number of
regional managers from 12 to 24;
-- Appointing assistant area managers to support compliance,
administration and arrears in order to free up the 160 area
managers to focus on local resource allocation and management of
individual CEM activity in the field;
-- Recruiting at least 300 part-time employed CEMs, primarily
from the previously self-employed agent workforce to accelerate the
reconnection with customers;
-- Providing additional training for new and underperforming
CEMs, including extending the shadowing period and reintroducing a
'buddy' system;
-- Increasing contact centre resource to handle significantly
higher call volumes, undertake a customer contact programme and
assist customers making their regular payments; and
-- Management of the field organisation is being supported by
the extensive use of analytics including tools that allow field
management and CEMs to view and manage activity on a real-time
basis via handheld technology.
The changes made by management over recent weeks have prevented
any further deterioration in performance and should provide the
foundation for delivering the necessary improvement in customer
service. Collections performance in September was 65%, up from 57%
in August, whilst sales were approximately GBP6m per week lower
than the prior year compared with GBP9m during August. Home credit
receivables ended September at GBP316.3m, down 33% from June 2017
(June 2017: GBP471.7m, September 2016: GBP489.2m).
Current performance is consistent with the recovery plan
developed by management and the guidance provided on 22 August 2017
of a pre-exceptional loss for CCD in a range of between GBP80m and
GBP120m for 2017 as a whole. This plan assumes a continuous
improvement in customer service, collections and sales performance
as the business trades through the seasonal peak in the weeks
leading up to Christmas.
Satsuma
The development trajectory of Satsuma continues to be
encouraging and customer numbers have increased from 66,000 at June
2017 to 71,000 at September 2017 (September 2016: 49,000) and
receivables increased from GBP25m to GBP32m over the same period
(September 2016: GBP14m). The business is expected to report a
small loss for the year as a whole, modestly below previous
guidance due to a lower inflow of potential customers from home
credit following the recent disruption. However, the business is
expected to generate a small profit during the second half of the
year.
Vanquis Bank
Vanquis Bank has delivered further good growth. New account
bookings through the third quarter were 5% higher than last year,
and continued to benefit from the actions put in place in the
second half of last year to develop the credit card proposition and
enhance distribution, including the launch of the Chrome nearer
prime credit card. Year-on-year customer growth of 13% and
receivables growth of 14% have been delivered against credit
standards that have recently been tightened, recognising the
uncertainties faced by the UK economy. The recently introduced
Vanquis Bank app has been well received and over 300,000 customers
have now registered.
Delinquency levels have remained stable through the third
quarter of the year reflecting the sound quality of the receivables
book and the stable UK employment market. In line with previous
guidance, the annualised risk-adjusted margin has moderated from
31.4% to June 2017 to 30.7% to September 2017 (September 2016:
32.2%), reflecting a reduction in the revenue yield due to a
further decline in the penetration of ROP within the customer base
and some moderation in the interest yield from the changing mix of
business.
The Vanquis Bank loans pilot, currently focused on loans to
existing credit card customers, continues to make steady progress.
Following the deployment of a loan specific scorecard, the product
range has been expanded and an online distribution channel has been
launched.
Moneybarn
Moneybarn has continued to enjoy a good flow of new business
volumes during the third quarter of the year, despite the
tightening of underwriting on higher risk categories of business
during the second quarter and some softness in customer demand.
Continued development of its best in class customer platform
together with extension of the product offering has enabled the
business to generate new business volumes 10% higher than the third
quarter of last year. Customer numbers and receivables ended
September at 49,000 (June 2017: 46,000, September 2016: 39,000) and
GBP362m (June 2017: GBP344m, September 2016: GBP286m) respectively,
representing year-on-year growth of around 25%.
The annualised risk-adjusted margin has moderated from 23.4% to
June 2017 to 22.7% to September 2017 (September 2016: 23.9%)
largely reflecting additional impairment associated with the
step-up in new business volumes over the last year and the flow
through of impairment from higher risk categories of business prior
to the tightening of underwriting in the second quarter.
Funding and capital
The group continues to actively monitor its capital and
liquidity positions in the context of the uncertainties surrounding
the home credit recovery plan and the ongoing FCA investigation
into ROP. The group's common equity tier one ratio as at 30
September 2017 was 21.2% (June 2017: 21.5%) and gearing at the end
of September was 3.0 times (June 2017: 2.7 times).
Vanquis Bank continues to build its retail deposits portfolio,
with retail deposits increasing from GBP1,065m at June 2017 to
GBP1,207m at September 2017.
At 30 September 2017, the group had cash resources of GBP194m,
excluding the liquid asset buffer held by Vanquis Bank, and
headroom on the group's committed debt facilities amounted to
GBP70m. The additional capacity for Vanquis Bank to take retail
deposits amounted to GBP92m, giving total funding capacity of
GBP356m. Cash resources and funding capacity were reduced by
GBP120m to GBP74m and GBP236m respectively following the repayment
of the 2012 retail bonds on the maturity date of 4 October 2017.
Maturities in 2018 comprise the third instalment of the M&G
term loan of GBP15m due in January 2018 and GBP20m of private
placement loan notes due in March 2018.
The group's credit rating from Fitch Ratings was downgraded from
BBB to BBB- and placed on negative watch following the group's
announcement on 22 August 2017.
Regulation
Vanquis Bank continues to work with the FCA in relation to the
investigation into ROP. As previously reported on 22 August 2017,
the FCA has indicated that it has concerns about ROP and is
investigating the period from 1 April 2014 to 19 April 2016. The
voluntary requirement agreed with the FCA to suspend all new sales
of ROP in April 2016 remains in place. In addition, the agreement
with the PRA not to pay dividends to, or enter into certain
transactions outside the normal course of business with, the
Provident Financial Group without the PRA's consent remains in
place pending the outcome of the FCA investigation.
CCD continues to operate under an interim permission whilst the
home credit business implements its recovery plan.
In April 2017 the FCA published a consultation paper (CP17/10)
as part of its ongoing Credit Card Market Study relating to
persistent debt and earlier intervention remedies. The overall
objective of the package of proposed remedies is to reduce the
number of customers in problem credit card debt and put borrowers
in greater control of their borrowing. The consultation closed on 3
July 2017 and the FCA expects to publish final rules in a policy
statement later this year.
Dividends
The Board confirms that a full-year dividend will not be
paid.
IFRS 9
IFRS 9 'Financial instruments' is effective from 1 January 2018
and replaces IAS 39 'Financial instruments: Recognition and
measurement'. IFRS 9 significantly changes the recognition of
impairment on customer receivables by introducing an expected loss
model. Under this approach, impairment provisions are recognised on
inception of a loan based on the probability of default and the
typical loss arising on default. This differs from the current
incurred loss model under IAS 39 whereby impairment provisions are
only reflected when there is objective evidence of impairment,
typically a missed payment. The resulting effect is that impairment
provisions under IFRS 9 are recognised earlier. This will result in
a one-off adjustment to receivables and reserves on adoption and
will result in delayed recognition of profits in growing businesses
such as Vanquis Bank, Moneybarn and Satsuma.
The group has made good progress with its IFRS 9 implementation
project and has now finalised the methodology and accounting
policies to be used. Accordingly, to illustrate the impact of IFRS
9, the group estimates that reported receivables at the end of 2016
would have been approximately 6%-8% lower under IFRS 9 and the
group's reported net assets at the same date, after taking account
of the deferred tax impact of the receivables adjustment, would be
approximately 15%-17% lower.
Despite the adjustments required to receivables, net assets and
earnings, it is important to note that IFRS 9 only changes the
timing of profits made on a loan. The group's underwriting and
scorecards will be unaffected by the change in accounting, the
ultimate profitability of loan is the same under both IAS 39 and
IFRS 9 and more fundamentally the cash flows and capital generation
over the life of a loan remain unchanged. The calculation of the
group's bank covenants are unaffected by IFRS 9, as they are based
on accounting standards in place at the time they were set. Based
on latest draft guidance, the regulatory capital impact of IFRS 9
is expected to be phased in on a transitional basis over five
years.
This announcement contains inside information.
Enquiries:
Media
Jade Byrne, Provident Financial 01274 351900
Craig Breheny/Simone Selzer, Brunswick 0207 4045959
providentfinancial@brunswickgroup.com
Investor relations
Gary Thompson/Vicki Turner, Provident Financial 01274 351900
investors@providentfinancial.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
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