U.K. Subprime Lender Plunges More Than 70%

Provident Financial Plc’s shares and bonds tumbled after the British subprime lender forecast a full-year loss and revealed it’s being probed by regulators. Chief Executive Officer Peter Crook stepped down.

The U.K. Financial Conduct Authority is investigating the Vanquis Bank credit-card unit, and the regulator had previously ordered Provident to stop offering a particular repayment product, the company said Tuesday. Provident scrapped its interim dividend and said a full-year payout is also unlikely. Manjit Wolstenholme will temporarily run the firm as executive chairman.

Source: Provident Financial Plc

The shares fell as much as 76 percent, the most on record. Provident also cited further deterioration at its home credit business after a botched roll-out of new technology as it scrapped a more-than-century-old business model. Crook, who was CEO for a decade, said in June that many of its 4,500 self-employed, door-to-door salesmen and debt collectors quit or worked less when they were informed they would be replaced by a smaller number of iPad-toting full-time staff.

“Given that the FCA investigation has the potential to be material to the company, investors are likely to take the view that this investigation should have been disclosed when it was known,” RBC Capital Markets analyst Peter Lenardos said in a note. “The shares are not investible until greater clarity is received, which may not be until next year,” he said, calling the probe, loss, dividend suspension and CEO’s departure a “quadruple whammy.”

The FCA confirmed it is investigating Vanquis, but declined to comment further on the status of the probe.

The company now expects a “pre-exceptional” loss for the home credit business of between 80 million pounds ($103 million) and 120 million pounds. It predicted a 60 million-pound profit as recently as June, when it issued a profit warning as loan sales and debt collections plunged. Wolstenholme said in the statement that it will take “an elongated period of time” to turn the division around.

Shares of the Bradford, England-based company dropped 68 percent to 559.5 pence at 1:10 p.m. in London. The stock is down about 80 percent this year, wiping more than 3 billion pounds from its market value.

The lender’s 250 million pounds of 8 percent notes due in October 2019 fell 33 pence on the pound to 80 pence, according to data compiled by Bloomberg. That’s the lowest since the notes were issued in 2009, the data show.

Read more: Analysts react to Provident Financial’s statement

The plunge will be welcomed by hedge funds Lansdowne Partners LP and AQR Capital Management, which made the two biggest gambles the stock would fall by taking short positions. On the other side: investment giant Invesco and money manager Neil Woodford, who hold 29 percent and 18 percent of Provident’s shares respectively, according to data compiled by Bloomberg.

While Provident didn’t make any mention of the broader U.K. economic environment or Brexit, its profit warning comes as the Bank of England cautions that the nation’s consumer credit market is overheating after years of low interest rates and low defaults bred complacency. Crook had previously said Provident’s business model was more resilient to an economic downturn than the big banks.

Provident may need a stock sale to survive, said Gary Greenwood, an analyst at Shore Capital in Liverpool, England, who suspended his buy recommendation on the stock.

“This is without doubt a disaster,” Greenwood said. “Future profit performance will depend on management’s ability to rescue the situation, which is highly uncertain. We expect that further heads will roll.”

Read More: Replacing Debt Collectors With Tech Goes Wrong at Provident

Provident said Tuesday that the FCA ordered the company to stop offering “repayment option plans” in April 2016. The products had been contributing about 70 million pounds in revenue a year.

There’s a risk the company “may be required to pay compensation to customers in respect of the trading period under investigation,” Greenwood said. “Growth will need to be dialed back in the group’s better-performing businesses to preserve capital, thus further impacting future profit forecasts.”

Data Integrity

As revenue from its old sales force continues to decline, its new technology isn’t panning out either. The routing and scheduling software designed to help the 2,500 full-time digital-savvy staff replacing the door-to-door salesmen “has presented some early issues, primarily relating to the integrity of data,” Provident said, while “the prescriptive nature of the new operating model has not allowed sufficient local autonomy to prioritize resource allocation.”

Debt collection performance has fallen to 57 percent this year from 90 percent at the end of 2016, according to the statement. Likewise, weekly sales were running at about 9 million pounds lower in the same period.

Bloomberg Intelligence: Provident Financial Isn’t Canary in Coal Mine; Vanquis a Concern

Provident serves 2.4 million customers, many of them unemployed or on welfare. Extending credit to the working class had been good to Provident: its stock had tripled over a decade that saw other British banks collapse or get bailed out in the financial crisis. Provident was started in 1880 by Joshua Waddilove, a philanthropist and social reformer who saw extending door-to-door credit as a way to alleviate poverty.

— With assistance by Suzi Ring

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