Provident Financial, one of Britain’s largest specialist subprime lenders, returned to profit in 2021, boosted by its shift away from riskier consumer lending and an improving economic outlook.
Annual pre-tax profits last year were £ 4.1mn despite a £ 95.5mn loss from the closure of its consumer credit business last year, which offered high-cost, short-term loans, the bank said on Thursday. In 2020, Provident declared a loss of £ 113.5mn.
“We spent a number of years sorting out the history of the group – that was quite a painful experience,” chief executive Malcolm Le May told the Financial Times. “We’re now looking forward rather than rectifying things.”
Since the closure of its consumer credit business, Provident has refocused on what it calls “mid-cost lending”, offering credit cards, vehicle finance and a pilot scheme for personal loans.
A better than expected economic recovery from the pandemic allowed the lender to reduce the impairment charge for potential bad debt for these sectors from £ 312.6mn in 2020 to £ 50.4mn in 2021.
Credit cards were the biggest driver of profit with adjusted pre-tax profits increasing more than fourfold to £ 173.9mn, driven primarily by lower impairments.
Spending had returned to pre-pandemic levels in most sectors, said Le May. The business had not been affected by rising inflation and increasing commodity prices yet, he added, although the bank took a provision of around £ 7.9mn at the end of 2021 specifically in case of this.
Provident also announced it was reinstating its dividend, with a proposed interim dividend per share of 12p.
The closure of Provident’s consumer credit business largely concludes a long-running drag on profits. The unit had been lossmaking since 2017 after a failed effort to modernize it led to a pair of profit warnings and an emergency rights issue.
The shuttered unit included the company’s doorstep lending division, in which a team of local agents regularly visited borrowers to collect repayments and discuss their products.
The model has faced a surge of customer complaints driven by professional claims management companies in recent years.
Last year, a court approved a proposed scheme by the lender to shut down the doorstep lending division and pay compensation to customers who had been mistreated, despite the Financial Conduct Authority describing the £ 50mn allocated for claims as “potentially arbitrary”. Provident allocated an additional £ 20mn for other scheme-related costs, with £ 16.5mn of the total used by the end of 2021.
The lender also has a £ 4.1mn provision for an ongoing investigation by the FCA into how it assesses loan affordability and the way it responded to a ruling by the Financial Ombudsman regarding complaints handling between February 2020 and February 2021.
The wider “non-standard finance” industry has struggled in recent years as concerns of a cycle of debt dependency have driven regulatory scrutiny. The number of active high-cost, short-term lenders in the UK fell by close to a third between 2016 and the third quarter of 2020, according to FCA figures.
Le May expressed concern that customers with the worst credit scores had an increasingly small range of lending options. “I think there’s got to be a different solution to purely commercial firms for that end of society,” he said.
He said that many were turning to buy now pay latera popular form of interest free credit that has faced fears of driving up consumer debt.
“It has never been more urgent to scale-up [non-profit] community development financial institutions, so more people have a better alternative when they need to borrow, ”said Theodora Hadjimichael, chief executive of CDFI trade group Responsible Finance.