Here's why City analysts aren't getting too excited about Provident Financial's soaring share price

 
Rebecca Smith
Provident said it was steadying the ship in today's update
Provident said it was steadying the ship in today's update (Source: Getty)

Provident Financial unveiled signs it had stemmed the tide of recent bad news this morning, saying that while it's expecting a loss of £80m-£120m for the year in its consumer credit division, that's unchanged from August.

A search for a new chief executive to oversee the turnaround is also underway, and shares have bounced back after a heavy fall in August when the firm unveiled its second profit warning in as many months.

At the time of writing they had surged more than 16 per cent.

Read more: Provident Financial shares surge as firm says recovery is on track

But, analysts aren't overly impressed. Here's why...

Sticking with the source of the problems

Neil Wilson, ETX Capital's senior market analyst said the recovery plan for Provident's home credit business, "is flawed".

The doorstep lender is employing 300 collection managers from the previously self-employed agent workforce to help re-establish relationships with customers.

But Wilson said: "Provident Financial says a turnaround is in place but is fundamentally sticking with the revamped operating model that caused all the problems.

The fix in the troubled home credit business pointedly retains the employed operating model. Self-employed agents are still out, customer experience managers are in. This is meant to let Provident own and manage the entire customer journey but it’s the source of the problems as agents have left - notably to rivals such as Morses Club.

Credit rating "teetering on the edge"

Meanwhile, Laith Khalaf, senior analyst at Hargreaves Lansdown, said the share price showing some relief "in these circumstances is natural", but said a "long rocky road" was ahead for the firm.

"The market clearly likes what it sees with the shares rising sharply," he said.

Khalaf added: "There are still reasons to be cautious though. Companies in recovery can go one of two ways, and the rewards, or losses, are usually high. Provident still doesn’t have a CEO, and the financial watchdog is investigating sales of its repayment option plan to Vanquis Bank customers, a product which looks a lot like PPI.

"Meanwhile the group’s credit rating is teetering on the edge of being downgraded to junk, a step down which would limit the availability of creditors, and push up the price of borrowing."

Concerns around underwriting quality "not misplaced"

Liberum analysts say the focus should be on the tightening of credit standards at Vanquis and Moneybarn, "which suggest to us that our concerns around underwriting quality and net loan book growth are not misplaced".

The update from Provident "reinforces our negative stance", they added, reiterating a "sell" rating.

Read more: Provident shares hit as Barclays weighs in with gloomy predictions

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