Is the credit bubble popping already? - Major concerns over Provident's home lending business
Daryl Jackson, News Editor
24 Aug 2017, 1:23 p.m.
Ten years on from the financial banking crisis there is news of a sub-prime lender in trouble here in the UK. We’ve highlighted concerns about this before, but the news about Provident Financial should surely send alarm bells ringing.
The company lost two-thirds of its stock market value in one day on Tuesday after the doorstep lender was hit by many blows. It led to the biggest fall in a FTSE 100 company ever in one day, wiping nearly £1.7bn off its stock market value. Provident Financial – which specialises in lending to people already in financial difficulty - issued its second profit warning in two months, sacked its chief executive and cancelled a dividend for shareholders.
Some analysts have been predicting that we are in a credit bubble that is close to bursting. Others are predicting that the next crash could be upon us very soon! Portia Patel, an analyst at Liberum, has estimated that Provident could be facing a funding shortfall of £73 million by the end of next June. It begs the question, do we all need to start protecting our wealth now, as many did during the banking crisis 10 years ago?
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What is behind all this?
There was an attempt, by the former chief executive, Peter Crook to change the business model that had served it well for 130 years. The company used to have door-to-door agents, who would know their customers and work to make sure they were not borrowing more than they could afford to repay. Under that model, the company had debt collection rates of 90%. That has fallen to around 57% after the company decided to replace about 4,500 self-employed door-to-door agents with half the number of full time, Ipad carrying “consumer experience managers”.
It turns out, they were not so good at collecting the money. When you are dealing with people on the financial margins of society, it is apparent that email and text message reminders do not work as well as a friendly face on the doorstep!
The original business model had been the backbone of the company since it started in 1880, way before the likes of Wonga came into the market. Last year, the door-to-door lending arm of the business delivered operating profits of £115.2m. However, with losses expected to be between £80m and £120m this year, last year’s profit looks likely to be reversed.
Is this a sign that I should protect my wealth?
Commentators are suggesting this shouldn’t bring back the nightmares of the financial crisis that started with the US sub-prime lending market ten years ago. This is a company specific problem where the chief executive broke the business model and tried to do things differently. Business models are made to be broken, but this is an example of a company failing to think through the negative implications!
However, it is worth noting and taking seriously the fact that the Bank of England and the financial watchdog (The FSA) are making no secret of their concerns about the amount of consumer debt. They are seriously concerned that the bubble could be about to burst again, leaving people with huge debts that they can never pay off. That could leave the financial industry in turmoil.
Personal debt of things like loans, credit cards, overdrafts and car loans now stands at over £200bn for the first time since the financial crisis that started ten years ago. You could argue, whatever the real problem here, now is the time for us all to be more cautious and make sure we have protected our wealth for future possible instability.