The British company Provident Financial scares the international markets. One word, just one, is enough to terrify investors from all over the world: “subprime”. From Wall Street to the London Stock Exchange, despite the ten years that have passed since the biggest financial crisis ever experienced since the Great Depression, the memory of what happened due to the wicked conduct of the largest international financial institutions continues to worry the world. They should have learned their lesson and make sure it doesn't happen again, but never say never in the markets.
In 2006 it all began precisely because, once the real estate bubble had deflated in the US, many owners of subprime mortgages, i.e. customers with high debt risk, became insolvent and were no longer able to repay the money received, wrecking the entire system with effects on the real economy that we all know.
Precisely for this reason the stock market and financial vicissitudes of Provident Financial, a company listed on the Ftse 100 and active in the subprime sector it is attracting everyone's attention. The Bradford (West Yorkshire) company built its fortune thanks to the crisis, exploiting the void created by the banks, no longer willing to grant loans to people without the required requisites. The greater shrewdness of the institutions has meant that Provident Financial over the years has managed to accumulate 2,5 million customers, many of whom are subprime (i.e. without the requirements to receive a standard bank loan), and to consolidate its position in the sector of home loans. But over the last few months the music seems to have changed.
The company announced the second profit warning in a few months and canceled the dividend to shareholders. It is expected to lose between £80-120 million in the third quarter as its debt collection rate has plummeted from 90% in 2016 to 57% today. The previous three months went no better and closed with a loss of 60 million pounds. News that would have shaken the stock prices of any giant, but as if that weren't enough, the coup de grace also arrived: Chief Executive Officer Peter Crook has resigned effective immediately, in his place Manjit Wolstenholme as executive chairman.
“I am very disappointed to announce the rapid deterioration in the outlook for the real estate credit business. Protecting the group's capital base by canceling the interim dividend and, in all likelihood, the annual dividend as well, is an appropriate response to retaining the high-value franchises of Vanquis Bank, Moneybarn and Satsuma. My immediate priority is to lead the turnaround of the home loans business,” Wolstenholme said in a statement.
The news from Bradford sparked the panic on the Ftse100. Yesterday's session, August 22, closed for Provident Financial with a record decline of 70% with a market capitalization heavily reduced to around 860 million. A massive sell-off that didn't spare even the bonds issued by the group with a 10-year maturity, with rates that jumped from 1,9% on August 21st to 12,6% according to the Financial Times. Today's increase (+2,3% to 603 pence) is certainly not enough to calm spirits, the road to recovery still appears long and arduous.
After the stock market crash, many are wondering how the company went from forecasting an annual profit of 60 million euros just two months ago to announcing losses that are even worth double that. Crook obviously ended up in the dock, guilty according to many of having thrown a suicidal restructuring of the group which would have caused extensive damage. The now former CEO has in fact decided to revolutionize the management of subprime loans, relying on technology and marginalizing the traditional "door to door" method with which the company offered loans and above all collected debts. The choice also led to the cutting of numerous jobs and the resignation of numerous agents who, sensing the danger, decided to leave before the boat sank. The result is there for all to see: to the heavy drop in the funding rate mentioned above, we must also add the vertical collapse of the data on the granting of new loans, which fell by around 9 million a week.
Regardless of the reasons behind the vicissitudes of Provident Financial, what is certain is that what is happening in the United Kingdom has reminded traders and investors of a very important concept: regardless of the past years, thehe word subprime is always synonymous with danger.
