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Provident sell-off strengthens as analyst sounds alarm

Provident sell-off strengthens as analyst sounds alarm

Shares in Provident Financial (PFG) have tumbled to the bottom of the FTSE 250 for the second day in a row after Liberum warned the risks presented by the embattled lender were 'still too great'.

The stock slumped 13.3% to 697.2p and is now down 24% over the last two days, after yesterday's update revealed the consumer credit division was expected to lose £120 million in 2017.

The shares are now back down at levels not seen since August, in the aftermath of the lender's profit warning that sent the shares tumbling 70%.

Liberum analyst Portia Patel delivered a bleak assessment of the lender's update and maintained her 'sell' rating on the shares, cutting her price target from 483p to 479p.

'The trading update offered no resolution on the Financial Conduct Authority's investigation into the repayment option plan (ROP), the search for a new chief executive and the balance sheet, which we are still convinced needs strengthening even before considering the unquantifiable potential liability for ROP,' she said.

'The shares are mispriced and the risks still too great to consider owning the stock in our view.'

Patel downgraded her earnings forecasts by nearly 10% for 2017 and more than 6% in 2018 and 2019 after yesterday's update.

She said Provident's balance sheet would come under more stress given the restrictions placed on Vanquis as part of the FCA investigation.

'The FCA's investigation into the Vanquis ROP product and consequent agreement with the Prudential Regulation Authority (PRA) to not "pay dividends to, or enter into certain transactions outside the normal course of business" with Provident Financial without the PRA's consent, has effectively ring-fenced Vanquis and prevents it from raising customer deposits or other funding to help replace maturing debt at the group level,' she said.

Patel added that the size of any redress or fine demanded by the FCA following the investigation was a major unknown.

'We find this impossible to quantify accurately without knowing the regulator's view but with the market estimates ranging widely, from £0 to £1 billion, this could materially damage the capital position.'

Peel Hunt analyst Stuart Duncan meanwhile cut his 2017 profit forecasts by 17% but maintained his 'hold' rating and 870p target price on the shares.

He said that with 'little clarity about the eventual resolution with the regulators' over the ROP product, the shares would 'remain volatile'.

'With regards to ROP, there remains the clear risk that profits (estimated previously at £50 million) from this product would drop out of Vanquis' earnings,' he said.

'It is also significant that any material amounts due under redress would impact both regulatory capital and cash, hence increased concerns about the requirement for funding.'

Provident Financial's fall will continue to weigh on the performance of the company's biggest shareholders, fund groups Woodford Investment Management and Invesco Perpetual.

Even with its heavy fall, the stock remains a top 10 holding in Neil Woodford's  LF Woodford Equity Income fund, with the manager having bought more shares since August's profit warning.

While the company has fallen out of the top 10 holdings in Mark Barnett's  Invesco Perpetual Income and High Income funds, Invesco has also been adding to its holding.

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