Provident Financial 2010 Annual Report

8/7/2019 Provident Financial 2010 Annual Report

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Meeting the needfor credit in the

real world

Annual Report & Financial Statements 2010


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C

Dic p: Overview

IFC Financial highlights1 Introduction2 A specialist market5 Policy and regulation6 Home Credit explained8 Vanquis Bank credit card explained

Dic p: Business review and management report

10 Chairmans statement12 Chief Executives review14 Strategy and KPIs

18 Group business review and management report19 Consumer Credit Division27 Vanquis Bank32 Financial review39 Managing our risks40 Risks42 Corporate responsibility

Dic p: Governance

46 Our directors and ofcers48 Governance54 Key governance principles

Dic i p

61 Letter from Chairman ofthe remuneration committee62 Remuneration at a glance63 Remuneration explained70 Remuneration in detail

Fici

78 Consolidated income statement78 Consolidated statement of comprehensive income78 Earnings per share and dividends79 Balance sheets80 Statements of changes in shareholders equity82 Statements of cashows83 Statement of accounting policies90 Financial and capital risk management94 Notes to the nancial statements

128 Independent auditors report

129 Information for shareholders

www.providentfinancial.com

Provident Financial provides

tailored credit products

to 2.4 million non-standard

borrowers in the UK and

Ireland. The Consumer Credit

Division has been providing

small loans, issued in thehome and collected weekly,

since 1880. Vanquis Bank

issues credit cards to people

often excluded by mainstream

card issuers, allowing them

to participate more fully

in the modern world.

Gp gc


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1

2

Financial highlights for theyear ended 31 December 2010:

144.5m 78.6p(2009: 130.1m) (2009: 71.4p)

Pfi bf dcpi c

Bic ig p hbf cpi c

142.0m 76.7p(2009: 125.7m) (2009: 67.5p)Pfi bf Bic ig p h

63.5p 3.3 times(2009: 63.5p) (2009: 3.3 times)

Diidd p h Gig

1.24 times 1,219m(2009: 1.12 times) (+7.0%)

Diidd c bfcpi c

Y d cib

2.4mGp c

3,700Gp py

3,150 874mC CdiDiii py

C CdiDiii y dcib

Provident Financial comprises two businesses.The Consumer Credit Division offers home creditloans. Vanquis Bank issues Visa-branded credit cards.

The Consumer Credit Division offers home creditloans through a network of local agents. It hasoffices in every town and city in the UK. 11,400agents call weekly on our 1.9m customers,reaching around one in 20 households in the UK.

GrouP

Consumer CreDIt DIvIsIon

Split of customersby business

1 Consumer CreditDivision 1,869,000 77%

2 Vanquis Bank544,000 23%

Highigh

Cautionary statement: All statements other than statements of historical fact included in thisdocument, including, with limitation, those regarding the nancial condition, results, operationsand business of Provident Financial plc and its strategy, plans and objectives and the markets inwhich it operates, are forward-looking statements. Such forward-looking statements which reectthe directors assumptions made on the basis of information available to them at this time, involveknown and unknown risks, uncertainties and other important factors which could cause the actualresults, performance or achievements of Provident Financial plc or the markets in which it operatesto be materially different from future results, performance or achievements expressed or impliedby such forward-looking statements. Nothing in the document shall be regarded as a prot forecastand its directors accept no liability to third par ties in respect of this report save as would arise underEnglish law. In particular, section 463 of the Companies Act 2006 limits the liability of the directorsof Provident Financial plc so that their liability is solely to Provident Financial plc.

vanquIs Bank

Vanquis Bank, our credit card business, continuesto make excellent progress and now serves over500,000 customers. Its headquarters are in centralLondon with a call centre in Chatham, Kent, whichhandles around 500,000 customer calls per month.

500 345mvi B py vi B y

d cib

Pid Fici pc a rp & Fici s 2010

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Pid Fici pc a rp & Fici s 2010 Company number 668987

2 oi: a pcii

A specialist marketAt the end of 2010, total personal debt balances in the UK stood

at 1.5 trillion, of which just over 1.2 trillion was secured by

mortgages and 214 billion was unsecured consumer credit.

The mainstream market, limited to low-risk borrowers, accountsfor over 80% of consumer credit balances. Provident competes

in the non-standard market. Collectively, the 10 million-plus

people in this market borrow around 65 billion annually.

ucdc cdi

Over 70% ofunsecured lendingis provided throughcredit cards.The remainderis split betweenunsecured personalloans, overdrafts,retail nance andmotor nance.

tHe maInstream lenDInG market

Mainstream lending is geared towards

people with good credit records.

Borrowers in the mainstream marketare usually salaried, have few other

unsecured borrowings and no history

of non-payment. Most have a mortgage

and most have a credit card on which

they pay off the full balance every month.

Lenders check potential borrowers

credit histories.

1.5trnValue of total personal

debt balances in the UK

214bnUnsecured consumercredit balances

1.2trnSecured consumercredit balances

55,272Average householddebt (includingmortgage)

n-dddig

The 10 million-pluspeople less able toaccess mainstreamcredit borrow in thenon-standard sectorwhere small-sumlending is the norm.This 65 billionmarket accountsfor around 40%

of all unsecuredcredit advances.

Pid Fici

Provident competesin the non-standardlending market.In 2010 we madegross advancesof 1.5 billion toour 2.4 millioncustomers.

tHe non-stanDarD lenDInG market

65bnCredit issued insmall amountsto low-incomecustomers withlimited accessto credit

1.5bnGroup credit issued

10m+Number ofnon-standardborrowers

175bnCredit issued(unsecuredconsumer credit)


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Pid Fici pc a rp & Fici s 2010Company number 668987

3

our role In tHe non-stanDarD lenDInG market

At Provident we have been lending responsibly in the non-standard market

ever since our foundation in 1880. Our values inform our approach.

We believe personal relationships are vital. In Home Credit, where we

are the UK market leader, agents meet up with our 1.9 million customers

weekly. Vanquis Bank stays in touch with its customers over the phone

and through newer innovations such as SMS text messaging.

Non-standardlending explained

Most products in the non-standardmarket are relatively short-term. Theycarry higher than average charges toreect the greater costs and risk oflending to non-standard borrowers.

Overdrafts, unsecured personal loansand credit cards make up

the bulk of the market.

The remaining 5% of non-standardlending is split between home

credit, payday loans, pawnbroking,rent-to-own and bills

of sale.

Home

credit

Unsecuredpersonal

loans

Paydaylending

Pawnbroking

OverdraftsHire purchase/retail finance

Securedlending

Credit

cards

1.9mHome Creditcustomers

0.5mVanquis Bankcustomers

867mHome Creditreceivables

345mVanquis Bankreceivables

Directrsreprt:overview


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4 oi: a pcii continued

Our customersTypically, Provident customers are hard-working

people living on modest incomes. They borrow

relatively small amounts, but it is a big commitment.

They need it to be easy to make repayments andthey like the exibility to adjust those payments

if their circumstances change.

Home CreDIt Customers

Home Credit customers are not always the main breadwinners,

but they often control the household budget. The majority

of our customers are women. The breadwinners in these

households are more likely to be hourly-paid or have part-time

or casual work than be in salaried employment and less than

half of our customers are in receipt of non-universal benefits.

Home Credit customers value the discipline of the weekly

visit and appreciate having flexibility on repayments.

Turn to page 6 to see how Home Credit works in detail

80%of Home Credit customersthink our products offergood value for money

250Average weeklyhousehold incomeI like being able to spread

the cost of purchases across

the year. Ive used part of my

loan to book us a holiday inthe sun. Weve also got some

new things for the house.

Sue, Home Credit customer

vanquIs Bank Customers

The household income of most Vanquis Bank customers

is between 10,000 and 30,000 a year. They use the card

in a similar way to users of mainstream cards at major

supermarkets, on the high street, and for internet shopping.

Growth in online shopping and changes in merchants

payment policies have made everyday tasks increasingly

difficult without a payment card. The card therefore hasa high utility value and offers useful additional consumer

protection it is often the only one they have.

Turn to page 8 to see how Vanquis Bank works in detail

20%Percentage of customerswith mortgages

84%Customersatisfaction rating

I got my Vanquis Bank credit

card when I was organising

my wedding. It helped me

stick to my budget and keep

track of my spending. Its also

really handy for ordering

online and over the phone.

Nicola, Vanquis Bank customer


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5

Policy and regulationThe group is subject to various regulatory and supervisory

regimes, including the Ofce of Fair Trading in respect of its

credit-granting businesses and the Financial Services Authority

on account of the banking licence held by Vanquis Bank.Our business in the Republic of Ireland is subject to the

authority of the Central Bank in the Republic of Ireland.

Current reGulatorY FrameworkFici sic ahiy (Fsa)Vanquis Bank holds a banking licence and is therefore regulated

by the FSA. The FSAs regulation takes two main forms:

regulatory capital requirements for both Vanquis Bank andthe wider Provident Financial group; and

liquidity requirements for Vanquis Bank.

During 2010, Vanquis Bank implemented the requirementsof the FSAs new liquidity regime, including the need to holda liquid assets buffer.

C Cdi acThe provision of credit is regulated by the rules set out in theConsumer Credit Act 1974 as amended (CCA). The main provisionof this legislation ensures that the UK consumer credit marketoperates in the interests of consumers in a fair, clear andcompetitive way. Both Home Credit and Vanquis Bank are subjectto CCA regulation.

The CCA and its supporting regulations cover:

advertising, canvassing and the provision of pre-contractinformation to customers;

the form and content of credit agreements; cancellation rights and early settlement rebates;

debt collection procedures; and the granting of consumer credit licences.

Changes were made to the CCA and EU regulations in March2010 to implement the 2008 Consumer Credit Directive, witha transitional period for businesses to comply with the new rulesby 31 January 2011. The group implemented the requiredchanges to its procedures in line with the prescribed timetable.

Similar legislation applies to Home Credits operations in theRepublic of Ireland.

Cdi d cd giIn March 2010, the Government and credit and store cardcompanies entered into a Joint Commitment agreeing toimplement five new rights for credit and store card users by

the end of 2010. These included a right to repay against thehighest-rate debt first, a right to control the level of credit limits,more time to reject interest rate increases, rights to clearerinformation to enable users to make comparisons and to dealmore effectively with payment difficulties and a ban on increasesin credit limits and interest rates for those who are at risk offinancial difficulties. Along with other credit and store cardproviders, Vanquis Bank made the necessary systems and otherprocedural changes during 2010 and early 2011 to ensurecompliance with the Joint Commitment.

Future reGulatorY lanDsCaPe

Hm ty (Hmt)/Dp f Bi,Ii d si (BIs) ri f CCdi d P IcyIn October 2010, HMT/BIS issued a call for evidence in supportof its Review of Credit and Insolvency Law. The Review is wide-ranging and the call for evidence sought comments on issuesarising at each stage of the life of a credit agreement, fromadvertising to debt recovery. The call for evidence closed on10 December 2010 and responses are now being consideredby HMT/BIS. There is, as yet, no formal indication of when theresults will be published. The group welcomes the Governmentsevidence-based approach to the review.

Hmt/BIs Ci tff rpibiiy f C CdiIn December 2010, a joint HMT/BIS Consultation was launchedsetting out the Governments proposal to transfer responsibility

for Consumer Credit from the Office of Fair Trading (OFT) to anew Financial Conduct Authority (formerly called the ConsumerProtection and Market Authority). Although the paper sets outtwo options for regulation, it is made clear that the Governmentspreferred option would be to bring the regulation of all retailfinancial products under one regulatory regime. The Consultationcloses on 22 March 2011 and the groups businesses havecontributed to the submissions by their respective trade bodies.



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6 oi: H Cdi pid

Home Creditexplained

wHat makes Home CreDIt DIFFerent?

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What they say

It doesnt help anyone if I lend

too much so I always visit new

customers in their homes to assess

what they can afford to borrow.

Karen, Home Credit agent

How it works

Fi ccMany customers hear about us througha recommendation. Much of our newbusiness comes from word of mouth,direct mail or is sourced throughour network of agents. We are alsorecruiting increasing numbers throughonline advertising.

th g iiAfter obtaining a request tocall at the customers home,the agent will visit to discussthe various products the companyoffers and make an appointmentfor the agent to call back.

How its underpinned

We manage thebusiness to strikethe right balancebetween growth,credit quality, andcollections capacity.

th bch Our 440 branches, extending tovirtually every postcode in the country,make us one of the very few businesseswith truly nationwide coverage in theUK and Ireland. We operate throughtwo main brands: Provident PersonalCredit and Greenwood Personal Credit.Local branch managers liaise withagents to manage paymentsand arrears.


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Karens visit has become part

of my weekly routine. Shes really

down to earth and understanding.

I like being able to deal with

a human being, not a robot.

Kim, Home Credit customer

It really helps that I understand

what lifes like for my customers.

I live in this community and was

a Provident customer myself for

many years.

Paula, Home Credit agent

tp There are no hidden charges.The maximum amount to be repaidis clear and fixed at the start, evenif the customer misses payments.

appyig f An agent will visit the customer in theirown home to conduct affordability andcreditworthiness checks, complete thepaperwork required, and agree a suitableloan amount, having fully explained theloan terms and determined it to besuitable. They will then agree a weeklycollection routine to suit the customerand hand over the loan in cash.

Bidig We operate a low and grow policy.First-time borrowers typically get smaller,shorter-term loans. Those able to managetheir repayments become eligible for largeramounts over longer periods.

lc gA network of 11,400 self-employed agentsadvance credit and collect payments inthe communities they serve. Crucially,the agents earn commission on amountsrepaid, rather than on loans issued. It is intheir interests to lend responsibly. Manyare former customers themselves andgenerally live in the communities wherethey operate. As a result, they are able tobuild up strong, professional relationships

with their customers.

Di, c fdigWe have medium and long-term fundingfrom banks, other lending institutions andthe public debt market. At any given timewe maintain substantial headroom andhave additional committed facilities inplace. We borrow for an average of threeto four years and lend for an averageof less than 12 months. It allows us toadapt our lending if external fundingcircumstances change.

Cdi gOur field force is focused on collectingcash which allows us to manageimpairment effectively. Every weekwe analyse the extensive data comingin from the field. We can identify trendsearly on and take the appropriate actionon lending and collections.



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8 oi: vi B cdi cd pid

wHat makes tHe vanquIs Bank CreDItCarD DIFFerent?

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Vanquis Bankcredit cardexplained

What they say

Id tried to get a credit card from other

lenders, but my nancial history let me

down. Vanquis Bank was different. They

looked at my situation and gave me a

card with a low starting limit. Now my

credit ratings improved, others want tosign me up. But Im sticking where I am.

Aidan, Vanquis Bank customer

How it works

Fi ccIn 2010, 50% of new customerscame from online channels, 33%from direct mail and 17% from

partner recommendations.

appyig f cdOnline applicants get a provisionalresponse within minutes. We aimto interview candidates by phone

before making a final decision.

How its underpinned

Vanquis Bank ismaintaining customerand profit growth.As the business expands,we are improving itseconomies of scale.

uk c cThe 450 staff at our call centre atChatham in Kent stay in close contactwith our 544,000 customers. We aimto speak by phone to every newcustomer prior to activating anaccount. Our staff are in phonecontact with each customer on aregular basis, approximately four

times as often as most mainstreamcard issuers.


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From day one we have much more

regular contact than the average

credit card issuer. We aim to get

to know our customers so we can

understand their priorities and

assist them if they have problemsor queries.

Natalie, Vanquis Bankcontact centre operative

I use my Vanquis card mainly

to smooth out peaks and troughs

in my nances. And with the

internet so important nowadays,

its great to be able to use it to

shop online too.Shaneel, Vanquis Bank customer

tp Every new customer receives awelcome pack outlining their rightsand responsibilities and offering tips

on managing finances and improvingtheir credit rating. Our websiteprovides detailed advice.

Py chWe have made repayments easier byaccepting payment online. We are alsotrialling PayPoint channels. We send SMS

text message reminders when paymentsare due to customers who have signedup for this facility.

Bidig With our low and grow lending policy,new customers typically receive a 250initial credit limit. After the first six months,

their limits are reviewed every four months.Where appropriate, we offer to increasethem in small, manageable steps.

acc iigWe monitor accounts continuously.Our collections team analyses paymentand spending patterns to understand theparticular circumstances of each individualborrower. We periodically suggest changesin credit limits and interest rates in linewith usage and risk levels. Customerswho service their debt effectively can

get reduced interest rates.

ayic piThe senior management team hassignificant experience in financial servicesand the credit card industry. In particular,its key personnel have strong analyticalcapabilities. The business has investedheavily in scorecard development andunderwriting systems. It supplementsstandard industry techniques with a

bespoke underwriting methodology.

opi fficicyThe Vanquis Bank trading model is highlyscalable. As the business grows, profitabilityis increasing. Recent investments ininfrastructure are promoting growth andproductivity. We created a new call centrefacility in 2008 and in 2009 we upgradedour underwriting engine and improvedour IT systems. Further enhancements

are planned in 2011 and 2012. We alsocontinue to invest in developing our people.



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Provident Financial plc Annual Report & Financial Statements 2010 Company number 668987

10 Business review and management report: Chairmans statement

John van KuffelerChairman

The groups businesses ocus on lending responsiblyto consumers in the non-standard segment o the marketwho are less able to access credit in the mainstreammarket and may otherwise ace fnancial exclusion.It has built up a close understanding o this specialistmarket over many years, attracting high levels ocustomer satisaction through delivering a range

o credit products specifcally tailored to the needso people on modest incomes.

Group resultsThe group has reported a strong set of results forthe year with profit before tax and exceptionalcosts up 11.1% to 144.5m (2009: 130.1m) andbasic earnings per share before exceptional costsup 10.1% to 78.6p (2009: 71.4p). The growth inearnings was well ahead of receivables growthdue to the strong management of yield, impairmentand costs. The group incurred an exceptional

charge of 2.5m in 2010 relating to the write-downof residual fixed assets following consolidation of theConsumer Credit Divisions head office into a single,purpose-built facility.

Home Credit delivered profits of 129.1m* (2009:128.9m), up 0.2m on last year. As anticipated,the demand for credit was subdued in the firstnine months of the year due to pressure onhousehold incomes from rising under-employment,characterised by reduced working hours, as well asthe rising cost of food, fuel and utility bills. Againstthis backdrop, a strong focus on collections and theearly actions taken to manage margins and reducecosts underpinned profitability. The last quarter of2010 saw an improvement in the demand for credit

as customers visibility of their future earningsimproved and details of the Governments SpendingReview were announced. At the same time, thecollections performance remained very sound.The good finish to the year leaves Home Creditwell positioned to deliver profitable growth in 2011.

Vanquis Bank achieved an excellent result in 2010,with profits up 89.4% to 26.7m (2009: 14.1m).The business delivered growth of over 25% incustomer numbers and average receivables againsttight underwriting standards. Delinquency trendshave been very favourable since the second quarterof the year enabling the business to deliver a post-taxreturn on equity in excess of its target of 30% for the

year as a whole. Vanquis Bank is very well positionedto continue further strong growth in 2011 anddeliver on its receivables target of 450m by theend of 2012 whilst continuing to earn a post-taxreturn on equity of 30%.

The groups funding and liquidity positions remainstrong with the balance sheet showing modestgearing of 3.3 times (2009: 3.3 times) against a

bank covenant of 5.0 times. In the first two monthsof 2011, the group has made further excellentprogress in increasing and further diversifyingits funding base by arranging private placementstotalling 128.5m, including the 10-year 100mfacility with M&G Investments announced on13 January 2011. The headroom on committedfacilities at the end of February 2011 is approximately370m. This is predominantly earmarked to meetcontractual debt maturities between now and theend of the first quarter of 2012 of 345m whichinclude the final tranche relating to those bankswho did not participate in the three-year extensionto the groups syndicated bank facilities in February2010. In line with the continuing strategy ofdiversifying its funding base, the group has

commenced a roadshow to promote a second retailbond issue following the success of its inauguralissue in April 2010. The group has made goodprogress in its dialogue with the FSA concerningVanquis Bank using its banking licence to take retaildeposits and expects to conclude the dialogue in thesecond quarter of 2011.

The proposed final dividend is maintained at 38.1pper share (2009: 38.1p) reflecting the companyspolicy set out at the time of the demerger to at leastmaintain a full-year payment of 63.5p per sharewhilst moving to a target payout ratio of 80% ofpost-tax profit in the medium term. Dividend coverbefore exceptional costs for 2010 increased to1.24 times (2009: 1.12 times).

Our role has never beenmore important

38.1pProposed fnal dividend


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m cdiiThe groups businesses focus on lending responsiblyto consumers in the non-standard segment of themarket who are less able to access credit in themainstream market and may otherwise face financialexclusion. It has built up a deep understanding ofthis specialist market over many years, attractinghigh levels of customer satisfaction throughdelivering a range of credit products specificallytailored to the needs of people on modest incomes.

Household incomes for many families in the homecredit market remained under pressure during 2010because of the rise in under-employment fromrestrictions on working hours and wage rates,coupled with rising food, fuel and utility bills.Customers reduced visibility of their future incomes,together with the uncertainty surrounding thepotential impact of public sector cuts and changesto welfare benefits, resulted in cautious customerbehaviour which tempered the demand for creditthrough the first nine months of the year.Anticipating these market conditions, managementplanned for modest receivables growth during 2010and placed a strong emphasis on managing revenueyields, maintaining credit standards and drivingthrough cost efficiency measures whilst protecting

collections and arrears management. Marketconditions improved in the final quarter of the yearas customers visibility over their future incomesimproved in a more stable employment market anddetails of the Governments Spending Reviewbecame known. These more favourable conditionshave continued in the early part of 2011.

The overall competitive landscape for Home Creditremained unchanged throughout the year witharound 500 active participants in the UK.

Vanquis Bank remains the most active participantwithin the non-standard credit card marketwhich continued to experience strong demand.As a result, the business has generated a strong

flow of applications and strong utilisation of creditlines. Other issuers remain relatively inactiveand the business has a significant medium-termgrowth opportunity.

Vanquis Banks customers are typically in regularemployment and the business is more sensitivethan Home Credit to changes in unemploymentrates which have been steady since mid-2009.This stability coupled with consistently tightunderwriting has contributed to a favourabletrend in delinquency during 2010.

At present, there is uncertainty about the futuredirection of the employment market which is likelyto remain until the impact of the Governments

Spending Review on UK economic growth is clearer.Consequently, tight underwriting standards willremain in place in both businesses.

G spdig riBased on its detailed understanding of the HomeCredit customer base, the group has assessed thepotential impact of the changes to welfare benefitsto be phased in over the next four years whichwere included in the Governments October 2010Spending Review and June 2010 Budget. Theconclusion is that the changes will have limitedimpact on the predominantly working householdsserved by Home Credit and that the short-termnature of the loan book means that any impact

on individual households will be factored intoagents lending decisions in the normal courseof business. Impairment typically arises inHome Credit due to unexpected rather thanexpected changes to customers circumstances.

rgiThe group has now implemented those parts ofthe Irresponsible Lending Guidance to Creditorsand the EU Directive on Consumer Credit whichwere required to be implemented by February 2011.

In conjunction with the UK Cards Association,Vanquis Bank has also implemented the necessarysystems and other procedural changes during 2010and early 2011 to ensure compliance with theDepartment for Business Innovation and Skills (BIS)consultation on credit and store card regulation.

In October 2010, HM Treasury (HMT)/BIS issueda call for evidence in connection with a review ofconsumer credit and insolvency. The review iswide-ranging and covers issues arising at each stageof the life of a credit agreement. HMT/BIS is now in theprocess of considering the responses and, at a datestill to be determined, will publish the results of theconsultation. The group welcomes the Governmentsevidence-based approach to the review.

In December 2010, a joint HMT/BIS consultationwas launched setting out the Governments proposalto transfer responsibility for consumer credit fromthe OFT to a new Financial Conduct Authority(formerly called the Consumer Protection andMarket Authority) and signalling the Governmentspreference to bring the regulation of all retailfinancial products under one regulatory regime.The Consultation closes on 22 March 2011 andthe groups businesses have contributed to thesubmissions through their respective trade bodies.

oAfter a strong final quarter in 2010, both HomeCredit and Vanquis Bank have made a good start to

2011. The first quarter is the peak collections periodin the Home Credit business and it is encouragingto report sound collections and a continuation ofyear-on-year sales growth. Vanquis Bank entered2011 with a high quality receivables book, 35.0%up on a year earlier, and has experienced stronggrowth and stable delinquency during the first twomonths of 2011.

In view of the uncertainty over the future directionof the UK employment market, the tightunderwriting standards which have been in placefor a considerable period of time will continue tobe applied in both businesses.

The good start to 2011 and the groups strong

funding and liquidity positions with currentheadroom against committed facilities of 370m,leaves the business well placed to deliver goodquality growth in 2011.

Jh kffChairman1 March 2011

The grouphas reporteda strong set ofresults for theyear with protbefore tax andexceptionalcosts up 11.1%to 144.5m.

*In order to align the weeklyHome Credit business withthe groups nancial year,Home Credits 2010nancial year includes53 weeks compared with52 weeks in 2009.

Directrsreprt:Businessreviewandmanagementreprt


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12 Bi i d g p: Chif e ci i

For most of 2010, people on lower incomes were quite

rightly anxious about the sustainability of their household

nances as well as the threat from cuts in Government

spending. Given this difcult context, it is satisfying to be

able to report on another year of progress. We have grown

customer numbers, increased prots and managed risk.

We have done all that by listening carefully to ourcustomers and lending responsibly.

rI am very pleased to report that the group deliveredan excellent set of results in 2010 with profit beforetax and exceptional costs up 14.4m to 144.5m,and earnings per share, before exceptional costs,up 10.1% to 78.6p.

We have delivered these strong results despite thechallenging economic environment, characterisedby a weak employment market and rising inflationwhich has put increasing pressure on our customersincomes. The fact that we have continued to tradesuccessfully is testament to the focus on our clearstrategy developed at the time we demerged ourinternational business in 2007, the quality of ourpeople and reflects the inherent characteristicsof our businesses which make them more resilientthan other business models.

sgyOur mission is straightforward it is to be theleading non-standard lender in the UK and Ireland,acting responsibly in all our relationships and playinga positive role in the communities we serve.

As we have been saying for some time, the UKnon-standard market is increasingly becoming the

domain of specialist lenders. Many lenders who haveoperated in this market have either failed, withdrawnor restructured, whilst Provident Financial hascontinued to deliver high returns in the small-sumunsecured segment of the market. The key to thissuccess is to understand the customer and builda business model to meet their needs whilstmaintaining responsible lending at its foundation.

Our strategy is centred on the organic growthof high return on equity businesses:

Having modernised the Home Credit business overthe past three years, we plan to continue to expandthe operation by attracting new customers,increasing our share of customers financialpurchases and broadening the product range.

We continue to scale up our credit card businessto realise its economies of scale. The significantmarket potential of Vanquis Bank is evident fromits rapid growth and the business is alreadygenerating more than enough capital to fundits own growth and contribute to the groupsdividends. Vanquis Banks next milestone is togrow its receivables book to 450m by the endof 2012 whilst maintaining a post-tax returnon equity of 30%. There is every reason toexpect that it will double its customer basein the medium term.

Our strategy of developing businesses whichgenerate strong returns on capital underpinsour generous dividend policy which aims todistribute 80% of our profits in the form ofdividends. In addition, we maintain a strongbalance sheet and prudent funding. Our businessmodel is based upon borrowing long and lendingshort and maintaining a diverse funding base.Our target gearing ratio is 3.5 times, comfortablyinside our banking covenant of 5.0 times.

Our leading positions in both the Home Creditand non-standard credit card markets providea very good base from which to deliver a

strong performance as the economy recovers.

lig f cThe stability and soundness of our businessmodels is rooted in our intimate understandingof our customers. Unlike most mainstream creditorganisations, we make a point of keeping closeto our customers from the moment they requesta loan to final repayment.

We do not attempt, and would not wish, to inventcomplex products that are superficially attractive.Transparency is one of the great strengths of ourbusiness model and one reason for our resilience.

144.5mGroup prot before taxand exceptional costs

10.1%Growth in EPS beforeexceptional costs

1.25timesTarget dividend cover

3.5timesTarget gearing ratio

Taking our cue fromour customers

P CChief Executive


16/135


13

What we do is really very simple. We provide smallamounts of money to help ordinary people onlower than average incomes get on with theirlives and participate in society.

We work hard to get to know our customers well andbuild productive relationships with them. We seek tolearn from them so that we can meet their particularneeds at every stage of the lending cycle.

o bi

Consumer Credit DivisionThe Consumer Credit Division has produced aresilient performance through the downturn.In 2010, Home Credit delivered profits of 129.1m*,up 0.2m on 2009, benefiting from the closeattention to yield, impairment and costs duringa period of modest receivables growth. In addition,the losses associated with the collect-out of the RealPersonal Finance receivables book reduced from7.7m in 2009 to 1.8m in 2010, all of which arosein the first half of the year.

A continuation of increasing underemployment in2010 has meant that some of our customers havebeen working fewer hours than they would havewished, resulting in pressure on their householdincomes. Add to this increasing inflation and themonths of uncertainty leading up to the GovernmentsSpending Review in October 2010 and it is notsurprising that for the first nine months of the year,some customers reduced their spending and didnot take out a loan when they normally might havedone. However, it is encouraging to report thatmarket conditions for Home Credit improved in thelast quarter of the year, demonstrated by a strongpick-up in sales. It is clear that our customers do notfeel that the austerity measures announced by theGovernment impact their finances as significantly asthey thought they might and they are also feelingmore certain about their future incomes. Onceagain, our strong focus on collections paid off in

2010 with impairment remaining stable beforeedging down towards the end of the year.

The performance in 2010, particularly in the lastquarter, leaves the Consumer Credit Divisionpoised to deliver good quality growth and takeadvantage of a recovery in economic conditions.The modernisation programme which started in2007 is now complete and the business is fullyinvested. We now have improved IT systems, usebetter credit science and have developed morechannels to market such as direct mail and theinternet. Our investment in the field force toimprove spans of control has helped us to manageimpairment during these tough times and givesus additional capacity as the economy recovers.

The modernisation programme has allowed us togrow our customer numbers by nearly 20% since thestart of 2007. We will continue to focus on servingthose existing customers who have the availableheadroom to borrow and whom we know well.However, we also believe our target market isgrowing as the temporary, part-time and casuallabour market is growing and banks continue torestrict credit which will allow us to grow ourcustomer base.

We will maintain our tight stance on underwritingand our investment in collections capacity.We are also confident that the impact from the

Governments austerity measures will not havea significant impact on the future developmentof the business.

Vanquis BankVanquis Bank delivered an excellent result in 2010,growing profits by 12.6m to 26.7m. The businessrecently passed the original objective, set at thetime of the demerger, to serve 500,000 customers,with receivables of 300m and delivering a post-taxreturn on equity of 30%. The business is now

generating more than enough capital to fund itsown growth and contribute to the groups dividends.

Because of the successful progress of Vanquis Bank,at the start of 2010 we set ourselves new targets ofachieving 450m receivables, generating a post-taxreturn on equity of 30% by the end of 2012. It isimportant to note that these new targets assumesimilar receivables growth to that achieved over thelast two years, no changes to our tight underwritingstance and a prudent view of the economic outlook.

The non-standard credit card market remainssignificantly under-served with Vanquis Bank as themost active participant. Our success in 2010 meansthat we are well placed to deliver on our new targetsand, in due course, Vanquis Bank has a significantopportunity to grow beyond its current targets.

lig hdThe UK and Ireland non-standard credit marketcurrently comprises over 10 million people and isexpected to grow modestly in 2011 and beyond.It is our aim to remain the leading lender in thismarket and I am confident that we have the rightmodel, people and resources to bring that about.

We are building sustainable market share by listeningcarefully to our customers, responding to their needsand by building on our reputation as a responsiblecorporate citizen.

Provident Financials future prospects are attractive:

Provident Financial has a long track record ofsuccessfully operating in the non-standard marketwhich will remain the domain of specialists.

We have an attractive business model withbusinesses that are well managed and inherentlymore resilient through difficult market conditions.

We have a fully invested and modernised HomeCredit business with the capacity to serveincreased demand as the economy recovers.

We continue to generate strong profitable andnow capital generative growth in Vanquis Bankand we expect further improvement as growthgenerates additional economies of scale.

Our businesses generate high returns and arevery capital-generative, supporting a high andsustainable distribution policy.

We have a strong balance sheet and a prudentfunding structure.

The group has performed very well in 2010.I am confident that we can continue to deliveron our strategy and deliver good returns forour shareholders.

P CChief Executive

1 March 2011

mIssIon

The group aims

to be the leading

non-standard lender

in the UK and Ireland.

It has adopted a

clear strategy to

achieve this.

The group has adopted

key performanceindicators (KPIs)

to assess progress

against each of its

strategic objectives,

including both

nancial and

non-nancial

measures.

These are helpful in

assessing progress

but not exhaustive.

Management also

takes account of

other measures

in assessing

performance. Strategic

aims and KPIs are

presented overleaf.




17/135


14 Bi i d g p: sgy d kPI

Delivering ourstrategy and KPIs

Our strategy KPI and description

1. Growth of higher returnbusinesses in the UK andIreland non-standard market

GrowandmoderniseourHomeCreditbusiness.

BringVanquisBankuptoulloperationalscale,generatingsignifcantreturns.

Extendourproductoeringstocovermoreoourchosenmarket.

C b

The number of active customers within each business.

r iy

Prot after tax, excluding exceptional costs, divided by averageequity. Equity is stated after deducting the groups pension assetand the fair value of derivative nancial instruments, both net ofdeferred tax, and the proposed nal dividend.

2. Generating shareholder returns

Generatesustainablegrowthinproftsanddividendstodeliverincreasingshareholderreturns.

Atleastmaintainaull-yeardividendo63.5ppersharewhilstmovingtoatargetpayoutratioo80%oproftatertax(1.25timesdividendcover)andthenmaintainingthisprofleasproftsgrow.

t shhd r (tsr)

The increase in the value of the groups shares together withany dividend returns made to shareholders. TSR is measuredover periods of three years in line with the groups Long TermIncentive Schemes.

adjd ig p h

Prot after tax, excluding exceptional costs, divided by theweighted average number of shares in issue, excluding ownshares held by the group.

Diidd p h

Total dividends for the year, including the interim dividend paidand the proposed nal dividend, divided by the number of sharesin issue, excluding own shares held by the group.


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15

Performance in 2010 Plans for 2011

Gp c b p by 5.7% 2.41 (2009: 2.28).

sg iy f 46% (2009: 45%).

C Cdi Diii:

Home Credit customer growth of 1.0% to 1.86m (2009: 1.84m).Rate of growth deliberately moderated to focus eld resources onserving good quality existing customers added in previous years.

Strong pick-up in sales in the fourth quarter, following subdued demandin the rst nine months of the year.

Stable collections performance and tight credit standards maintainedthroughout 2010.

Home Credit prot before tax for 2010 of 129.1m* (2009: 128.9m),beneting from early actions taken to improve margins and reducecosts during a period of modest receivables growth.

Losses associated with the collect-out of the Real Personal Financereceivables book reduced from 7.7m in 2009 to 1.8m in 2010,all of which arose in the rst half.

vi B:

Continued strong ow of applications with customer numbers growingby 27.7% and average receivables growth of 25.1%.

Receivables passed the 300m milestone during September and endedthe year at 345.0m (2009: 255.5m).

Risk-adjusted margin of 33.9% (2009: 30.1%) reecting favourabledelinquency trends experienced since the second quarter of the year.

Target post-tax return on equity of 30% achieved in the year.

Strong growth in prot before tax to 26.7m from 14.1m in 2009.

C Cdi Diii:

Continue to focus on serving good qualityexisting customers and recruiting goodquality new customers against tight creditstandards in order to generate protablegrowth in receivables.

Drive the efciency of eld operations andmaintain tight cost control.

vi B:

Continue to advance towards the medium-termobjective of 450m receivables by the endof 2012 generating a post-tax return on equityof 30%.

Maintain tight stance on underwriting andcredit line increases in light of the uncertaintyof the direction of the labour market.

Upgrade the core card processing systemto improve efciency.

Develop plans to expand call centre capacityto accommodate future growth.

tsr f +9.4% p h pid f spb 2007 spb 2010 cpd ih 2.1% p f h Ftse 250 h pid.

adjd ig p h p 10.1% 78.6p (2009: 71.4p).

Diidd p h iid 63.5p (2009: 63.5p).

Continue the commitment made at the time ofdemerger to at least maintain the dividend pershare at 63.5p, until cover reaches 1.25 timesand then maintaining this prole as prots grow.


+9.4%per annumTotal Shareholder Return(from September 2007to September 2010)



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16 Bi i d g p: sgy d kPI continued

Delivering our strategy

and KPIs continued

Our strategy KPI and description

3. Maintaining a secure funding andcapital structure

Maintainsufcientequityandborrowingacilitiestosustainthegroupsoperationsandundgrowthoveratleastthenext12months.

Maintainagearingratioo3.5times,toensurealignmentwiththedividendpayoutratioo80%andthegroupsgrowthplans.

Continuetodiversiythegroupssourcesounding.

Gig

Borrowings (based on contracted rates of exchange andexcluding deferred arrangement fees) divided by equity.Equity is stated after deducting the groups pension assetand the fair value of derivative nancial instruments, both netof deferred tax, in line with the groups banking covenants.

Big hd

Total committed borrowing facilities less actual borrowings(based on contracted rates of exchange and excluding deferredarrangement fees).

4. Acting responsibly in ourrelationships with customers andmaking a positive contribution tothe communities served by thegroups businesses

Earnhighlevelsocustomersatisaction.

Investinthecommunitiesinwhichourcustomers

andagentsliveandinwhichourstawork. Maintainasystemtomanagecorporateresponsibility.

Meetorexceedregulatoryrequirementsonresponsiblelending.

Followourcorporatevaluesinthetreatmentoourstakeholders.

C ifci

The percentage of customers surveyed who are satised with theservice they have been given.

I i h ciy

The amount of money invested in support of communityprogrammes (based on the London Benchmarking Groupsguidelines) and donated for charitable purposes.


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17

Performance in 2010 Plans for 2011

Gig b 3.3 i (2009: 3.3 i) cpd ih gf 3.5 i d big c f 5.0 i.

Hd cid big fciii f 185 (2009: 331) 31 Dcb 2010 icd 370 28 Fby 2011.

Extension of 380m of bank facilities maturing in March 2012 to May 2013in February 2010.

Debut issue of retail bond of 25.2m in April 2010.

Excellent progress made in further diversifying funding sources in rsttwo months of 2011 by arranging private placements totalling 128.5m,including 100m term loan facility with M&G Investments.

Headroom on committed borrowing facilities at the end of February 2011,earmarked to meet contractual debt maturities of 345m between nowand the end of the rst quarter of 2012.

Strong capital generation of 80.4m before the payment of dividends(2009: 55.6m) reecting Vanquis Bank becoming capital-generativeand measures taken to improve revenue yield and control impairmentand costs in the Consumer Credit Division.

Regulatory capital levels comfortably ahead of FSA requirements.

Roadshow launched to promote the issue of a second retail bond.Good progress made in the dialogue with the FSA concerningVanquis Bank using its banking licence to take retail deposits.

Aim to maintain committed borrowing facilitieswhich provide funding headroom for at least thefollowing 12 months.

Maintain capital and gearing at prudent levels.

Continue to consider further opportunities todiversify funding sources.

C ifci f 91% f H Cdi (2009: 94%) d 84% fvi B (2009: 84%).

Id 1,468,000 i i pg dig 2010 b hcii (2009: 1,329,000).

Further investment in Good Neighbour, a major new strand in the groupscommunity programme, comprising substantial funding for: (i) projectswithin the communities we serve; (ii) employee volunteering schemes; and(iii) employee matched giving.

Continued to embed the groups core values into the behaviour of theorganisation and our people through changes to HR, performancemanagement and other processes.

Maintain or improve customer satisfaction levels.

Increase the groups investment in thecommunities we serve through theGood Neighbour initiative.

+91%Home Credit customersatisfaction

+84%Vanquis Bank customersatisfaction



21/135


18 Bi i d g p: Gp

1

2

Group business reviewand management report

The group has produced a strong

performance in 2010 as a result of the

careful management of growth, impairment

and costs against the backdrop of a difcult

economic environment. The group has a

strong balance sheet and liquidity position.

2.4mTotal number ofgroup customers

144.5mProt before tax andexceptional costs

Gp

Year ended 31 December

2010m

2009m

Changem

Home Credit 129.1 128.9 0.2

Real Personal Finance (1.8) (7.7) 5.9

Consumer Credit Division 127.3 121.2 6.1

Vanquis Bank 26.7 14.1 12.6

Yes Car Credit 0.2 (0.2)

Central:

costs (8.1) (7.0) (1.1)

interest (payable)/receivable (1.4) 1.6 (3.0)

Total central (9.5) (5.4) (4.1)

Prot before tax and exceptional costs 144.5 130.1 14.4

1 Consumer Credit Division874.3m 72%

2 Vanquis Bank345.0m 28%

spi f bi diii

by y d cib


22/135


19Bi i d g p: C Cdi Diii

Meeting the needs of non-standard borrowers:

Consumer CreditDivision

For generations of working-class families

the weekly visit from the Provi has been

part of everyday life. Today, as much as

ever, we pride ourselves on the distinctly

personal nature of our service. The

business continues to ll an important

space in the UK non-standard market. Chi GipiManaging Director,Consumer Credit Division

Diii gy Grow customer

numbers Continually improve

credit management Broaden the

product mix Fully embrace the

new regulatoryenvironment

Maintain highlevels of customer

satisfaction

unexPeCteD exPenses

Spreading the load

Life is rarely predictable and even the best-laid planssometimes get thrown off course. For most people replacing

a broken fridge or washing machine is an unwelcome

expense. For lower-income families this kind of unanticipated

nancial hurdle can be devastating. Our short-term loans

can help by spreading the cost over several months.

Stepping in when thefridge needs replacing...



23/135


20 Bi i d g p: C Cdi Diii

Since its foundation in 1880, Provident Financialhas helped families on below-average incomesnegotiate the peaks and troughs in their financialcircumstances. Our Home Credit business is thelongest running and the largest in the UKand Ireland.

It is the only high-touch, face-to-face lendingbusiness trading right across the UK. Every week11,400 local agents visit 1.9 million customers,one in 20 of UK households, to issue loans andcollect repayments. Our network covers almostevery postcode in the country.

Our personal approach is very popular. For householdson limited budgets, the agents weekly visit is anessential discipline.

Our business is flourishing because we providesimple, transparent and flexible financial productsto our customers. Our customers appreciatethese attributes.

They like the fact that Home Credit loans arestructured to allow borrowers to repay when theycan. If customers are unable to meet a weeklypayment they know they will get a sympatheticresponse. Perhaps more importantly, there are

no penalty fees or extra interest whatsoever;the amount to be repaid remains unchanged.

Meeting the needs of non-standard borrowers:Consumer Credit Division

A helping handwhen the kids goback to school...

exPensIve tImes

Back to school

The start of the new school year is always a

busy time. Its great to watch the kids growing

up but it can also be costly. Parents have to nd

funds for new uniforms; then theres new shoes,

stationery, books, sports kit it all adds up.

A Home Credit loan can ease the burden.


24/135


21

The agents play an important role. Many are formercustomers themselves. They live in the communitiesthey serve and naturally empathise with thepeople there.

All agents are self-employed and only earncommission as loans get repaid. They therefore haveno reason to encourage people to borrow morethan they can afford. This acts as a valuable checkon impairment and it makes sense for the customertoo. It is one reason why our customers rate ourservices so highly. In our latest survey 91% said theywere satisfied with our service and 80% felt our

products offered good value for money.

ky ciii i 2010The Consumer Credit Division can be proud of itsperformance during a difficult year, having tradedsuccessfully through tough market conditions.Home Credit generated profits of 129.1m* (2009:128.9m), up 0.2m on last year despite onlymoderate receivables and customer growth.In addition, the loss associated with the collect-outof the Real Personal Finance receivables bookreduced from 7.7m in 2009 to 1.8m in 2010,all of which arose in the first half of the year.

Many lenders who had over-extended in previous

years have withdrawn from the non-standard creditsector. Mainstream lenders are shying away fromlending to those at the margins of their lendingmodels. It presents an opportunity to win backcustomers better suited to our high service, flexible,small-sum model.

With fewer mainstream, non-home creditcompetitors in the market we could have electedto grow volume. We opted instead to strengthenunderwriting and moderate growth. By adoptinga cautious approach to lending and staying closeto our customers, we have been able to avoid thetrap of lending too much too quickly. We maintaina highly selective approach and currently onlyaccept around a quarter of lending opportunities.

Our customers appreciate that Home Credit has auseful place in financial planning. After an extendedperiod of gradual decline, we have added to ourcustomer numbers in each of the last five years.

Rebalancing the businessDuring 2010, we continued to focus on rebalancingthe workforce to improve our profitability during aperiod of lower growth. We had to take somedifficult decisions in the long-term interests of thebusiness. The number of head office and directrepayment loan personnel fell by approximately 200

129.1m*Home Credit protbefore tax

867.2mHome Credit year endreceivables

72%of agents are female

at the beginning of the year. Field collections andarrears management capacity were unaffected bythese changes. As a result, our cost base remainedbroadly flat in 2010.

The business is well-balanced entering 2011 andwe are poised to gain from any improvement ineconomic conditions. As the economy improveswe have the capacity to increase our lending. If theeconomy moves back into recession we have morepeople in place to manage loans where customersare experiencing difficulties.

New headquartersOur move to purpose-built headquarters inOctober 2010 marked an important stagingpost in our development. We are staying trueto our Yorkshire roots by remaining in Bradford.It underlines our commitment to the regenerationof the area. We are proud to be one of thelargest private sector employers in the city.The new premises, which obtained a very goodrating under the Building Research EstablishmentEnvironmental Assessment Methodology (BREEAM),will accommodate the future growth of thebusiness and help us realise economies of scalemore effectively.

Fresh StartFresh Start gained momentum as a customeracquisition tool during the year. We work with thirdparties who are having difficulty collecting paymenton outstanding debts. With their permission weapproach selected non-paying customers. Customerswho might have struggled with remote lendingmodels can often benefit from the discipline ofweekly home collection. Those that opt to transfertheir debt to us have the opportunity to improvetheir credit rating by beginning to repay whatthey owe.

Love2Shop vouchersThe Love2Shop voucher scheme has grown inpopularity. We are now the largest reseller in the

country. This is a highly seasonal business with mostvouchers bought in the run-up to Christmas. It makesa significant contribution to the range of productswe can make available to our customers.

Provident Money cardsWe currently offer Visa cards as an alternativeto cash advances which can be loaded with a fixedamount of 300. The cards can be used in cashmachines, on the high street and online. We planto replace these with a card which can be loadedand re-loaded with variable amounts. We anticipategrowth in this product offering once the new cardis established.

1

2

3

4

5

1 Agent 58%2 Internet 20%

3 Fresh start 7%

4 Direct mail 5%

5 Other 10%

C ciiich




25/135


22 Bi i d g p: C Cdi Diii continued

Government Spending ReviewOn 20 October 2010, the Chancellor announceddetails of the Governments Spending Review,including cuts to public spending and reformsto welfare benefits.

Based on our deep understanding of our customers,we believe that the proposed changes to benefitswill not have a significant impact on Home Credit:

Savings of 18.1bn out of a total welfare budgetof 200bn are phased over four years to 201415with almost half relating to the switch of

indexation of benefits from RPI to CPI and theremoval of child benefit for higher-rate tax payers.Both these measures do not result in a loss ofincome for our customers.

The incomes of Home Credit customers comefrom a diversified range of sources, typicallyincluding an income from employment.Non-universal benefits form a componentof household income for less than half ofHome Credit customers.

The short-term nature of loans and the visibility ofthe impact of any changes in welfare benefits allowagents to adjust lending decisions in the normalcourse of business. Impairment typically arisesin Home Credit due to unexpected, rather thanexpected, changes to customers circumstances.

The reduction in public sector employment isexpected to be centred on those engaged inadministration roles, which will not typically beHome Credit customers, who derive their incomefrom hourly paid, part-time or casual work and aretherefore not typically employed in administrative

roles within Central or Local Government.

The Government has stated that it will protectfinancially benefit claimants through the plannedtransition to the Universal Credit by 2017.Furthermore, the Government has estimatedthat its introduction will result in 2.5 millionhouseholds receiving higher entitlementswhich should benefit the Home Credit businessin due course.

At least a third of Home Credit customers willbenefit from planned future increases in thetax free threshold for income to 10,000during the life of the current parliament.

1.9mNumber of HomeCredit customers


runnInG rePaIrs

Nipping problems in the bud

Many families cant do without a car, but with

the price of tax, fuel and insurance all rising,

the cost of keeping it on the road is mounting

all the time. So when something goes wrong, the

extra expense can be difcult to bear. But when

it comes to repairs it rarely makes sense to put

things off. A short-term loan to cover the cost

keeps the car on the road, the family safe and

addresses any problems before they get worse.

Making sure thefamily car stayson the road...


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23

rConsumer Credit DivisionThe Consumer Credit Division generated a profit before tax of 127.3m in 2010 (2009: 121.2m) analysedas follows:


2010(53 weeks)

m

2009(52 weeks)

mChange

%

Prot/(loss) before tax:

Home Credit 129.1 128.9 0.2

Real Personal Finance (1.8) (7.7) 76.6

Consumer Credit Division 127.3 121.2 5.0

Home CreditThe Home Credit business generated a profit before tax of 129.1m (2009: 128.9m).


2010(53 weeks)

m

2009(52 weeks)

mChange

%

Customer numbers (000) 1,861 1,842 1.0

Year end customer receivables 867.2 866.0 0.1

Average customer receivables* 753.6 759.2 (0.7)

Revenue 701.1 673.7 4.1

Impairment (230.6) (216.7) (6.4)

Revenue less impairment 470.5 457.0 3.0

Revenue yield** 93.0% 88.7%

Impairment % revenue*** 32.9% 32.2%

Costs (292.3) (288.4) (1.4)

Prot before interest and tax 178.2 168.6 5.7

Interest (49.1) (39.7) (23.7)

Prot before tax 129.1 128.9 0.2

* Based on an average of month end receivab les throughout the year.

** Revenue as a percentage of average receivables for the 12 months ended 31 December.

*** Impairment as a percentage of revenue for the 12 months ended 31 December.

aGent InsIGHt

Kath, HomeCredit agent

Its important to build

strong relationships.

Then, if someones

having trouble making

a repayment, we can

sit down together to

nd a solution. A few

weeks ago one of my

customers had to dealwith an unexpectedly

high bill. We skipped

a payment and he paid

a little bit extra over

the next few weeks.

My customers really

value that exibility.



27/135




rThe groups planning assumption at the start ofthe year was that Home Credit customers wouldcontinue to experience pressure on their householdincomes and consumers would remain cautious.Accordingly, the business planned for relativelylow receivables growth with no relaxation of creditstandards and implemented a cost reductionprogramme whilst protecting collections and arrearsmanagement capacity in the field. This approach,combined with the introduction of a revised coreproduct in late 2009 to shorten the book andincrease the revenue yield, has ensured that

Home Credit has delivered a 5.7% increase in profitbefore interest and tax to 178.2m against a broadlyflat receivables profile. After absorbing a 9.4mincrease in interest costs, 8.8m of which reflects anuplift in the groups average funding rate from 7.0%in 2009 to 8.5% in 2010, Home Credits profit beforetax increased marginally to 129.1m (2009: 128.9m).

The year-on-year growth in customer numbers was1.0%. The growth rate moderated towards the endof the year from the annual growth of approximately6% achieved since the start of 2007 because ofmanagements decision to focus field resources onserving credit to the existing pool of good qualitycustomers. During the first nine months of the year,some customers were cautious in requesting newcredit. They were concerned about their futureprospects because of the pressure on householdincomes from increasing under-employment,characterised by reduced working hours and havingto accept part-time or temporary work, together

with rising food, fuel and utility bills. The last quarterof the year saw a pick-up in demand for credit ascustomers visibility on their household incomesimproved in a more stable employment market anddetails of the Governments Spending Review wereannounced. Whilst year-on-year sales growth for2010 as a whole was just 1.2%, growth in the fourthquarter was 9% reflecting strong sales to existingcustomers against unchanged tight credit standards.

low anD Grow

Developingrelationships

We structure our

loans to be simple to

understand and with

no nasty surprises.

We typically offer our

rst-time customers

smaller loans over a

short period. Theresno penalty if they

miss payments but

if they meet all their

payments on time, we

can talk about larger

loans. Our low and

grow policy builds

trust over time and

protects customers

from borrowing more

than they can afford.

Melvyn, HomeCredit customer

My mums been a

Provident customer

for years. She

suggested I try out

Home Credit and its

worked out really

well. Im paid weekly

so the repayment

structure ties in

nicely with that.

Knowing my agent

is coming round

each week helps me

plan my nances and

stick to a budget.


28/135


25

Average receivables were 0.7% lower than last year,reflecting relatively low sales growth for the yeartogether with some shortening of the durationof the loan book to help mitigate risk in a difficultenvironment. Year end receivables of 867.2m(2009: 866.0m) were marginally higher than lastyear, benefiting from the strong pick-up in sales

activity in the last quarter of the year, and in linewith managements planning assumptions for 2011.

The revenue yield increased from 88.7% in 2009to 93.0% in 2010. The core 50-week productintroduced in late 2009 to replace the old 57-weekproduct contributed approximately half of thegrowth in the revenue yield. The new productis better suited to customers needs for a loanof a year in duration and allows more effectivemanagement of risk. The yield on the book willmoderate in 2011 due to the strong fourth quartergrowth in credit issued to existing good qualitycustomers who, compared with new customers,tend to be served with slightly longer termproducts which carry a lower yield.

The collections performance remained soundthroughout 2010. A relatively strong collectionsperformance in the final quarter resulted in the rateof annualised impairment to revenue reducing from33.3% at June 2010 to 32.9% at December 2010.This performance reflects the natural resilience ofthe Home Credit business model, continued tight

underwriting and the investment in front-linecollections and arrears management capacitythrough the difficult trading environment of thelast two years. In the absence of any significantchange in the external environment, collectionsperformance and the rate of impairment in 2011are expected to remain at similar levels to 2010.

Anticipating a lower growth environment in 2010,the business implemented a cost reductionprogramme at the start of the year which includedremoving 90 positions from the Home Credit headoffice support functions during February. Fieldcollections and arrears management capacity wereunaffected by these changes. After allowing for theadditional trading week in 2010, costs during 2010were broadly flat. Annual pay awards to staff of

seasonal Peaks

Planning for Christmas

Our customers are nancially astute. They

have to be life on a modest income leaves

little room for manoeuvre. If they know

in advance they will have extra expenses

they plan accordingly. Nearly two in ve use

Home Credit loans for Christmas and birthdays.

Some choose Christmas hampers in January

and pay for them through the year. Love2Shop

vouchers are another popular option, allowing

customers to buy treats for the family without

spending more than planned.

Sylvia, HomeCredit customer

Ive been with

Provident for 36 years

now. My agent, Kath,

comes to see me at

the same time every

week so I always know

exactly where I am

with my repayments.

Shes really friendlyand I feel comfortable

talking to her if I have

worries or concerns.



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between 1.0% and 1.5% together with the additionalcost of the new head office in Bradford have beenlargely offset by the savings generated by the costreduction programme. Costs through the first halfof 2011 will reflect an uplift in agents commissionfollowing the strong sales in the final quarter of 2010together with additional training and administrativecosts associated with the implementation of the EUConsumer Credit Directive across the organisation.

In order to align the weekly Home Credit businesswith the groups financial year, Home Credits 2010financial year includes 53 weeks compared with

52 weeks in 2009. Overall, the additional weekhas added approximately 2% to revenue, costsand profit in 2010.

Real Personal FinanceFollowing the decision to focus direct repaymentlending on known prospects generated through theHome Credit branch network, the re-focusing ofthe business and associated cost reductions madein February resulted in Real Personal Financeincurring a loss of 1.8m in 2010 (2009: loss of7.7m), all of which arose in the first half of theyear. The collect-out of the receivables book hasprogressed satisfactorily and receivables stood at7.1m at the end of 2010, down from 17.8m at

the end of 2009. Direct repayment loan productsbranded Provident Direct and Greenwood Directwere introduced in August as part of the Home Creditbusiness and initial volumes have been modest.

lig hdWe have 1.9 million customers across the country.Agents visit each of them every week. We aim toleverage these strong personal relationships bydoing more for our existing customers as well asworking with new ones.

We anticipate steady growth in the underlyingmarket for Home Credit in 2011 as the number ofpart-time, casual and temporary workers increasesand mainstream lenders continue to restrict credit.

Based on our detailed understanding of ourcustomer base, we are satisfied that the changesto welfare benefits announced as part of theGovernments Spending Review will not have asignificant impact on our customers. With thesteps we have taken to strengthen the businesswe are confident that this will translate intogood earnings growth.


Customer InsIGHt

Gemma and family, Home Credit customer

Ethan and Louis-James needed newuniforms for the start of the newschool year in September. I onlywanted a small loan so I chose HomeCredit. I like the way its structured,with weekly repayments and thereassurance of never having toworry about extra charges.


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27Bi i d g p: vi B

In todays world, lack of access to plastic

makes it hard to participate fully in

modern life. Mainstream card issuers

exclude borrowers with limited or uneven

credit histories. The Vanquis card brings

the exibility, consumer protection and

convenience of the credit card to thissection of the population.

Meeting the needs of non-standard borrowers:

Vanquis Bank

Taking advantageof online offers...

mich lManaging Director,Vanquis Bank

Diii gy Continue to scale

up the business Generate a post-tax

return on equityof 30%

Reach 450m inreceivables by 2012

Fully embrace thenew regulatoryenvironment

Continue to treat

customers fairly

GIvInG Customers aCCessto tHe Best Deals

Shopping online

The internet is a critical tool in todays world.

It is extending choice and putting power in the

hands of individuals but only for those with

unrestricted access. The Vanquis card puts

people with adverse credit histories on an

equal footing. They enjoy the benets of

shopping from home and can access online

offers and discounts.



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28 Bi i d g p: vi B continued

Vanquis Bank again performed strongly in 2010,meeting or exceeding all of our targets on growthand profitability. Profits increased by 89.4% to26.7m (2009: 14.1m) and we increased ourcustomer accounts by 27.7%, passing the doublemilestone of 500,000 accounts and 300 millionreceivables. We are firmly on schedule to hit ourtarget of 450 million receivables by 2012.

Growth was not achieved at the expense of qualityand we remain highly selective. Our credit qualitywas even better in 2010 than in 2009, resulting inimproved margins and healthy profitability. By the

second half of 2010 we had already reached ourtarget of a 30% post-tax return on equity.

Vanquis Bank operates in the non-standard sectorof the UK credit card market. Many of our customershave been refused credit by mainstream cardlenders. Of the 10 million people in the UK non-standard market, we estimate that five million maybe suitable candidates for our credit card product.We currently have 544,000 customers, around 10%of the market. We typically lend to working peoplewith limited access to other lines of credit who earnup to around 30,000 per annum.

The Vanquis card is already popular with customers.

In our 2010 survey, customer satisfaction levelswere 84%.

Responsible lendingResponsible lending is a fundamental requirementfor our brand. As a specialist lender in thenon-standard market, we take our responsibilitiesextremely seriously.

There is consistently high demand for our Visa-branded card, but we are highly selective aboutwhich applications to accept. In 2007 nearly one infour were approved. In 2010, just 18% were approved.

Low and growWe have tailored our service to the non-standard

market. Our experience in this sector makes us morecomfortable lending to such customers. We do somindful that there are additional risks. As such, theinterest rate on our cards is generally at the higherend of credit card lenders rates.

Our products are built around responsible lending.Our low and grow lending policy allows us to getto know customers and only lend to those who canafford and manage repayments. Initial credit linesare a good deal lower than those of mainstream cardissuers, typically starting at around 250. Customerrequirements are reassessed every four months. Theaverage credit limit is currently approximately 900.

Vanquis Bank is rapidly developing as a key player inthe non-standard market. We only began trading in2003, with full product launch in 2005. In just fiveyears the business has progressed rapidly from a loss

of 18.1m in 2006 to a 26.7m profit in 2010.

Customer contactWe have a closer relationship with customers thanwould normally be expected of a card-based lender.We manage more than a million customer accountsfrom our UK-based call centre in Chatham.

Before taking on any new customer we aim toconduct a telephone interview with them. Thiswelcome conversation is part of the underwritingprocess. It stands to reason that if we cannotmanage to get hold of customers on the phonebefore lending, it will be more difficult when weneed to speak with them once lending has started.

We rigorously check security details to reduce theincidence of fraud.

Related productsThe welcome call is also an opportunity to offercustomers related products which may suit themsuch as identity theft protection and a productwhich allows occasional missed repayments.

We have several recent innovations includingcustomers being able to choose their favourite carddesign. In addition, we have a 24/7 Fraud Watchservice and offer SMS account management.

Gold cardWhilst we endeavour to maintain a high level of

service for all of our customers, above and beyondthis we rolled out our gold card service during 2010.This is proving very popular, but is only available toour very best customers. They get priority support,with a dedicated call centre number. They are alsosent account updates by SMS text.

250Initial VanquisBank credit limit

900Average VanquisBank credit limit

Meeting the needs of non-standard borrowers:Vanquis Bank


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29

Streamlined payment systemsOur SMS account management service allows us tocommunicate with customers by SMS text and allowscustomers to authorise payments on their debit cardby SMS text message. We will automatically remindcustomers when a payment is due on their account.We will also notify them if they exceed their limit.We have also introduced an online payment channeland a PayPoint-based payment facility.

Our collections strategy focuses on contactingcustomers early, before there is a problem.We endeavour to work with the customer,

educating them on the importance of goodaccount management and offer a variety ofsolutions to get their account in good order.

sImPlICItY anD ConvenIenCe

Simplifying regular shopping

Plastic is safer, simpler and more convenient

than cash. Its also easier to keep track of

spending. Customers use the Vanquis card

to pay for the main weekly shop and monitor

spending week by week. They can analyse

spending over time and work out where

savings can be made.

Anthony, VanquisBank customer

Before I had my

Vanquis card I bought

my groceries a bit at

a time, whenever

I had spare cash. Now

I do a single weekly

shop and its costing

me less. Because Im

clear about what Im

spending, its easier

to stick to my budget.

Keeping track ofthe weekly shop...



33/135


30 Bi i d g p: vi B continued

rVanquis Bank generated a profit before tax of 26.7m in 2010 (2009: 14.1m).


2010m

2009m

Change%

Customer numbers (000) 544 426 27.7

Year end customer receivables 345.0 255.5 35.0

Average customer receivables* 289.2 231.1 25.1

Revenue 162.0 131.3 23.4

Impairment (63.9) (61.7) (3.6)

Revenue less impairment 98.1 69.6 40.9Risk-adjusted margin** 33.9% 30.1%

Impairment % revenue*** 39.4% 47.0%

Costs (52.9) (43.3) (22.2)

Prot before interest and tax 45.2 26.3 71.9

Interest (18.5) (12.2) (51.6)

Prot before tax 26.7 14.1 89.4

* Based on an average of month end receivab les throughout the year.

** Revenue less impairment as a percentage of average receivables for the 12 months ended 31 December.

*** Impairment as a percentage of revenue for the 12 months ended 31 December.

Vanquis Bank performed strongly during 2010,

delivering profits up 89.4% on 2009. The businessmet its target post-tax return on equity of 30% in2010 and is now generating sufficient capital tofund its own growth and start contributing to thegroups dividends.

Demand for non-standard credit cards has remainedstrong and Vanquis Bank has experienced a flow ofover 1,300,000 applications during 2010. Customergrowth was 27.7%, up significantly on 2009 as aresult of a more active customer acquisitionprogramme which was assisted by securing areduction in the average acquisition cost peraccount. The 241,000 (2009: 167,000) newcustomers in the year have been booked againsttight underwriting standards that have remained

consistent with those applied throughout 2009,resulting in a similar acceptance rate of 18%.

The growth in customer numbers together with the

credit line increase programme to customers whohave established a sound payment history, have ledto a 25.1% increase in average receivables and a23.4% increase in revenue. Returns from this lowand grow approach to extending credit remainstrong. Vanquis Bank has also continued to beextremely active in managing the level of credit lineutilisation and revenue yield to reflect underlyingrisk. Average utilisation during 2010 was 79%ensuring that a strong stream of revenue is earnedwhilst maintaining a relatively low level ofcontingent undrawn exposure.

Impairment showed a modest increase of just 3.6%during 2010 compared with growth of 35.0% inyear end receivables. Delinquency rates improved

consistently from the second quarter of the yearagainst the backdrop of stable unemployment. Thisreflects the improvement in the underlying qualityof the loan book as a direct result of the progressivetightening of underwriting from 2007 to 2009 anddemonstrates the effectiveness of Vanquis Bankscredit decisioning. The impairment charge benefitedby approximately 5m from the reduction indelinquency during the year which will not recuras delinquency levels stabilise.

26.7mVanquis Bank protbefore tax

544,000Number of VanquisBank customers

Meeting the needs of non-standard borrowers:Vanquis Bank


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31

Notwithstanding the improvement in delinquencyduring 2010, management is mindful of the potentialfor unemployment to rise as a result of theGovernments austerity measures. Accordingly,the tight underwriting and credit line increasecriteria applied in 2010 will remain in place forthe foreseeable future.

During 2010, Vanquis Bank generated an annualisedrisk-adjusted margin of 33.9% (2009: 30.1%), aboveits target of 30.0%. This reflects the strong revenueyield on the receivables book and the benefit ofthe improvement in delinquency levels during

the year. The risk-adjusted margin is expectedto moderate towards the target level in 2011as delinquency stabilises.

Cost growth of 22.2% in 2010 trailed the levels ofrevenue and receivables growth as the businesscontinues to benefit from increased scale. Directmail and internet marketing activities were increasedto sup

Provident Financial 2010 Annual Report

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Transcript of Provident Financial 2010 Annual Report